Understanding the Five Disqualifiers of Strategy with Peter Compo
Welcome back to another episode featuring Peter Compo, the renowned author of 'The Emergent Approach to Strategy.' In today's discussion, Peter delves deep into the 'Five Disqualifiers of Strategy,' offering insights into common pitfalls in strategic design. The episode is packed with practical examples and explanations of why traditional strategy tests often fall short. Peter illustrates the importance of real-time guidance, unified decisions, and free choices in strategic frameworks. Learn about five critical tests to evaluate your strategy: 'Is the opposite absurd?', 'Does it have numbers?', 'Does it exclude anything?', 'Does it duplicate the higher-level organization?', and 'Is it a list?'. This episode is essential for anyone involved in business strategy, innovation, and better thinking.
00:00 Introduction and Welcome
01:01 The Importance of Strategy Testing
01:40 Traditional vs. Modern Strategy Tests
02:17 Introduction to the Five Disqualifiers
05:24 Detailed Explanation of the Five Disqualifiers
06:33 Practical Examples and Applications
08:37 Common Pitfalls in Strategy
18:55 The Role of Clear Language in Strategy
21:43 Summary and Conclusion
38:14 Next Episode Preview
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strategy, disqualifiers, Peter Compo, Aidan McCullen, emergent approach, strategy design, business strategy, adaptive tools, Michael Porter, McKinsey, corporate strategy, innovation, Henry Ford, Warren Buffett, R&D, market dynamics, organizational strategy, DVD business, Netflix, Adobe
Welcome back to another episode with Peter Campo, author of The Emergent Approach to Strategy. Today's episode is on the five disqualifiers of strategy. Welcome back, Peter. Thanks for having me back. Well, thanks for your patience, man, and putting up with me. We're having fun. Absolutely, man. I thought I'd start off this chapter because it provides examples of applying the disqualifiers in various scenarios, illustrating common pitfalls and strategy design and the importance of avoiding them. And why the examples are so important is you do give these disqualifiers. And on their own, you can miss what they actually mean. And I said to Peter off, "It's going to be so hard for me to keep out of it because I found so many little nuggets that I was like on our audience. We'll love that. I've got to tell them about that, et cetera." So you may have to put up with me coming in every so often with one of those. But I thought I'd warm myself and warm you up, maybe, to bring it back to where the time of writing with a little excerpt from this chapter. And then you take it away. Do you say, "In the fog of designing and implementing frameworks, wouldn't it be wonderful to have simple tests that show whether the strategy component of the framework is at minimum functioning as a strategy?" This is what the five disqualifiers can give. They are powerful adaptive tools. You say, "Strategy testing is a time-honored practice and some traditional sets are well known, for instance, those by Michael Porter and McKinsey. However, most traditional tests apply to entire frameworks not to the strategy component, and many require significant prediction and opinion to answer. For example, "Will your strategy beat the market?" Well, if you know the answer is yes, why would you need to do any thinking at all? Just beat the market and get rich and famous. Other tests like, "Does your strategy balance commitment and flexibility? Or is there conviction to act on your strategy while useful for testing framework alternatives are quite subjective?" The five disqualifiers are less subjective. They minimize the need for prediction and they allow for testing the strategy component itself. They apply to any endeavor or function, not just a business unit and can be used selectively on other designed framework components. They are useful for all aspects of life. So over to you to unpack what I talked about there and tell us what's behind the five disqualifiers. So as you read, strategy testing is a time-honored process. I think they've been tests of strategy have been around for maybe 50, 60 years. I don't know. There's a range of quality of the tests. You mentioned a few. Some like, "Will your strategy beat the market?" I don't think is a very useful test because if you knew the answer to that, you wouldn't need a strategy at all. You would just make a plan to beat the market and get rich. Others are quite useful. "Does your strategy tell you what not to do versus tell you what to do?" is a great test. "Does your strategy provide clear trade-offs? Does it show you what you're giving up in order to impose your strategy?" These are good. But what the five disqualifiers are is a set of tests that come directly out of the theory of strategy. And if we could just recap what that was, is that a model of complex adaptive systems showed some very fundamental requirements about what a strategy had to be. And it had to give real-time guidance. It had to unify all decisions. And it had to be something you're free to impose. And then a fourth thing came up in a later chapter, chapter 7 is the idea of nested strategies that in any organization of any size, there are multiple strategy frameworks, both at the highest level, that governs and constrains what the entire organization does, and then at functional levels and smaller business levels. Or in any organization, governmental, military, sports, you have the same thing. And that gives another requirement about how strategies must function. So if you boil down how to do nested, that it must be a free choice, it must give real-time guidance, and it must unify, you actually can derive five questions, called the five disqualifiers, that tell you whether those requirements are in place. And they're a little easier than going back to the theory. And I'll even say they're a little bit fun to use. So what are the five? They are, is the opposite absurd? Does it have numbers? Does it exclude anything? Does it duplicate what the higher level organization told you? And number five, is it a list? If you can answer yes to any of those, what you likely have is a goal at best, but often a cliche, or a truism, something that adds no information. And so my final point will be almost all of traditional tests pass if you give a yes answer, here a yes answer fails. So in a traditional test, does your strategy tell you what not to do? Yes, passes. Here is the opposite of your strategy absurd. Yes, fail. So those are the five disqualifiers. Peter, I might show figure eight one. I thought this was useful to see it. Yeah, so I think that this is really a little map of how you would use the disqualifiers in your head, or as an organization. The trick is to learn them. And once you've learned them, you start to become very attuned to exactly what this figure shows. The duplicate test, the corporate strategy, is that we're going to focus on usability of our products for this next period, versus new features. And then you go down the line and you see a product development group, or a marketing group, and they say, well, our strategy is to focus on unit on usability. Well, if you've learned these disqualifiers, your ears would be tuned and you'd say, no, that can't be our strategy. Because it's already imposed on us, it's an external constraint, which was talked about in chapter five, these different constraints that we're dealing with. Opposite absurd is probably one that's the easiest to tune your ears. Our strategy is to win by growing 10% faster than the competition. Well, what are you going to lose? Are you going to grow slower than the competition? So what I'm hoping is that people will learn these five, and they're quite easy to learn, and then become so attuned to them that they get this diagram in their head. And also, as a team, that people know not to suggest the strategy that fails these tests, because the rest of the team will immediately react to it. I thought that was so helpful, because it points to the fact that like innovation, I think one of the biggest challenges is with innovation is people's definition of it. And it's the same when it comes to strategy, because people think they're being strategic. Even on a boardroom level, they think they're being strategic, and they have different definitions of what that means. So I thought this disqualification of strategy and a common language of what that means across an organization is absolutely key. So everybody's on the same page. But I wanted to just make a point. I said I'd pull out a few little threads that I found. One of them was this little paragraph that you wrote. You said aspiring to low cost may make perfect sense, but turning the sentiment into a strategy requires more business content. It requires identifying the bottlenecks that we talked about before, that is unique to the business, and creating a rule that unifies around that bottleneck. So that's one thing. For instance, for a company to lower cost, whose product line has become hopelessly complicated, may need a strategy to raise R&D spending. R&D may need to invent more flexible products that replace many specialized ones. The opposite of raise R&D spending is certainly not absurd. A strategy defined as low cost could lead to every function in the organization reducing cost with no differential management, which is aimless. The opposite disqualifier illuminates the subtle difference between low cost as a reasonable aspiration and a non-functioning strategy. There's a lot in there, but just reading that, it dawned on me how many organizations go through this. And they make these decisions to lower costs, to make layoffs, to reduce spending R&D, or to do what they think is R&D. And by understanding what strategy is and not, they actually might make better decisions. And I just thought that was such a key paragraph to pull out, and I'd love you to elaborate on it. I'm really glad you picked that one out, because I think using the opposite disqualifier on this proposed strategy statement of our strategy is to be low cost. It really brings out a subtlety that the opposite of that is absurd, right? Our strategy is to be high cost. No one would ever want that. It would never be an objective of any or even a nonprofit organization, a government. Nobody would want to be high cost. You might accept high cost and return for some other value. Our strategy is to be premier. We're no longer going to work in the low end of our marketplace. We're going to have to accept high cost as part of that transition. But low cost fails the opposite test. And then what it does is it forces the organization to do a deeper dive into what are we really trying to achieve here? Yes, that's a reasonable goal that we need to be low cost because of whatever market dynamic. Maybe it's to grow. Maybe it's to survive. So what does low cost mean to us? And you brought out the example of maybe that means higher R&D costs. What's the greatest danger of low cost as a strategy where everybody gets a 10% reduction, right? How many times have we seen that? We have to be low cost. That means everybody has to reduce by a certain amount. There's no subtlety to that. There's no nuance. There's no understanding of the dynamics. We talked a lot about Henry Ford in our earlier sessions. And I think it's another great example. You might think that his strategy was low cost, but I don't think it was. I think his strategy was low price to consumers, low price and high throughput. And as an example of that, he raised the wages for factory workers by double, all of a sudden from 250 a day to five US dollars a day back in probably in the teens when he did this. And that was considered an outrageous thing to do. All the other corporate leaders and captains of industry were so angry at him, right? Well, how can that be part of a low cost strategy? What do you mean? We're doubling the price of workers' salaries to be beyond anything that anybody's willing to pay today? Well, it was because the monotony of the assembly line forced him to make the jobs more attractive. Low cost? No. Low price to consumers, high throughput to consumers? Yes. That objective, low cost to consumers, high throughput were not absurd. They did have a useful opposite. I loved that. I had that in my notes to Ford example as well. One of the things I thought about him, it was also a clever, maybe a strategy by him that by increasing wages, he also created new consumers that they could afford to buy their own cars, maybe at a discount. I don't think that was lost on him at all. I think he even talked about that. If I'm right, he was trying. Essentially, he was changing society. He was changing society in so many ways, and we may look back now and be upset that he made cars so much a part of our world. But that's what he was doing. I think he did want to see his people, his employees participate in that revolution. We did an episode last week with Kim Cameron, a former dean on his family, Jonathan and Aaron. They did a book called "Leaving Through." I wrote my weekly article and I wrote about how Taylor brought in Taylorism and scientific management and created basically the thinking team and the doing team. You just reminded me of this through talking about Ford. But what's happened in so many places is that people have one view of strategy and the longer the organization is in existence, oftentimes they're hiring strategists who are so far removed what it's like on the doing line, whatever that version of an assembly line is today for an organization. And they're making these decisions in isolation like this 10% across the board reduction in cost. And oftentimes that's at the expense of the future. So they're making cuts in R&D or some project that's just about there. And next thing, it gets this devastating blow and the future is damaged as well. And I just thought you might have some thoughts on that because I'm sure you've seen that yourself. I think it's a classic example. It's very hard when a company is under siege, right? Stock prices are down. Markets down. All of a sudden you're on the brink of a lack of profitability. There's so many cases that can come around on this. And you can understand why you do this. What's been described sometimes like spread the peanut butter evenly over every aspect of the company. It leaves no ambiguity, right? Hey, we're all in this together. We all have to sacrifice. But it can be very damaging. And it can become a habit too, I believe. And it probably results from when there isn't really a strategy in place already to lean on when things get tough. And you resort to what looks like tough leadership but what it really is is just the default case. And I'm sure in some cases it's worked to some extent that it's brought some value but you would think there would be a more sophisticated way of doing that in most cases. But I think once it's upon you that you have to do something, if you didn't really have a strategy in place that was meaningful, it's probably too late and that you don't immediately have a way to do it. That's a great point. When you don't know where to pull from, pull your budget from maybe a sunset business into an emerging one, then you just make it on mass across the board. Great point. There was another great line I loved here. You said, and you see this all the time that there was this funny website. It's probably still around. It was like something like a mission statement generator. And you basically put it into this website, a few bits and pieces of what your business does and it spits out this jargon. And I was like, that's what happens when you read a lot of strategies sometimes. And you write some words that may give illusions of success. For example, my organization gets it that our strategy is to optimize and grow. My unit understands that results are all that matter. My team is accelerating at XYZ. You say these words may project excitement to bosses or boards, but don't fool your people and don't fool yourself. Express sentiment is hard hitting jargon-free language that shows the tough trade-offs that you mentioned and uncertainties. I thought that was a really important aspect to point on and not to pick on people, but just to show how important this is to speak in clear language that people understand as that strategy cascades down the organization. Everybody knows what you're talking about. I think the strategy world, consultants, academics, practitioners, experts in companies themselves, I think it's a very tough area to use precise and non-jargan language because let's face it, a great number of people who create the language of strategy have extremely lucrative consulting businesses. And if you're a consultant, you've got to be differentiated, you got to market, you got to brand, and you got to excite people. And so many of the words that fail the opposite test, which is what you were referring to there about terms that feel good or active, exciting, nearly all of these will not be a strategy. They may be useful as a goal, minimize, maximize, sustain, innovate, breakthrough, advance, grow, transform, attract. Some of them will be reasonable goals, but others are just noise that don't have any information to the organization. We're going to transform. Okay. How many times if you read the word transform in the strategy, social media, and also all the magazines and journals. It's a word that's lost all its meaning. And I think that we would all help each other if we started avoiding these terms, especially as anything related to strategy and just pick them very carefully if we're going to use them as goals. I said at the top of the show that we'd give a brief example of each of the square fires. So we'll go through all five and it'd be great if you just gave a one line around what that one was. And then an example of how it comes to life. Then we'll wrap this episode and we're going to move on to execution as the next episode. So over to you maybe to take us through those Peter and I might jump in sometimes again with some great lines here and there just for a bit of color. Great. So let's, I actually was thinking about a great example of the opposite test this morning. Warren Buffett said, never lose money. Okay. Always lose money. Never make money. It's completely absurd. It gives no information and related to a corporate strategy as to our objective is to grow with profits or our strategy is to improve profitability. Anything related to this, it's truly a non-statement, right? Never lose money. But contrast it with another Warren Buffett statement where he says be greedy when others are fearful and fearful when others are greedy. Now that's a statement with content. The opposite is not absurd. How many people actually do exactly the opposite or think that it's smart to be careful when everybody else is pulling back. That concept, be greedy when others are fearful has content. It has meaning and it passes the opposite test. Brilliant example and the numbers disqualify. I thought that was such an important one. Does it have numbers or dates? You say a statement with numbers including dates rarely functions as a strategy. Numbers usually signify a specific goal plan or sometimes a tactic and this made me think of when people talk about smart goals. They actually think they're talking about strategies sometimes and to your point here, that's not the case at all. No, if it has a number, it's usually a goal. Sometimes it could be a tactic. So let's quick example. Grow 10% faster than the competition. It's a goal. The reason why we need the numbers test there is because there is no opposite to a number. There's no opposite to 10%. There's no opposite to be number one or number two in your industry. The opposite is to be the last. It has no technical opposite. So all these examples you're showing right here are examples of goals, not strategies. There is an exception to this. Sometimes when the number is a set point. So for example, we will put 30% of free cash flow into R&D. That is a very valid statement. It's testable. It's it's auditable. It gives real time guidance. But it's probably a tactic. So numbers, set point numbers, statements like that are are useful but probably not a strategy that unifies all the decisions in the organization, probably just a tactic. That was so useful to know because people will often say make it real, put some numbers in there, put some deadlines in there and you're kind of going, I'm going to point to this episode and go. I'm going to send you a YouTube video. Listen to this. I'll put a timestamp on it. So the next one you alluded to this one earlier on, the duplicate disqualifier is the same as the parent and you say this asks whether the prospective strategy is the same as a parent strategy. If the answer is yes, if it duplicates this parent, then it's not a valid strategy. Yeah, exactly. We talked about the idea. What if the corporate strategy is to focus on usability versus features for a period? For whatever reason they came to that conclusion, whatever their diagnosis says, that's the corporate directive. That's the strategy. We're going to trade off now. We're going to give up some features in return for making the features we have more useful to our customers. Extremely valid strategy has a beautiful opposite, right? Features versus features versus usability. But now what if you go down into the organization and you talk to manufacturing and you talk to marketing and you talk to R&D and they say, well, my strategy is to focus on usability. Well, you haven't added any information. That's already imposed upon you by the leadership of the company. You can try to negotiate and say, look, we're giving up if we do this and try to change their minds. But unless you can do that, it's an external constraint and you're adding no information. So R&D's strategy has to be something about how they're going to make trade-offs to get usability into the product line. That's so important because so many times, you know, a board member or maybe it's a family business and the owner, their kid says something, oh, we should be on TikTok, right? And you have like a marketing team who have this direction and then they're told to do this thing and go, okay, well, I only have so many people and resources available. There has to be a trade-off and when they understand that language and the whole organization understands that, they're able to then articulate it back up and the usability one is a huge one because you're, okay, well, then we're going to have to lose a focus on building new things if we're actually going to be scaling the back. I thought that was really, really valuable. And if you can make it implicit, then your decision-making becomes so much more solid on any kind of strategy as well. So the next we'll fly through and then we'll wrap this episode. They're exclude and list. So the excluded is just to ensure that you don't get seduced by only focusing on something that is exciting or fun or important to convey to Wall Street or to analysts or so forth. And that is the excluded. You can't have a strategy that only addresses part of the product line or part of the organization or else it doesn't unify. So if we stick with the usability example, you can't have R&D saying, okay, yeah, that's great. I'm going to do usability over here, but I'm not going to be focused on usability over here because I think features are really important, okay? You now have a divergence. Now again, you can negotiate, you can decide that might be the right thing to do, but until you do, it's not consistent with the overall strategy and you're now, you no longer have a unifying strategy. Another really classic example of this is that most businesses have product lines with mature products and with new products. And it's very seductive to say our strategy is to do market driven innovation development of our new products when investing their features, investing their quality, and yet you have a bunch of products that you're supposed to be cash cowing to generate cash for those others. Well, that strategy doesn't apply cash cow products. It's not a strategy. You need an overall strategy that unifies both. And then you can have separate strategies in a nested system for the new products and for the cash cow. Can we talk with that one for a moment? Because I was thinking of an example. So, up until recently, Netflix kept DVD.com. That's still sold or still rented out DVDs by mail and it was still a huge market for that. And they still threw off millions. Now, they were managed totally different. One was managed for efficiency. The other one as we know, Netflix managed for exploration and innovation. But how would they, how would an overarching strategy marry those two together, if at all? Yeah, I think the first part would be the CEO, the C-suite saying, we think it's valid to have these two business models simultaneously in the company. Right there is a strategy statement. We are going to continue to invest in both and maintain both. Now, immediately, you have a trade off, right? By maintaining the old CD DVD business, you're taking some resources, you're taking some mind space and taking it away from the growth, from the core of the streaming business. I think that's a very valid strategy discussion right there, decided it's worth keeping that. That might be the only thing the C-suite has to say. Now, the leader of the DVD business has to say, okay, how much resources do I have? Do I have a negotiation with leadership around that? And now I'll make this work the best I can. That's a great nested system. Leadership doesn't overimpose, doesn't overimpose what the DVD business should look like and what it should be. They might give a few restrictions on how much cash you have, how much capital you have, what your objectives are to do, how many people you can have. And otherwise, they leave that organization free to figure out the best way to run. Beautiful, beautiful. And then the last one is list, which is actually, again, it goes to this idea of smart goals and how people create a list and give you the list and go, that's our strategy. Now, discipline is absolutely key. And so is execution of the list, which is what we're going to talk about in the episode. But the list is not a strategy. No, almost never will a list of anything be a strategy. What's such a crazy thing is that the vast majority of strategies, if you did a survey in business, in community groups, in nonprofits, in government, in military, name it, sports teams, the strategy that they give you would be some high level vision, mission type stuff, and then list, sometimes massive lists of what are actually sub goals and plan. And as you said, so the vision may be, you know, the mission generator website, and then some overarching word full of those, you know, the list that we gave earlier on, transformation, innovation, disruption is in there, somewhere. And then it's a list with the dates on it. There's always dates, a deadline. How much are you going to make by what deadline? Yeah, yeah, we're going to do this by then, we're going to grow this by that, we're going to reduce quality complaints by 10%, in six months, we're going to and it's a beautiful list. But it's got nothing to do with strategy. And here's the most, here's the most nuanced issue about lists, is that sometimes a list, and I gave an example of on page 114, figure eight, 10, of a list that actually is not just a list of sub goals. But each item in the list there, in eight, 10, is a valid rule. But even a list of valid rules, sensible choices to make, stop pursuing acquisition targets, and invest only in organic growth, focus the sales force on multinational accounts and deemphasize local accounts. Each one of the six I give here could be a valid rule, tactical rule, but the fact is that the list itself is not the strategy. The list of choices or actions are not the strategy. The strategy would be the overall concept that unifies them all, that brings the list to coherence. So for example, in this list, it might be we got ourselves completely complex, we got way beyond ourselves here, and we can't manage this big mess, and we have to simplify things. And now we have a list of very, very valid tactical choices and tactical rules to do that. But the unifying feature here is a strategy of accept that we're going to lose some customers by not treating everybody equally. We're going to lose some features of products by not investing in everything in return for simplification that allows us to get a handle on this business again. So the strategy is not the list, even if the list is really good. A great example, I thought of was Adobe's move to the cloud when they decided to. So remember, we used to get the CDs and you'd upload the software through the CD or even by floppies. I was going to say some people will say floppy. I remember the floppies too. And that's how you got your software and your upload, et cetera. And then Adobe decided to move to the cloud early. And they know they're going to annoy. That's going to irritate, but they managed Wall Street really well. So I didn't look back at what the strategy was then maybe in the earnings calls, et cetera, but they did manage it really well. And they did have a little bit of dip in stock price followed by a massive gain afterwards. No, what you're describing is even perhaps more so the opposite test, the idea that any valid strategy will have a trade off will have a downside. If it doesn't, it's just a truism. It's just a cliche. It doesn't add any information. Strategy has to have pain in it. Beautiful. Great way to finish. And hopefully we're removing the pain for many people as well, because I know, I just want to say to our audience, I know reading a book about strategy that that undoes what you think strategy is, is not pleasant. It's not a pleasant experience sometimes to go through that and kind of go, I thought this, oh, I thought I had this. And you're asking people to unlearn and relearn a new way. And Peter's book does that, it challenges you to think about strategy in a different way. And it's brilliantly researched. I said this to impossible to do in a one-hour episode, which is why Peter's kindly joined us for multiple episodes. The books there, the emergent approach to strategy. Peter, as I said before, for those who have followed us, and maybe you have just joined in for the first time, do go to Peter's website. He is very generous with multitude of extra resources that are available there as well. Peter, where can people find you to find out that? Emergence approach.com. Or you can, of course, get the book on Amazon and you can see me on LinkedIn, just Peter Campo. And I post often and give lots of little posts on details of all the things we've been talking about. And I'll link to all those places as well, help your SEO as well. So I'll do that. Peter and I are going to take a quick water break, a cup of tea or a cup of coffee. And we're going to be back and release the next episode, which is beyond execution, where the rubber hits the road. See you very soon. Thanks for joining us, Peter Campo.
