When you hear the term "strategy," you should always be suspicious. Most businesses don't need much “strategy” at all, and among the companies that do, most of them actually have other, more pressing problems to solve first than some big picture reframe. It's just the default fate for most companies to spend their existence looking roughly similar to what they started as, and to improve through practice and obvious incremental tweaks—not through bold plans. Of course, some companies do pivot, but they often articulate their strategy in retrospect: for every successful company that started out with a top-down plan to take optimal advantage of some sweeping trend, there are probably ten more that started out with someone building something they thought was cool and then finding a way to sell it for enough money that they could keep improving it.

It's even tricky to define "strategic," but a good working definition might be: any decision a company makes that is not a normal-course-of-business choice, that has a present cost most comparable companies are empirically unwilling to pay, but that the decisionmaker thinks will pay off well long-term. McDonald's opening another McDonald's isn't strategy; McDonald's taking a majority stake in Chipotle as a hedge against shifting dining habits (and a bet on a good concept) was. Fixing a software bug isn't strategic; open-sourcing an internal tool is.

A useful framing is that strategic moves are still about optimizing profitability, but they're also a way to give future management more tools for doing so at a later date. One obvious conclusion from this is that managers think a lot more about strategy when their business is well-capitalized, growing at a sustainable pace, and generating more free cash flow than it can consume, and, as a corollary, that the worst strategic decisions will tend to happen at distressed companies. Sacrificing some ability to maximize profits a few years from now is a decent trade if it helps ensure survival in the interim.

This shows up in how different industries evolve based on financing conditions and profitability. Take the frackers: for a long time, they were consuming more cash than they generated from operations, but investors were very willing to underwrite it because frackers kept getting more efficient. And that dynamic meant that they were willing to pay up for leases, on the grounds that a bad investment today would, given improvements in unit economics, be an enviable one in a few years. In 2014, the bottom fell out as Saudi Arabia opened the taps and oil prices crashed. And just as the industry was just getting back to a sustainable level in the late 2010s when Covid hit and there was another wipeout. Now, they're back to being able to spend through internally-generated cash flows rather than investor funding. Frackers themselves have decided that the optimal decision right now is to return lots of capital to shareholders (there's a lot of trotting out T. Boone Pickens' classic joke that the cheapest place to drill for oil is on the floor of the NYSE). Meanwhile, larger energy companies are enjoying those same higher-than-usual cash flows, and are using that money for lithium, geothermal, and carbon capture.

Airlines also went through a long period where they made terrible strategic decisions; overcommitting to planes, giving up economics on credit card deals, and negotiating lopsided union contracts that left them vulnerable to a downturn. The industry was undercapitalized, and couldn’t afford to plan too far ahead. They've since calmed down, and while it's hard to get a clean read on their long-term economics given the Covid hit, the industry does seem to be closer to a sustainable cyclical business than a money pit. Now they, too, are thinking about their long-term strategy, whether that's rearchitecting pricing or investing in eVTOL companies to feed them more passengers.

But if you're making a list of notable strategic decisions over the last decade, more than half of them will probably be some form of tech: Intel splitting into proprietary chips and third-party foundry, Microsoft betting on AI, Apple killing off parts of the ad ecosystem and wounding Meta, Meta giving up revenue in order to win in short video. And this makes sense based on the capitalization model above: these companies produce cash flow, and have some financial headroom to think about the next few years. They're also in industries where the ground truth changes fast enough that they need to think a few years ahead, not a few quarters—fluctuations in demand for steel or hamburgers pale in comparison to things like the shift from desktop to mobile, or the ongoing AI-ification of user interfaces. Technology is full of strategic inflection points, not just because it moves fast, but because those fast moves result in companies that have the financial breathing room to make long-term decisions and the paranoia necessary to take those decisions seriously.

"Strategic" is one of those words that has a positive valence when people talk about their own behavior and a negative one when they're generalizing about someone else's. And a lot of make-work and mistakes can be covered up as "strategic." But strategy still matters. And over a long enough time period, every company is defined by the strategic choices it made, and by the ones it missed.

Disclosure: Long MSFT.

Read More in The Diff

The Diff spends a lot of time teasing out the strategy behind different corporate decisions. A sampling:

• We’ve examined Google’s incredibly successful bet on owning the most popular browser ($).

• How to run an airline depends on how you think about unit economics.

• One strategic mistake people make is to over-extrapolate from when a supplier subsidizes them.

• How do you model the financial impact of strategic choices? Think of equity as an option on future high-return reinvestment.

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