Underlying Logic of Strategy Formulation: First Principles

Systemic Risks of Homogenized Strategies

A typical flaw in strategic decision-making prevails in the current business environment. When drafting medium and long-term development plans, numerous enterprises fall into path dependence, relying heavily on external references such as benchmarking against industry peers, following the layouts of leading companies and chasing trending tracks. They directly piece together fragmented industry information and proven practices of established enterprises into their own strategic frameworks. Such approaches often produce logically coherent plans covering mainstream business segments that can even gain approval from the board of directors. Nevertheless, practical outcomes reveal common problems including poor executability, severe mismatch between resource input and output, and eventual abandonment halfway through implementation.

The fundamental flaw lies in the fact that such strategies stem from comparative imitation rather than endogenous innovation. They operate on the implicit assumption that approaches proven viable for competitors will work equally well for the enterprise, and that successful experience of industry leaders can be copied outright. This is a typical attribution bias in business decision-making: it ignores unique preconditions behind successful cases, including era dividends, resource endowments and organizational capabilities, and mistakenly equates correlation with causation. Development data of China’s e-commerce sector from 2011 to 2018 illustrates the fallacy of this mindset. Among hundreds of new small and medium-sized e-commerce platforms launched during this period, over 90% were modeled after Taobao’s mature business model. In the end, fewer than 2% managed to survive through industry cycles, while the rest were eliminated from the market amid homogenized competition.

Core Connotation of First Principles

The key solution to avoid the trap of homogenized strategies is to adopt first principles as the underlying logical framework for strategic deduction.

Essentially, first principles mean conducting deductive reasoning based on the fundamental constraints of things. It strips away cognitive distractions brought by industry conventions, path dependence and costs of intermediate links, targets the most essential and irreplaceable fundamental questions in a given decision-making scenario, and identifies optimal solutions through layer-by-layer analysis of core constraints. When applied to business strategy formulation, three core questions need to be addressed in sequence: first, what is the ultimate value goal of the business? Second, what are the essential constraints in terms of technology, physical conditions and business rules for achieving this goal? Third, what is the most efficient path to satisfy these constraints?

The commercial application of this decision-making framework has been fully validated by real-world cases. Before stepping into the aerospace industry, Elon Musk, founder of SpaceX, only had entrepreneurial experience in the internet sector with no background in aerospace engineering or high-end manufacturing. His first strategic move upon entering the industry was to conduct a full breakdown of launch vehicle cost structures. He finally found that the physical cost of raw materials for rockets, including aluminum, titanium, copper and carbon fiber, accounted for merely 2% of the regular industry launch quotation. The remaining 98% of costs derived from unnecessary constraints such as multi-tiered supply chain premiums, efficiency losses under traditional manufacturing models and the design rule of disposable rockets. Based on this conclusion, SpaceX adopted a highly focused strategy: it gradually cut down the 98% of redundant costs through in-house design across all procedures, vertical integration of supply chains and independent R&D of core technologies. Reusable rocket technology is a tangible outcome of this approach. It broke the long-standing industry norm that launch vehicles are disposable supplies and slashed the unit launch cost by an order of magnitude.

Guiding Value of First Principles for Domestic Business Practices

Many strategic initiatives of domestic enterprises such as digital transformation and new retail deployment remain superficial, which essentially results from failure to apply first principles in strategic reasoning. A large number of enterprises make decisions based on the logic that "everyone in the industry is pursuing digital transformation, so we must do the same". What follows is nothing more than superficial upgrades, such as adding mobile applications to traditional businesses or launching live-streaming sales on existing channels, without unlocking the true commercial value of technology.

The correct reasoning should return to two fundamental questions: First, what core value does our business deliver to users — maximum delivery efficiency, personalized service experience or cost advantages? Second, how can digital technologies empower the delivery of such core value? Options include optimizing inventory allocation via algorithms to replace the asset-heavy model of extensive offline store expansion, or building a decentralized direct-to-user system to reduce reliance on centralized traffic platforms. Any strategic moves detached from these two fundamentals cannot achieve in-depth integration between technology and business.

The burst of the community group buying bubble between 2020 and 2022 serves as another typical counterexample. The strategic plans of most entrants were filled with conceptual rhetoric like "traffic entry", "ecological closed loop" and "using high-frequency consumption to drive low-frequency consumption". Few teams applied first principles to reflect on the essence of community retail. The core demands of residents for daily consumption boil down to four aspects: variety, speed, quality and affordability. If a business cannot compete with established offline supermarket chains on pricing, match instant retail platforms on delivery speed, or build differentiated advantages in quality control, it will lack sustainable foundations no matter how much financing it secures or how aggressive its ground promotion is. Eventually, such businesses will be phased out by the market.

Implementation Path of First Principles

To embed first principles into the strategy formulation process, enterprises need to conduct Socratic self-questioning and answer four key questions one by one:

1. What is the core value of the enterprise? Specifically, what irreplaceable practical problems does it solve for targeted user groups, rather than empty statements of social responsibility? Sustainable profitability is a prerequisite for all value creation activities of an enterprise.
2. What is the minimum set of essential actions required to solve these problems? Eliminate all unnecessary procedures, rules and resource inputs to find the most efficient path to deliver core value.
3. Can the enterprise’s current resource endowments, organizational capabilities and structural design support the execution of these essential actions?
4. Are there any redundant operations in existing business processes that deviate from the core development track?

This reasoning process inevitably involves writing off sunk costs from past investments, and may even require abandoning rules, systems and consensus established by management. This is the major obstacle preventing many enterprises from practicing first principles: competitive strengths that managers once took pride in may have turned into burdens for development, and widely accepted industry consensus may evolve into cognitive biases that hinder innovation. From this perspective, the barrier to applying first principles lies never in intellectual understanding, but in the courage to return to fundamentals and make decisions by embracing simplicity.