I teach strategy
It’s a great privilege to learn with 260+ thoughtful, relational, ambitious people this semester. We look at classic frameworks (willingness-to-pay, economies of scale, vertical integration, MR > MC, STP) and apply it to what we see in the Wall Street Journal, and what we experience during recruiting interviews.
For me, teaching strategy is EXTRA fascinating because it melds together:
- What we teach at the business school (marketing, finance, accounting, operations, decision making)
- What a liberal arts education like Emory stands for (looking at the facts, understanding our own biases, being a humble learner, challenging our thinking, winning together)
I spoke with an executive recently (hat tip: MS) who said that a lot of the strategic topics we studied (competition, rivalry, differentiation, switching costs, barriers to entry) become increasingly useful as he manages headcount, budget, projects, politics, and competition. The bigger your burden, the more you better have 1) a strong, rigorous, evidence-based plan 2) a thoughtful strategy on how you will win 3) the person leadership and a team to hustle out solutions.
Strategy is difficult
Strategy ain’t easy. In fact, it’s difficult for many reasons:
- It’s long-term (think: BRK-A has outperformed the S&P for 40+ years)
- Competitors are always eager to eat your lunch
- Customers change their preferences (and are picky, not loyal, and smart)
- The macro-environment changes (think: tarrifs, geopolitics, Covid-19, interest rates)
- Executives changes (new CEO, COO, CTO, CHRO)
- Your company grows and your old fixed costs create barriers to exit
- Complacency sets in; there is bloat; innovation stalls out
- Every company (and person) has different resources, capabilities, talents
- We want different things (e.g., profit vs. non-profit vs. quasi-governmental vs, privately held companies
- Luck matters, and it’s hard to be lucky for 30+ years k) I could go on . . . .
Strategy is needed
When you look around, a lot of companies, governments, organizations, and people are lost. They don’t know what they believe, they don’t know how to mobilize their people, they don’t know how to stop in-fighting, they don’t know how to prioritize. Everything is a fire that needs to be put out. Oh, this is exhausting.
There is FOMO everywhere. “What is the competition doing?” is a frequent question consultants get asked.
Question: Is chess a good analogy for strategy?
Kinda. I am not a chess player, but I would imagine that great chess players:
- Practice deliberately; get better over time
- Quickly evaluate different moves / opportunities
- Can think multiple moves in advance
- Can anticipate the opponents thinking
- Can evaluate trade-offs (moving knight vs. sacrificing pawn)
- Recognize patterns of previous games, common openings
- Visualize the board and think spatially
- Remember A LOT of things; moves, piece placement
- Manage their time (knowing when they are “certain enough”)
- Manage their emotions (being aware of their own biases, common errors)
All those things are good gravy. Excellent, who would not want that? If you can do those 10+ things – you will be successful in life. It looks like the CV of a superhero.
Question: How is strategy like poker?
I know, we’re 400 words into this blog post, and you’re thinking FINALLY. . .why isn’t there a TL;DR section?
Poker (let’s say Texas Hold’ Em) has a lot of attributes that better resemble business life, and strategy:
1) Different cards
In chess, you get the same number of pieces with the same value. You get 2 knights, and so do I. It’s really democratic in this way. In poker, you and I may both get 2 pocket cards (what’s in our hand), but they will vary. Your AA is way better than my 4,7 off suit. “In life, you need to play the hand you were dealt”
Same is true in strategy. If you want to launch a global online retail store. . do you, Amazon, Temu, Walmart start with the same cards? Short-answer: no. Long-answer: no. You have different cards than Amazon.
2) Multiple hands
In chess, you play 1 game (presumably it’s not a Grandmaster tournament). In poker, you will play dozens+ or hundreds of hands that might only last 2 minutes each. This makes the relationship between the players more insightful, important, and political.
In business, you definitely play “many hands” with your customers and rivals. This is particularly true in a B2B setting when you are often competing with the same rivals for the same subset of customers.
3) Number of players
Chess = play 1 opponent at a time.
In poker, you can start with 6 people, then dwindle down to 2 people (you and an opponent). Obviously, the odds will change. Obviously, you will compete against 1 person vs. a full field of 5 people playing until the end (River).
In strategy world, we see the table changing often. Smaller competitors being acquired or going out of business. We also see “new entrants.” Amazon was not in the grocery business, and then in 2017, it purchased Whole Foods, then i was THE dominant player in upscale grocery. Amazon wasn’t in grocery, then pop, it was.
In the US, there used to be no electric cars. Now there are 50+ different models (e.g., Tesla X, Y, S, E). In China, the number is bigger than that. In China, there are 50+ electric vehicle COMPANIES (e.g., BYD, Zeeker, Nio, Xpeng)
In business: if there is a large, profitable, and growing market, it will attract new entrants.
4) Imperfect information
In chess, I can count your pieces. I can see what you have, where they are, and what options you have.
In poker, I can only see the back of the 2 cards in your hand. What’s in your hand? Ace & King? Pair of 4s?
Unless I have x-ray vision (Superman), then your cards are hidden. There is not perfect information.
Yep, this sounds like reality. Coca-Cola doesn’t know what Pepsi has planned. ADM doesn’t have a magic ball that can predict corn, soybean, hog prices in 2027. In business, there is a LOT we don’t know. Massive uncertainty.
5) Luck
My understanding (forgive me PT if this wrong) is that chess is more algorithmic than poker.
There is a standard (optimal) set of decisions for a specific board set up and situation (that’s why Deep Blue, computer, can optimize it. It just need enough compute to muscle through the analysis). Presumably, that is also true of GO too. When AlphaGo beat the world’s best Go player – same thing. Machine beats humans when there is perfect information (they can see everything on the board). With poker = more difficult. Luck matters.
Can the machine beat humans in poker? I think the answer is yes, AND it takes 10,000+ hands (good to know).
6) Bluffing
Why might humans be better than computers (read: GenAI) in poker in shorter melees? Some of it has to do with the ability to bluff and act slightly different than “the book” (most optimal, logical choices). This brings up the poker adage [paraphrased], “You play against the person, not just the cards.” If you are playing against a brash, risk-taker who bluffs a lot = that’s information. If the player has a “tell” (some subconscious habit that reliably reveals their emotions), that’s something you can exploit. In the end, it’s humans vs. humans.
7) Objectives vary
In chess, the objective is to win (or at least draw). In poker, your objective could be to win all the money or simply to play for 2 hours, make $200 and go home. Since you are “playing the person” you need to quickly assess who they are, how they think, how much of a risk-taker they are, and what you should do against them. Game theory.
In business, strategy, and negotiations = it’s all about understanding the competition, knowing what they want, then making good decisions to fight, avoid, partner, or delay.
8) Bankroll
Not a trick question: Does the $$$,$$$ you have when starting a business matter? Bien sur, mon cherie.
In poker, if you are the “stack leader”, your risk tolerances go up; you can afford to take more risks because the chances that 1 hand will ruin you = low. You can use your $$$,$$$ to bully people around. If you have $120,000 and the next person has $50,000, and the last person has $10,000. . . you are in a good spot.
If you were starting a business and I might ask, “How many months of runway do you have?” This the same thing as a) “How long can you run the business without revenue?” b) “What’s your burn rate vs. what’s your cash pile?” c) “How many hands of poker can you withstand?
9) Bet size and frequency
In chess, you have to move your piece, or you lose.
In poker, you don’t have to play every hand. You don’t have to bet the same amount. There is massive flexibility in the size and frequency of your betting. My understanding is that you should NOT play every hand to the end; you should either RAISE or fold. This sounds like strategy = double down when you have an unfair advantage & don’t blindly go into fights you are are likely to lose. Play the odds.
10) Adaptability
This all gets back to the difference between planning and strategy (hint: they are not the same thing). You can plan a great product launch with good technical reviews, influencer endorsements, and strong initial sales result. . . customers might not like it. Yes, you can plan to acquire the #4 player in your industry to increase economies of scale (hint: lowering your per unit costs because of your size), but the regulators might prevent the merger.
In business, A LOT of things can happen that force you to re-assess your options, and make the best decision at THIS MOMENT, not when you made you plan.
Strategy is not simple. It’s not a formula you memorize for the exam. This makes sense because if was formulaic, then everyone would do it. If everyone did it, then NO ONE could beat the market. You don’t get above average returns by doing average things. (finance talk: you don’t get alpha by investing the same as everyone else).
Call it a paradox or call it the red queen effect. . .but once follows the best practices, or common knowledge, any competitive edge vanishes.
So What?
Okay John, that was a lot of words. Now what should we do?
- Did you study? Do you know the probabilities (XYZ situation with # opponents with your current hand)?
- Know what game you are playing (is it once-and-done, or a continuous game like poker?)
- Know the other people at the table. What do they want? What do they have? What’s their risk tolerance?
- What are your goals? What’s you bankroll? How much are you willing to risk?
- Are you continuously learning about your rivals? Are you tracking that competitive intelligence?
- Are you masking, hiding any “tells” you have in the market? Are you creating sufficient causal ambiguity?
- Are you self-aware enough to know your biases, tendencies, and bad habits?
- Do you know which hands to fold vs. raise?
Keep playing games to learn how to make decisions. Great video here on how a Wall Street Trading firm uses poker to train their traders. It teaches them how to evaluate risk, manage their emotions, and win.
