One of the things I’ve noticed over the years is that most people in business are pretty good at solving the problem directly in front of them.
Far fewer stop and ask whether solving that particular problem actually creates the best outcome for the business.
I think of this as the difference between transactional thinking and strategic thinking.
Transactional thinking says: Here is the problem. What do I need to do to solve it?
Strategic thinking asks a different question: What are we actually trying to accomplish, and what outcome creates the most value for the company?
Those sound similar. They aren’t.
I recently ran across a situation that I think illustrates the difference perfectly.
A customer owed a company approximately $3,000. The operational answer was pretty straightforward: the customer owes us $3,000, so collect the $3,000.
And that is exactly what happened.
The problem is what happened along the way.
The dispute created significant tension with the customer. The customer became angry. There were negative reviews. The relationship was effectively destroyed. There was almost no possibility that this customer would ever refer another customer or do anything positive for the company again.
But we collected the $3,000.
So was that a win?
Maybe. But I think that is the wrong question.
The better question is: What was the maximum amount of value we could have extracted from that situation?
Maybe the answer was still $3,000.
But maybe it wasn’t.
What if instead we sat down with the customer and explained exactly why they owed the money, acknowledged their frustration and tried to find a reasonable resolution?
Maybe we collect $2,000 instead of $3,000.
On the surface, someone looking at an accounts-receivable report would say we just lost $1,000.
But what if the customer walked away satisfied enough with the resolution that the negative review disappeared? What if the customer later left an honest positive review based on how the problem was handled? What if they referred one or two people to us who ultimately became customers?
Suddenly giving up $1,000 might have created $5,000, $10,000 or considerably more in value.
That’s strategic thinking.
It isn’t about being nice to the customer. It isn’t about giving money away. And it certainly isn’t about allowing people to get out of contractual obligations.
It is about optimizing for the entire outcome rather than one transaction.
Peter Drucker argued that the purpose of a business is to create and keep customers. The Drucker Institute still incorporates that idea into how it evaluates corporate effectiveness, including customer satisfaction, loyalty and willingness to recommend. (The Drucker Institute)
That seems obvious, but companies violate the principle every day.
We create departments and give them metrics. Collections is measured on collections. Sales is measured on sales. Operations is measured on operational efficiency. Customer service is measured on customer-service metrics.
Then we act surprised when people optimize their individual number rather than the overall value of the business.
W. Edwards Deming made essentially this argument through systems thinking. His view was that management’s job is to optimize the overall system, not maximize each individual component. Improving one department’s result can actually make the total organization worse. (The W. Edwards Deming Institute)
Michael Porter approached the issue from another direction. In his classic What Is Strategy?, he made an important distinction between operational effectiveness and strategy. Being very good at executing individual activities is necessary, but it isn’t the same thing as strategy. (Harvard Business Review)
I think this explains something else I’ve seen throughout my career.
Most organizations say they want strategic thinkers. But most organizations actually incentivize transactional thinkers.
We tell someone what their job is. We give them three or four KPIs. We measure them against those KPIs. We pay bonuses based on those KPIs.
And then they optimize the KPIs.
Why wouldn’t they?
There is even a well-known concept called Goodhart’s Law that describes the problem: when a measure becomes a target, it can stop being a useful measure because people begin optimizing the metric rather than the underlying objective. Research on metric optimization has documented exactly these types of unintended consequences. (arXiv)
This is where I think the people who ultimately rise within organizations tend to separate themselves.
They still understand the transaction. They still know that the $3,000 matters. They aren’t ignoring the numbers.
They simply see a bigger playing field.
They ask:
Why are we doing this?
What are we really trying to accomplish?
If I solve this problem exactly the way I’ve been instructed to solve it, what happens next?
Is there another solution that creates more value for the company?
Sometimes the strategic answer will be: collect every penny of the $3,000.
There may be precedent involved. There may be legal considerations. Maybe this is a customer you don’t want. Maybe allowing the customer out of the obligation creates a much bigger problem.
That’s fine.
Strategic thinking doesn’t mean always choosing the softer or more complicated answer.
It means understanding the second- and third-order consequences before deciding what the answer should be.
I’ve come to think about the distinction this way:
Transactional thinking asks: What are we owed?
Tactical thinking asks: How do we get it?
Strategic thinking asks: What outcome creates the greatest long-term value?
Companies need all three.
But the people who can consistently move from the first question to the third are relatively rare.
And in my experience, those are usually the people who eventually become the most valuable people in the organization.