Tag Archives: Strategy

How Life Imitates Chess by Gary Kasparov

Summary

  1. World chess grand master Gary Kasparov discusses his entrance, rise, and dominance of the chess world

Key Takeaways

  1. What makes chess such an ideal laboratory for the decision-making process? To play chess on a truly high level requires a constant stream of exact, informed decisions, made in real time and under pressure from your opponent. What’s more, it requires a synthesis of some very different virtues, all of which are necessary to good decisions: calculation, creativity, and a desire for results. If you ask a Grandmaster, an artist, and a computer scientist what makes a good chess player, you’ll get a glimpse of these different strengths in action.
  2. Having spent a lifetime analyzing the game of chess and comparing the capacity of computers to the capacity of the human brain, I’ve often wondered, where does our success come from? The answer is synthesis, the ability to combine creativity and calculation, art and science, into a whole that is much greater than the sum of its parts. Chess is a unique cognitive nexus, a place where art and science come together in the human mind and are then refined and improved by experience.
  3. We can explore our own boundaries and the boundaries of our own lives. But before we go exploring, we’ll need a map. Having a personalized map of your decision-making process is essential, and this book can only roughly chart the stages of observation and analysis that go into drawing that map. The map tells you which areas of your mind are well-known to you and which are still uncharted. It reveals your strengths, weaknesses, and areas as yet untested. Most important, you must look to develop your own map. There is no advantage in trying to identify the common denominator that links you to your friends or colleagues or opponents. We must all look higher and dig deeper, move beyond the basic and universal.
  4. We cannot pick and choose which style we would prefer for ourselves. Personal style is not generic software you can download and install. You must instead recognize what works best for you and then, through challenge and trial, develop your own method—your own map. To begin, ask yourself, What am I lacking? What are my strengths? What type of challenges do I tend to avoid and why? The method you employ to achieve success is a secret because it can be discovered only by you analyzing your own decisions. This is what my questioners should really have been asking me about instead of my trivial habits: How did I push myself? What questions did I ask myself? How did I investigate and understand my strengths and weaknesses? And how did I use what I learned to get better and further define and hone my method?
  5. Better Decision-Making Cannot Be Taught, but It Can Be Self-Taught. Let me explain. You must become conscious of your decision-making processes, and with practice they will improve your intuitive—unconscious— performance. Developing your personal blueprint allows you to make better decisions, to have the confidence to trust your instincts, and to know that no matter the result, you will come out stronger. There, inside each of us, is our unique secret of success. It’s not enough to be talented. It’s not enough to work hard and to study late into the night. You must also become intimately aware of the methods you use to reach your decisions.
  6. Whereas strategy is abstract and based on long-term goals, tactics are concrete and based on finding the best move right now. Tactics are conditional and opportunistic, all about threat and defense. No matter what pursuit you’re engaged in—chess, business, the military, managing a sports team—it takes both good tactics and wise strategy to be successful. As Sun Tzu wrote centuries ago, “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”
  7. The lesson here is that if you play without long-term goals your decisions will become purely reactive and you’ll be playing your opponent’s game, not your own. As you jump from one new thing to the next, you will be pulled off course, caught up in what’s right in front of you instead of what you need to achieve.
  8. The strategist starts with a goal in the distant future and works backward to the present. A Grandmaster makes the best moves because they are based on what he wants the board to look like ten or twenty moves in the future. This doesn’t require the calculation of countless twenty-move variations. He evaluates where his fortunes lie in the position and establishes objectives. Then he works out the step-by-step moves to accomplish those aims.
  9. “The strategist’s method is to challenge the prevailing assumptions with a single question: Why?” “Why?” is the question that separates visionaries from functionaries, great strategists from mere tacticians. You must ask this question constantly if you are to understand and develop and follow your strategy. 
  10. Experience allows us to instantly apply the patterns we have successfully used in the past. Tactics involve calculations that can tax the human brain, but when you boil them down, they are actually the simplest part of chess and are almost trivial compared to strategy. Think of tactics as forced, planned responses, basically a series of “if—then” statements that would make a computer programmer feel right at home.
  11. Every time you make a move, you must consider your opponent’s response, your answer to that response, and so on. A tactic ignites an explosive chain reaction
  12. And yet they never believed the airplane would amount to much beyond novelty and sport. The American scientific community shared that view, and soon the USA fell way behind in the aircraft business. The Wright brothers failed to envision the potential of their creation, and it was left to others to exploit the power of flight for commercial and military purposes.
  13. A key to developing successful strategies is to be aware of your strengths and weaknesses, to know what you do well. Two strong chess players can have very different strategies in the same position and they might be equally effective—leaving aside those positions in which a single forced winning line is available. Each player has his own style, his own way of solving problems and making decisions.
  14. So before I played Petrosian again, less than a year after the defeats described above, I spoke with Spassky, who was playing in the same tournament in Yugoslavia. He counseled me that the key was to apply pressure, but just a little, steadily. “Squeeze his balls,” he told me in an unforgettable turn of phrase. “But just squeeze one, not both!”
  15. You must always be aware of your limitations and also of your best qualities. This knowledge allows you to both play your own game and adapt when it is required.
  16. Instead of continuing to be frustrated in my attempts to change the character of the games, I decided my best chance was to go with the flow. Instead of making sharp moves that I thought were more in my style, I played the best solid moves available even if they led to quiet positions. Freed from the psychological difficulty of trying to force the issue in each game, I could just play chess.
  17. Change can be essential, but it should only be made with careful consideration and just cause. Losing can persuade you to change what doesn’t need to be changed, and winning can convince you everything is fine even if you are on the brink of disaster. If you are quick to blame faulty strategy and change it all the time, you don’t really have any strategy at all. Only when the environment shifts radically should you consider a change in fundamentals. We all must walk a fine line between flexibility and consistency. Avoid change for the sake of change.
  18. The problem, as many of these players discovered, is that most of their “original” concepts were rare for good reason. The virtue of innovation only rarely compensates for the vice of inadequacy.
  19. Finally we come to the hardest part of developing and employing strategic thinking: the confidence to use it and the ability to stick to it consistently. Once you have your strategy down on paper, the real work begins. How do you stay on track, and how do you know when you have slipped away from thinking strategically? We stay on track with rigorous questioning of our results, both good and bad, and our ongoing decisions. During a game I question my moves, and after the game I question how accurate my evaluations were in the heat of battle. Were my decisions good ones? Was my strategy sound? If I won, was it due to luck or skill? When this system fails, or fails to operate quickly enough, disaster can strike.
  20. In 2000 I met a former pupil of mine, Vladimir Kramnik, in a sixteen-game match for the world chess championship, my sixth title defense. I had won the title back in 1985, and headed into this match, I had been playing some of the best chess of my life. In other words, I was ripe for defeat. Years of success had made it difficult for me to imagine I could lose. Going into that match, I had won seven consecutive grand slam tournaments in a row and I wasn’t aware of my own weaknesses. I felt I was in great form and unbeatable. After all, hadn’t I beaten everyone else? With each success the ability to change is reduced. My longtime friend and coach, Grandmaster Yuri Dokhoian, aptly compared it to being dipped in bronze. Each victory added another coat.
  21. Questioning yourself must become a habit, one strong enough to surmount the obstacles of overconfidence and dejection. It is a muscle that can be developed only with constant practice.
  22. Tactics is knowing what to do when there is something to do; strategy is knowing what to do when there is nothing to do. —SAVIELLY TARTAKOWER
  23. What exactly do you do when there is nothing to do? We call these phases “positional play” because our goal is to improve our position. You must avoid creating weaknesses, find small ways to improve your pieces, and think small—but never stop thinking. One tends to get lazy in quiet positions, which is why positional masters such as Karpov and Petrosian were so deadly. They were always alert and were happy to go long stretches without any real action on the board if it meant gaining a tiny advantage, and then another. Eventually their opponents would find themselves without any good moves at all, as if they were standing on quicksand.
  24. In life there is no such obligation to move. If you can’t find a useful plan, you can watch television, stick with business as usual, and believe that no news is good news. Human beings are brilliantly creative at finding ways to pass time in unconstructive ways. At these times, a true strategist shines by finding the means to make progress, to strengthen his position and prepare for the inevitable conflict. And conflict, we cannot forget, is inevitable.
  25. I often refer to the need for effective development, something that is now taken for granted by any chess player beyond the rank of novice. But it took the first great American sports hero to demonstrate the importance of this fundamental concept to the world. His lesson, that you should have a solid and well-developed position before going on the attack, is applicable to every field of battle.
  26. Morphy’s secret, and it’s unlikely he was aware of it himself, was his understanding of positional play. Instead of flying directly into an attack, as was the rule in those days, Morphy first made sure everything was ready. He understood that a winning attack should only be launched from a strong position, and that a position with no weaknesses could not be overwhelmed. Unfortunately, he left no map behind, few writings that could explain his method. Morphy was so far ahead of his time that it took another quarter century for these principles of development and attack to be rediscovered and formulated.
  27. Trusting yourself means having faith in your strategy and in your instincts.
  28. Studies performed by Dutch psychologist Adriaan de Groot have shown that elite players don’t in fact look ahead that much further than considerably weaker players while solving chess problems. They can, on occasion, but it doesn’t define their superior play. A computer may look at millions of moves per second, but lacks a deep sense of why one move is better than another; this capacity for evaluation is where computers falter and humans excel. It doesn’t matter how far ahead you see if you don’t understand what you are looking at. We have seen that precise calculation is the first key to effective decision-making. The second is the ability to evaluate both static (permanent) and fluid factors. When I contemplate my move, I don’t start out by immediately running down the decision tree for every possible move. First I consider all of the elements in the position—such as material and king safety—so I can establish a strategy and develop intermediate objectives. Only when I have these goals in mind do I select the moves to analyze.
  29. In a complicated game this tree of analysis usually stays within a depth of four or five moves—that is, four or five moves for each player, or eight to ten total moves.
  30. The decision tree must constantly be pruned. Move from one variation to the next, discarding the less promising moves and following up the better ones. Don’t jump to another before you’ve reached a conclusion on the move you’re analyzing; you’ll waste precious time and risk confusing yourself. You must also have a sense of when to stop. Discipline yourself to keep calculating until you have determined a path that is clearly the best, or until further analysis won’t return enough value for the time spent.
  31. In some cases, the best move will be so obvious that it’s not necessary to work out all the details, especially if time is of the essence. This is rare, however, and it is often when we assume something is obvious and react hastily that we make a mistake. More often you should break routine by doing more analysis, not less. These are the moments when your instincts tell you that something is lurking below the surface, or that you’ve reached a critical juncture and a deeper look is required. To detect these key moments you must be sensitive to trends and patterns in your analysis. If one of the branches in your analysis starts to show surprising results, good or bad, it’s worth investing the time to find out what’s going on. Sometimes it’s hard to explain exactly what makes those bells go off in your head telling you there is more to be found. The important thing is to listen to them when they ring. One of my best games came about thanks to this sixth sense. I saw the final winning position, an incredible fifteen moves away. It was a feat of calculation, but there is no way your mind can go that far without help from your imagination.
  32. As an aside, although it turned out well for me, my missing the best move illustrates one of the perils of becoming fixated on a distant goal. I was so entranced by my vision of the gold at the end of this rainbow that I stopped looking around as I approached it. I’d convinced myself that such a pretty finish must be scientifically correct too—a potentially dangerous delusion.
  33. As for internal factors, it is clear to me that I would not have achieved such success at anything other than chess. The game came to me naturally, its requirements fitting my talents like a glove. My talents for memorization and calculation were blended with an aggressive streak for an ideal chess combination.
  34. The position doesn’t have to be an exact replica to produce this benefit. If you play the Najdorf Defense your entire career, you develop a feel for what moves to make and when in response to certain ideas and plans. We automatically find parallels and apply our knowledge of analogous positions. A Grandmaster will retain tens of thousands of fragments and patterns of chess data and adds to them constantly through frequent practice. My ability to recall so many games and positions doesn’t mean I have an easier time remembering names, dates, or anything else.
  35. De Groot illustrated this in an elegant fashion in his 1944 study of chess players. He tested players of every level, from former world champions to beginners, seeking to unlock the secrets of master chess. He gave the players a set of positions from games to memorize, then recorded how well they could reproduce them. Predictably, the stronger the player, the better he scored. The elite players scored ninety-three percent, the experts seventy-two percent, the average players just 51 percent. Thirty years later, in 1973, researchers Bill Chase and Herb Simon replicated de Groot’s experiment but added a key second set of test positions. For the second set they placed the pieces on the boards randomly, not following the rules of the game or any pattern at all. As in de Groot’s study, the stronger players scored better on the positions taken from actual games. But with the random positions, all levels of players scored approximately the same. Without being able to utilize patterns, or what psychologists call chunks, the masters didn’t display superior memory prowess. The same processes are at work in every human endeavor. Rote memorization is far less important than the ability to recognize meaningful patterns.
  36. Most people talk about unwinding after work or school, putting the day behind them so they can relax. How much more effective would they become if, at the end of each day, they asked themselves what lessons they had taken away for tomorrow?
  37. Fantasy isn’t something you can turn on with the flip of a switch. The key is to indulge it as often as you can to encourage the habit, to allow your unconventional side to flourish. Everyone develops his own device for prompting his muse. The goal is for it to become continuous and unconscious, so your fantasy is always active.
  38. Before I resigned myself to the seemingly inevitable queen move, I took a deep breath and surveyed the rest of the board. As with so many fantasy moves, this one started with a mental “Wouldn’t it be nice if . . .” If you daydream a little about what you’d like to see happen, sometimes you find that it is really possible.
  39. Too often we quickly discard apparently outlandish ideas and solutions, especially in areas where the known methods have been in place for a long time. The failure to think creatively is as much self-imposed as it is imposed by the parameters of our jobs and of our lives. “What if?” often leads to “Why not?” and at that point we must summon our courage and find out. 
  40. The more you experiment, the more successful your experiments will be. Break your routines, even to the point of changing ones you are happy with to see if you can find new and better methods.
  41. If critics and competitors can’t match your results, they will often denigrate the way you achieve them. Fast, intuitive types are called lazy. Dedicated burners of midnight oil are called obsessed. And while it’s obviously not a bad idea to hear and consider the opinions of others, you should be suspicious when these criticisms emerge right on the heels of a success.
  42. Few lives and few endeavors permit such devotion. But in truth it’s not the amount of time that really counts—it’s the quality of your study and how you use your time. Becoming a 24/7 fanatic who counts every minute and second isn’t going to make you a success. The keys to great preparation are self-awareness and consistency. Steady effort pays off, even if not always in an immediate, tangible way.
  43. There was an almost mystical correlation between work and achievement, with no direct tie between them. Perhaps I was benefiting from the chess equivalent of the placebo effect. Going into battle with what I believed were lethal weapons gave me confidence even though they went largely unused and wouldn’t in some cases have been effective.
  44. You can—and must—look for ways to experiment and to push the boundaries of your capacity in different areas.
  45. Now, though retired from professional chess, I stick with my routine as closely as possible. This means hours of sleep, mealtimes, hours of work on different projects, and staying conscious of how these things are balanced daily and weekly. I’ve adapted my new activities into the old chess program, preserving the patterns that have kept me comfortable and productive. Where there used to be chess, there is now politics. Where before I would analyze the games of my chess opponents, I now analyze the statements of my political opponents. My afternoon nap is still sacrosanct.
  46. This isn’t a cookbook, and I’m not offering a recipe for your success. Everyone must create his own successful combinations with the ingredients he has. There are guidelines for what works, but each person has to discover what works for him. This doesn’t happen by itself. Through practice and observation, you must take an active role in your own education.
  47. Evaluating a position goes well beyond looking for the best move. The move is only the result, the product of an equation that must first be imagined and developed. So, determine the relevant factors, measure them, and, most critically, determine the optimal balance among them. Before you can begin your search for the keys to a position, you have to perform this basic due diligence. We can categorize these factors into three groups: material, time, and quality.
  48. Botvinnik made it clear that the worst type of mistake was one produced due to a bad habit because it made you predictable.
  49. Our friends, colleagues, and family usually know much more about our bad habits than we do. Hearing about these psychological tics can be as surprising as being told by your spouse that you snore. Prejudices and preferences in your decisions are unlikely to be harmful as long as you are aware of them and actively work to iron them out. Awareness can mean the difference between a harmless habit and a bias that leads to a dangerous loss of objectivity.
  50. Put that bad piece, that underperforming asset, to good use or get rid of it and your overall position will improve.
  51. Successfully exploiting your advantages leads to greater advantages, eventually great enough to win a decisive amount of material. This is where the alchemy comes in, the transformation of one type of advantage into another. With accurate play we can turn material into time and back again, or invest both for a high return in quality.
  52. When measuring imbalances, you should consider the elements of your operation not just in relation to your rivals’, but also in relation to one another. In chess we talk about having harmony in our position. Are your pieces working together? Is your material developed in accordance with your strategic goals? The difficulty of achieving successful coordination increases with the number of assets.
  53. Physics also tells us that “ordered systems lose less energy than chaotic systems.” In chess terms, when our pieces work together, they can turn one advantage into another without losing quality. A position or a company or a military unit that is disorganized can be torn apart by attempting a transformation. Trying to achieve the objective can leave them so depleted that they are quickly wiped out. This happens most frequently— in chess and in life—when positions or circumstances are already tenuous.
  54. A player in a difficult position tends to make mistakes due to the psychological pressure that comes with knowing he’s in trouble. But another key dynamic is also at work: an inferior position is less able to withstand the loss of energy required by an attempt at change. This is why a company that is in financial trouble should never gamble on a risky venture.
  55. In competitive play, though, that theory rarely holds up. Long before a player becomes a master, he realizes that rote memorization, however prodigious, is useless without understanding. At some point, he’ll reach the end of his memory’s rope and be without a premade fix in a position he doesn’t really understand. Without knowing why all the moves were made, he’ll have little idea of how to continue when play inevitably advances beyond the moves he was able to store in his memory.
  56. All the study and preparation in the world can’t show you what it’s really going to be like in the wild. Observing typical plans in action, mistakes and accidents included, is vastly superior to ivory-tower planning.
  57. Intuition and instinct form the bedrock of our decision-making, especially the rapid-fire decisions that make up our daily lives.
  58. This mentality requires us to overcome the desire to release the tension. Many bad decisions come from wanting to just get the process over to escape the pressure of having to make the decision. This is the worst type of haste, an unforced error. Resist it! If there is no benefit to making the decision at the moment and no penalty in delaying it, use that time to improve your evaluation, to gather more information, and to examine other options. As Margaret Thatcher put it, “I’ve learned one thing in politics. You don’t make a decision until you have to.”
  59. Success Is the Enemy of Future Success
  60. Question the status quo at all times, especially when things are going well. When something goes wrong, you naturally want to do it better the next time, but you must train yourself to want to do it better even when things go right. Failing to do this leads to stagnation and eventual breakdown. For me, it led to a crushing defeat.
  61. It can feel a bit paradoxical to muster up the confidence that we are the best but still compete as if we were outsiders and underdogs. But that’s what it takes.
  62. Perhaps you should create your own “happiness index,” which can be as simple as a mental or actual list of things that motivate you and give you pleasure and satisfaction.
  63. Every person has to find the right balance between confidence and correction, but my rule of thumb is, lose as often as you can take it.
  64. I believe that winning requires a constant and strong psychology not just at the board but in every aspect of your life.
  65. I always knew something was wrong if I wasn’t on edge before a game. Nervous energy is the ammunition we take into any mental battle. If you don’t have enough of it, your concentration will fade. If you have a surplus, the results can be explosive.
  66. In the real world, the moment you believe you are entitled to something is exactly when you are ripe to lose it to someone who is fighting harder.
  67. Bronstein was the most creative player of his generation, and he seemed to have all the ingredients necessary to bring down the world champion. But having set his sights on reaching the final, he found it impossible to raise them to winning the match itself.
  68. Weak human + machine + superior process was greater than a strong computer and, remarkably, greater than a strong human + machine with an inferior process.
  69. A manager might say they built an effective team from a group of individuals with disparate skill sets. An army commander would recognize that a well-coordinated force will almost always triumph over a numerically superior enemy who lacks organization. A company with an efficient management structure, or assembly line, will often have better margins than a larger, less agile competitor. Process is critical, especially since its benefits multiply with each cycle.
  70. Engaging with the weakest points in our game and drilling down so we really understand them is the best and fastest way to improve. Working to become a universal player—someone who can defend as well as attack and is at home in any type of position—may not always have an obvious immediate benefit, especially if you are in a specialized field. But in my experience working toward a universal style creates a rising tide that lifts all boats. Gaining experience in one area improves our overall abilities in unexpected, often inexplicable ways.
  71. It sounds strange to say that being a better artist might make me a stronger chess player or that listening to classical music can make you a more effective manager. And yet this is exactly the sort of thing that Feynman had in mind when he said that being a drummer made him a better physicist. When we regularly challenge ourselves with something new—even something not obviously related to our immediate goals—we build cognitive and emotional “muscles” that make us more effective in every way. If we can overcome our fear of speaking in public, or of submitting a poem to a magazine, or learning a new language, confidence will flow into every area of our lives. Don’t get so caught up in “what I do” that you stop being a curious human being. Your greatest strength is the ability to absorb and synthesize patterns, methods, and information. Intentionally inhibiting that ability by focusing too narrowly is not only a crime, but one with few rewards.
  72. Agatha Christie said of intuition, “You can’t ignore it and you can’t explain it.” But we don’t need a pat explanation to recognize how important it is and investigate how we can develop ours to our maximum potential
  73. This is the essential element that cannot be measured by any analysis or device, and I believe it’s at the heart of success in all things: the power of intuition and the ability to harness and use it like a master.
  74. The biggest problem I see among people who want to excel in chess—and in business and in life in general—is not trusting these instincts enough. Too often they rely on having all the information, which then forces them to a conclusion. This effectively reduces them to the role of a microprocessor and guarantees that their intuition will remain dormant.
  75. The truest tests of skill and intuition come when everything looks quiet and we aren’t sure what to do, or if we should do anything at all.
  76. crisis really means a turning point, a critical moment when the stakes are high and the outcome uncertain. It also implies a point of no return. This signifies both danger and opportunity, so Kennedy’s speech was accurate where it mattered.
  77. Apart from its merit as an indicator of good or poor form, the ability to detect these crisis points is a gauge of overall strength in a chess player—and in a decision-maker. The greatest players are distinguished by their ability to recognize crucial factors that are both specific and general.
  78. Sometimes the hardest thing to do in a pressure situation is to allow the tension to persist. The temptation is to make a decision, any decision, even if it is an inferior choice.
  79. One of the constant themes of this book has been how essential it is to continually challenge ourselves. The only way to develop is to venture into the unknown, to take risks, and to learn new things. We must force ourselves out of our comfort zone and trust our ability to adapt and thrive.
  80. What we make of the future is defined by how well we understand and make use of our past. Our past creates a map not only of where we have come from, but of where we are going; on it are marked the things we have valued, and the places we have found success or failure.
  81. I thank Stanley Druckenmiller for his counsel as well as his steady support of chess education in the United States via the Kasparov Chess Foundation,

What I got out of it

  1. Beautiful book on strategy, tactics, mastery, learning. A multi-disciplinary thinker whose insights on chess can help in any endeavor

On Grand Strategy by John Lewis Gaddis

Longer write-up and full notes can be found below. Excellent book if you’re interested in strategy and seeing how it has played out and been shaped over the last several millennia

7 Powers: The Foundations of Business Strategy by Hamilton Helmer

Summary

  1. Helmer sets out to create a simple, but not simplistic, strategy compass. His 7 powers include: scale economics, switching costs, cornered resource, counter positioning, branding, network effects, and process.

Key Takeaways

  1. Strategy: the study of the fundamental determinants of potential business value The objective here is both positive—to reveal the foundations of business value—and normative—to guide businesspeople in their own value-creation efforts. Following a line of reasoning common in Economics, Strategy can be usefully separated into two topics: Statics—i.e. “Being There”: what makes Intel’s microprocessor business so durably valuable? Dynamics—i.e. “Getting There”: what developments yielded this attractive state of affairs in the first place? These two form the core of the discipline of Strategy, and though interwoven, they lead to quite different, although highly complementary, lines of inquiry.
  2. Power: the set of conditions creating the potential for persistent differential returns. Power is the core concept of Strategy and of this book, too. It is the Holy Grail of business—notoriously difficult to reach, but well worth your attention and study. And so it is the task of this book to detail the specific conditions that result in Power
  3. The Mantra: a route to continuing Power in significant markets. I refer to this as The Mantra, since it provides an exhaustive characterization of the requirements of a strategy.
  4. The Value Axiom. Strategy has one and only one objective: maximizing potential fundamental business value.
    1. For the purposes of this book, “value” refers to absolute fundamental shareholder value—the ongoing enterprise value shareholders attribute to the strategically separate business of an individual firm. The best proxy for this is the net present value (NPV) of expected future free cash flow (FCF) of that activity.
  5. Dual Attributes. Power is as hard to achieve as it is important. As stated above, its defining feature ex post is persistent differential returns. Accordingly, we must associate it with both magnitude and duration.
    1. Benefit. The conditions created by Power must materially augment cash flow, and this is the magnitude aspect of our dual attributes. It can manifest as any combination of increased prices, reduced costs and/or lessened investment needs.
    2. Barrier. The Benefit must not only augment cash flow, but it must persist, too. There must be some aspect of the Power conditions which prevents existing and potential competitors, both direct and functional, from engaging in the sort of value-destroying arbitrage Intel experienced with its memory business. This is the duration aspect of Power
    3. Benefits are common, and they often bear little positive impact on company value, as they are generally subject to full arbitrage. The true potential for value lies in those rare instances in which you can prevent such arbitrage, and it is the Barrier which accomplishes this. Thus, the decisive attainment of Power often syncs up with the establishment of the Barrier.
  6. Complex Competition. Power, unlike strength, is an explicitly relative concept: it is about your strength in relation to that of a specific competitor. Good strategy involves assessing Power with respect to each competitor, which includes potential as well as existing competitors, and functional as well as direct competitors. Any such players could be the source of the arbitrage you are trying to circumvent, and any one arbitrageur is enough to drive down differential margins.
  7. The 7 Powers
    1. Scale Economies
      1. Scale Economies—the First of the 7 Powers The quality of declining unit costs with increased business size is referred to as Scale Economies.
        1. Benefit: Reduced Cost
        2. Barrier: Prohibitive Costs of Share Gains
    2. Network Economies
      1. Network Economies: the value of the service to each customer is enhanced as new customers join the “network.” In such a situation, having the most customers is everything,
      2. Industries exhibiting Network Economies often exhibit these attributes: Winner take all.
    3. Counter-Positioning
      1. Counter-Positioning: A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.
      2. This chapter introduces Counter-Positioning, the next Power type. I developed this concept to depict a not well-understood competitive dynamic I often have observed both as a strategy advisor and an equity investor. I must confess it is my favorite form of Power, both because of my authorship and because it is so contrarian. As we will see, it is an avenue for defeating an incumbent who appears unassailable by conventional wisdom metrics of competitive strength.
      3. But nearly always, these featured the same outcome: the incumbent responds either not at all or too late. The incumbent’s failure to respond, more often than not, results from thoughtful calculation. They observe the upstart’s new model, and ask, “Am I better off staying the course, or adopting the new model?” Counter-Positioning applies to the subset of cases in which the expected damage to the existing business elicits a “no” answer from the incumbent. The Barrier, simply put, is collateral damage. In the Vanguard case, Fidelity looked at their highly attractive active management franchise and concluded that the new passive funds’ more modest returns would likely fail to offset the damage done by a migration from their flagship products.
      4.  What are the potential causes of such decrements? They could be numerous, but over several decades of client strategy work, I have noted two that seem common. The first involves two characteristics of challenges to incumbency:
        1. The challenger’s approach is novel and, at first, unproven. As a consequence, it is shrouded in uncertainty, especially to those looking in from the outside. The low signal-to-noise of the situation only heightens that uncertainty.
        2. The incumbent has a successful business model. This heritage is influential and deeply embedded, as suggested by Nelson and Winter’s notion of “routines,” and with it comes a certain view of how the world works. The CEO probably can’t help but view circumstances through this lens, at least in part. Together these two characteristics frequently lead incumbents to at first belittle the new approach, grossly underestimating its potential.
        3. As noted in the Introduction, Power must be considered relative to each competitor, actual and implicit. With Counter-Positioning, this is particularly important, because this type of Power only applies relative to the incumbent and says nothing regarding Power relative to other firms utilizing the new business model.
        4. Though this isn’t always the case, I have noticed a frequently repeated script for how an incumbent reacts to a CP challenge. I whimsically refer to it as the Five Stages of Counter-Positioning: Denial Ridicule Fear Anger Capitulation (frequently too late)
        5. Once market erosion becomes severe, a Counter-Positioned incumbent comes under tremendous pressure to do something; at the same time, they face great pressure to not upset the apple cart of the legacy business model. A frequent outcome of this duality? Let’s call it dabbling: the incumbent puts a toe in the water, somehow, but refuses to commit in a way that meaningfully answers the challenge. Counter-Positioning often underlies situations in which the following developments are jointly observed: For the challenger Rapid share gains Strong profitability (or at least the promise of it) For the incumbent Share loss Inability to counter the entrant’s moves Eventual management shake-up (s) Capitulation, often occurring too late
        6. Such reversals are rare in business, because contests typically take place over extended periods and with great thoughtfulness on all sides. Even a momentary lapse by an incumbent won’t present a sufficient opening. The only bet worthwhile for a challenger is one in which even if the incumbent plays its best game, it can be taken off the board. A competent Counter-Positioned challenger must take advantage of the strengths of the incumbent, as it is this strength which molds the Barrier, collateral damage.
    4. Switching Costs
      1. Switching Costs arise when a consumer values compatibility across multiple purchases from a specific firm over time. These can include repeat purchases of the same product or purchases of complementary goods.
      2. Benefit. A company that has embedded Switching Costs for its current customers can charge higher prices than competitors for equivalent products or services. This benefit only accrues to the Power holder in selling follow-on products to their current customers; they hold no Benefit with potential customers and there is no Benefit if there are no follow-on products.
      3. Barrier. To offer an equivalent product, competitors must compensate customers for Switching Costs. The firm that has previously roped in the customer, then, can set or adjust prices in a way that puts their potential rival at a cost disadvantage, rendering such a challenge distinctly unattractive. Thus, as with Scale Economies and Network Economies, the Barrier arises from the unattractive cost/benefit of share gains for the challenger.
      4. Switching Costs can be divided into three broad groups:
        1. Financial.
        2. Procedural.
        3. Relational.
        4. Switching Costs are a non-exclusive Power type: all players can enjoy their benefits.
    5. Branding
      1. Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product.
      2. Benefit. A business with Branding is able to charge a higher price for its offering due to one or both of these two reasons:
        1. Affective valence. The built-up associations with the brand elicit good feelings about the offering, distinct from the objective value of the good.
        2. Uncertainty reduction. A customer attains “peace of mind” knowing that the branded product will be as just as expected.
      3. Barrier. A strong brand can only be created over a lengthy period of reinforcing actions (hysteresis), which itself serves as the key Barrier.
      4. Brand Dilution. Firms require focus and diligence to guide Branding over time and ensure that the reputation created remains consistent in the valences it generates. Hence, the biggest pitfall lies in diminishing the brand by releasing products which deviate from, or damage, the brand image. Seeking higher “down market” volumes can reduce affective valence by damaging the aura of exclusivity, weakening positive associations with the product.
      5. Problem is, the qualities that make Branding a Power also make it hard to change; the considerable risk is dilution or brand destruction.
      6. Type of Good. Only certain types of goods have Branding potential as they must clear two conditions:
        1. Magnitude: the promise of eventually justifying a significant price premium. Business-to-business goods typically fail to exhibit meaningful affective valence price premia, since most purchasers are only concerned with objective deliverables. Consumer goods, in particular those associated with a sense of identity, tend to have the purchasing decision more driven by affective valence. Here’s the reason: in order to associate with an identity, there must be some way to signal the exclusion of alternative identities.
        2. For Branding Power derived from uncertainty reduction, the customer’s higher willingness to pay is driven by high perceived costs of uncertainty relative to the cost of the good. Such products tend to be those associated with bad tail events: safety, medicine, food, transport, etc. Branded medicine formulations, for example, are identical to those of generics, yet garner a significantly higher price. Duration: a long enough amount of time to achieve such magnitude. If the requisite duration is not present, the Benefit attained will fall prey to normal arbitraging behavior.
    6. Cornered Resource
      1. Cornered Resource definition: Preferential access at attractive terms to a coveted asset that can independently enhance value.
      2. Benefit. In the Pixar case, this resource produced an uncommonly appealing product—“superior deliverables”—driving demand with very attractive price/volume combinations in the form of huge box office returns. No doubt—this was material (a large m in the Fundamental Equation of Strategy). In other instances, however, the Cornered Resource can emerge in varied forms, offering uniquely different benefits. It might, for example, be preferential access to a valuable patent, such as that for a blockbuster drug; a required input, such as a cement producer’s ownership of a nearby limestone source, or a cost-saving production manufacturing approach, such as Bausch and Lomb’s spin casting technology for soft contact lenses.
      3. Barrier. The Barrier in Cornered Resource is unlike anything we have encountered before. You might wonder: “Why does Pixar retain the Brain Trust?” Any one of this group would be highly sought after by other animated film companies, and yet over this period, and no doubt into the future, they have stayed with Pixar. Even during the company’s rocky beginning, there was a loyalty that went beyond simple financial calculation.
      4. Our general term for this sort of barrier is “fiat”; it is not based on ongoing interaction but rather comes by decree, either general or personal.
      5. Another way to put this is that a Cornered Resource is a sufficient condition for potential for differential returns.
    7. Process Power
      1. I save it until last because it is rare. I will use the Toyota Motor Corporation as a case.
      2. Perhaps the best way to think of it is this: Process Power equals operational excellence, plus hysteresis. Having said that, such hysteresis occurs so rarely that I am in strong agreement with Professor Porter’s sentiments.
      3. Benefit. A company with Process Power is able to improve product attributes and/or lower costs as a result of process improvements embedded within the organization. For example, Toyota has maintained the quality increases and cost reductions of the TPS over a span of decades; these assets do not disappear as new workers are brought in and older workers retire.
      4. Barrier. The Barrier in Process Power is hysteresis: these process advances are difficult to replicate, and can only be achieved over a long time period of sustained evolutionary advance. This inherent speed limit in achieving the Benefit results from two factors:
        1. Complexity. Returning to our example: automobile production, combined with all the logistic chains which support it, entails enormous complexity. If process improvements touch many parts of these chains, as they did with Toyota, then achieving them quickly will prove challenging, if not impossible.
        2. Opacity. The development of TPS should tip us off to the long time constant inevitably faced by would-be imitators. The system was fashioned from the bottom up, over decades of trial and error. The fundamental tenets were never formally codified, and much of the organizational knowledge remained tacit, rather than explicit. It would not be an exaggeration to say that even Toyota did not have a full, top-down understanding of what they had created—it took fully fifteen years, for instance, before they were able to transfer TPS to their suppliers. GM’s experience with NUMMI also implies the tacit character of this knowledge: even when Toyota wanted to illuminate their work processes, they could not entirely do so.
  8. The Path to Power: “Me Too” Won’t Do
    1. Here’s the first important takeaway from our consideration of Dynamics: “getting there” (Dynamics) is completely different from “being there” (Statics). In other words, to assess which journeys are worth taking, you must first understand which destinations are desirable. Fortunately the 7 Powers does exactly that: it maps the only seven worthwhile destinations.
    2. The first cause of every Power type is invention, be it the invention of a product, process, business model or brand. The adage “‘Me too’ won’t do” guides the creation of Power.
    3. Planning rarely creates Power. It may meaningfully boost Power once you have established it, but if Power does not yet exist, you can’t rely on planning. Instead you must create something new that produces substantial economic gain in the value chain. Not surprisingly, we have worked our way back to Schumpeter.
    4. Power arrives only on the heels of invention. If you want your business to create value, then action and creativity must come foremost. But success requires more than Power alone; it needs scale. Recall the Fundamental Equation of Strategy: Value = [Market Size] * [Power]
    5. Invention has a powerful one-two value punch: it both opens the door for Power and also propels market size.
  9. Other
    1. By far the most important “value moment” for a business occurs when the bars of uncertainty are radically diminished with regards to the Fundamental Equation of Strategy, market size and Power. At that moment, the cash flow future makes a step-change in transparency.
    2. A primary driver of opacity is high flux: if a business is in a fast-changing environment, then the information facing investment pros tends to have much higher uncertainty bars regarding future free cash flow. But high flux also attends the sort of conditions which orbit the “value moment.” So if the 7 Powers can lead to alpha by identifying Power in these situations ex ante, it also promises to be useful in doing the same for those inventors on the ground trying to find a path to satisfy The Mantra.
    3. The 3 S’s. Power, the potential to realize persistent differential returns, is the key to value creation. Power is created if a business attribute is simultaneously:
      1. Superior—improves free cash flow
      2. Significant—the cash flow improvement must be material
      3. Sustainable—the improvement must be largely immune to competitive arbitrage

What I got out of it

  1. Helmer provides a simple, but not simplistic, strategy framework in which to analyze, build, invest in companies. SSCCBNP – scale economies, switching costs, cornered resource, counter positioning, branding, network effects, process. The book is well worth reading and re-reading. The real world examples he gives relating to his framework are helpful to better understand it all.

A Treatise on Efficacy

This book is about the diverging patterns of efficacy between Western and Chinese thinking. The Western model of efficacy, inherited from the ancient Greeks’ conception of action, seeks to attain directly a predetermined goal through voluntary and assertive action. The Chinese tend to evaluate the power inherent in a situation (shi) and transform it through non-assertiveness, relying on the “propensity” of things in such a way that the result takes place of itself. The Chinese strategist manipulates his own troops and the enemy to win a battle without waging war and to bring about victory effortlessly. Efficacity in China is thus conceived of in terms of transformation (as opposed to action) and manipulation. To summarize the difference between Western and Chinese thought: one constructs a model that is then projected onto the situation, which implies that the situation is momentarily “frozen”. The other relies on the situation as on a disposition that is known to be constantly evolving. It is a disposition that functions as a device.

One of my all-time favorites. It ties together so many recent themes for me – Werner’s effortless mastery, strategy, philosophy, psychology, and more.

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The Prince by Niccolo Machiavelli

Summary

  1. Machiavelli lays out what the prince of a territory should and should not do in order to rule successfully. His insight covers topics from how to rule your people, what to do with colonies, whether one should wish to be feared or loved (not hated turns out to be the answer), how to rule newly conquered people, etc. It is often very direct and harsh in its suggestions.
Key Takeaways
  1. It is far better to gain the confidence of the people than to rely on fortresses
  2. He who thinks that new favors will cause great personages to forget old injuries deceives himself
  3. Of fortune and women, it is the bold rather than the cautious that will win and hold them both
  4. Men are still the dupes of their simplicity and greed
  5. The cloak of religion still conceals the vices of mens’ ambitions
  6. Louis XII made the 5 errors – he destroyed the minor powers, he increased the strength of one of the greater powers in Italy, he brought in a foreign power, he did not settle in the country, he did not send colonies
  7. He who has not first laid his foundations may be able with great ability to lay them afterwards, but they will be laid with trouble to the architect and danger to the building
  8. Upon this a question arises: whether it be better to be loved than feared or feared than loved? It may be answered that one should wish to be both, but, because it is difficult to unite them in one person, it is much safer to be feared than loved, when, of the two, either must be dispensed with. Love is preserved by the link of obligation which, owing to the baseness of men, is broken at every opportunity for their advantage; but fear preserves you by a dread of punishment which never fails. Above being feared and loved, it is more important to avoid hatred
  9. A prince who is not wise himself will never take good advice, unless by chance he has yielded his affairs entirely to one person who happens to be a very prudent man.
  10. It is of the greatest important in this world that a man should know himself, and the measure of his own strength and means; and he who knows that he has not a genius for fighting must learn how to govern by the arts of peace. 
What I got out of it
  1. The term Machiavellian has been a bit distorted over the centuries to become synonymous with manipulation. While Machiavelli undoubtedly advises this in certain situation, that is not his main argument. Many valid points on how to deal with people or groups of people and while his examples are dated, his messages are as clear as ever.

Read The Prince

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The Art of War by Sun Tzu

Summary

  1. Sun Tzu’s 2,000 year old principles are as relevant today as they were back then. Whether in business, sports, war, or any other field, taking care of the small decisions as well as deception, disguise and diversion are all required for success.
Key Takeaways
  1. Sun Tzu lived from 544 to 496 BC and was a very successful general even in his own time and was revered by all Chinese military leaders for centuries
  2. Art of War was origianlly written for King Helu
  3. “He who relies solely on warlike measures shall be exterminated; he who relies solely on peaceful measures shall perish.”
  4. Many think of China as the largest peace-loving nation on earth but forget about her turbulent, violent times thousands of years ago. They had built the Great Wall and had a huge standing army before Rome’s first legion even existed
What I got out of it
  1. Amazing how certain principles will always be relevant and Sun Tzu’s Art of War is no exception. Although his examples are all based on warfare, these can be translated into any field. Great read

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