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191 Castro Street, 2nd Floor, Mountain View, CA 94041 | P:
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CUSTOMER INTELLIGENCE:
THE KEY TO KEEPING
SAAS/CLOUD CUSTOMERS
There is good news and bad news for software
companies in the shift to the software subscription
model of the Cloud. The good news is that
revenues have become much more predictable and
stable. The bad news is that you have to keep
reselling the sale in order to retain those customer
income streams over time. The good news is that
there is more available data than ever before about
your customers. The bad news is that the data is
scattered all over the company and is therefore not
easily accessible.
The good news is that adding and supporting
application features and functionality is easier to do
in the Cloud. The bad news is that your
competitors will soon be adding those same
features to their applications too. The meaning is
clear. In the SaaS/Cloud business model, what is
really being sold is a relationship rather than
technological features & functions, and keeping that
relationship profitably going for as long as possible is
the core issue for long-term success as SaaS
company.
1

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Why should a SaaS company, especially if they think that
they’re in their “land-grab” phase and therefore don’t have time
or resources to worry about churn at this point, invest time and
money now in building dedicated customer retention
resources?
SaaS-Capital, a provider of debt-based growth capital for SaaS
companies, answers the question. Churn is a cumulative
beast. The income that you lost last quarter continues to be lost
next year and the year after. Consider their model of
two SaaS companies. Both sell only software subscriptions; no
other income conduit is included. Both sign 10 new
customers per month @ $1,000.00 each. Both spend $120K per
month on sales & marketing to acquire those
relationships (CAC). The only difference between them is that
one has a customer retention rate of 95%; the other’s
only 80%. At the end of 5 years, the difference in bottom-line
company valuation between the two was $15 million
dollars. Along the way, the company with the 95% retention
rate also had increased revenues to work with, up to $24K
per month. That’s a lot of money – your money – both now and
later.
THE HUGE COST OF CHURN
THE NEED TO KNOW

To make the initial sale, you needed to know quite a
bit about your prospective customer. What were
their business needs and requirements? Who were
the decision makers and influencers? What were
the timetable and the budget factors? All of that
knowledge and more made the signature on the
first contract possible. To get the renewal
signatures, however, you’ll have to keep that data up
to date and to add to it. Customer Intelligence is a
process that can’t have an end. It’s what you don’t
know about your customer relationships that can
cause you to lose them.
If the key to keeping SaaS customers is to know
everything necessary about them and appropriately
applying that knowledge, that function is too
important to be left unmanaged. Does your
company have a Customer Intelligence team? For
collecting, updating and analyzing all relevant data
about your customers as individuals, value tiers and
as a base? If you haven’t formally chartered an
individual or a team to be responsible for customer
intelligence, it’s time to put that initiative before the
senior management team for active consideration.
In this white paper, I’ll present a high-level view of the
customer intelligence role, looking at the strategy,
t h e p ro c e s s o f g a t h e r i n g , ev a l u a t i n g a n d
disseminating data, the people who are involved in

that effort, and the technology that will be needed.
1
THE STRATEGY OF CUSTOMER
INTELLIGENCE
The first step in developing a Strategy for your
company’s customer intelligence program is to
define the term and thereby set a foundation for
everything else to follow. Customer Intelligence is
the Collection, Analysis and Use of information for
the purpose of increasing customer retention and
optimizing per-customer profitability levels. In
other words, it’s what you need to know about
preventing churn and improving the profitability of
your customer portfolio.
The scope of the information to be collected,
analyzed and used includes general information
about the company’s customer base and specific
information about individual companies, their
people and their usage of your application. The
gathering of general information about a company’s
customer base begins with identifying and defining
value tiers, the various portfolios or groupings of
that base, and determining the profitability of each
tier. According to the Wharton School of Business,
this knowledge is fundamental to putting the
company on an authentic customer-centric footing.
There are a couple of immediate uses for the
general customer portfolio data. It enables
prioritization of assignments of customer-facing
resources for maximum cost-effectiveness.

The Wharton School of Business’ definition of Customer
Centricity” offers a very specific foundation for establishing
and managing a Customer Intelligence function.
Customer Centricity, according to Wharton, requires that a
company conceive of and manage themselves “not as a
group of products, services, territories or functions, but as a
portfolio of customers.” The program teaches that
companies who are customer centric “know how much money
they make or lose with each of their customers or
customer segments, and they understand why.” Perhaps most
importantly, “they understand in precise analytic terms
exactly how their different customer relationships contribute to,
or subtract from, the total value of the firm. Because
they manage their customer portfolio on this basis, they know
what to manage and where to invest in order to create
sustainable profitable growth…”
THE DEFINITION OF CUSTOMER CENTRICITY
Next, we can use that information to figure out
ways to encourage lower-value customers to move
into the higher-value groups. The data and insight
should also be given to Sales so that they can better
focus their prospecting activities. Detailed analysis
of departed customers is a crucial part of the
general customer base knowledge set. What
caused the defection? What did the customer
actually give as the reason for not renewing the
subscription? Could there have been other factors
involved? What was their level of engagement
during the period leading up to the exit?
You should also establish a baseline for the char-
acteristics of average customers, and another for
the ideal progression up the adoption and received

value curve. Moving beyond the general customer
base data to the individual customer level, the basic
data set begins with the identification of the
decision makers and influencers in every one of the
customer companies. Where appropriate, the
various strong promoters and detractors of your
company and its products should also be identified,
and what’s often called the “power users” as well –
the people who are really skilled in using your
application to the fullest. The health of all of these
connections needs to be monitored, and this will
require the development of appropriate metrics for
use in reporting status changes. What behaviors
might indicate the development of an At-Risk
scenario? What common signs are present in your
most loyal customer relationships?
The research questions for individual members of
customer organizations also includes such issues as
identifying their goals and objectives, their decision-
making styles, and their awareness of the ROI for
the investment their company has made in your
products.
One of the most vital areas of customer data is their
engagement with the application in terms of
licenses/logons and percentage of actual usage of
the applications key features and functions. The
core of your health indicators for the status of
relationships with people has to be sourced in these

usage data. Customers may, and often do, say that
they are completely satisfied with the product and
that they are willing to recommend you to others –
but if they are not actually using your application,
those claims will present a very false picture.
The Strategy discussion is the foundation for your
customer intelligence program development
efforts in the other areas, and can serve as a check
on the decision-making process throughout the
initiative. If you can’t make a clean connection back
to your strategic base for a given decision, you’ll
probably find that either you left something out of
your strategy, or what you are thinking of doing may
not be appropriate.
THE PROCESS OF CUSTOMER
INTELLIGENCE
The Process of Customer Intelligence is about the
Sources of the data, the Validation of that data, and
the Dissemination of the data. In other words,
where does the information come from, how
reliable and useful is it, and how is it to be put into
the hands of the people who will make active use of
it?
DATA SOURCES
You already have a lot of the raw sources and data in
place. The CRM system that Sales used during the
prospecting and acquisition phase should have a
substantial amount of data about each customer
company and the individuals in it.
When Implementation / Professional Services did

their work, they kept records of initial specifications
1
the way and who requested and approved them, etc.
If those records aren’t immediately available to you,
go ask for them. If a 3rd party did the project, see
what they are willing to share with you. The same
thing is true of the Training team. What did they
learn? With which contacts did they interact?
Which were the “good” projects and what made
them so? What did the “tough” gigs have in
common? If you already have a Customer Success
team, talk to them about what they are hearing in
their interactions with key individuals.
Down in the Customer Support Center of your
operation, there is a wealth of very valuable
information about your customers. It’s in two
forms: the records of the support case management
system, and in the heads of the support reps. To
begin the process of understanding the support
center’s knowledge resources, sit down and listen in
on some of the conversations between the reps and
the customers as a regular activity. You’ll be
surprised at how much you can learn here about
what’s really going on out there in your company’s
customerium. Talking with the reps can also provide
insights as to what may be learned from the records
in the case management system. For the future,
consider: if you could assign just two questions per
week for the support team to ask of all of their
contacts, what would you ask and what would it be
worth to get those answers?
The various forms of social media are another

prime resource. While not everybody amongst the
160-odd million members of LinkedIn keeps their
profiles up to date, many do – and the information
It’s what you don’t know about
your customer relationships that
can cause you to lose them.
Mikael Blaisdell,
Publisher :
The HotLine Magazine
there can be extensive. Facebook and Twitter are
also important vantage points for keeping track of
key individuals. If you have key individuals at
customer sites on your watch list, LinkedIn can
often provide you with the first indication that they
have moved to a new company. You can then pass
that information back to Sales for them to evaluate
a possible new prospect, and you can start figuring
out who took their former position.
VALIDATION
Completeness, Accuracy and Usefulness are the key
aspects of the validation process. Consider the
CRM system and its data. Did the Sales team enter
in everything that they came to know about the
prospect? Don’t bet on it. Go interview them and
look for missing pieces. If the sales rep for that
account has left your company, see if you can track

them down and interview them. The same is true of
the other sources and data repositories.
Accuracy takes work. Keep asking questions and
comparing notes. I learned over the course of many
years in doing operational assessments of support
centers to never assume any answer was accurate
until I’d cross-checked it against what I found out
elsewhere. For example, in nearly every project, the
VP and Director level would tell me that certain
things were never done in their group – and the line
reps would often tell me that those very things were
an everyday part of the job they did.
If you get answers that do not fit or make sense;
either logically or because there is a contradiction,
you then know something is wrong or broken, or
that the wrong question has been asked. The art
and science of asking effective questions is going to
be a key skill of Customer Intelligence people.
Veteran systems design & implementation
professionals have a standard question that they
continually put to their clients during the process of
system design and configuration. How will you use
this data? Indiscriminate collection of data for the
sake of col-lecting data will result in an unusable
deluge.
For the past decade, an increasing amount of
attention has been paid to the issue of knowledge
1
management, especially in the context of Customer
Support. There are a variety of knowledge

management practices and technologies that are
directly applicable to the validation of customer
intelligence data.
DISSEMINATION
Who gets what information? How should it be
delivered? What actions should follow?
In dealing with the dissemination of information,
there are a couple of very common errors. The first
is to assume that if anyone wants to know
something, they’ll ask for it. The problem with such
an assumption is that people often simply don’t
know what is available. Even if they do have an idea
of what could be available, they may not venture to
ask for it. This is especially true of customer
support data in virtually every software company in
the industry.
A second common error is to assume that people
read standard reports.
In dealing with the dissemination
of information, there are a
couple of very common errors.
The first is to assume that if
anyone wants to know
something, they’ll ask for it. The
problem with such an
assumption is that people often
simply don’t know what is
available. Even if they do have
an idea of what could be
available, they may not venture
to ask for it. This is especially

true of customer support data
in virtually every software
company in the industry.
Early in my career, I was asked to assist an MIS team
with a review of the reports being produced by the
company’s mainframe. We began by asking key
people in the various departments about the
reports that they relied upon for the decisions that
they made. A list was assembled of all of the “must
have” reports, and of the decisions that depended
upon having those reports. Another list was
assembled of the names of reports that were never
mentioned. Then we started to print, but not
deliver, the reports that were not mentioned – and
listened for complaints. If none were received, the
reports were no longer printed for a time, and then
no longer processed at all. At the end of that phase
of the project, we had cut our list of reports down
from nearly 100 to less than 10.
Dissemination should not be a passive activity. If
information is not being used, it’s important to find
the reason for the lack. Is it that the decision
makers don’t know about or understand the value
of the information? Do they disagree with it? Are
they basing their decisions on something else?
THE PEOPLE OF CUSTOMER
INTELLIGENCE

Who will be responsible for doing the research and
the maintenance of the data concerning the
companies and individuals of interest? Who does
the analysis of the gathered information and
assessing the effectiveness of its dissemination?
How large should the team be, and where should it
be located in the overall organizational chart?
Where will you find suitable people, and how will
your company maintain and increase their skills?
While SaaS/Cloud companies often have to run
“lean and mean” organizations, especially in their
early years, it’s unfortunately true that assuming
everyone will be responsible for all aspects of the
work is a recipe for failure.
Where everyone is responsible but no one is
accountable, the results are minimal. Customer
intelligence is too important to be left to chance; it
needs a dedicated and accountable executive
owner and a team of professionals.
My recommendation is that the CI team should
report to the CCO or whoever is the authentic
1
owner of the ongoing customer relationships.
Marketing may cast covetous eyes on the CI team,
and there should be a lot of interaction with both
Marketing and Sales – but keep in mind that the
ultimate purpose of CI is retention, not acquisition.
CI SKILLS AND EXPERTISE
The essence of customer intelligence is having the
right data, in usable form, asking the right questions

and understanding the meaning of the answers. The
skills set of the team, therefore, needs to include
expertise in research, number crunching, analysis
and especially domain knowledge. You probably
won’t find all of those skills in the same person, but
they need to be well-represented in the team as a
whole.
The core of the team will need to be employees, but
you should also periodically bring in outside experts
of various kinds to look at your data and to suggest
both new questions and possible meanings. Have a
chat with the faculty of your nearby colleges and
universities to see who they may have on staff or
perhaps even as grad student interns. One possible
approach to both staffing and training is to
“borrow” people from other departments of the
company for limited durations.
Many years ago, the VP of Customer Support for a
large software company made a surprising new hire
– a recent doctoral graduate in Anthropology.
Noting the concerns of the new employee about
their lack of any experience in the software field, the
VP told him that the reason that he was being hired
was that he had expertise in analyzing communities
and in asking good questions. According to the VP,
the new hire more than paid for entire cost of his
The art and science of asking
effective questions is going to be
a key skill of Customer
Intelligence people.

650-532-8155 | E: [email protected]ainsight.com | 6
first year’s salary within a few weeks on the job by
uncovering some trends that no one else had
noticed.
THE TECHNOLOGY OF CUSTOMER
INTELLIGENCE
What applications or tools do you use to gather
information? Do they share a common database or
are they otherwise linked so that information is
available across the organization?
Most software companies who have moved beyond
the initial startup phase and have released products
will already have some sort of CRM/SFA (Sales
Force Automation) system in place. They may also
have added some marketing tools to track the
effectiveness of their email and other marketing
efforts.
Shortly after sales have been made to customers,
there will be Support – and some type of case
management system. In this day of easily available
Cloud-based tools, it’s hard to imagine a support
team that would either attempt to do without a
case/ticket management system or to write their
own – but the records of whatever system they may
have may not be linked with the overall corporate
CRM system.
There may be a Project Management system that is
used by Implementation/ProServe and/or Training.
Here, too, it’s very common for that system to not

be able to share its data with the core CRM system.
Who reads the emails you send out to your
customer base? If your emailing system is doing its
job, it should be able to answer that question, at
least for your prime persons of interest, and that
information should be shared with the CRM system
as well. Who attends webinars that your Customer
Success team does to encourage individuals and
companies to get even more value from your
technology? Who doesn’t attend?
More and more software firms are publishing
content relevant to their vertical markets and of
interest to customers and prospects alike. There is a
definite need for technologies to provide insight on
your website visitors’ motivations and decisions?
1
From the company’s perspective, the key questions
are:
What brought the visitor to the site? Was it
from a Search engine referral, linkage from
another site, or by direct access? If by search
engine, what was the phrasing of the query and
what results were offered? If a link from
another site was involved, which one? If the
visitor arrived by direct access, where/how did
they get the URL? Did they pick up the link in an
email?
What did they read? What was the first article
or page accessed, and were there any others
that were also read? If there were others, how

did they find them? Internal search? If so, again,
what was the phrasing of the query and what
results were offered? Links within the articles?
What did the visitor do next? In a Support
setting, for example, if they asked a question,
read an article or two, and then asked another
question in the same area, that would indicate
that the first answer(s) didn’t work. It also tells
us more about how the visitor thinks about the
problem they are researching.
To succeed in the Cloud, a
company must consider the
entire scope of its customerium,
the community of its customers,
influencers, fans, affiliates,
mavens, promoters, detractors,
ambivalents — and understand
how each sector affects and
impacts the profitability of the
corporation.
Mikael Blaisdell,
Publisher :
The HotLine Magazine
Once you’ve got the data from the various tools and
systems, the next step is analysis. You’ll need
business analytics technologies capable of accessing
data in different formats and repositories.

How will you deliver the processed and validated
data to those who will use it as the basis for action?
I think that this will turn out to be a combination of
push and pull access channels – and controlling that
access, managing the security of your knowledge
resources is going to require more technology.
THE CASE FOR CUSTOMER
INTELLIGENCE
From the beginning of the SaaS/Cloud tsunami,
industry observers noted that the new subscription
business model rather than the traditional
purchasing of perpetual licenses meant that
customers would be less committed to vendors.
While many early SaaS vendors attempted to assure
loyalty by holding customer data hostage, this
strategy proved unsustainable. Not only did
increasing customization functionality ultimately
also enable data migration, it was not long before
data synchronization firms entered the market to
make exits and migration much less troublesome.
The handwriting was on the wall – there is no real
competitive advantage in software features &
functionality. Today’s breakthrough will be
tomorrow’s commodity. An industry that has long
known how to sell technological bells & whistles,
1
leaving the customer with the burden of getting
measurable value from the product, must now learn
how to sell real value in the form of enduring
relationships.

A significant indication of the awareness by SaaS
vendors of the new market realities was the
creation and rapid proliferation of Customer
Success Management roles. Company after
company has fielded CSM teams and programs to
help customers achieve success with their software
subscription investments in the hopes of keeping
those income streams going. The byproduct of
those CSM efforts has been increased knowledge
about customers and their needs, and expertise in
capitalizing on them. Now it’s time to take the next
step to formalize the gathering, analysis and use of
data about customers to increase retention and
profitability.
The first step is to assess the currently available
resources. What data do you have, and how is it
being used? What is your actual customer
retention picture, and what does it reveal about
your company’s profitability prospects? The
answers to the latter two questions should be used
as the beginning of a budgetary process to identify
how much of an investment properly needs to be
made to increase retention and the expected
return. With that information in hand, it’s time to
design a customer intelligence program and team.
For more information about the emerging customer intelligence
role, you’re welcome to join in the discussions
of and its associated LinkedIn resource, .The HotLine
Magazine The Customer Success Management Forum
ABOUT MB & A, INC
Mikael Blaisdell is the leading voice in the SaaS/Cloud sector
on the strategy, process, people and technology of

customer retention and increased per-customer profitability.
Drawing upon the experience of more than 30
years in the support/service field, he provides a range of
consulting services for SaaS/Cloud firms of all types
and sizes, especially in the area of the emerging profession and
practice of Customer Success Management.
Publisher of The HotLine Magazine, Mikael’s vision and
commentary about how companies can optimize
customer relationships is read in over 135 countries around the
world.
Mikael Blaisdell | Alameda, California USA | 510.8654515 |
[email protected]
http://www.TheHotLineMagazine.com
http://www.linkedin.com/groups?gid=1913401&trk=group-name
When the business landscape was simple, companies
could afford to have complex strategies. But now that
business is so complex, they need to simplify. Smart
companies have done just that with a new approach:
a few straightforward, hard-and-fast rules that
define direction without confining it.
Strategy
as Simple Rules

by Kathleen M. Eisenhardt
and Donald N. Sull
JANUARY 2 0 0 1
S INCE ITS FOUNDING IN 1994. Yahoo! has e m e r g e d
asone of the blue chips of the new economy. As the
Intemet's top portal, Yahoo! generates the astounding
numbers we've come to expect from stars of tbe digital
era-more than loo million visits per day, annual sales
growth approaching 200%, and a market capitalization
that has exceeded the value ofthe Walt Disney Company.
Yet Yahoo! also provides something we don't generally
expect from Intemet companies: profits.
107
strategy as Simple Rules
Everyone recognizes the unprecedented success of
Yahoo!, but it's not easily explained using traditional
thinking about competitive strategy. Yahoo!'s rise can't
be attributed to an attractive industry
structure, for example. In fact, the
Internet portal space is a strategist's
worst nightmare: it's characterized by
intense rivalries, instant imitators, and
customers who refuse to pay a cent.
Worse yet, there are few barriers to
entry. Nor is it possible to attribute
Yahoo!'s success to unique or valuable
resources- its founders had little more
than a computer and a great idea

when they started the company. As for
strategy, many analysts would say it's
not clear that Yahoo! even has one.
The company began as a catalog of
Web sites, became a content aggrega-
tor, and eventually grew into a com-
munity of users. Lately it bas become
a broad network of media, commerce,
and communication services. If Yahoo!
has a strategy, it would be very hard to
pin down using traditional, textbook
notions.
While the Yahoo! story is dramatic,
it's far from unique. Many otber lead-
ers ofthe new economy, including eBay and America On-
line, also rose to prominence by pursuing constantly
evolving strategies in market spaces that were considered
unattractive according to traditional measures. And it's
not exclusively a new-economy phenomenon. Companies
in even the oldest sectors of the economy have excelled
without the advantages of superior resources or strategic
positions. Consider Enron and AES in energy, Ispat Inter-
national in steel, Cemex in cement, and Vodafone and
Global Crossing in telecommunications.
The performance of all these companies-despite un-
attractive industry structures, few apparent resource ad-
vantages, and constantly evolving strategies-raises criti-
cal questions. How did tbey succeed? More generally,
what are the sources of competitive advantage in high-
velocity markets? What does strategy mean in the new
economy?
The secret of companies like Yahoo! is strategy as sim-
ple rules. Managers of such companies know that the

greatest opportunities for competitive advantage lie in
market confusion, so they jump into chaotic markets,
probe for opportunities, build on successful forays, and
shift flexibly among opportunities as circumstances dic-
tate. But they recognize tbe need for a few key strategic
processes and a few simple rules to guide them through
the chaos. As one Intemet executive explained: "1 have
a thousand opportunities a day; strategy is deciding which
The new economy's most
profound strategic implication
is that companies must
capture unanticipated,
fleeting opportunities
in order to succeed.
50 to do." In traditional strategy, advantage comes from ex-
ploiting resources or stable market positions. In strategy
as simple rules, by contrast, advantage comes from suc-
cessfully seizing fleeting opportunities.
It's not surprising that a young com-
pany like Yahoo! should rely on strat-
egy as simple rules. Entrepreneurs have
always used that kind of opportunity-
grabbing approach because it can help
them win against established competi-
tors. What is surprising is that strategy
as simple rules makes sense for all
kinds of companies-large and small,

old and young- in fast-moving markets
like tbose in the new economy. That's
because, while information economics
and network effects are important, the
new economy's most profound strate-
gic implication is tbat companies must
capture unanticipated, fleeting oppor-
tunities in order to succeed.
Of course, theory is one thing, but
putting it into practice is another. In
fact, our recommendations reverse
some prescriptions of traditional strat-
egy. Rather than picking a position or
leveraging a competence, managers
should select a few key strategic pro-
cesses. Rather tban responding to a complicated world
with elaborate strategies, they should craft a handful of
simple rules. Ratber tban avoiding uncertainty, they
should jump in.
Zeroing in on Key Processes
Companies that rely on strategy as simple rules are often
accused of lacking strategies altogether. Critics have de-
rided AOL as "the cockroach ofthe Internet" for scurrying
from one opportunity to the next. Some analysts accuse
Enron of doing tbe same thing. Erom the outside, compa-
nies like these certainly appear to be following an "if it
Kathleen M. Eisenhardt is a professor of strategy and or-
ganization at Stanford University in Caiifortiia. Donald N.
Sull is an assistant professor at Harvard Business School iti
Boston.
This article is the third in a series on corporate strategy in

the new economy that Eisenhardt has published in HBR
in the past 20 tnonths. The central theme ofthe series is that in
dynamic markets, strategy centers on processes, not posi-
tions. The first tvt/o articles in the series were "Patching:
Restitching Business Portfolios in Dynamic Markets"
(May-June 1999, with Shona L Brown) and "Coevolving: At
Last, a Way to Make Synergies Work" (January-February
2000, with D. Charles Galunic).
108 HARVARD BUSINESS REVIEW
works, anything goes" approach. But that couldn't be fur-
ther from the truth. Each company follows a disciplined
strategy - otherwise, it would be paralyzed by chaos. And,
as with all effective strategies, the strategy is unique to the
company. But a simple-rules strategy and its underlying
logic of pursuing opportunities are harder to see than tra-
ditional approaches. (The exhibit "Three Approaches to
Strategy" compares the strategies of position, resources,
and simple rules.)
Managers using this strategy pick a small number of
strategically significant processes and craft a few simple
rules to guide them. The key strategic processes should
place the company where the flow of opportunities is
swiftest and deepest. The processes might include product
innovation, partnering, spinout creation, or new-market
entry. For some companies, the choices are obvious - Sun
Microsystems* focus on developing new products is
a good example. For other companies, the selection of
key processes might require some creativity - Akamai, for

instance, has developed a focus on customer care. The
simple rules provide the guidelines within which man-
agers can pursue opportunities. Strategy, then, consists of
the unique set of strategically significant processes and the
handful of simple rules that guide them.
Autodesk, the global leader in software for design pro-
fessionals, illustrates strategy as simple rules. In the mid-
1990s, Autodesk's markets were mature, and the company
dominated all of them. As a result, growth slowed to
single-digit rates. CEO Carol Bartz was sure that her most-
promising opportunities lay in making use of those Auto-
desk technologies - in areas such as wireless communica-
tions, the Intemet, imaging, and global positioning-that
hadn't yet been exploited. But she wasn't sure which new
technologies and related products would be big winners.
So she refocused the strategy on the product innovation
process and introduced a simple, radical rule: the new-
product development schedule would be shortened from
a leisurely 18 to 24 months to, in some cases, a hyper-
Three Approaches
to Strategy
Managers competing in business can choose among three
distinct ways to fight. They can build a fortress and defend it;
they
can nurture and leverage unique resources; or they can flexibly
pursue fleeting opportunities within simple rules. Each
approach
requires different skill sets and works best under different
circumstances.
Position Resources
Strategic logic

Strategic steps
Strategic question
Source of advantage
Works best in
Duration of advantage
Risk
Performance goal
Establish position
Identify an attractive market
Locate a defensible position
Fortify and defend
Where should we be?
Unique, valuable position
with tightly integrated
activity system
Leverage resources
Establish a vision
Build resources
Leverage across markets
Simple rules
Pursue opportunities

Jump into the confusion
Keep moving
Seize opportunities
Finish strong
What should we be?
LJnique, valuable,
inimitable resources
Slowly changing,
well-structured markets
Sustained
It will be too difficult to alter
Moderately changing,
well-structured markets
How should we proceed?
Key processes and unique
simple rules
Rapidly changing,
ambiguous markets
Sustained
Company will be too
Unpredictable

position as conditions change slow to build new resources
as conditions change
Profitability Long-term dominance
Managers will be too
tentative in executing on
promising opportunities
Growth
JANUARY 2001 109
Strategy as Simple Rules
kinetic three months. That changed the pace, scale, and
strategic logic with which Autodesk tackled technology
opportunities.
While a strategy of accelerating product innovation
helped identify opportunities more quickly, Bartz lacked
the cash to commercialize all of Autodesk's promising
technologies. So she added a significant new strategy:
spinouts. The first spinout, Buzzsaw.com, debuted in 1999.
It allowed engineers to purchase construction materials
using B2B exchange technology. Buzzsaw.com attracted
significant venture capital and benefited from Autodesk's
powerful brand and its customer relationships. Autodesk
has since created a second spinout, RedSpark, and has de-
veloped simple rules for the new key process of spinning
off companies.

A company's particular combination of opportunities
and constraints often dictates the pro-
cesses it chooses. Cisco, Autodesk, Lego,
and Yahoo! began with strategies in
which product innovation was domi-
nant, but their emphases diverged.
Cisco's new opportunities lay in the
many new networking technologies
that were emerging, but the company
lacked the time and engineering tal-
ent to develop them all. In contrast to
technology-rich and stock-price-poor
Autodesk, which focused on spinouts,
Cisco-with high market capitaliza-
tion-found that acquisitions was the
way to go. Despite its stratospheric
market cap. Yahoo! went in yet an-
other direction. The company wanted
to exploit content and commerce op-
portunities but needed a lot of part-
ners. Many were too big to acquire,
so it created partnerships. Lego's best
opportunities were in extending its
power brand and philosophy into new markets. But since
the company faced less competition and operated at a
slower pace than Autodesk, Cisco, or Yahoo!, managers
could grow organically into new product markets such as
children's robotics, clothing, theme parks, and software.
Simple Rules for Unpredictable
Markets
Most managers quickly grasp the concept of focusing on
key strategic processes that will position their companies
where the flow of opportunities is most promising. But
because they equate processes with detailed routines,
they often miss the notion of simple rules. Yet simple

rules are essential. They poise the company on what's
termed in complexity theory "the edge of chaos," provid-
ing just enough structure to allow it to capture the best
Thick manuals of rules can
be paralyzing.They can keep
managers from seeing
opportunities and moving
quickly enough to capture them.
opportunities. It may sound counterintuitive, but the
complicated improvisational movements that companies
like AOL and Enron make as they pursue fieeting oppor-
tunities arise from simple rules.
Yahoo!'s managers initially focused their strategy on
the branding and product innovation processes and lived
by four product innovation rules; know the priority rank
of each product in development, ensure that every engi-
neer can work on every project, maintain the Yahoo! look
in the user interface, and launch products quietly. As long
as they followed the rules, developers could change prod-
ucts in any way they chose, come to work at any hour,
wear anything, and bring along their dogs and significant
others. One developer decided at midnight to build a new
sports page covering the European soccer champion-
ships. Within 48 hours, it became Yahoo!'s most popular
page, with more than 100,000 hits per
day. Since he knew which lines he had
to stay within, he was free to run with
a great idea when it occurred to him.

A day later, he was back on his primary
project. On a bigger scale, the simple
rules, in particular the requirement
that every engineer be able to work
on every project, allowed Yahoo! to
change 50% of the code for the enor-
mously successful My Yahoo! service
four weeks before launch to adjust to
the changing market.'
Over the course of studying dozens
of companies in turbulent and unpre-
dictable markets, we've discovered that
the simple rules fall into five broad
categories. (See the exhibit "Simple
Rules, Summarized.")
How-to Rules. Yahoo!'s how-to
rules kept managers just organized
enough to seize opportunities. Enron
provides another how-to example, its commodities-
trading business focuses strategy on the risk management
process with two rules: each trade must be offset by an-
other trade that allows the company to hedge its risk, and
every trader must complete a daily profit-and-loss state-
ment. Computer giant Dell focuses on the process of rapid
reorganization (or patching) around focused customer
segments. A key how-to rule for this process is that a busi-
ness must be split in two when its revenue hits $1 billion.
Boundary Rules. Sometimes simple rules delineate
boundary conditions that help managers sort through
many opportunities quickly. The rules might center on
customers, geography, or technologies. For example,
when Cisco first moved to an acquisitions-led strategy, its

boundary rule was that it could acquire companies with
at most 75 employees, 75% of whom were engineers. At
a major pharmaceutical company, strategy centers on the
Simple Rules,
Summarized
In turbulent markets, managers should flexibly seize
opportunities-but flexibility must be disciplined. Smart
companies focus on
key processes and simple rules. Different types of rules help
executives manage different aspects of seizing opportunities.
Type
How-to rules
Boundary rules
Priority rules
Timing rules
Exit rules
Purpose
They spell out key features of how
a process is executed - "What makes

our process unique?"
They focus managers on which
opportunities can be pursued and
which are outside the pale.
They help managers rank the
accepted opportunities.
They synchronize managers with
the pace of emerging opportunities
and other parts ofthe company.
They help managers decide when to
Example
Akamai's rules for the customer service process: staff must
consist of technical gurus, every question must be answered
on the first call or e-mail, and R&D staff must rotate through
customer service.
Cisco's early acquisitions rule: companies to be acquired
must have no more than 75 empioyees, 75% of whom are
engineers.
Intel's rule for allocating manufacturing capacity:
allocation is based on a product's gross margin.
Nortel's rules for product development: project teams must
know when a product has to be delivered to the leading
customer to win, and product development time must be
less than i8 months.
Oticon's rule for pulling the plug on projects in development:
pull out of yesterday's opportunities. if a key team member-

manager or not-chooses to leave the
project for another within the company, the project is killed.
drug discovery process and several boundary rules: re-
searchers can work on any of ten molecules (no more
than four at once) specified by a senior research commit-
tee, and a research project must pass a few continuation
hurdles related to progress in clinical trials. Within those
boundaries, researchers are free to pursue whatever looks
promising. The result has been a drug pipeline that's the
envy ofthe industry.
Miramax-well known for artistically innovative
movies such as Tbe Crymg Game, Ufe is Beautiful, and Pulp
Fictioti - has boundary rules that guide the all-important
movie-picking process: first, every movie must revolve
around a central human condition, such as love {The Cry-
ing Game) or envy (The Talented Mr. Ripley). Second,
a movie's main character must be appealing but deeply
flawed-the hero of Shakespeare in Love is gifted and
charming but steals ideas from friends and betrays his
wife. Third, movies must have a very clear story iine with
a beginning, middle, and end (although in Pulp Fiction the
end comes first). Finally, there is a firm cap on production
costs. Within the rules, tbere is flexibility to move quickly
when a writer or director shows up with a great script.
The result is an enormously creative and even surprising
fiow of movies and enough discipline to produce superior.
consistent financial results. The English Patient, for exam-
ple, cost $27 million to make, grossed more than $200 mil-
lion, and grabbed nine Oscars.
Lego provides another illustration of boundary rules.
At Lego, the product market-entry process is a strategic

focus because of the many opportunities to extend the
Lego brand and philosophy. But while there is plenty of
fiexibility, not every market makes the cut. Lego has a
checklist of rules. Does the proposed product have the
Lego look? Will children leam while having fun? Will par-
ents approve? Does the product maintain high quality
standards? Does it stimulate creativity? If an opportunity
falls short on one hurdle, the business team can proceed,
but ultimately the hurdle must be cleared. Lego children's
wear, for example, met all the criteria except one; it didn't
stimulate creativity. As a result, the members of the chil-
dren's wear team worked until they figured out the an-
s w e r - a line of mix-and-match clothing items that en-
couraged children to create their own fashion statements.
Priority Rules. Simple rules can set priorities for re-
source allocation among competing opportunities. Intel
realized a long time ago that it needed to allocate manu-
facturing capacity among its products very carefully,
given the enormous costs of fabrication facilities. At
JANUARY 2001 111
a time of extreme price volatility in the
mid-1980s, when Asian chip manufac-
turers were disrupting world markets
with severe price cuts and accelerated
technological improvement, Intel fol-
lowed a simple rule: allocate manufac-
turing capacity based on a product's
gross margin. Without this rule, the
company might have continued to allo-

cate too much capacity to its traditional
core memory business rather than seiz-
ing the opportunity to dominate the
nascent and highly profitable micro-
processor niche.'
Timing Rules. Many companies
have timing rules that set the rhythm of
key strategic processes. In fact, pacing is
one ofthe important elements that set
simple-rules strategies apart from tradi-
tional strategies. Timing rules can help
synchronize a company with emerging
opportunities and coordinate the company's various
parts to capture them. Nortel Networks now relies on
two timing ruies for its strategically important product
innovation process: project teams must always know
when a product has to be delivered to the leading cus-
tomer to win, and product development time must be
less than 18 months. The first rule keeps Nortel in sync
with cutting-edge customers, who represent the best op-
portunities. The second forces Nortel to move quickly
into new opportunities while synchronizing the various
parts of the corporation to do so. Together, the rules
helped the company shift focus from perfecting its cur-
rent products to exploiting market openings - to "go from
perfection to hitting market windows," as CEO John Roth
puts it. At an Intemet-based service company where we
While it's appealing to think that
simple rules arise from clever
thinking, they rarely do. More
often, they grow out of experi-

ence, especially mistakes.
worked, globalization was the process
that put the company squarely in the
path of superior opportunities. Man-
agers drove new-country expansion
at the rate of one new country every
two months, thus maintaining con-
stant movement into new opportuni-
ties. Many top Silicon Valley compa-
nies set timing rules for the length
of the product innovation process.
When developers approach a dead-
line, they drop features to meet the
schedule. Such rhythms maintain
movement and ensure that the mar-
ket and various groups within the or-
ganization-from manufacturing to
marketing to engineering - are on the
same beat.
Exit Rules. Exit rules help man-
agers pull out from yesterday's op-
portunities. At the Danish hearing-
aid company Oticon, executives pull the plug on a
product in development if a key team member leaves for
another project. Similarly, at a major high-tech multina-
tional where creating new businesses is a key strategic
process, senior executives stop new initiatives that don't
meet certain sales and profit goals within two years. (For
a look at the flip side of simple ruies, see the sidebar
"What Simple Rules Are Not")
The Number of Rules Matters

obviously, it's crucial to write the right rules. But it's also
important to have the optimal number of rules. Thick
manuals of rules can be paralyzing. They can keep man-
agers from seeing opportunities and moving quickly
What Simple Rules
Are Not
I t is impossible to dictate exactly whata company's simple rules
should be.
It is possible, however, to say what they
should not be.
Broad. Managers often confuse a
company's guiding principles with sim-
ple rules. The celebrated "HP way,"for ex-
ample, consists of principles like "we
focus on a high level of achievement and
contribution" and "we encourage flexibil-
ity and innovation."The principles are
designed to apply to every activity
within the company,from purchasing to
product innovation. They may create
a productive culture, but they provide
little concrete guidance for employees
trying to evaluate a partner or decide
whether to enter a new market. The
most effective simple rules, in contrast,
are tailored to a single process.
Vague. Some rules cover a single pro-
cess but are too vague to provide real
guidance. One Western bank operating in
Russia, for example, provided the follow-
ing guideline for screening investment

proposals: all investments must be cur-
rently undervalued and have potential for
long-term capital appreciation. Imagine
the plight of a newly hired associate who
turns to that rule for guidance!
A simple screen can help managers
test whether their rules are too vague.
Ask: could any reasonable person argue
the exact opposite ofthe rule? In the case
ofthe bank in Russia, it is hard to imag-
ine anyone suggesting that the company
target overvalued companies with no po-
tential for long-term capital appreciation.
If your rulesflunkthistest, they are not
effective.
Mindle5s. Companies whose simple
rules have remained implicit may find
upon examining them that these rules
destroy rather than create value. In one
enough to capture them. We worked with a computer
maker, for example, whose minutely structured process
for product innovation was highly efficient but left the
company no flexihility to respond to market changes. On
the other hand, too few rules can also paralyze. Managers
chase too many opportunities or hecome confused ahout
which to pursue and which to ignore. We worked with

a biotech company that lagged behind the competition in
forming successful partnerships, a key strategic process
in that industry. Because the company lacked guidelines,
development managers brought in deal after deal, and
key scientists were pulled from clinical trials over and over
again to perform due diligence. Senior management
ended up rejecting most of the proposals. Executives may
have had implicit rules, but nobody knew what they were.
One business development manager lamented; "It would
be so liberating if only I had a few guidelines about what
I'm supposed to be looking for"
While creating the right number of rules-it's usually
somewhere between two and seven-is central, compa-
nies arrive at the optimal number from different direc-
tions. On the one hand, young companies usually have
too few rules, which prevents them from executing inno-
vative ideas effectively. They need more structure, and
they often have to build their simple rules from the
ground up. On the other hand, older companies usually
have too many rules, which keep them from competing
effectively in turbulent markets. They need to throw out
massively complex procedures and start over with a few
easy-to-follow directives.
The optimal number of rules for a particular company
can also shift over time, depending on the nature of the
business opportunities. In a period of predictability and
focused opportunities, a company should have more rules
in order to increase efficiency. When the landscape be-
comes less predictable and the opportunities more dif-
fuse, it makes sense to have fewer rules in order to
increase flexibility. When Cisco started to acquire aggres-
sively, the "75 people, 75% engineers" rule worked ex-
tremely well-it ensured a match with Cisco's entrepre-

neurial culture and left the company with lots of space to
maneuver. As the company developed more clarity and
focus in its home market, Cisco recognized the need for
a few more rules: a target must share Cisco's vision of
where the industry is headed, it must have potential for
short-term wins with current products, it must have po-
tential for long-term wins with the follow-on product gen-
eration, it must have geographic proximity to Cisco, and
its culture must be compatible with Cisco's. If a potential
acquisition meets all five criteria, it gets a green light If
it meets four, it gets a yellow light-further consideration
is required. A candidate that meets fewer than four gets
a red light. CEO John Chambers believes that observing
these simple rules has helped Cisco resist the temptation
to make inappropriate acquisitions. More recently, Cisco
has relaxed its rules (especially on proximity) to accom-
modate new opportunities as the company moves further
afield into new technologies and toward new customers.
How Rules Are Created
We're often asked where simple rules come from. While
it's appealing to think that they arise from clever think-
ing, they rarely do. More often, they grow out of experi-
ence, especially mistakes. Take Yahoo! and its partnership-
creation rules. An exclusive Joint venture with a major
credit card company proved calamitous. The deal locked
Yahoo! into a relationship with a particular firm, thereby
limiting e-commerce opportunities. After an expensive
exit. Yahoo! developed two simple rules for partnership
creation: deals can't be exclusive, and the basic service is
always free.
company, managers listed their recent
partnership relationships and then tried
to figure out what rules could have pro-
duced the list. To their chagrin, they

found that one rule seemed to be: always
form partnerships with small, weak com-
panies that we can control. Another was:
always form partnerships with compa-
nies that are not as successful as they
once were. Again, use a simple t e s t -
reverse-engineer your processes to de-
termine your implicit simple rules. Throw
out the ones that are embarrassing.
Stale. In high-velocity markets, rules
can linger beyond their sell-by dates. Con-
sider Bane One. The Columbus, Ohio-
JANUARY 2001
based bank grew to be the seventh-
largest bank in the United States by ac-
quiring more than loo regional banks.
Bane One's acquisitions followed a set of
simple rules that were based on experi-
ence: Bane One must never pay so much
that earnings are diluted, it must only
buy successful banks with established
management teams, it must never ac-
quire a bank with assets greater than
one-third of Bane One's, and it must allow
acquired banks to run as autonomous af-
filiates. The rules worked weii until others
in the banking industry consolidated op-
erations to lower their costs substantially.
Then Bane One's loose confederation of
banks was burdened with redundant op-
erations, and it got clobbered by efficient
competitors.

How do you figure out if your rules are
stale? Slowing growth is a good indicator.
Stock price is even better. Investors ob-
sess about the future, while your own fi-
nancials report the past. So if your share
price is dropping relative to your com-
petitors'share prices, or if your percent-
age of the industry's market value is de-
clining, or if growth is slipping,your rules
may need a refresh.
At young companies, where there is no history to leam
from, senior executives use experience gained at other
companies. CEO George Conrades of Akamai, for exam-
ple, drew on his decades of marketing experience to focus
his company on customer service - a surprising choice of
strategy for a high-tech venture. He then xieclared some
simple rules: the company must staff the customer service
group with technical gurus, every question must be an-
swered on the first call or e-mail, and R&D people must
rotate through customer care. These how-to rules shaped
customer service at Akamai hut left plenty of room for
employees to innovate with individual customers.
Most often, a rough outline of simple rules already ex-
ists in some implicit form. It takes an observant manager
to make them explicit and then extend them as business
opportunities evolve. {It's even possible to trace a young
company's evolution by examining how its simple rules
have been applied over time.) EBay, for example, started
out with two strong values: egalitarianism and commu-

nity-or, asone user put it, "capitalism for the rest of us."
Over time, founder and chairman Pierre Omidyar and
CEO Meg Whitman made those values explicit in simple
rules that helped managers predict which opportunities
would work for eBay. Egalitarianism evolved into two
simple how-to rules for rurming auctions: the number of
buyers and sellers must be balanced, and transactions
must be as transparent as possible. The first rule equalizes
the power of buyers and sellers but does not restrict who
can participate, so the eBay site is open to everyone,
from individual collectors to corporations (indeed, sev-
eral major retailers now use eBay as a quiet channel for
their merchandise). The second rule gives all partici-
pants equal access to as much information as possible.
This rule guided eBay managers into a series of moves
such as creating feedback ratings on sellers, on-line gal-
leries for expensive items, and authentication services
from Lloyd's of London.
The business meaning of community was crystallized
into a few simple rules, too: product ads aren't allowed
(they compete with the community), prices for basic ser-
vices must not be raised (increases hurt small members),
and eBay must uphold high safety standards (a commu-
nity needs to feel safe). The rules further clarified which
opportimities made sense. For instance, it was okay to
launch the PowerSellers program, which offers extra ser-
vices for community members who sell frequently. It was
also okay to allow advertising by financial services com-
panies and to expand into Europe, because neither move
broke the rules or threatened the community. On the
other hand, it was not okay to have advertising deals with
companies such as CDnow whose merchandise competes
with the community. Only later did the economic value of
the rules become apparent: the strength of the eBay com-

munity posed a formidable entry barrier to competitors,
E n r o n : simple Rules and Opportunity Logic
S imple rules establish a strategicf r a m e - n o t a step-by-step
recipe-to
help managers seize fleeting opportuni-
ties. Few companies have followed the
logicof opportunity or the discipline of
simple rules as consistently as Enron. Fif-
teen years ago, the company's main line
of business was interstate gastrans-
mission-hardly a market space teeming
with opportunities. Today, Enron makes
markets in commodities ranging from
pulp and paper to pollution-emission al-
lowances. It also controls an expansive
fiber-optic network, and runs an on-line
exchange-EnronOnline-whose daily
trading volume ranks it among the
largest e-commerce sites.
Enron began its remarkable transfor-
mation by embracing uncertainty. White
conventional wisdom dictates that man-
agers avoid uncertainty, the logicof op-
portunity dictates that they seek it out.
Like the outlaw Willie Sutton, who
robbed banks because that's where the
money was, Enron managers embraced
uncertainty because that's where the
juicy opportunities lay. Enron's managers
expanded from their traditional pipeline
business into wholesale energy distribu-
tion, trading, and global energy. At a time

when other energy executives were
doggedly defending their regulatory pro-
tection, Enron CEO Ken Lay aggressively
lobbied to accelerate deregulation in
order to create new opportunities for
Enron to exploit.
Once they had plunged into the brave
new world of deregulated energy, Enron
managers faced a challenge common to
new-economy companies but rare among
utilities-how to navigate among the
overabundance of opportunities. To shift
among opportunities, Enron mostly re-
lied on small moves, which are faster and
safer than large ones. Often, the moves
were made from the b o t t o m - m a n y of
Enron's new trading businesses began as
one-person operations.
The company needed to provide some
structure for all this movement among
opportunities. Enter key processes and
simple rules. In Enron's commodities-
trading businesses, for example, strategy
centers on the risk management process
and two simple rules: all trades must
be balanced with an offsetting trade to
minimize unhedged risk, and each
trader must report a daily profit-and-
loss statement. As long as they follow
these how-to rules, Enron's traders are
free to pursue new opportunities. The
strategy has led the company to pioneer
markets for commodities that had never
been traded before, including fiber-optic

bandwidth, pollution-emission credits,
and weather derivatives-contracts that
allow companies to hedge their weather-
related risk.
When it comes to strategic processes
and simple rules, one size doesn't fit all.
When Enron pioneered outsourced en-
ergy-management services in 1996, every
while egalitarianism created a high level of trust and
transparency among traders that effectively differenti-
ated eBay from its competitors.
It's entirely possible for two companies to focus on the
same key process yet develop radically different simple
rules to govern it. Consider Ispat International and Cisco.
In the last decade, Ispat has gone from running a single
steel mill in Indonesia to being the fourth-largest steel
company in the world by using a new-economy strategy
in an old-economy business. Founder Lakshmi Mittal's
strategy centers on the acquisition process. But Ispat's
rules for acquisitions look a whole lot different from
Cisco's for the same process.
Ispat's rules include buying established, state-owned
companies that have problems. Cisco's rules limit its ac-
quisitions to young, well-run, VC-backed companies.
Ispat's rules don't include geographic restrictions, so man-
agers search the globe -Mexico, Kazakhstan, Ireland-for

ailing companies. At least initially, Cisco's rules required
exactly the opposite focus-the company stayed close to
home with lots of acquisitions in Silicon Valley. Ispat fo-
cuses narrowly on two process technologies - DRI and
electrip arc furnaces-to drive companywide consistency.
At Cisco, the whole point is to acquire new technologies.
Ispat's rules center on finding companies in which costs
can be cut from cinrent operations. Cisco's rules gauge
revenue gains from future products. The bottom line:
same strategic process, same entrepreneurial emphasis
on seizing fleeting opportunities, same superior wealth
creation-but with totally different simple rules.
Knowing When to Change
It's important for companies with simple-rules strategies
to follow the rules religiously-think Ten Command-
ments, not optional suggestions-to avoid the tempta-
tion to change them too frequently. A consistent strat-
egy helps managers rapidly sort through all kinds of
opportunities and gain short-term advantage by exploit-
ing the attractive ones. More subtly, it can lead to pat-
terns that build long-term advantage, such as Lego's pow-
erful brand position and Cisco's interrelated networking
technologies.
Although it's unwise to chum the rules, strategies do go
stale. Shifting the rules can sometimes rejuvenate strat-
egy, but if the problems are deep, switching strategic pro-
cesses may be necessary. The ability to switch to new stra-
tegic processes has been a success secret of the best
new-economy companies. For example, Inktomi, a leader
in Internet infrastructure software, augmented its origi-
nal strategic focus on the product innovation process with
a focus on the market entry process and a few boundary
rules: the company must never produce a hardware prod-

uct, never interface directly with end users, and always
organization with a high energy bill was
a potential customer. To select from the
overwhelming number of opportunities,
Enron managers focused on the cus-
tomer-screening process and articulated
a few boundary rules to identify attrac-
tive customers: a target customer must
have outsourced before, energy must not
be the core of its business, and contacts
with Enron mustatready exist some-
where within the company. In addition,
Enron's salespeople must deal directly
with the CEO or CFO, because only the
top executives can assess the potential for
companywide savings and then commit.
In fouryears, Enron Energy Services has
grown from nothing to $15 billion in sales.
When pursuing novel opportunities
such as trading weather derivatives and
providing outsourced energy manage-
ment, it's impossible for Enron managers
to predict which initiatives will take off.
Managers must be prepared, therefore, to
reinforce successful moves that gain trac-
tion, even if those successes run counter
to managers' preconceived notions of
what should work. Fiber-optic cable, for
example, had little to do with Enron's core
energy business, but managers quickly
recognized its potential and backed a
winner.

In uncertain markets, not every oppor-
tunity pans out. Savvy managers respond
not by making fewer moves but by cut-
ting their losses quickly; after Enron's ac-
quisition of Portland General failed to
workout according to plan, the company
quickly put the utility back on the block.
Managers at Enron also try to build on
mistakes by salvaging what did work and
recombining it with other resources to
create new opportunities. This recombi-
nation works particularly well for large
companies like Enron that have an abun-
dance of "genetic material"-technolo-
gies, products, and expertise-for creative
combinations. So while the Portland Gen-
eral acquisition as a whole failed to pan
out, Enron managers salvaged the util-
ity's fledgling broadband cable business
and combined it with Enron's expertise in
trading to create a host of new opportuni-
ties in buying and selling broadband ca-
pacity and running a fiber-optic network.
The Enron story also illustrates the im-
portance of "finishing strong" when man-
agers discover a huge opportunity, in
chaotic markets, the initial move, no mat-
ter how masterful, rarely yields unam-
biguous success. Rather, initial moves un-
earth subsequent opportunities that may
prove huge, as e-commerce and broad-
band cable have for Enron. The key risks
in pursuing uncertain opportunities are
that moves may become too tentative -

too prone to quick retreat-and that man-
agers might grow overly cautious in pur-
suing the big opportunities that promise
outsized payoffs. Enron has succeeded, in
large part, because its managers finish
strong. In broadband, the company rein-
forced early successes through moves
such as delivering movies on demand in
partnership with Blockbuster. Similarly,
after Enron's initial foray into Internet
trading took off, top executives rapidly re-
deployed resources from throughout the
company to scale EnronOnline.
JANUARY 2 0 0 1 115
Strategy as Simple Ruies
develop software for applications with many users and
transactions (this exploits Inktomi's basic technology).
Company managers did not restrict the business or rev-
enue models. The result was successful new businesses in,
for example, search engines, caching, and e-commerce en-
gines. In fact, the company's second business, caching, is
now its key growth driver. But CEO Dave Peterschmidt
and his team have recently turned their attention to the
sales process because corporations-a much bigger cus-
tomer set than was available in their original portal mar-
k e t - a r e buying Inktomi software to manage intranets,
thus opening a massive stream of new opportunities. Ink-
tomi is turning to this new opportunity flow and crafting
fresh simple rules. Inktomi is thus accelerating growth by
adding new processes before old ones falter. !f managers
wait until the opportunity flow dries up before shifting

processes, it's already too late. (For more details on the use
of simple rules over time, see the sidebar "Enron: Simple
Rules and Opportunity Logic")
What Is Strategy?
Like all effective strategies, strategy as simple rules is
about being different. But that difference does not arise
from tightly linked activity systems or leveraged core com-
petencies, as in traditional strategies. It arises from focus-
ing on key strategic processes and developing simple rules
that shape those processes. When a pattern emerges from
the processes-a pattern that creates network effects or
economies of scale or scope - the result can be a long-term
competitive advantage like the ones Intel and Microsoft
achieved for over a decade. More ofren, the competitive
advantage is short term.
The more significant point, though, is that no one can
predict how long an advantage will last. An executive
must manage, therefore, as if it could all end tomorrow.
The new economy and other chaotic markets are too un-
certain to do otherwise. From newcomers like Yahoo!
founder Jerry Yang, who claims, "We live on the edge," to
Dell's Michael Dell, who famously said, "The only con-
stant is change," there's almost universal recognition that
the most salient feature of competitive advantage in these
markets is not sustainability but unpredictability.
In stable markets, managers can rely on complicated
strategies built on detailed predictions ofthe future. But
in complicated, fast-moving markets where significant
growth and wealth creation can occur, unpredictahility
reigns. It makes sense to follow the lead of entrepreneurs
and underdogs-seize opportunities in the here and now
with a handful of rules and a few key processes. In other

words, when business becomes complicated, strategy
should be simple.
1. Data on the Yahoo! product launch is drawn from Marco
Iansiti and Alan
MacCormack,"Living on Internet Time,"HBS case no. 6-97-
052,1999.
2. Data on Intel's exit from microprocessors is drawn from
Robert A. Burgel-
man, Dennis L. Carter, and Raymond S. Bamford,"Intel
Corporation: The Evo-
lution of an Adaptive Organization" Stanford Graduate Schooi
of Business
case no. SM-6s,i999.
Reprint ROIOIG
To order reprints, see the last page of Executive Summaries.
To further explore the topic of this article, go to
www.hbr.org/explore.
"Oh, that? That's where the computer's mouse lives.
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www.hbr.org
What Is Strategy?
by Michael E. Porter
Included with this full-text Harvard Business Review article:
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
Article Summary
What Is Strategy?

A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications
21 Further Reading
1
2
http://www.hbr.org
What Is Strategy?
The Idea in Brief The Idea in Practice
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The myriad activities that go into creating,
producing, selling, and delivering a product
service are the basic units of competitive
vantage. Operational effectiveness
eans performing these activities better—
at is, faster, or with fewer inputs and
fects—than rivals. Companies can reap
ormous advantages from operational ef-
tiveness, as Japanese firms demon-
ated in the 1970s and 1980s with such
actices as total quality management and
ntinuous improvement. But from a com-
titive standpoint, the problem with oper-
onal effectiveness is that best practices
easily emulated. As all competitors in an
ustry adopt them, the productivity
ntier—the maximum value a company
n deliver at a given cost, given the best
ailable technology, skills, and manage-
ent techniques—shifts outward, lowering
sts and improving value at the same
e. Such competition produces absolute
provement in operational effectiveness,
t relative improvement for no one. And
e more benchmarking that companies
, the more competitive convergence

u have—that is, the more indistinguish-
le companies are from one another.
rategic positioning attempts to achieve
stainable competitive advantage by
eserving what is distinctive about a com-
ny. It means performing different activi-
s from rivals, or performing similar activi-
s in different ways.
Three key principles underlie strategic positioning.
1. Strategy is the creation of a unique and
valuable position, involving a different set
of activities. Strategic position emerges from
three distinct sources:
• serving few needs of many customers (Jiffy
Lube provides only auto lubricants)
• serving broad needs of few customers
(Bessemer Trust targets only very high-
wealth clients)
• serving broad needs of many customers
in a narrow market (Carmike Cinemas op-
erates only in cities with a population
under 200,000)
2. Strategy requires you to make trade-offs
in competing—to choose what not to do.
Some competitive activities are incompatible;
thus, gains in one area can be achieved only
at the expense of another area. For example,
Neutrogena soap is positioned more as a me-
dicinal product than as a cleansing agent. The
company says “no” to sales based on deodor-

izing, gives up large volume, and sacrifices
manufacturing efficiencies. By contrast, Maytag’s
decision to extend its product line and ac-
quire other brands represented a failure to
make difficult trade-offs: the boost in reve-
nues came at the expense of return on sales.
3. Strategy involves creating “fit” among a
company’s activities. Fit has to do with the
ways a company’s activities interact and rein-
force one another. For example, Vanguard
Group aligns all of its activities with a low-cost
strategy; it distributes funds directly to con-
sumers and minimizes portfolio turnover. Fit
drives both competitive advantage and sus-
tainability: when activities mutually reinforce
each other, competitors can’t easily imitate
them. When Continental Lite tried to match a
few of Southwest Airlines’ activities, but not
the whole interlocking system, the results
were disastrous.
Employees need guidance about how to
deepen a strategic position rather than
broaden or compromise it. About how to ex-
tend the company’s uniqueness while
strengthening the fit among its activities. This
work of deciding which target group of cus-
tomers and needs to serve requires discipline,
the ability to set limits, and forthright commu-
nication. Clearly, strategy and leadership are
inextricably linked.
What Is Strategy?

by Michael E. Porter
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harvard business review • november–
I. Operational Effectiveness Is Not
Strategy
For almost two decades, managers have been
learning to play by a new set of rules. Compa-
nies must be flexible to respond rapidly to

competitive and market changes. They must
benchmark continuously to achieve best prac-
tice. They must outsource aggressively to gain
efficiencies. And they must nurture a few core
competencies in race to stay ahead of rivals.
Positioning—once the heart of strategy—is
rejected as too static for today’s dynamic mar-
kets and changing technologies. According to
the new dogma, rivals can quickly copy any
market position, and competitive advantage is,
at best, temporary.
But those beliefs are dangerous half-truths,
and they are leading more and more companies
down the path of mutually destructive compe-
tition. True, some barriers to competition are
falling as regulation eases and markets become
global. True, companies have properly invested
energy in becoming leaner and more nimble.
In many industries, however, what some call
hypercompetition is a self-inflicted wound, not
the inevitable outcome of a changing paradigm
of competition.
The root of the problem is the failure to dis-
tinguish between operational effectiveness and
strategy. The quest for productivity, quality, and
speed has spawned a remarkable number of
management tools and techniques: total quality
management, benchmarking, time-based com-
petition, outsourcing, partnering, reengineering,
change management. Although the resulting
operational improvements have often been
dramatic, many companies have been frustrated

by their inability to translate those gains into
sustainable profitability. And bit by bit, almost
imperceptibly, management tools have taken
the place of strategy. As managers push to im-
prove on all fronts, they move farther away
from viable competitive positions.
Operational Effectiveness: Necessary but Not
Sufficient. Operational effectiveness and strategy
are both essential to superior performance,
which, after all, is the primary goal of any en-
terprise. But they work in very different ways.
december 1996 page 2
What Is Strategy?
Michael E. Porter is the C. Roland
Christensen Professor of Business
Administration at the Harvard Business
School in Boston, Massachusetts.
This article has benefited greatly
from the assistance of many individuals
and companies. The author gives spe-
cial thanks to Jan Rivkin, the coauthor
of a related paper. Substantial research
contributions have been made by
Nicolaj Siggelkow, Dawn Sylvester, and
Lucia Marshall. Tarun Khanna, Roger
Martin, and Anita McGahan have pro-
vided especially extensive comments.
A company can outperform rivals only if it can

establish a difference that it can preserve. It must
deliver greater value to customers or create
comparable value at a lower cost, or do both.
The arithmetic of superior profitability then fol-
lows: delivering greater value allows a company
to charge higher average unit prices; greater
efficiency results in lower average unit costs.
Ultimately, all differences between companies
in cost or price derive from the hundreds of ac-
tivities required to create, produce, sell, and de-
liver their products or services, such as calling
on customers, assembling final products, and
training employees. Cost is generated by per-
forming activities, and cost advantage arises
from performing particular activities more effi-
ciently than competitors. Similarly, differentia-
tion arises from both the choice of activities and
how they are performed. Activities, then are the
basic units of competitive advantage. Overall ad-
vantage or disadvantage results from all a com-
pany’s activities, not only a few.1
Operational effectiveness (OE) means per-
forming similar activities better than rivals per-
form them. Operational effectiveness includes
but is not limited to efficiency. It refers to any
number of practices that allow a company to bet-
ter utilize its inputs by, for example, reducing de-
fects in products or developing better products
faster. In contrast, strategic positioning means
performing different activities from rivals’ or per-
forming similar activities in different ways.
Differences in operational effectiveness among
companies are pervasive. Some companies

are able to get more out of their inputs than
others because they eliminate wasted effort,
employ more advanced technology, motivate
employees better, or have greater insight into
managing particular activities or sets of activ-
ities. Such differences in operational effective-
ness are an important source of differences in
profitability among competitors because they
directly affect relative cost positions and
levels of differentiation.
Differences in operational effectiveness
were at the heart of the Japanese challenge to
Western companies in the 1980s. The Japa-
nese were so far ahead of rivals in operational
effectiveness that they could offer lower cost
and superior quality at the same time. It is
worth dwelling on this point, because so much
recent thinking about competition depends
on it. Imagine for a moment a productivity
frontier that constitutes the sum of all existing
best practices at any given time. Think of it as
the maximum value that a company deliver-
ing a particular product or service can create
at a given cost, using the best available tech-
nologies, skills, management techniques, and
purchased inputs. The productivity frontier
can apply to individual activities, to groups
of linked activities such as order processing
and manufacturing, and to an entire com-
pany’s activities. When a company improves
its operational effectiveness, it moves toward
the frontier. Doing so may require capital in-
vestment, different personnel, or simply new
ways of managing.

The productivity frontier is constantly shift-
ing outward as new technologies and man-
agement approaches are developed and as
new inputs become available. Laptop com-
puters, mobile communications, the Internet,
and software such as Lotus Notes, for exam-
ple, have redefined the productivity frontier
for sales-force operations and created rich
possibilities for linking sales with such activi-
ties as order processing and after-sales sup-
port. Similarly, lean production, which involves a
family of activities, has allowed substantial
improvements in manufacturing productivity
and asset utilization.
For at least the past decade, managers have
been preoccupied with improving operational
effectiveness. Through programs such as TQM,
time-based competition, and benchmarking,
they have changed how they perform activities
in order to eliminate inefficiencies, improve
customer satisfaction, and achieve best practice.
Hoping to keep up with shifts in the produc-
tivity frontier, managers have embraced con-
tinuous improvement, empowerment, change
management, and the so-called learning orga-
nization. The popularity of outsourcing and
the virtual corporation reflect the growing
recognition that it is difficult to perform all
activities as productively as specialists.
As companies move to the frontier, they can
often improve on multiple dimensions of per-
formance at the same time. For example, manu-
facturers that adopted the Japanese practice of

rapid changeovers in the 1980s were able to
lower cost and improve differentiation simul-
taneously. What were once believed to be
real trade-offs—between defects and costs, for
example—turned out to be illusions created by
poor operational effectiveness. Managers have
learned to reject such false trade-offs.
What Is Strategy?
Operatio
Versus S
dereviled eulav reyub ecirpno
N
low
high
high
Constant improvement in operational ef-
fectiveness is necessary to achieve superior
profitability. However, it is not usually suffi-
cient. Few companies have competed success-
fully on the basis of operational effectiveness
over an extended period, and staying ahead of
rivals gets harder every day. The most obvious
reason for that is the rapid diffusion of best
practices. Competitors can quickly imitate
management techniques, new technologies,
input improvements, and superior ways of

meeting customers’ needs. The most generic
solutions—those that can be used in multiple
settings—diffuse the fastest. Witness the pro-
liferation of OE techniques accelerated by
support from consultants.
OE competition shifts the productivity fron-
tier outward, effectively raising the bar for
everyone. But although such competition pro-
duces absolute improvement in operational ef-
fectiveness, it leads to relative improvement
for no one. Consider the $5 billion-plus U.S.
commercial-printing industry. The major players—
R.R. Donnelley & Sons Company, Quebecor,
World Color Press, and Big Flower Press—are
competing head to head, serving all types of
customers, offering the same array of printing
technologies (gravure and web offset), in-
vesting heavily in the same new equipment,
running their presses faster, and reducing crew
sizes. But the resulting major productivity
gains are being captured by customers and
equipment suppliers, not retained in superior
profitability. Even industry-leader Donnelley’s
profit margin, consistently higher than 7% in
the 1980s, fell to less than 4.6% in 1995. This
pattern is playing itself out in industry after
industry. Even the Japanese, pioneers of the
new competition, suffer from persistently low
profits. (See the insert “Japanese Companies
Rarely Have Strategies.”)
The second reason that improved opera-
tional effectiveness is insufficient—competitive
convergence—is more subtle and insidious. The

more benchmarking companies do, the more
they look alike. The more that rivals out-
source activities to efficient third parties,
often the same ones, the more generic those
activities become. As rivals imitate one an-
other’s improvements in quality, cycle times,
or supplier partnerships, strategies converge
and competition becomes a series of races
down identical paths that no one can win.
Competition based on operational effective-
ness alone is mutually destructive, leading
to wars of attrition that can be arrested only
by limiting competition.
The recent wave of industry consolidation
through mergers makes sense in the context of
OE competition. Driven by performance pres-
sures but lacking strategic vision, company
after company has had no better idea than to
buy up its rivals. The competitors left standing
are often those that outlasted others, not com-
panies with real advantage.
After a decade of impressive gains in opera-
tional effectiveness, many companies are facing
diminishing returns. Continuous improvement
has been etched on managers’ brains. But its
tools unwittingly draw companies toward imi-
tation and homogeneity. Gradually, managers
have let operational effectiveness supplant strat-
egy. The result is zero-sum competition, static or
declining prices, and pressures on costs that
compromise companies’ ability to invest in the
business for the long term.
II. Strategy Rests on Unique

Activities
Competitive strategy is about being different.
It means deliberately choosing a different set
of activities to deliver a unique mix of value.
Southwest Airlines Company, for example,
offers short-haul, low-cost, point-to-point service
between midsize cities and secondary airports
nal Effectiveness
trategic Positioning
Relative cost position
low
Productivity Frontier
(state of best practice)
What Is Strategy?
Japanese Companies
The Japanese triggered a global revol
tion in operational effectiveness in th
1970s and 1980s, pioneering practices
such as total quality management an
continuous improvement. As a result,
Japanese manufacturers enjoyed sub-
stantial cost and quality advantages fo
many years.

But Japanese companies rarely de
veloped distinct strategic positions
the kind discussed in this article.
Those that did—Sony, Canon, and Sega,
for example—were the exception rathe
than the rule. Most Japanese compa
nies imitate and emulate one anothe
All rivals offer most if not all produc
varieties, features, and services; the
employ all channels and match one
anothers’ plant configurations.
The dangers of Japanese-style comp
tition are now becoming easier to rec
ognize. In the 1980s, with rivals opera
ing far from the productivity frontier,
seemed possible to win on both cost
and quality indefinitely. Japanese com
panies were all able to grow in an ex-
panding domestic economy and by
penetrating global markets. They ap-
in large cities. Southwest avoids large airports
and does not fly great distances. Its customers
include business travelers, families, and stu-
dents. Southwest’s frequent departures and
low fares attract price-sensitive customers who
otherwise would travel by bus or car, and
convenience-oriented travelers who would
choose a full-service airline on other routes.
Most managers describe strategic position-
ing in terms of their customers: “Southwest
Airlines serves price- and convenience-sensitive
travelers,” for example. But the essence of strat-
egy is in the activities—choosing to perform
activities differently or to perform different ac-

tivities than rivals. Otherwise, a strategy is
nothing more than a marketing slogan that
will not withstand competition.
A full-service airline is configured to get
passengers from almost any point A to any point
B. To reach a large number of destinations and
serve passengers with connecting flights, full-
service airlines employ a hub-and-spoke system
centered on major airports. To attract passengers
who desire more comfort, they offer first-class
or business-class service. To accommodate
passengers who must change planes, they co-
ordinate schedules and check and transfer
baggage. Because some passengers will be
traveling for many hours, full-service airlines
serve meals.
Southwest, in contrast, tailors all its activities
to deliver low-cost, convenient service on its par-
ticular type of route. Through fast turnarounds at
the gate of only 15 minutes, Southwest is able to
keep planes flying longer hours than rivals and
provide frequent departures with fewer aircraft.
Southwest does not offer meals, assigned seats,
interline baggage checking, or premium classes
of service. Automated ticketing at the gate
encourages customers to bypass travel agents, al-
lowing Southwest to avoid their commissions.
A standardized fleet of 737 aircraft boosts the
efficiency of maintenance.
Southwest has staked out a unique and valu-
able strategic position based on a tailored set
of activities. On the routes served by South-

west, a full-service airline could never be as
convenient or as low cost.
Ikea, the global furniture retailer based in
Sweden, also has a clear strategic positioning.
Ikea targets young furniture buyers who want
style at low cost. What turns this marketing
concept into a strategic positioning is the tai-
lored set of activities that make it work. Like
Southwest, Ikea has chosen to perform activi-
ties differently from its rivals.
Consider the typical furniture store. Show-
rooms display samples of the merchandise.
One area might contain 25 sofas; another will
display five dining tables. But those items rep-
resent only a fraction of the choices available
to customers. Dozens of books displaying fabric
swatches or wood samples or alternate styles
offer customers thousands of product varieties
to choose from. Salespeople often escort cus-
tomers through the store, answering questions
and helping them navigate this maze of choices.
Once a customer makes a selection, the order
is relayed to a third-party manufacturer. With
luck, the furniture will be delivered to the cus-
tomer’s home within six to eight weeks. This is
a value chain that maximizes customization
and service but does so at high cost.
In contrast, Ikea serves customers who are
happy to trade off service for cost. Instead of
Rarely Have Strategies
u-
e

d
r
-
of
r
-
r.
t
y
e-
-
t-
it
-
peared unstoppable. But as the gap in
operational effectiveness narrows, Jap-
anese companies are increasingly
caught in a trap of their own making. If
they are to escape the mutually destruc-
tive battles now ravaging their perfor-
mance, Japanese companies will have
to learn strategy.
To do so, they may have to overcome
strong cultural barriers. Japan is noto-
riously consensus oriented, and com-
panies have a strong tendency to medi-

ate differences among individuals
rather than accentuate them. Strategy,
on the other hand, requires hard
choices. The Japanese also have a
deeply ingrained service tradition that
predisposes them to go to great
lengths to satisfy any need a customer
expresses. Companies that compete in
that way end up blurring their distinct
positioning, becoming all things to
all customers.
This discussion of Japan is drawn from
the author’s research with Hirotaka
Takeuchi, with help from Mariko
Sakakibara.
What Is Strategy?
Finding New Position
Strategic competition can be thought o
the process of perceiving new position
woo customers from established positi
draw new customers into the market. F
ample, superstores offering depth of m
chandise in a single product category t
market share from broad-line departm
stores offering a more limited selection
many categories. Mail-order catalogs p
customers who crave convenience. In p
ple, incumbents and entrepreneurs fac

same challenges in finding new strateg
sitions. In practice, new entrants often
the edge.
Strategic positionings are often not o
ous, and finding them requires creativit
insight. New entrants often discover un
having a sales associate trail customers around
the store, Ikea uses a self-service model based
on clear, in-store displays. Rather than rely
solely on third-party manufacturers, Ikea designs
its own low-cost, modular, ready-to-assemble
furniture to fit its positioning. In huge stores,
Ikea displays every product it sells in room-like
settings, so customers don’t need a decorator
to help them imagine how to put the pieces to-
gether. Adjacent to the furnished showrooms
is a warehouse section with the products in
boxes on pallets. Customers are expected to do
their own pickup and delivery, and Ikea will
even sell you a roof rack for your car that you
can return for a refund on your next visit.
Although much of its low-cost position comes
from having customers “do it themselves,” Ikea
offers a number of extra services that its com-
petitors do not. In-store child care is one. Ex-
tended hours are another. Those services are
uniquely aligned with the needs of its custom-
ers, who are young, not wealthy, likely to
have children (but no nanny), and, because
they work for a living, have a need to shop
at odd hours.
The Origins of Strategic Positions. Strategic
positions emerge from three distinct sources,

which are not mutually exclusive and often
overlap. First, positioning can be based on pro-
ducing a subset of an industry’s products or
services. I call this variety-based positioning
because it is based on the choice of product
or service varieties rather than customer
segments. Variety-based positioning makes
economic sense when a company can best
produce particular products or services using
distinctive sets of activities.
Jiffy Lube International, for instance, spe-
cializes in automotive lubricants and does not
offer other car repair or maintenance services.
Its value chain produces faster service at a
lower cost than broader line repair shops, a
combination so attractive that many customers
subdivide their purchases, buying oil changes
from the focused competitor, Jiffy Lube, and
going to rivals for other services.
The Vanguard Group, a leader in the mutual
fund industry, is another example of variety-
based positioning. Vanguard provides an
array of common stock, bond, and money
market funds that offer predictable perfor-
mance and rock-bottom expenses. The com-
pany’s investment approach deliberately
sacrifices the possibility of extraordinary per-
formance in any one year for good relative
performance in every year. Vanguard is known,
for example, for its index funds. It avoids mak-
ing bets on interest rates and steers clear of
narrow stock groups. Fund managers keep
trading levels low, which holds expenses

down; in addition, the company discourages
customers from rapid buying and selling be-
cause doing so drives up costs and can force a
fund manager to trade in order to deploy new
s: The Entrepreneurial Edge
f as
s that
ons or
or ex-
er-
ake
ent
in
ick off
rinci-
e the
ic po-
have
bvi-
y and
ique
positions that have been available but simply
overlooked by established competitors. Ikea,
for example, recognized a customer group
that had been ignored or served poorly. Cir-
cuit City Stores’ entry into used cars, CarMax,
is based on a new way of performing activities—
extensive refurbishing of cars, product guaran-
tees, no-haggle pricing, sophisticated use of in-
house customer financing—that has long
been open to incumbents.

New entrants can prosper by occupying a
position that a competitor once held but has
ceded through years of imitation and strad-
dling. And entrants coming from other indus-
tries can create new positions because of dis-
tinctive activities drawn from their other
businesses. CarMax borrows heavily from
Circuit City’s expertise in inventory manage-
ment, credit, and other activities in consumer
electronics retailing.
Most commonly, however, new positions
open up because of change. New customer
groups or purchase occasions arise; new
needs emerge as societies evolve; new distri-
bution channels appear; new technologies
are developed; new machinery or informa-
tion systems become available. When such
changes happen, new entrants, unencum-
bered by a long history in the industry, can
often more easily perceive the potential
for a new way of competing. Unlike incum-
bents, newcomers can be more flexible be-
cause they face no trade-offs with their
existing activities.
What Is Strategy?
A company can

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