rendezvous II

In the first class of my course at IIM, I asked students a simple question: What is strategy?. The most interesting response came from a rather cynical student: “Start with common sense, then add some jargon. What you get is strategy”.

I didn’t say so at the time, but that is precisely what strategy is not. If anything, strategy is uncommon sense - making choices that may not appear intuitive at the time.

In business school, my class played a marketing simulation game called MarkStrat. I didn’t learn much from that, but through a lucky coincidence got to play the game again a few months later. In a stunning illustration of the "Einmal is Keimal" principle, I got to compare two different approaches to playing the game. Here are the two approaches:

Strategy as common sense

The first time I played MarkStrat with my group, we knew what we had to do: maximize profit. Consequently, we came up with a strategy I now call “the mindless pursuit of profit”. It went something like this:

1. Create a product for each of the 3 largest market segments
2. Produce at the lowest possible cost
3. Mark up the price to about 120% of cost
4. Spend whatever money is left on marketing

Common sense, right?

Absolutely. We were profitable from the start, and ploughed the profits back into the same scheme - higher R&D and marketing budgets every quarter, which grew sales at a slow but steady rate. Midway through the game, we were rather pleased with ourselves. We would finish our strategy sessions in a half hour by running our Excel model, while other groups endlessly debated strategy. What could possibly go wrong?

Well, everything. While our profitability never declined, competitors started pulling ahead of us. Increasing marketing spend further would push up sales one quarter, but things would fall back as soon as the campaign ended. R&D budgets suffered in this expensive war, which meant our products could no longer compete on features, which meant even more marketing was required to sell them. The idea of a price war came up, but was quickly shot down because profitability, after all, was sacred.

At the end of the game we finished in the middle of the class, with none of our products having a market share higher than 4%. So much for common sense!

Strategy as uncommon sense

The next time I played MarkStrat, my team tried a different approach. We threw aside Excel models and played from the gut. Our strategy this time was so simple, it did not need jargon: “do one thing, and do it well”.

We decided to pursue only the low-end segment, and to try and dominate it. To do that, we had to keep prices below cost to start with, and wait for economies of scale to kick in. Also, since we had only one product, we could spend enough on R&D to continually lower cost of production.

There were two counterintuitive strains in this line of thought:

1. Sacrifice the present to bet on the future (sell below cost)
2. Concentrate your risk rather than spread it (sell only one product)

That is why this was a choice, not merely common sense. In this case, the choice worked out, and we finished in the top 3.

Of course it was risky, and we might easily have finished in the bottom 3. Of course it was just a game, and it is different when you play with real money and with real-world variables. Of course luck played a huge role, and you cannot model luck. But none of this changes the fact that having a strategy gave us a shot at success, while the first approach guaranteed mediocrity.