Drucker Phenomenon states that doing the right things adequately will always produce better outcomes than doing the wrong things well.
The Experience Curve states that every time you repeat a transaction you learn how to do it better. For example, studies have shown that every time a manufacturer doubles their production of a specific part, productivity increases between 10 and 25 percent.
The Law of Concentrations states that every connection makes that connection point more attractive for future connections. For example, in social networking, the more followers you have, the more followers you are likely to attract. In business, since it’s easier and less risky to purchase from a known vendor, over time a company can find the majority of its revenue coming from a small number of very large customers, with the potential for catastrophic impact should one or two of them leave for any reason.
The Law of Critical Mass states that there is a point when business activity acquires self-sustaining viability. For example, being a market leader can enable you to be the “low cost” provider, provide you with better insight into emerging customer needs, and enable you to set the industry standards for price and features. (Strategically, having the lowest costs allows you to set the market price. None of your competitors can win a price war since you can discount prices below their ability to make a profit.)
The Pareto Principle, also known as the 80/20 Rule, states that 20 percent of something usually accounts for 80 percent of the results. For example, if you focus on the top 20 percent of your customers you can affect 80 percent of your revenue. This law is recursive; that is, even the 20 percent of the 20 percent (4 percent) is responsible for 80 percent of the 80 percent (64 percent).
The Product Life Cycle states that over time all products move through the four stages of introduction, growth, maturity, and decline. It enables you to estimate when you need to begin the introduction of a new product whose revenue will replace that of one soon moving from maturity to decline. The investment strategy required during the introduction stage would be wildly inappropriate for a product in its declining stage.
The Risk/Reward Tradeoff is an investment theory that correlates an increase in certain types of risk with greater return on an investment. (Lower-risk investments typically yield smaller returns.) For example, you may open a fancy new office in Portland to service the local market with an expectation that the monthly operating costs will be covered within six months by new Portland-area customers. Your greatest risk may be that you have to cover another year of monthly operating losses if it actually takes eighteen months or more to develop that business base.
Strategic processes
The chemistry of strategy also relies on a few simple processes that you will use repeatedly over time.
Where are we now?
Where do we want to be in the future?
How do we change the status quo to get there?
In the next chapter, we will discuss what it takes to build a healthy leadership team. If you add up the total compensation of your executive leadership team, you may discover that, as at many other small companies, this is by far your most expensive asset. Improving the effectiveness of this team has an immediate impact on the effectiveness of the organization. Developing and implementing strategy, no matter how brilliant, is impossible without the right leadership.
CHAPTER SUMMARY
The Chemistry of Strategy
What are the major concepts in this chapter?
Why are these major concepts important?
How can you apply these major concepts?
Chapter 2
The Chemistry of an Executive Leadership Team
“Good leadership consists of showing average people how to do the work of superior people.”
John D. Rockefeller
“Why do you try to form a team? Because teamwork builds trust and
