Patterns of Strategic Thinking – The Secrets of Exploiting Leverage

Introduction

I’ve recently been obsessed with strategy and have been reading a variety of strategy books in a variety of fields such as psychology, economics, business, military, etc.  I noticed that while few people really understand strategy (even though they think they do) there were certain patterns of strategic thinking that show up over and over again in these works. These patterns can easily be abstracted out of their respective fields and used in their everyday life.

Game theory is one of the fields that studies some of these patterns from the perspective of games where you and an opponent take turns making moves. According to Wikipedia game theory is: “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.”

Your objective in these games is to be able to predict what moves your opponent will make for every one of your moves and choose the most optimal one for you to win the game (however winning is defined)

Personally I’m not a big fan of game theory for two core reasons. First it limits your thinking to a frame of move-countermove when in real life things are a lot more dynamic and complex. In fact, in many cases you can build quite an advantage without worrying about what your opponents or competitors are doing. Second it utilizes a model of the “intelligent rational decision makers” which according to many studies in behavioral economics is incorrect.

I first started to notice these patterns while I was studying psychology and influence, however I saw them as specific techniques within those fields. It wasn’t until I started reading books on strategy that I was able to generalize them and abstract them out of those fields and I started to see them everywhere. The techniques were different of course but the patterns were eerily similar

For example you can leverage certain skills you have to get a higher position in one company than you’d be able to get in another company. In another setting, say in business, you might be able to leverage big cash reserves to invest in R&D to move your company beyond the current trends in technology and be able to actually shape the future rather than be shaped by the future.

In both cases you’re leveraging/exploiting certain assets, that are only available to you, to put yourself in a better position to succeed. What else can your leverage that puts you in a position of advantage against your competition? More on that in a bit.

This is the first in a series of posts on the patterns of strategic thinking. My goal with this is to create a collection of these patterns that can be used as a toolkit for making smarter decisions both in business and in personal life and who doesn’t want to make smarter decisions?

In this post we will explore the vast and unending ways you can exploit and make use of leverage.

Using Leverage

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” – Archimedes

Leverage is simply a way to multiply the force used to a greater effect or to achieve a specific objective. It’s a type of advantage that is context free and not rooted in any particular field.

You can get or use leverage in one of two ways:

  1. by exploiting certain patterns that exist in a system either innate to it or by design
  2. by creating and accumulating assets which can be used at a later time

Let’s explore these two in depth.

There are three categories of patterns you can notice and exploit in systems:

  1. Predictive Patterns
  2. Pivotal Points
  3. Focused Effort

Part 1 – Exploiting Patterns

1. Predictive Patterns are patterns that allow you to predict what might happen in the future through the use of trends in the industry, momentum, routines, habits, biases, social dynamics in a given context, psychological models of behavior, inertias, etc.

In game theory a lot of your leverage and advantage comes from your ability to predict other people’s responses to your moves and figure out the countermoves to that anticipated behavior so you can win the game in the end. The farther you’re able to predict, the more likely you are to win the game.

As I mentioned above, one of the issues I have with it is that it assumes that you’re dealing with intelligent and fully rational human beings. However, as Daniel Kahneman and Amos Tversky (and later Dan Ariely in Predictably Irrational, Richard Thaler and Cass Sunnstein in Nudge and many others) have repeatedly pointed out, humans deviate from the so-called “rational behavior” but do so in relatively predictable ways.

So you can either use the “rational model” of behavior, or you can use the biases model that behavioral economics has put forth. In fact a lot of the techniques that are discussed in books about persuasion and influence focus specifically in telling you the various patterns of behavior that humans tend to follow which can be used for leverage.

Here are a few examples.

-In investing/business, if you notice a trend towards cloud computing and anticipate growth, you can invest in a company that owns and operates a lot of data centers.

-In your career, if you notice that everyone is talking about data science and big data and anticipate a big demand for people who know data analysis, you can start to learn statistics, if you already know programming or programming if you already know math/statistics.

-In your personal or social life, if you notice that when you call yourself a statistician people stop wanting to talk to you, next time you can call yourself a data scientist and get them more interested.

2. Pivotal Points are things like imbalances, inefficiencies, weaknesses, and so on that magnify the effects of effort. They are either innate to the system or are put there “by design” and once noticed can be used over and over again until the system is either corrected or corrects itself.

I put “by design” in quotes to highlight the fact that in many cases the weakness that are exploited in certain systems, (for example networks or websites that are hacked) are usually not there on purpose but through design they were introduced in the system as bugs probably through oversight or just faulty construction.

Imbalances exists when a small shift in the system results in relatively large effects. This can be for example pent-up demand for an item that nobody thought would be there. In war/conflict an imbalance would be a perceptual difference between say the number of soldiers that the enemy says they have and their actual numbers.

Inefficiencies are usually extra steps that one has to take to accomplish something in the system and are the most easily noticed form of leverage. Google for example noticed that the big search engines operating in the late 90’s all had the same inefficiency. They would provide irrelevant search results and as an advertiser you might be able to buy yourself into the top of the results list and stay there as long as you were paying.

Google exploited this inefficiency by introducing their PageRank algorithm and later their bid-style PPC ad buying platform. This not only had the effect of millions of users switching over to Google as their default search ending but also leveling the field for everyone so the little guy could compete with the big advertisers on an even footing.

Notice that this was both an imbalance (search engine users wanted to see relevant results so there was pent-up demand) and an inefficiency (users had to scroll through many irrelevant search results to get to what they were looking for sometimes never finding it)

Weaknesses are areas of lack of competency by an opponent/competitor that can be exploited and used by someone who has that competency. Of course the actual competency needs to be in demand in order for it to be worth exploiting. Again this is another common way that leverage is used in business or even personal life.

A good example of this is choosing a career. We’re all good at some things but not others, so for example if you find yourself in an organization that has really poor processes that are hindering growth and you are good at project management, this is a weakness you might be able to exploit long enough to either become an expert in project management or get promoted within the organization.

The examples above should be plenty to stir your imagination so let’s move on to the third pattern.

3. Focused Effort is a pattern where you limit your application of effort into a concentrated area of the system and you get larger payoffs from it. This pattern relies on constraints and threshold effects within the system.

A threshold effect is like a tipping point. There’s some point in the system that you need to reach before you see any payoff. This is something that happens for example when you launch a new product. It can take a lot of effort to get to the threshold/tipping point of awareness about that product but once you’re there things start to become easier and you just need enough effort to maintain the effect.

The threshold effect can be understood through the concept of inertia from mechanics where it takes a lot of initial effort to get an object moving, but once it has momentum, you just need enough force to counteract friction.

Another application of constraints and threshold effects is when you go after a small market and seek to dominate it before trying to take on a bigger market. From a strategic point it is a lot easier to dominate a smaller market fully than to claim an equal slice from a bigger market.

A perfect example of the threshold and focused effort patterns is the strategy that Tesla Motors has used to take on the giants of the automotive industry. In a recent article in FastCompany.com, Tesla Motors founder Elon Musk stated that his plan for introducing the electric car was really simple:

1. Build sports car
2. Use that money to build an affordable car
3. Use that money to build an even more affordable car
4. While doing above, also provide zero-emission electric-power generation options

One of the investors in Tesla explained in an answer on Quora why they chose to first build the very expensive Roadster (the sports car) then the Model S (the affordable car) and the plans for what they’re calling the Bluestar (the more affordable version). The reason for this is that you can’t penetrate the automobile market from the bottom up, it has to be top-down.

The Roadster provided Tesla with many benefits they wouldn’t otherwise have if they started with an affordable car. They got money from sales to be able to sustain themselves, they created a brand image, they showed the world they could build a high-performance electric vehicle, and they learned a lot from the engineering challenges, lessons they can now apply towards making more affordable electric cars for everyone.

Part 2 – Building Assets

Now that we covered the patterns you can exploit in a system to gain leverage, let’s cover the other side of the coin which covers the assets, competencies and advantages that allow you to exploit those patterns.

There are three types of assets you may innately have or can build:

  1. Positions
  2. Resources
  3. Competencies.

1. Positions are a type of asset that has to do with either a physical location in space or a more abstract perceptual position in the mind. The first one is obvious. In real estate for example you know that the key is location, location, location. Where you are located with respect to people’s movement patterns can make you or break you. In war/conflict certain positions are more advantageous than others and thus become mission critical to get and to hold. Good examples are bridges, hills, trenches, etc.

The second one is more abstract in that it represents a position in your mind (or as Al Ries and Jack Trout in their seminal work Positioning – The battle for your mind call it cherchez le creneau). The central idea is that a product, a service or a company should occupy a very well-defined and simple concept in the consumer’s mind. For example when you’re thinking about a refreshing drink, Coca Cola wants you to think of Coke.

One of the key insights in the book is that you should not try to compete with a position that’s already been taken by a competitor but rather try and create a new position and place yourself, your company or your product there as the sole owner. You do this by inventing a category and becoming the only provider of products/services in that category.

Tim Ferriss (of the 4-Hour Work Week fame) didn’t want another book on “career advice” so he created a new category called “lifestyle design” and put his book as the first one there.

This doesn’t just work for brands and companies, it’s the same for people too. In a company for example you might be the “go-to guy” whom everyone calls in a crisis, or you may be the “recluse but brilliant scientist” whom nobody has met but everyone knows about. This position can make or break a career and should be chosen very carefully otherwise people will just slap some disadvantageous label onl you that will hinder your career.

There’s a lot that can be written when it comes to perceptual positions. I may do a full post on this in the future. Suffice it to say that how you position yourself will greatly affect your success in life.

2. Resources are a type of asset that represents concepts like money, connections, physical things like real estate, factories, farms, machinery, weapons, personal things like looks, height, weight, age, etc. They can be created, acquired or innate.

This is the most common type of leverage you have or can build because it’s really obvious when used. If you’re astute you will notice that resources can be used directly on one of the three patterns mentioned above (anticipation, pivotal points and focused effort) If you’re not using some kind of advantage to get ahead in life or in your career, you’re really being left behind and missing out. All those successful people you see have some kind of secret advantage they’re using, connections, physical features (height, weight, looks), competencies, etc.

3. Competencies are assets that reflect things you or your company are good at or have expertise in. They represent strengths but they’re slightly different than resources, although they can be called resources and just like resources they can be built (like skills), acquired (like experts) or innate (like talent)

A really good example of the use of competencies to exploit an advantage is the case of IBM getting out of the PC market and focusing on providing their customers tailored information processing solutions to their problems under the IBM brand name. They sold the PC business to Lenovo and moved their entire business into IT consulting knowing that they had the necessary competencies in place both software and hardware. That allowed IBM to keep growing while the PC business commoditized.

Putting it all together.

Competencies, resources and positions are at the mercy of the market forces of supply and demand as well as the three patterns we discussed above in part 1. They dictate whether or not the assets you have can be used as leverage.

The patterns of leverage are vast as you can see. I hope with the above I’ve been able to make a dent in this subject. Please note that this post doesn’t discuss the morality of how you use leverage. As with any power tool it can be used for both good and bad. My goal here is to simply make you aware of the various patterns of strategic thinking that we humans use to reach our goals or solve problems and hopefully help you by structuring it into something more usable.

Note: A lot of the ideas in this post came from Richard Rumelt’s book Good Strategy, Bad Strategy