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Tag Archives: Strategy

Why Bad Behavior is Almost Always Good Politics

Most great thinkers have speculated about the kind of leadership that might give rise to a better society, analyzing it through what’s sometimes called a “normative” lens: What should we be doing?

In Leviathan, for example, Thomas Hobbes argued for a single, absolute sovereign to hold together the social contract. He was addressing a debate over how leaders should act—whether they should follow their citizens’ wishes or act in the interests of future generations, against current pressures.

Other thinkers have focused on the real-world, actual path to leadership, leaving justice and civic virtue out of it; a more “descriptive” lens. For example, Robert Caro’s The Power Broker, required reading at many college campuses, focuses on just that idea. How does power actually work? (Part of his answer was that power doesn’t always corrupt, but it does always reveal.)

Or take Niccolò Machiavelli’s well-known brand of statecraft:

Whoever desires to establish a kingdom or principality where liberty and equality prevail, will equally fail, unless he withdraws from that general equality a number of the boldest and most ambitious spirits, and makes gentlemen of them, not merely in name but in fact, by giving them castles and possessions, as well as money and subjects; so that surrounded by these he may be able to maintain his power, and that by his support they may satisfy their ambition.

Machiavelli may not have had access to statistical analytic tools, but the cross-national data seems to back up his crony-focused approach, according to the four authors of The Logic of Political Survival.

Over the course of 500+ pages of formal game theory proofs and model testing, they make a strong case for what they call Selectorate Theory.

That book is a bit dense, so for the layperson, two of the authors—Bruce Bueno de Mesquita and Alastair Smith—also distilled their findings into the far more readable The Dictator’s Handbook: Why Bad Behavior is Almost Always Good Politics.

Their idea is that governance—public or corporate—is driven by the self-interested effort of leaders to acquire and keep their power.

Under this lens, all policy decisions are a play for the loyalty of key backers, whether it’s the inner circle in a dictatorship or a whole populace in a democracy.

The logic of a leader’s political survival dictates all of the varieties of governments we see, from monarchies or corporate boards to communist states and democracies. According to Selectorate Theory, it boils down to the relative size of three groups:

The Nominal Selectorate (interchangeables), which has at least some small voice in choosing the leader. This is the pool of potential supporters.

Example: Millions of individual voters or small shareholders.

The Real Selectorate (influentials), who actually choose the leader.

Example: Senior members of the Saudi royal family or big institutional shareholders.

The Winning Coalition (essentials), whose support is critical both to gaining the leadership and to keeping it.

Example: A handful of board members and senior management.

Our starting point is the realization that any leader worth her salt wants as much power as she can get, and to keep it for as long as possible. Managing the interchangeables, influentials, and essentials to that end is the act, art, and science of governing.

The difference in the relative size of these groups determines how much a leader can get away with and what the quality of life is like for those at the bottom of the system.

Dictatorships are governments based on a small winning coalition formed of a handful of generals, bureaucrats and regional leaders. The real selectorate is also small, and drawn from a large population.

In democracies, the opposite is true: the winning coalition is large, and the real selectorate is almost as large as the nominal selectorate. This means that dictators can keep their jobs by handing out private goods to their cronies, whereas democratic leaders have to dole out public goods to maintain their power. That seems to square pretty well with observations in the real world.

De Mesquita and Smith place the governance of most publicly-traded companies on the dictator side of the scale. A very small number of people usually determine the political survival of a CEO – small enough that the CEO can maintain power by making this small group happy rather than working for all of the shareholders.

In cases where companies have large groups whose approval is essential for leadership, public goods like increasing share value reward everyone and become the focus of the leader.

Much of political theory has focused on what justice and civic virtue looks like, without much evidence of the way things really work. But to change the world for the better, it is not enough to take a philosophical position. Wishful thinking has never been a wise starting point.

De Mesquita and Smith conclude that leaders shouldn’t be taken at face value on their motives.

Appeals to ideological principles and rights are generally a cover. J.P. Morgan had it right: There is always some principled way to defend any position, especially one’s own interests.

They propose five rules to keep a hold on power in any system:

1. Keep your “Winning Coalition” as small as possible.

The smaller the symbiotic group of people beholden to you, the more efficient it is to retain leadership through giving private benefits.

2. Keep your “Nominal Selectorate” as large as possible.

You’ll want to keep your inner circle on its toes by having many people waiting in the wings to replace them. You also want a large tax base to draw from.

3. Control the flow of revenue.

State bankruptcy is a political crisis. It either means the leader cannot purchase political loyalty from key backers or, in a democracy, cannot afford pork-barrel projects to buy popularity.

4. Pay your key supporters just enough to keep them loyal.

And make sure you’re the only one with access to the treasury.

5. Don’t take money out of your supporters’ pockets to make the people’s lives better.

Starving illiterates don’t make good revolutionaries, whereas dissatisfied cronies can oust you.

As a ruler, your inner circle may include very few of the people who brought you to power in the first place. Your fellow revolutionaries may be too much in the habit of revolution to be safe colleagues going forward. As Machiavelli wrote in The Prince:

It is easier for the prince to make friends of those men who were contented under the former government, and are therefore his enemies, than of those who, being discontented with it, were favourable to him and encouraged him to seize it.

Much as we may wish it weren’t the case, the authors’ data suggest corrupt dictatorships or oligarchies handled in this way are actually quite stable and long-lasting.

As long as the leader offers more benefits to his essentials than they could expect from alternate leadership, the incumbent enjoys a large advantage, and coup attempts often fail. For example, from 1917 until the 1980s, all but one Soviet leader ruled until his natural death. The exception, Kruschev, was deposed after reneging on promises to cronies.

The three most important characteristics of a coalition are: (1) Loyalty; (2) Loyalty; (3) Loyalty. Successful leaders surround themselves with trusted friends and family, and rid themselves of any ambitious supporters.

Though the logic of politics cannot be changed, it can be applied to finding windows for change.

The beginning of a leader’s rule or his or her terminal illness mark unstable periods of the reign, particularly if an heir has not been assigned and groomed. Sometimes it’s a financial angle: Under severe financial pressure, even an autocratic leader may see that political reform holds the best promise of political survival.

(In Taiwan, for example, Chiang Kai-Shek expanded his own coalition, in response to various pressures, until one day he found himself in a democracy.)

If an autocrat’s “inner circle” feels that their future is insecure, they will be incentivized to improve the lot of the nominal selectorate in case they someday find themselves on the outside. Mobs may take to the streets or storm government buildings when they are encouraged to do so by someone powerful, like a military leader. And with this blessing from the inner circle, the power of the people can often topple the leadership.

While there is a lot of precedent for nasty regimes being overthrown, certain conditions are necessary to prevent another dictatorship from taking hold. Countries without the political curse of natural resource wealth are more likely to succeed in democratic revolution, because they rely on a well-fed and productive populace to sustain them. The overall structure of the populace and its underlying stability or instability, cohesiveness or disjointedness matters greatly.

And in the end, given that political regimes are extremely complex systems, some of this can simply be hard to predict.

If you liked this post, you might also love:

Breaking the Rules to Rise to Power: How Norm Violators Gain Power in the Eyes of Others – Idealists among us would hope that people with power who break the rules quickly and loudly fall off the corporate ladder. But, as the research asks, is this the case? Or does the very act of breaking the rules fuel perceptions of power and make the person more powerful?

Why Performance Won’t Get You Promoted – If you’re going to play the game you should at least educate yourself on the unwritten rules. In an NPR interview, Stanford business professor Jeffrey Pfeffer highlights why performance won’t get you promoted and why power is corrupting.

Simple Rules for Business Strategy

The book Simple Rules by Donald Sull and Kathleen Eisenhardt has a very interesting chapter on strategy, which tries to answer the following question: How do you translate your broad objectives into a strategy that can provide guidelines for your employees from day to day?

It’s the last bit there which is particularly important — getting everyone on the same page. 

Companies don’t seem to have a problem creating broad objectives (which isn’t really a strategy). Your company might not call them that, they might call them “mission statements” or simply “corporate goals.”  They sound all well and good, but very little thought is given to how we will actually implement these lofty goals.

As Sull and Eisenhardt put it: 

Developing a strategy and implementing it are often viewed as two distinct activities — first you come up with the perfect plan and then you worry about how to make it happen. This approach, common through it is, creates a disconnect between what a company is trying to accomplish and what employees do on a day-to-day basis.

The authors argue that companies can bridge this gap between strategic intent and actual implementation by following three steps:

  1. Figure out what will move the needles.
  2. Choose a bottleneck.
  3. Craft the rules.

1. Moving the Needles

The authors use a dual needle metaphor to visualize corporate profits. They see it as two parallel needles: an upper needle which represents revenues and a lower needle which represents costs. The first critical step is to identify which actions will drive a wedge between the needles causing an increase in profits, a decrease in costs, and sustain this over time.

In other words, as simple as it sounds, we need an actual set of steps to get from figure a. to figure b.

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What action will become the wedge that will move the needles?

The authors believe the best way to answer this is to sit down with your management team and ask them to work as a group to answer the following three questions:

  1. Who will we target as customers?
  2. What product or service will we offer?
  3. How will we provide this product at a profit?

When you are trying to massage out these answers remember to use inversion as well. 

Equally important are the choices on who not to serve and what not to offer.

Steve Jobs once pointed out that Apple was defined as much by what it didn’t do as by what it did.

2. Bottlenecks

Speaking of inversion, in order to complete our goal we must also figure out what’s holding us back from moving the needles — the bottlenecks standing in our way.

When it comes to implementing a strategy of simple rules, pinpointing the precise decision or activity where rules will have the most impact is half the battle. We use the term bottleneck to describe a specific activity or decision that hinders a company from moving the needles.

You may be surprised at the amount of bottlenecks you come across, so you’ll have to practice some “triage” of your issues, sorting what’s important from what’s really important.

The authors believe that the best bottlenecks to focus your attention on share three characteristics:

  1. They have a direct and significant impact on value creation.
  2. They should represent recurrent decisions (as opposed to ‘one off’ choices).
  3. They should be obstacles that arise when opportunities exceed available resources.

Once we’ve established what the bottlenecks are, it’s time to craft the rules which will provide you a framework in which to remove them.

3. Craft the Rules

Developing rules from the top down is a big mistake. When leaders rely on their gut instincts, they overemphasize recent events, build in their personal biases, and ignore data that doesn’t fit with their preconceived notions. It is much better to involve a team, typically ranging in size from four to eight members, and use a structured process to harness members’ diverse insights and points of view. When drafting the dream team to develop simple rules, it is critical to include some of the people who will be using them on a day-to-day basis.

This probably seems like common sense but we’re guessing you have worked at least one place where all information and new initiatives came from above, and much of it seemingly came out of nowhere because you weren’t likely involved.

In these situations it’s very hard to get buy-in from the employees — yet they are the ones doing the work, implementing the rules. So we need to think about their involvement from the beginning.

Having users make the rules confers several advantages. First, they are closest to the facts on the ground and best positioned to codify experience into usable rules. Because they will make decisions based on the rules, they can strike the right balance between guidance and discretion, avoiding rules that are overly vague or restrictive. User can also phrase the rules in language that resonates for them, rather than relying on business jargon. By actively participating in the process, users are more likely to buy into the final rules and therefore apply them in practice. Firsthand knowledge also makes it easier to explain the rules, and their underlying rationale, to colleagues who did not participate in the process.

It’s important to note here that this is a process, a process in which you are never done – there is no real finish line. You must always plan to learn and to iterate as you learn — keep changing the plan as new information comes in. Rigidity to a plan is not a virtue; learning and adapting are virtues

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There’s nothing wrong with strategy. In fact, without a strategy, it’s hard to figure out what to do; some strategy or another must guide your actions as an organization. But it’s simply not enough: Detailed execution, at the employee level, is what gets things done. That’s what the Simple Rules are all about.

Strategy, in our view, lives in the simple rules that guide an organization’s most important activities. They allow employees to make on-the-spot decisions and seize unexpected opportunities without losing sight of the big picture.

The process you use to develop simple rules matters as much as the rules themselves. Involving a broad cross-section of employees, for example, injects more points of view into the discussion, produces a shared understanding of what matters for value creation, and increases buy-in to the simple rules. Investing the time up front to clarify what will move the needles dramatically increases the odds that simple rules will be applied where they can have the greatest impact.

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Still Interested? Read the book, or check out our other post where we cover the details of creating your simple rules.

Lee Kuan Yew’s Rule

Lee Kuan Yew, the “Father of Modern Singapore”, who took a nation from “Third World to First” in his own lifetime, has a simple idea about using theory and philosophy. Here it is: Does it work?

He isn’t throwing away big ideas or theories, or even discounting them per se. They just have to meet the simple, pragmatic standard.

Does it work?

Try it out the next time you study a philosophy, a value, an approach, a theory, an ideology…it doesn’t matter if the source is a great thinker of antiquity or your grandmother. Has it worked? We’ll call this Lee Kuan Yew’s Rule, to make it easy to remember.

Here’s his discussion of it in The Grand Master’s Insights on China, the United States, and the World:

My life is not guided by philosophy or theories. I get things done and leave others to extract the principles from my successful solutions. I do not work on a theory. Instead, I ask: what will make this work? If, after a series of solutions, I find that a certain approach worked, then I try to find out what was the principle behind the solution. So Plato, Aristotle, Socrates, I am not guided by them…I am interested in what works…Presented with the difficulty or major problem or an assortment of conflicting facts, I review what alternatives I have if my proposed solution does not work. I choose a solution which offers a higher probability of success, but if it fails, I have some other way. Never a dead end.

We were not ideologues. We did not believe in theories as such. A theory is an attractive proposition intellectually. What we faced was a real problem of human beings looking for work, to be paid, to buy their food, their clothes, their homes, and to bring their children up…I had read the theories and maybe half believed in them.

But we were sufficiently practical and pragmatic enough not to be cluttered up and inhibited by theories. If a thing works, let us work it, and that eventually evolved into the kind of economy that we have today. Our test was: does it work? Does it bring benefits to the people?…The prevailing theory then was that multinationals were exploiters of cheap labor and cheap raw materials and would suck a country dry…Nobody else wanted to exploit the labor. So why not, if they want to exploit our labor? They are welcome to it…. We were learning how to do a job from them, which we would never have learnt… We were part of the process that disproved the theory of the development economics school, that this was exploitation. We were in no position to be fussy about high-minded principles.

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Want More? Check out our prior posts on Lee Kuan Yew, or check out the short book of his insights from where this clip came. If you really want to dive deep, check out his wonderful autobiography, the amazing story of Singapore’s climb.

Culture Eats Strategy: Nucor’s Ken Iverson on Building a Different Kind of Company

Much can be learned about the world by studying business.

***

The problem with most management, leadership, and business books is that many of them harp on the same self-evident points, overconfident in the usefulness of their prescriptions for would-be imitators. They tend to vastly underestimate the role of circumstance, luck, the nature of completion, and the effects of scale, among other things; falling prey to the many delusions described by Phil Rosenzweig in his incredibly important book, The Halo Effect.

The main problem Rosenzweig describes in the book is that attributes we tend to think cause great performance (culture, leadership, etc.) are often just things that are attributed to companies we already know are high-performing. There’s a Halo around everything they do. (Reminding one of the fundamental attribution error.)

How many current high-fliers would ever be described as having a bad culture, or bad leadership? It would be nonsense to say it. Thus, we run into a recursiveness problem. High performing companies have great culture, and great culture is defined as the attributes that cause high performance.

In other words, when you ask someone if Apple has a great corporate culture, they will tell you it does. (And it’s an extremely successful company, so of course it does.)

But when we try to pinpoint which aspects of Apple’s culture make it more successful than its peers, and which would be predictive of success at other companies, we run into a difficult problem.

The Halo Effect tells us that we will find a lot of false positives. The attributes we think are causal of success are the same ones we often deem causal of failure when company performance deteriorates. This is the strategy paradox.

***

Plain Talk, by Ken Iverson, is a memoir of his time running the steel company Nucor. Despite the warning, above this book deserves your attention for a few reasons:

  • Nucor was extremely successful, for a long period, in an industry that provided huge headwinds. There are no magic pills to being successful in steel. It’s generally an awful business.
  • The company did some very unusual things that we see in few other companies, even successful ones.
  • The book was recommended by a very smart friend who runs a very successful business of his own, using similar principles.
  • The author/CEO, Iverson, seems honest about the fact that many of his prescriptions are not new or different. The book is not presented as a panacea.
  • It’s generally good to study outlier success or failure.

A Peculiar Kind of Success

Ken Iverson

Under Iverson, Nucor was an unusual sort of steel company compared to the Carnegie-esque behemoths of the past.

Some of its attributes remind us of companies like Berkshire Hathaway, but Nucor did it very differently. There were few acquisitions. The company was totally focused on steel. Iverson describes some of the peculiarities in the opening of the book (this was written in 1998):

  • Our 7,000 employees are the best paid workers in the industry, yet Nucor has the lowest labor cost per ton of steel produced
  • Nucor is a Fortune 500 company with sales in excess of 3.6 billion, yet we have a total of just 22 people working at our corporate headquarters, and just four layers of management from the CEO to the front-line workers.
  • Nucor operates in a “rust belt” industry that lost one out of two jobs over a 25-year time span, yet Nucor has never laid off an employee or shut down a facility for lack of work, nor have we lost money in any business quarter for more than thirty consecutive years.

That is, of course, a very interesting outcome. Most steel companies were struggling mightily when Nucor came up. Bethlehem Steel almost went bankrupt in the late 70s. (They eventually did.) Foreign competition, rising input costs, rising labor costs, commoditization…steel is about as bad a business as you could invent. Yet in Iverson’s 30+ year reign, Nucor compounded its per-share earnings at a rate of about 17% per annum. There must have been something going on here — he sounds like an outsider.

Let’s focus on a few things that were particularly unusual.

Extreme Decentralization

Nucor believed (and to my knowledge, still believes) strongly in decentralization. The only parallel for 22 people at headquarters in a $4 billion business is probably Berkshire itself. Capital Cities, now part of ABC, might have been another parallel.

In order to achieve that leanness at the top, power must have been pushed down pretty far into the organization. And of course, it was:

Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies, find their own customers; set their own production quotas; hire, train, and manage their own work force; create and administer their own safety programs…In short, all the important decisions are made right there at the division. And the general manager of the division is accountable for those divisions.

This is scary for most companies. They are not willing to allow local general mangers that kind of control and responsibility. The allure of synergy and the allure of top-down controls are too strong. And once it’s in place, headquarters culture has a way of taking on a life of its own. Take a look at PepsiCo, or General Electric, or any number of corporate beasts in the United States. There is huge, expensive bureaucracy at the top. It is always thus. (Of course, that keeps firms like 3G Capital in business.)

But Iverson was willing to take the tradeoffs:

“We are honest-to-god autonomous,” says Hamilton Lott, general manager of our Vulcraft Division in Florence, South Carolina. “That means we duplicate efforts made in other parts of Nucor. The company might develop the same computer program six times. But, the advantages of local autonomy are so great, we think it’s worth it.”

Any of you who have worked in a modern corporation know how unusual this mentality is. Who would allow the same company to develop the same software six times? Why not increase knowledge sharing and synergies?

Part of the problem is that the tremendous benefits of local autonomy are less immediately tangible than the costs. Berkshire has dealt with this for years. Every time one of Buffett’s subordinates acts up, and it happens pretty darn infrequently by our count, people pipe up and ask why he isn’t imposing more rigid oversight on them. It’s very simple: the long-term benefits of trust-giving have far outweighed the occasional cost of non-compliance.

Call this an “unrecognized simplicity.” Nucor’s corporate overhead expense was so small they didn’t even bother allocating corporate expenses to the divisions. That is rare.

The other under-appreciated value of decentralized control is that great ideas tend to rise from the bottom rather than being dictated by the executives. Iverson claims that many or even most of Nucor’s great innovations came from down in the divisions. The company merely had to be smart enough to harness them.

This has happened elsewhere in Corporate America. Look at McDonald’s. Do you think Ray Kroc invented the Chicken McNugget, the Big Mac, and the Filet ‘o Fish? Do you think he figured out how to keep millions of pounds of potatoes fresh and get them to customers tasting exactly the same every time? No. But franchisees and suppliers did. He just had to be smart enough to help the ideas spread. (Hamburger U, anyone?)

Simple and Precise Strategy

In the book Good Strategy, Bad Strategy by Richard Rumelt (highly recommended, and we’ve written about it before), the author is clear that what makes a good strategy is that it’s clear and that it’s precise, a real call to a specific action:

The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a signpost, marking the direction forward but not defining the details of the trip. Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy.

This is precisely what Iverson did at Nucor:

We don’t clutter the picture with lofty vision statements, ask employees to pursue vague, intermediate objectives like “excellence,” or burden them with complex business strategies. Our competitive strategy is to build manufacturing facilities economically, and to operate them efficiently. Period.

Simple but not easy.

Was the technology that went into developing and implementing this strategy simple? I’m not an expert in metallurgy, but I doubt it. The modern steel company is quite efficient and quite advanced. Nucor made major strides like the mini-mill and thin-slab casting of flat-rolled steel. Whether that kind of technology would have been given a chance to succeed in a different culture is hard to say.  We can’t re-run history but Nucor’s purposeful drive seems to have fostered the right environment.

 

Remove Unnecessary Hierarchy

Ultimately, it’s hard to build a great, supportive, seamless web of deserved trust if the executives are consistently treated as “above the fray” – subject to a different level of treatment than the rank and file. This is the way it is in most organizations.

The results tend to be predictable. Envy, plus a violation of basic Kantian fairness tendency, will create a lot of hatred. You can’t put the managers and the executives in first class and stick the associates in coach and expect anything but resentment. It’s basic human nature, driven by biology. Nucor was smart enough to avoid this folly:

Our executives get the same group insurance, same holidays, and same vacations as everybody else. They eat lunch in the same cafeterias. They fly economy class on regular commercial flights (although we do allow the use of frequent flyer upgrades). We have no executive suites and no executive cars. At headquarters, our “corporate dining room” is the deli across the street.

Our executives wouldn’t have it any other way. They see our egalitarian culture serving their interests as much as the interests of our employees. For one thing, our mangers don’t have to waste time fretting over their chances to get the fancy corner office or arguing over who gets to use the company plane. We don’t have those perks, and we imagine they would cause a lot more stress than fulfillment. What a bunch of nonsense! Chasing meaningless status symbols and tokens of power…

Nucor had essentially four promotions available: Supervisor, Department Manager, General Manger, and Chairman (Iverson himself). That’s it. I can imagine that over all those years of growth, more than one consultant tried to get Iverson to create a whole lot of bureaucracy, but he wisely resisted. The costs (such as the mathematically unavoidable large spans of control due to fewer managers in the system) were once again greatly outweighed by the benefits. Another unrecognized simplicity.

And when it came time for pay cuts, everyone shared in the pain. What a simple, yet generally unused concept:

Why, then, would workers who had endured deep cuts in pay and who had every reason to fear for their futures reach out to share a laugh with a manager passing through a mill? Simple. No employee was being asked to carry more than his or her part of the burden.

You see, their department heads had taken pay cuts of up to 40 percent, and the general managers and other officers of the company were earning 50-60 percent less than we had made in preceding years. My own pay dropped that year to about $110,000, from about $450,000 the year before. We not only shared the pain, but doled out the lion’s share to the people at the top.

Think about what an inversion that is of most organizations, where the CEO takes a minor cut in pay (or worse, no cut) and hundreds of low-level employees simply lose their jobs. Wouldn’t most places work better with Nucor’s ethos? The fact that they did this in the highly cyclical steel business gives some tailwind to the idea. It wasn’t a story like Google, where constant success has allowed them to pamper employees financially and otherwise. Nucor managed to avoid layoffs and share in the pain in a business that, by necessity, is constantly offering pain to share.

A Postscript on the Post-Iverson Era; Implications for Investors 

In the final analysis, Nucor probably didn’t have any core attributes that were unavailable to its competitors. It simply made better choices and was more fanatical about sticking to them. The resulting success was deserved. This is why culture eats strategy.

But the postscript to the Iverson era has been interesting, at least from the perspective of the passive investor. Nucor was a brilliant investment in Iverson’s time as manager, but if you’d bought the stock in the early 90s when Iverson left the CEO post, your results would have been pretty mediocre since. Can we see why? Let’s deduce a few reasons.

  • Partially, the stock was fairly rich at that time – trading for something like 40x price/earnings. That’s high even for a good industrial company. It’s not so high now. But their fundamental performance has not been nearly as impressive either, in the time since Iverson left, especially in the last five or six years.
  • Partially, the effects of compound interest have served to slow down an increasingly large corporation. Nucor is now a giant in the steel business. They started off as a tadpole. If the company’s net earnings had continued to grow at 17% per annum, they would currently be earning $4 billion a year, versus a little over $120 million in 1993. There’s only so much profit available in steel.
  • Is there a tinge of Halo Effect here, as described at the beginning of the piece? Perhaps. Iverson would be the first to say his prescriptions were not that ground-breaking. I tend to think some of the attributes above did contribute greatly to its unusual success, but more of the success may have been situational and strategy driven than Iverson recognized.
  • Even more important might be to recognize that the steel business always was a fundamentally hard one, and even the best ships might struggle on a stormy enough ocean. Iverson and his team rowed very hard and successfully for many years, and that has continued to this day. Bethlehem Steel went bankrupt in 2001 and Nucor made money that year. U.S. Steel has been bleeding red ink for years and Nucor, although less profitable than it once was, has still made money. But the ocean current is what it is.

So even if Nucor has been better than most of its competitors in the last ten or twenty years, and I suspect it has, an investor would have had to ask him or herself: Do I want to be in the steel business at all? As Buffett used to say, something not worth doing well is often not worth doing at all.

Regardless, the lessons from Plain Talk show that the roads less traveled can be worth exploring. They’re not that complicated. But they work.

The Books That Influenced C. Roland Christensen

C. Roland Christensen
I thought C Roland Christensen’s response in The Harvard Guide to Influential Books: 113 Distinguished Harvard Professors Discuss the Books That Have Helped to Shape Their Thinking was one of the more interesting. Christensen was a pioneer in the field of business strategy. We can also thank him for reviving the case method from the ancient Greeks.

In the preface to his response, he writes:

Here are the books—all old, dog-eared, reread and reread, little (no big fat volumes), most committed to memory—of my five-inch bookshelf. But they miss the greatest influence on this educator—Miss Adams, a seventh-grade teacher in Iowa City, Iowa. She introduced me to poetry, where the ultimate wisdom —the philosophy of life—is found. The first step in the development of an anthology was our study of “Miniver Cheevey” by Edwin Arlington Robinson. It is still exciting fifty-four years after that original encounter.

What Is History? by Edward H. Carr

Carr’s little book has a magnificent message—to live we must understand our historical roots. Carr gives us a way of
understanding the past so as to predict the future.

Can Man Be Modified? Jean Rostand

Rostand, a biologist, views man in a very human way, examines how science is impacting that basic humanness and then teases us with what he/she will be in future centuries.

How to Run a Bassoon Factory, or Business Explained by Mark Spade

Spade tickles the mind; with tongue in cheek, he describes business so that one laughs—even roars—at his chosen vocation.

The Insect World by J. Henri Fabre

Fabre looks at the smallest and lowest—insects—and shows us their great abilities—even wisdom. A constant reminder to look at the ordinary to see the extraordinary.

The Art of Scientific Investigation by William I. Beveridge

For the investigator, this little book is a gold mine of reflection and practical suggestion. He brings the power of scientific discipline to bear on everyday life.

Power Without Property by Adolph A. Berle, Jr.

The book raises fundamental questions about modern business organization and ownership. It outlines the quiet revolution which has changed the power bases of our industrial society.

Follow your curiosity, for more in this series check out the books that influenced E. O. Wilson, B. F. Skinner, Thomas C. Shelling, Michael J. Sandel, Jerome Kagan, Stephen Jay Gould, and John Kenneth Galbraith.

Six Strategy Traps

Strategy could be the most over-used word since leadership. How many strategies can one organization have? A lot of people say “strategy” when they really mean goal or objective. This is a strategy trap.

Strategy Traps

One of the best books on Strategy is Roger Martin and A. G. Lafley’s Playing to Win: How Strategy Really Works.

In this excerpt they comment on the signals that a company has a worrisome strategy.

There is no perfect strategy—no algorithm that can guarantee sustainable competitive advantage in a given industry or business. But there are signals that a company has a particularly worrisome strategy. Here are six of the most common strategy traps:

  1. The do-it-all strategy: failing to make choices, and making everything a priority. Remember, strategy is choice.
  2. The Don Quixote strategy: attacking competitive “walled cities” or taking on the strongest competitor first, head-to-head. Remember, where to play is your choice. Pick somewhere you can have a chance to win.
  3. The Waterloo strategy: starting wars on multiple fronts with multiple competitors at the same time. No company can do everything well. If you try to do so, you will do everything weakly.
  4. The something-for-everyone strategy: attempting to capture all consumer or channel or geographic or category segments at once. Remember, to create real value, you have to choose to serve some constituents really well and not worry about the others.
  5. The dreams-that-never-come-true strategy: developing high-level aspirations and mission statements that never get translated into concrete where-to-play and how-to-win choices, core capabilities, and management systems. Remember that aspirations are not strategy. Strategy is the answer to all five questions in the choice cascade.
  6. The program-of-the-month strategy: settling for generic industry strategies, in which all competitors are chasing the same customers, geographies, and segments in the same way. The choice cascade and activity system that supports these choices should be distinctive. The more your choices look like those of your competitors, the less likely you will ever win.

These are strategic traps to be aware of as you craft a strategy.

Playing to Win is right up there with Good Strategy Bad Strategy on my list of must reads for anyone seeking an understanding of strategy as it relates to business.