Mastering Strategy

Many discussions of strategy revolve around companies. But what about the people who develop corporate strategies? How can executives develop their skills as strategists?

There’s no better way than to learn from the masters. That’s the idea behind a recent book by David B. Yoffie, the Max and Doris Starr Professor of International Business Administration at Harvard Business School, and Michael A. Cusumano, the Sloan Management Review Distinguished Professor of Management at the MIT Sloan School of Management. Both men are experts in business strategy — they’ve been teaching the subject for nearly 30 years at Harvard and MIT, respectively. What’s more, Yoffie and Cusumano have studied or worked closely with some of the world’s leading technology executives. In their book, Strategy Rules: Five Timeless Lessons From Bill Gates, Andy Grove, and Steve Jobs (HarperCollins, 2015), Yoffie and Cusumano explore strategy insights drawn from the careers of the former CEOs of Microsoft Corp., Intel Corp., and Apple Inc.

MIT Sloan Management Review editorial director Martha E. Mangelsdorf spoke with Yoffie and Cusumano about what executives can learn from Gates, Grove, and Jobs about mastering the art of strategy. What follows is an edited and condensed version of that conversation.

MIT Sloan Management Review: Your book “Strategy Rules” looks at strategy lessons from three iconic CEOs from the computer industry: Bill Gates, Andy Grove, and Steve Jobs. What made you choose those three CEOs to write about?

Yoffie: There are several reasons for choosing these three. First and foremost, all three of the companies they led — Microsoft, Intel, and Apple — became the most valuable company in the world at some point. We were looking at three companies where we believed it was undisputed that the three individual CEOs had accomplished an extraordinary amount over their careers.

Second, we had spent a lot of time working with or observing all three of these individuals. We knew them, their records, and their companies extremely well. And by identifying three executives whose legacy as CEO was complete — and where the companies they led had continued to perform well after their departure — we could capture a more complete picture. We also understood the problems and occasional failures of these three CEOs, not just their successes.

That was an interesting aspect of the book. It was fun to learn about not just the things that we know about these three CEOs’ successes, but also about some of the things that didn’t go as well and the areas where they changed and developed as executives.

One of the ideas that I found intriguing in your book was your observation that strategic thinking is a capability that leaders develop over time — and that these executives, whom we know as having made some great decisions, didn’t necessarily start off as such accomplished strategists. Say a little bit about that.

Yoffie: Andy Grove is probably the easiest one to talk about, because he started as a scientist in the lab doing R&D. When he took the next step in his career to help launch and build Intel, he was a true operating manager. He was running a division and then became chief operating officer. Grove’s 1983 book, High Output Management, was all about making middle managers more effective; Grove didn’t become an effective strategist until several years into being CEO. Part of what enabled Grove’s development and transformation was his desire to learn new things — to continually go beyond his current capabilities.

For example, Andy was an engineer who initially knew less than nothing about brands. He was selling an industrial product — semiconductors for computers and other electronic devices — to other industrial companies, and the concept of building a consumer brand was far beyond his experience. But he made a large personal effort to educate himself to understand what a consumer brand was and how consumer pull could work for an industrial products company like Intel.

That whole learning process helped lead to the “Intel Inside” marketing campaign in 1991, which made Intel into one of the most valuable brands in the world.

Cusumano: To continue on this question of developing as a strategist, we believe that Bill Gates was a natural strategist and was born to be a strategic thinker. But again, he, too, learned: He learned to expand his horizons. The famous anecdote about Gates is that when IBM first came to him in 1980 for an operating system for IBM’s new personal computer, he sent them off to another company run by Gary Kildall. But when IBM came back to Gates, he clearly understood the opportunity that was ahead — to create the foundation for a whole new industry. Over the years, we’ve seen many examples of brilliant strategic moves by Gates: breaking with IBM; putting his resources behind Windows; embracing and extending the Internet; and then rebuilding Windows and Microsoft Office around the Internet.

What Gates really learned about is execution and organization. He learned that he couldn’t personally run whole areas of the company. He understood coding and algorithms, which allowed him to go one-on-one with engineers, but he went outside the company to hire talented managers with different backgrounds and experiences to run operations and various product groups.

Steve Jobs, on the other hand, always had great product instincts, but he had to learn to master strategy in the high-tech world. The strategy of Apple initially was great products, one product at a time. He only gradually adapted, with pressure from his management team in the 2000s. After resisting for years, Jobs eventually agreed to adopt a broader platform strategy, with a vision of a digital hub that targeted Windows as well as Macintosh users. By the time iPods and iTunes starting rolling out to the broader market beyond Macintosh users, we think Jobs had become a brilliant strategist.

Yoffie: I would also add that Steve was not pragmatic in his first 10 years as Apple’s CEO and that part of what made him a much better strategist by the late 1990s was he became a pragmatist. He recognized that you have to make deals with the enemy — in Apple’s case, Microsoft — and you have to delegate.

In your book, you identify five important strategy lessons that you drew from these three executives’ careers. Can you explain a little bit about the five strategy rules you identified? Let’s go through all five.

Strategy Rule #1: Look Forward, Reason Back

Yoffie: For managers, it’s a natural instinct to look backward and then reason forward about what they need to do today. That involves learning from history, thinking about the problems the business had yesterday, and how to solve similar problems tomorrow. But great strategists are like great chess players or great game theorists: They need to think several steps ahead towards the end of the game and then reason back to what that means about what they need to do today.

As a strategist, you need to think about where you want your business to be two, three, five, seven years down the road and then figure out what are the priorities and boundaries of what you need to do as a company today to get there. You need to be able to anticipate customer needs — not just solving the customer problems of today, but what the customer is going to need tomorrow. Then match that to the capabilities you can deliver in terms of new products and new processes for the customer over the next several years. You also need to anticipate what competitors will do and try to find ways to systematically build barriers to imitation and barriers to entry to reduce the likelihood that competitors will take away your advantage down the road. Finally, you have to be able to think about how whole industries may change.

The core story is a discipline of thinking several steps ahead and then figuring out what that means for the company now. This was a discipline that we saw across all three CEOs.

Cusumano: For example, all three of the CEOs extrapolated from Moore’s Law [the number of transistors on an integrated circuit doubling approximately every 18-24 months] in a different way. In the 1970s, both Gates and Jobs extrapolated that computing power was becoming ubiquitous and cheap, which would give birth to personal computers.

Gates, with Paul Allen in 1975, saw Moore’s Law and reasoned: Computers are just boxes without software. Software could be the source of value. Hardware is going to become a commodity. We’re going to control the software. And Microsoft was essentially the first software product company.

Jobs saw the same thing and concluded: Computers are going to be everywhere. We’re going to make them as easy to use as a typewriter or a toaster, out of the box. We’re going to make the computer a consumer appliance.

It took Grove a little while longer, but after a few years he figured out that Moore’s Law would lead to massive economies of scale and specialization in the computing industry, and that would probably make it difficult for the vertically integrated companies like IBM and Digital Equipment Corp. to maintain excellence and superiority in all the different segments. Grove reasoned that the computing industry would de-integrate into horizontal layers: Microsoft and some other companies would probably dominate software, but Intel would focus on the microprocessor. Eventually, he exited most other businesses, such as commodity memory products, and decided Intel was not going to build full computers and compete with its partners. Intel was just going to focus on that one layer: microprocessors.

Strategy Rule #2: Make Big Bets, Without Betting the Company

Cusumano: All three executives made big bets, but they never really bet the company. They always hedged those big bets. For example, one of Microsoft’s big bets was the decision to break with IBM in 1991. By the time Gates made that decision, Microsoft had many other companies as customers for DOS and then Windows — the PC clone industry. In addition, Microsoft had a small applications business that was growing quite fast. They also had the application business for the Macintosh. Breaking with IBM was a huge gamble, because Big Blue had really made Microsoft into a powerhouse, but Microsoft would not be killed by the divorce.

Strategy Rule #3: Build Platforms and Ecosystems — Not Just Products

Cusumano: These three executives set the intellectual foundations for understanding platform strategy and how it differs from product strategy. I can’t think of any three CEOs who have clarified our thinking more on that enormously important strategic concept.

For example, Gates understood the importance of platforms pretty much immediately in 1980, with Microsoft’s contract with IBM for the DOS operating system. Gates understood platforms through the lens of IBM; he knew IBM’s history quite well. The IBM mainframe had become an industry platform, where other companies had built compatible hardware. There were actual clones of the IBM mainframe. There were many peripherals that were clones, and there was a lot of software that was written to work on IBM and IBM-compatible machines.

Gates states very clearly — and we have the quote in the book — that he knew from day one, when Microsoft structured its deal with IBM to allow Microsoft to license DOS to other companies, that there would probably be a clone industry for personal computers, just like there had been for the IBM mainframe. So he saw that the personal computer would be a platform — and that Microsoft’s operating system could be a key element of that platform.

Strategy Rule #4: Exploit Leverage and Power — Play Judo and Sumo

Yoffie: If you’re going to be a great strategist, you’ve got to be able to execute at the tactical level. The things that you do every day, day-to-day with your customers, with your competitors, and with your partners become critical in your ability to execute your longer-term strategy. You have to be both clever and tough at the same time. The cleverness is the judo idea — trying to find ways to take advantage of your competitors’ strengths and turn them to your advantage, to find ways to avoid head-to-head struggles with your competitors at times when you’re not necessarily strong enough to compete that way.

Here’s an example of a judo tactic in strategy: When Jobs was launching iTunes, Apple only had around 2% of the PC market. So he used that to his advantage in negotiating with music executives; he persuaded them to license music on Apple’s terms as an experiment. In effect, he said: I’m only 2% of the market; what have you got to lose? In that case, being underestimated helped Steve Jobs get his way. That was, in retrospect, a huge mistake by the music industry.

Conversely, when you’re big enough and powerful enough, you have to be tough enough to extract as much value as possible in your interactions with other businesses. That’s the sumo aspect of strategy — not being afraid to throw your weight around. Gates, for example, regularly played hardball with customers and competitors alike. When he wanted Apple to adopt Internet Explorer in his efforts to win the browser wars, he threatened Gil Amelio, Apple’s then-CEO, with shutting down Microsoft Office for the Macintosh. Insiders believed this move could have put Apple out of business. Jobs was no less ruthless; for instance, he bullied book publishers into accepting Apple’s terms to launch the Apple iBookstore with the iPad. But as these two examples suggest, playing sumo means walking a fine line with antitrust. Both Microsoft and Apple faced antitrust battles with the U.S. Department of Justice.

Strategy Rule #5: Shape the Organization Around Your Personal Anchor

Cusumano: This was the hardest rule to describe. We try to explain why these three CEOs were effective at execution. Our answer was that each had a stake in the ground — a personal anchor — that helped them grow their companies, focus strategy, and hire people around.

For Gates, it was his understanding of software, which was as good as anybody in the world at the time he was launching Microsoft, at least for personal computers. For Jobs, it was his uncanny ability to understand the average user, especially the user interface. And Andy Grove had this incredible engineering-like process discipline; it was very clear that what he tried to do was bring the discipline of engineering to the messy business that semiconductor manufacturing was at that time. It was a business that was more art, or trial and error, than science and in which Intel was getting beaten up by the Japanese, who at that time were better at process. But Andy brought this incredibly disciplined and data-driven decision making, and intensity of debate and process discipline, to everything he did — to manufacturing, marketing, and sales, as well as to strategic planning.

Yoffie: Another aspect of a personal anchor is a bit paradoxical: You want to dive deep into the things you’re really good at, but at the same time stay at a high level and always keep the big picture in mind. You have to know yourself, know what you are good at, and know your weak spots. It doesn’t matter whether you’re an entrepreneur or running a $50 billion company; the key thing is figuring out how to compensate for your weaknesses in order to make the organization execute effectively. We think that’s true regardless of company size; any CEO has to do that. In the case of Grove and Gates, they knew very early on in their careers what they were good at and what they weren’t; their crisp execution depended on finding ways to get the right people around them to compensate for areas that weren’t their personal strengths.

In the case of Jobs, of course, he did not appreciate this ‘rule’ in the early days. One of the things he figured out when he came back to Apple the second time, in 1997, was that he really wasn’t good at many things, and he needed a lot of people to help him. He needed to figure out how to do what he did really well and drive that aspect of the organization — and then make sure he had other talented executives to lead areas such as supply chain and finance.

All three executives developed their skills as strategists over the years and became very strong in different ways by the end of their careers.

But as you point out in your book, none of these CEOs’ visions will last forever — particularly not in the fast-changing technology sector. How do these lessons apply to the next generation of technology CEOs? What’s different for the up-and-coming generation of technology entrepreneurs?

Cusumano: We think all of these principles and the details behind them — not just the high-level rules — are of extraordinary use to the next generation. I was recently at a lecture where I saw a list of the most valuable pre-IPO companies, and they’re nearly all platform companies. They’re taking advantage of exponential growth possible over the Internet in some shape or form, whether it’s Airbnb or Uber or many others.

And all of those businesses evolve from looking forward, reasoning back, figuring out what to do; making some big bets; building platforms rather than standalone products or services; figuring out how to be both clever and powerful; and building companies around the strengths of the founders. Most of these companies have a very distinct “edge” — a strategic and technical focus — to them that comes from the founders or the founders’ teams. But if entrepreneurs don’t then build broader teams with more diverse skills, they limit their success and growth.

I think all five principles are valuable for managers. But we also identified two additional lessons that apply to the next generation of entrepreneurs: First, while it is critical to build a company around your personal anchor and make that into an organizational anchor to sustain your advantage, you also have to beware that an anchor can limit you and hold the company back. And second, be aware of an inherent challenge associated with building a successful platform: You become so successful that you see the world through the lens of your platform. Then it gets very difficult to move to whatever comes next.