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Liu Xue/Text

Decision makers all know that strategy is future-oriented. When it comes to the future, decision makers often feel lost and confused: there are too many variables that affect the development of the enterprise, the relationship between variables is complex, the mechanism that affects the enterprise is vague, and it is in a state of rapid change all the time. Some people use the combination of the first letters of four English words VUCA (volatility, uncertainty, complexity, ambiguity) to describe the world: turbulence, uncertainty, complexity, ambiguity. In such an environment, it is almost impossible to make an objective and accurate judgment about the future. The final decision is often based on intuition and belief, as well as the risk of "taking a gamble and fighting hard" at a critical moment. Therefore, it is common to see this phenomenon: once the strategy is successful, the decision maker will show off the greatness and wisdom of the strategy in front of others, and then burn incense and worship Buddha behind others to thank God for his protection.

In his book On Grand Strategy, John Gaddis (2019), a historian at Yale University, quoted from Sun Tzu's Art of War: "There are only five sounds, and the changes of the five sounds are endless to listen to; there are only five colors, and the changes of the five colors are endless to watch..." to illustrate that "simplicity and complexity coexist, and simplicity can guide us to understand complexity". If we only see the complexity and turbulence of the world and ignore the simple laws in it, we may be anxious, nervous, or even at a loss. If we can discover the simple laws in it, they may help us understand and control the complex and chaotic world.

Lawrence Freedman (2013), a professor at King's College London, repeatedly stressed in his book Strategy: A History that "strategy is constrained by the starting point, not the end point." Entering the new century, many decision makers in technology companies, especially Internet companies, have questioned and challenged this decision-making paradigm. Their experience and understanding in business practice is that strategic decisions should "see through the end and start with the end in mind."

For most managers, it seems self-evident whether to focus on the starting point (constraints) when formulating a strategy, or the endpoint (objective function) of the organization. Almost all strategic theories and tools start from the analysis of initial conditions (the external environment and resource capabilities of the organization). PEST analysis, SWOT analysis, Boston matrix, GE matrix, etc., all look for directional clues of future strategies from the current environmental variables affecting the development of the enterprise and their changing trends, and then match them with their own resource capabilities. The only difference is whether accurate analysis and prediction can be made based on the initial conditions of the enterprise's development and its future trends. Friedman (2013) called those who believe that analysis and prediction can be made "planned strategies", including the design school, planning school, positioning school, etc. mentioned by Henry Mintzberg (2012). Friedman called those who believe that analysis and prediction are difficult to make "contingency strategies", including the learning school, power school, environmental school, etc.

Friedman (2013) firmly believes that "strategy is inherently fluid and flexible", "is a series of rational responses to complex business management problems in an ever-changing environment", and "depends on how to transform a series of complex and ever-changing things into favorable conditions."

In his book On Grand Strategy, Gaddis (2019) divides strategic decision-makers’ thinking patterns into two types: fox type and hedgehog type. Decision-makers with a fox-type thinking pattern “respect the environment” and always try to avoid various traps. They are good at changing the goals they pursue and adjusting the strategies and rhythm of their actions in a timely manner according to changes in the environment. Decision-makers with a hedgehog-type thinking pattern “will reshape the environment” and “only see the picture in the distance. There, ambition is opportunity, and simplifying problems is the beacon that illuminates the future”. Decision-makers with a hedgehog-type thinking pattern often “neglect to establish the correct connection between goals and means”, are unwilling to be constrained by realistic conditions, always try to destroy anything that hinders them, and stubbornly pursue goals beyond their capabilities. To meet future challenges, an effective integration of the fox-type and hedgehog-type thinking patterns is needed. Grand strategy “is the integration of infinitely far-reaching ambitions and necessarily limited capabilities”.

Obviously, decision makers with a fox-type mindset pay more attention to the starting point or initial conditions, and are good at adjusting their goals and strategies according to the evolution of the initial conditions; decision makers with a hedgehog-type mindset pay more attention to the final state, and determine their goals based on the final state. As a historian, Gaddis did not discuss in depth how the "distant picture" of decision makers with a hedgehog-type mindset was formed. Gaddis did not study how to effectively integrate infinite ambitions with inevitably limited capabilities.

Among the 10 strategic management schools mentioned by Mintzberg (2012), the entrepreneurial school is the one that is closest to focusing on the "end game". "The core concept of this school is vision. ... Vision is often expressed as an image, not just a plan detailed in words or numbers." This makes the strategy very flexible, and leaders can fully use their experience when formulating strategies, which shows that entrepreneurial strategies are both thoughtful and adaptable. They are thoughtful in terms of overall ideas and directions, but can be adaptable in specific details. "The inspiration of great leaders with vision does not always come from luck, but often from rich experience in certain specific situations." This specific situation can be understood as the end game of the industry. "Entrepreneurial strategies try to occupy a special market position that can protect the company from the impact of market competition." This implies the idea of ​​positioning in the end game.

Mintzberg (2012) also criticized: "The entrepreneurial school also shows some serious shortcomings. The entrepreneurial school completely uses the behavior of individual corporate leaders to demonstrate the formation of strategy, but has never discussed the process of strategy formation in detail. In the eyes of the entrepreneurial school, the strategy formation process continues to be seen as a black box buried in the human cognitive process."

After entering the Internet era, the business world has changed a lot. From the perspective of incumbents, the Internet, AI, and big data have transformed business competition from creating competitive advantages locally and gradually to subverting and reconstructing the ecosystem and industrial structure. Only by seeing the end game clearly can we discover the key opportunities and control points in the end game structure, identify the favorable and achievable positions in the end game, and form the company's strategic positioning on this basis. Opportunities are not only discovered from the prediction of the trajectory of changes in the external environment, but also from the insight into the future pattern.

The Internet has changed the form and connotation of business competition (Philip Evans, 2000). Traditional competition is usually a confrontation at the level of technology, products, services, prices, channels, promotions, etc., that is, the so-called head-on battle. Today, it is more about competition between cross-border business models. "The competition between new models and traditional models is often not that the new model defeats the old model, but that the old model is marginalized unconsciously by reconstructing the ecosystem and industrial structure."

At the same time, the resource base on which competition depends has changed: from the comparison of physical resources, human resources, and knowledge assets to the competition of data assets, intelligent assets, and human assets. Once the leader builds a strong ecosystem, forming a dynamic aggregation of network effects and data assets, it will be difficult for followers to surpass it.

In addition, the rhythm of competition has changed. The speed of technological change is getting faster and faster, the product life cycle is getting shorter and shorter, and the window period for new industries to enter is getting shorter and shorter, giving corporate decision makers less time to observe and think about strategies. Path dependence + speed competition makes the initial strategic path and genes of the organization determine the future success or failure. You can try and make mistakes in tactics, but once you make a mistake in a major strategic choice, you often lose the opportunity.

Therefore, some scholars and entrepreneurs with sharp minds realize that it is not enough to make strategic decisions only from the "starting point". In December 2014, Professor Tang Mingzhe, then vice president of National Taiwan University, emphasized in a speech at the Guanghua School of Management of Peking University that corporate transformation requires "insight into the end game, early layout, and going with the flow". Professor Zeng Ming, Chief of Staff of Alibaba, mentioned the attention of Alibaba's decision-makers to the end game of the industry when introducing Alibaba's strategy. In the book "Three Axes: Alibaba's Management", Zeng Ming's strategic concept is divided into four steps: "end game, layout, positioning, and strategy".

The experience and perception of entrepreneurs in practice inspire us to pay attention to: What is the appropriate era background for strategic decision-making based on initial condition analysis? From the perspective of industrial practice, in an era when the external environment is relatively stable, or even if there are changes, the changes are relatively continuous and recursive, the strategy formulation process based on initial condition analysis is effective. However, in an era of great changes, especially when an industry may be impacted by disruptive technologies, the strategy formulation process based on initial condition analysis encounters huge challenges. Because the process from initial conditions to the end of the industry is a leap-like or discontinuous change process. In many cases, especially for incumbents, although the initial conditions contain some clues to the future pattern of the industry, they are often hidden in many variables that affect the development of the enterprise. Over-emphasizing initial condition analysis often induces decision makers to pay attention to historical clues, continue the historical path, or make local adaptive adjustments based on the historical path. It is conceivable that in this case, no matter how much time and resources the enterprise invests in strategy formulation, it is difficult to produce the right strategic choice, and even lead to huge strategic mistakes.

Based on the study of the strategic thinking process of innovative industry decision makers, I summarized the "24-word formula" for enterprises to formulate strategies in the era of great changes: insight into the endgame, self-examination, determination of positioning, selection of paths, early layout, and follow the trend. Although analyzing the initial conditions is necessary for formulating strategies in any case, after finding clues that the industrial structure may undergo major changes through initial condition analysis, the focus of strategic analysis should be on insight into the industrial endgame. Clearly see the future industrial structure, find key opportunities and control points from it, then examine yourself, objectively and rationally analyze the resources and capabilities you have, including potential resources that can be integrated, examine your ambitions, ideals and long-term economic and social values, and decide on your position in the industrial endgame. After determining "where I want to go", look back at the starting point, start from the end, and choose the path to achieve the vision based on "where I am"; lay out resources and capabilities early, and follow the trend in terms of pace and rhythm.

In other words, when analyzing the external environment, we must first determine whether changes in the external environment will have a significant impact or shock on the future structure of the industry. If the environment has not undergone major changes sufficient to reconstruct the future structure of the industry, the strategic decision-making process based on initial condition analysis is effective. However, if the industry may be impacted by disruptive technologies or disruptive business models, or if the rules of the game in the industry have changed significantly, then the focus of strategic formulation must shift to insight into the end game of the industry.

In an era of great change, it is often short-sighted to form a strategy that does not form a judgment on the final outcome of the industry, but only analyzes the initial conditions and matches the opportunities and threats in the external environment with the strengths and weaknesses within the enterprise. This is one of the key reasons why Nokia, which was good at "scientific" strategy formulation, was eventually eliminated in the face of the challenge of smartphones.

Let's take two examples to illustrate why it is necessary to have insight into the end game when formulating strategies in an era of great change. "Longzhong Strategy" has always been regarded as the greatest strategic decision of all time. Before Zhuge Liang left his thatched cottage, he decided to divide the world into three parts. The background of "Longzhong Strategy" is the end of the Eastern Han Dynasty, when the world was in chaos and many heroes emerged. It was a typical era of great change. Liu Bei, who claimed to be the descendant of the Han Dynasty, visited Zhuge Liang three times at his cottage to ask for advice on how to restore the Han Dynasty. Zhuge Liang first inferred the future world pattern based on the current players, the power distribution of players, and the regional distribution, and identified key opportunities and control points:

Cao now has millions of people, and he can control the princes by holding the emperor hostage. This is truly impossible to compete with. Sun Quan has occupied Jiangdong for three generations. The country is strategic and the people are loyal. He has the ability to serve. This can be used as a support but cannot be plotted. Jingzhou is located in the north of Han and Mianyang, and has the benefits of the South China Sea. It is connected to Wuhui in the east and Bashu in the west. This is a country that can be used for military purposes, but its lord cannot defend it. This is probably why God has given it to the general. Do you have any interest in it? Yizhou is a strategically located place with fertile fields for thousands of miles. It is a land of abundance. Emperor Gaozu used it to build his empire. Liu Zhang is weak and Zhang Lu is in the north. The people are prosperous and the country is rich, but they do not know how to care for it. Intelligent people want to find a wise ruler.

Zhuge Liang judged that in the future, Cao Cao and Sun Quan would each occupy one part of the world and would be unshakable. However, there were important opportunities and room for development in Jingzhou and Yizhou. Then he examined himself and decided on his position (one of the three parts of the world) and path in the end of the first stage based on Liu Bei's resources and capabilities:

The general is a descendant of the imperial family, and his trustworthiness is well-known throughout the world. He has gathered together heroes and is eager for talented people. If he could control Jing and Yi, he could protect their mountainous areas, make peace with the barbarians in the west, pacify the Yi and Yue in the south, make friends with Sun Quan externally, and improve government at home.

The timing and path to achieve the ultimate vision (restoring the Han Dynasty) must be based on the situation and the trend:

If there is a change in the empire, then we can order a general to lead the army of Jingzhou to attack Wan and Luo, and the general himself can lead the people of Yizhou to go out of Qinchuan. Who among the people would dare not welcome the general with food and drink? If this is true, then hegemony can be achieved and the Han Dynasty can be revived.

Let's discuss another corporate case - the rise of Amazon. After Jeff Bezos joined the quantitative hedge fund DE Shaw & Co., he was quickly promoted to vice president of the company due to his outstanding performance. Around 1994, Bezos discovered two phenomena. First, compared with the previous year, the number of active Internet users increased by 2,300%, and the growth was still accelerating. The more active the platform, the more resource support it can obtain; the more resources it obtains, the better the platform service can be improved, thereby gaining more attention and growing faster, forming a strong and strong. Second, many people sell their own computers, second-hand electronic products and other things online. Although many people have the idea of ​​buying, the transaction volume is extremely low because the authenticity of the product and the reputation of the seller cannot be distinguished.

The huge demand and the platform it relied on grew at an extremely alarming rate, which touched Bezos' entrepreneurial nerve. In 1994, he resigned from Wall Street and started his own entrepreneurial journey. In 1995, Bezos named his officially registered company after the Amazon River, which has the largest flow, the widest basin, and the richest species in the world; the company went public in May 1997. At the end of 1997, Bezos wrote a letter to shareholders, disclosing the company's strategic insights and decisions.

Industry endgame: Online retail will impact and even subvert the traditional retail industry, and it is likely to be an industry where the strong will always be strong, or even where the winner takes all.

Strategic positioning: Become a leader in the online retail industry. Everything revolves around long-term shareholder value, which lies in continuously strengthening the company's industry leadership: "Industry leadership can bring higher revenue, higher profit margins, better capital liquidity and investment returns."

Path: Enter the market from standardized books, cultivate customers' online shopping habits, and then subvert traditional industries through category expansion; build a full-scenario, omni-channel digital system by enhancing entertainment functions, delivery functions, and technical functions to meet consumers' personalized needs anytime and anywhere.

● Product category expansion: books, audio-visual products, clothing, home appliances, daily necessities, and fresh food.

●Entertainment functions: audio and video, games.

●Delivery functions: express delivery, self-service pickup, and drone delivery.

●Technical features: one-click ordering, warehouse robots, mobile payment, unmanned supermarkets, voice assistants.

Bezos communicated with investors through this letter: When you buy Amazon's stock, don't regard dividends as the most important way to get a return on investment. The company will not pay dividends for quite a long time, because I need to invest all the cash flow obtained from the capital market and business operations to drive the rapid growth of the company's scale so that I can quickly become the industry leader. Internet companies started to burn a lot of money to drive the rapid growth of the company's scale in order to become the industry leader. He adopted this strategy because of his insight and positioning of the industry's end.

Bezos also put a lot of thought into the path selection. At that time, he and his subordinates listed more than 20 products suitable for sale on the Internet, including books, software, office supplies, audio-visual products, etc. Although the goal was rapid growth, various products did not advance in parallel, and Bezos chose to focus on books. The reason for choosing this path is not only because books are the most standardized, the most convenient to choose online, and the distribution cost is low, but more importantly, books can best play the advantages of the Internet: provide almost unlimited choices for unlimited customers beyond geographical space limitations (rather than customers within the best service radius), and the search cost is the lowest; recognize the value of books through real customer feedback; provide ultimate personalized services based on customer information. In addition, the two major American book wholesale groups, Ingram and Backer & Taylor, almost control more than 80% of the more than 300,000 new books published by thousands of American publishers each year, so the company does not need to deal with thousands of publishers, which is also very important for startups with limited resources. After Amazon achieved rapid growth and absolute share in the book market, it entered the audio-visual product market, further increased categories, improved technology, and enhanced customer experience, and eventually became one of the most valuable companies in the world.

So, how do we define the end of the industry? In the initial stage of the development of disruptive innovation industries, can the end of the industry be foreseen? Which indicators can help us see the end of the industry clearly? Can we find a suitable method to help us see the end of the industry relatively accurately? After seeing the end and determining the vision, how do we choose the path to achieve the vision? In terms of resource capabilities, how early should we "lay out"? In terms of pace and rhythm, how should we "follow the trend"? How should we grasp this "trend"? This book provides systematic answers to these questions.

The basic logic of this book is that the formation of the final outcome of an industry generally follows the inherent evolutionary laws of the industry determined by the product technology structure, functional structure, and industrial economic characteristics. Whether the incumbent or the challenger will eventually win or occupy a dominant position in the future industrial landscape is the result of the game between the two parties under the influence of capital and government power. "Technology is composed of other technologies, and technology is generated from combinations of other technologies" (Brian Arthur, 2018). Therefore, the final outcome of an industry can be inferred based on the reference method commonly used in the cognitive and decision-making process.

According to the technical structure and functional structure of disruptive innovation, two reference objects are selected: one is the best alternative industry, that is, the industry whose technical structure and functional structure are similar to those of disruptive innovation and is most affected by disruptive innovation; the other is the best reference industry, that is, the industry with similar technical structure and functional structure and has the attributes of pioneering innovation. Study the basic pattern of the best alternative industry and the best reference industry, including industry scale, competition pattern, profit margin, mainstream business model, industry supply chain ecology, downstream operation and service ecology, etc. Because the above indicators of the best alternative industry and the best reference industry are all historical and factual, an accurate description can be made. Then compare the similarities and differences between the technical structure, functional structure, and industrial economic characteristics of the disruptive innovation industry and the best alternative industry and the best reference industry, and infer the final outcome of the disruptive innovation industry.

After understanding the final outcome, determining the positioning, and confirming the vision, the success or failure of the strategy lies in the control of the process. From the two dimensions of the game between incumbents and challengers and the cycle of transforming the potential market of disruptive innovation into the actual market, we study the process of the formation of the industry's final outcome and which side, the incumbent or the challenger, is more likely to win in the game.

The difference between the disruptive innovation technology structure and the original technology structure of the incumbent determines the degree of threat to the core resource capabilities of the incumbent, the difference between the disruptive innovation technology management logic/organizational genes and the original business management logic/organizational genes, and thus determines the cost and cycle of the incumbent's transformation. The resource capabilities of the challenger and the support strength and sustainability of the government policies and capital markets determine the challenger's advantages and the cycle it can persist in the process of competing with the incumbent. The industrial structure and the bargaining power determined by it determine the negotiating position of both parties in the process of competition and cooperation. The time when the dominant design is formed plays a very important and even decisive role in which party ultimately wins in the game between the two parties. The faster the dominant design is formed, the shorter the transformation cycle of the incumbent; the slower the dominant design is formed, the more difficult it is for the challenger who relies on capital support from the capital market to survive and develop. The cycle of transforming the potential market into the actual market depends not only on the characteristics of the disruptive innovation technology in terms of novelty, complexity, and leadership, but also on factors such as product access policy, demand for complementary facilities, and construction cycle and cost. The speed at which the dominant design is formed is also a very critical factor in determining the cycle of converting potential market into real market.

Based on the above logic and methods, with traditional car companies as incumbents and technology companies as challengers, a conceptual model that affects the outcome of the game between the two parties was constructed, and the game process was analyzed; with traditional automobile manufacturing as the best alternative industry and smartphone manufacturing as the best reference industry, a systematic inference was made on the future pattern of the smart car industry; a conceptual model that affects the transformation of the potential market of smart cars into the actual market was constructed, and the cycle of the transformation of the potential market into the actual market was inferred. On this basis, suggestions are provided for the strategic positioning and selection of traditional Chinese car companies, technology companies, new forces companies, and supply chain companies, especially for how Chinese smart car-related companies can seize the opportunity of major adjustments in the global automobile manufacturing industry and how to achieve globalization in the era of anti-globalization.

Having been engaged in strategic management teaching and research at Peking University Guanghua School of Management for more than 20 years, I have witnessed the ups and downs of many industries such as the Internet, real estate, and medical and pharmaceutical industries, and observed the success and failure of many companies. I know the importance and difficulty of formulating strategies in an era of great change. I hope that the content discussed in this book can provide some inspiration or reference for those entrepreneurs who seek to subvert traditional industries through innovation, and those incumbents who are or will experience the impact of disruptive innovation technologies.

(The author Liu Xue is a PhD in Economics and a professor in the Department of Organization and Strategy at the Guanghua School of Management, Peking University; this article is an excerpt from the book "Endgame Thinking: The New Logic of Strategic Decision-making")

Editor-in-charge: Liu Jinping Chief Editor: Cheng Kai