The words good strategy on a white background, and bad strategy on a black background
Good Strategy/Bad Strategy
Richard Rumelt

"Strategy" is a term that anyone throws around these days. Not Rumelt: he knows exactly what it is, what it means, and has endless examples of his own to back it up. The wisdom of decades, packed into an endlessly fascinating book. Enormously valuable.

"The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors." (Page 2)
"Strategy" is a word that has lost a lot of its meaning. It's used sloppily and is usually completely misunderstood. To know what it is, it's important to know both what it is, and what it isn't.

Part 1: good and bad strategy

What is "good strategy"?

"The first natural advantage of good strategy arises because other organizations often don't have one. And because they don't expect you to have one, either. A good strategy has coherence, coordinating actions, policies, and resources so as to accomplish an important end. Many organizations, most of the time, don't have this. Instead, they have multiple goals and initiatives that symbolize progress, but no coherent approach to accomplishing that progress other than "spend more and try harder." (Page 11)

Strategy is "strength applied to the most promising opportunity." But strength also comes from having a coherent strategy, as well as from subtle shifts in viewpoint that create new positions of strength and weakness.

Before Steve Jobs rejoined Apple in the mid 90s, is was struggling. Taking the helm again, he took all of the classic "turnaround" moves:

  • Cut 15 desktops to 1
  • Cut the entire laptop range to 1
  • Cut software and peripherals
  • Offshored production to Taiwan, dropping inventory by 80%
  • Cut distributors entirely, selling direct to consumers via the web

Jobs himself had said that the product lineup was confusing. Asked about what is his strategy was after the above successful turnaround, he simply answered: "wait for the next big thing." That is, to hold fire until he could see the next massive opportunity, then go after it. This came with the iPod. Then the iPhone.

The success of Desert Storm was another example of good strategy, that of envelopment. Distract the main bulk of the force with direct and naval feints while bringing the bulk of the force (a quarter million troops total) quietly up and around the flank to perform a "left hook." The war lasted a total of 100 hours.

Why was this a surprise? This type of strategy is known doctrine of the United States Army. It was a surprise to Saddam Hussein because strategy is rarely so well executed.

"We are surprised when a complex organization, such as Apple or the U.S. Army, actually focuses its actions. Not because of secrecy, but because good strategy itself is unexpected." (Page 19)

Good strategy demands leaders who are capable of saying no to competing and conflicting demands, ideas and interests.

The power of a shift in persepctive:

  • David and Goliath: if he had fought conventionally, he would have lost. David's power came from a shift in perspective to see a hidden weakness. Wearing no armour was unconventional but was coherent with his strategy, allowing him to exploit a weak point.
  • The cold war: rather than simply adding more budget to keep tipping the scales back in favour of the United States, the policy was instead to create competitive advantage that imposed asymmetric costs on the Soviets. By investing in technology that the US was strong in, it would mean the Soviets either couldn't compete or would have to spend astronomical sums to keep pace. "For instance, increasing the accuracy of missiles or the quietness of submarines forced the Soviet Union to spend scarce resources on counters without increasing the threat to the United States." (Page 29)
  • Walmart and Kmart: change in operation of discount retailers. The known philosophy was that a) you couldn't sustain a discount store in a small town and, b) you needed to give autonomy/decisions to individual stores. Walmart instead bent conventional wisdom and built stores everywhere, including small towns. The pivotal change in perspective here was that they weren't individual stores, but a part of a network. "The network replaced the store. A regional network of 150 stores serves a population of millions! Walton didn't break the conventional wisdom; he broke the old definition of a store." (Page 27)

Bad strategy

There are four major hallmarks of bad strategy:

  1. Fluff: fancy words masquerading as high-level thinking, but ultimately empty. According to one bank Rumelt cites: "Our fundamental strategy is one of customer-centric intermediation." The Sunday word "intermediation" means that the company accepts deposits and then lends them to others. In other words, it is a bank." (Page 37)
  2. Failure to face the challenge: if you cannot define the challenge, your can't evaluate a strategy. "A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And if you cannot assess a strategy's quality, you cannot reject a bad strategy or improve a good one." (Page 41)
  3. Mistaking goals for strategy: a goal is just something you want. How do you intend to actually get what you want? "Most corporate strategic plans are simply three-year or five-year rolling budgets combined with market share projections. Calling a rolling budget of this type a "strategic plan" gives people false expectations that the exercise will somehow result in a coherent strategy." (Page 50)
  4. Bad strategic objectives: usually a means to an end, or a dog's dinner: take all possible objectives, call them "strategy" and say they're "long term" so none need to be done today. Also found with "blue sky thinking" which is often just a restatement of even greater objectives. "Unless leadership offers a theory of why things haven't worked in the past, or why the challenge is difficult, it is hard to generate good strategy." (Page 55)

Why is there so much bad strategy?

"Not miscalculation, bad strategy is the active avoidance of the hard work of crafting a good strategy. One common reason for choosing avoidance is the pain or difficulty of choice. When leaders are unwilling or unable to make choices among competing values and parties, bad strategy is the consequence." (Page 58)

Bad strategy happens because of the inability or lack of willingness to make difficult choices. You must set aside some options in favour of others. This will hurt some people, and it will be difficult.

If a "strategy" receives universal buy-in, this means no difficult decisions have been made.

Template style strategy

The idea that, for example, charismatic leadership is possible by the numbers. If you fill out a "vision, mission, values, strategies" sheet you found online, you usually just have gibberish. This is paint by numbers, and achieves little.

"There is a large industry of consultants and book writers who are willing to provide instruction on the delicate differences between missions, visions, strategies, initiatives, and priorities. From small boutiques to the large IT-based firms trying to break into strategy work, consultants have found that template-style strategy frees them from the onerous work of analyzing the true challenges and opportunities faced by the client. Plus, by couching strategy in terms of positives-vision, mission, and values no feelings are hurt." (Page 68)

New Thought

New thought believes that thinking about success means success will happen, and the same for failure. We see this in things like manifestation and The Secret.

But it's also seeped into corporate strategy and speech. "Shared visions" are from nothing if not  New Thought gibberish.

"Ascribing the success of Ford and Apple to a vision, shared at all levels, rather than pockets of outstanding competence mixed with luck, is a radical distortion of history." (Page 74)

"I do not know whether meditation and other inward journeys perfect the human soul. But I do know that believing that rays come out of your head and change the physical world, and that by thinking only of success you can become a success, are forms of psychosis and cannot be recommended as approaches to management or strategy." (Page 76)

Good strategy

Good strategy has three core elements:

  1. A diagnosis: this defines the challenge, finding the most critical elements. A good diagnosis lets you focus far more attention on certain things, and far less on others. Key quote: "A great deal of strategy work is trying to figure out what is going on. Not just deciding what to do, but the more fundamental problem of comprehending the situation." (Page 79)
  2. A guiding policy: a good guiding policy creates or leans upon sources of advantage. It anticipates actions and reactions from the delivery of the policy, it reduces complexity and ambiguity, and it results in actions that are coherent. Key quote: "The guiding policy outlines an overall approach for overcoming the obstacles highlighted by the diagnosis. It is "guiding" because it channels action in certain directions without defining exactly what shall be done." (Page 84)
  3. Coherent action: this means, at minimum, a lack of conflict between actions. There is a balance to strike between centralized co-ordination and decentralized decision making. "It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring concepts down to earth. To have punch, actions should coordinate and build upon one another, focusing organizational energy." (Page 87)

Part 2: sources of power

1: Leverage

"In general, strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort." (Page 98)

Strategic leverage happens when a mixture of three things align.

Anticipation: consider the habits, behaviours, and likely anticipation of others. Consider how systems work, and extant forces that you will have to deal with. It is important to also be able to see/predict what direction things are actually moving in.

Pivot points: these magnify the effect of a given effort, and can be very different depending on the situation even where many other things remain equal.

Concentration: where a focus on fewer things generates a larger payoff in the long-run.

2: Proximate objectives

"A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm." (Page 106)

There is often a lot of ambiguity in any given situation. Proximate objectives give people problems  they can actually solve.

Consider the original moon shot: JFK committing the United States to landing on the moon. It was a proximate objective because, with the right investment, it was possible. It would also shortcut and undermine the Soviet advances where they were beating the US, reframe the game, and be an incredible achievement.

A good example of a non-proximate objective  is "the war on drugs." It's impossible to achieve within current frameworks and politics, and it also no clear success criteria.

Consider the belief that dynamic situations require more planning and longer thought out objectives. The opposite is true: in a more dynamic situation you have less foresight and therefore need much more proximate objectives.

3: Chain-link systems

"A system has a chain-link logic when its performance is limited by its weakest subunit, or "link." When there is a weak link, a chain is not made stronger by strengthening the other links." (Page 116)

Chain link systems require improvements to many different elements at once to see an overall improvement. For example, to improve the supply of goods into a developing country it won't be enough to build a large, modern port. You will also need to upgrade the road and/or rail systems to distribute the cargo. You also have to consider education for specialist jobs, the availability of necessary vehicles, the existence of companies to move that freight and so on.

The trick here is recognising that multiple problems must be solved in a specific order, with few gains to begin with. The focus must be on the bottlenecks.

A good example of this in the real world is Ikea. You cannot just copy one element of Ikea, like the "flat pack" design and hope to take their market share. You also need the enormous stores carrying large amounts of inventory, the supply chain to keep these stores stocked, the manufacturing facilities to handle the global volume to feed this supply chain, and the design and engineering teams to create the furniture to begin with.

4: Using design

"A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions." (Page 134)

There are three elements to a strategy with good design:

  1. Premeditation: "winging it" is no kind of strategy
  2. Anticipation: how much understanding of the situation and the elements you might have in advance
  3. Coordinated action: the design of a novel response, rather than just choosing one particular decision or choice

The greater the challenge the more of a tightly designed focus you'll need. Upstart "disruptors" who displace complacent incumbents will always have a well-designed strategy.

5: Focus

"At the core, strategy is about focus, and most complex organizations don't focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them." (Page 150)

Rumelt uses the example of an incredibly successful canning company from the mid-to-late twentieth century: Crown, Cork and Seal.

Unlike competing companies, CC&S did not do large runs for large customers. Instead, they focused on short runs only. This meant they were satisfying two very different types of demand, when compared to their larger cost-driven competitors:

  1. Rush orders and seasonal products
  2. Smaller companies

This meant they focused on rapid response, technical assistance, and providing more manufacturing capacity allowing for more customers per plant. Putting all of this together, the focus is on customers who fit a specific profile who allow them to have higher margins.

6: Growth

"The proposition that growth itself creates value is so deeply entrenched in the rhetoric of business that it has become an article of almost unquestioned faith that growth is a good thing." (Page 156)

Growth for the sake of growth is bad. Especially when it comes to M&A.

Good, healthy growth is not engineered. It is a result of:

  • An exceptional product
  • Skill
  • Innovation
  • Cleverness
  • Efficiency
  • Creativity

7: Using advantage

"No one has an advantage at everything. Teams, organizations, and even nations have advantages in certain kinds of rivalry under particular conditions. The secret to using advantage is understanding this particularity. You must press where you have advantages and side-step situations in which you do not. You must exploit your rivals' weaknesses and avoid leading with your own." (Page 161)

When you win the 1500m race, it's a good bet to back you for the 5k race. Maybe even the 10k. But not wrestling, and not wrestling a gorilla. For a company who develops a great product, but then tries to pivot that into an entirely different business, it's perhaps a high risk activity and unlikely to work because that is not where your advantage lies.

Consider the US Army vs the Taliban. The former used massive force at high cost to invade and occupy a state. But their enemy had a significant advantage over them: they were embedded and fractured. No force, no matter how big, could "win" over this advantage.

Increasing value requires a strategy to progress on at least 1 of 4 fronts:

  1. Deepening advantages: reduce costs, increase value. Not just through policy and pressure but more importantly through deliberate engineering.
  2. Broadening the extent of advantages: do complimentary activities without hurting the core.
  3. Stimulate higher demand for advantaged products or services: there used to be virtually zero demand for pomegranates. One company had a small crop but no demand, so began to plant more, develop the "POM" juice product, while also undertaking a strategy to increase demand. This consisted of funding research and then using the results of this research to drive PR activities.
  4. Strengthening blocks to replication or competition: typically this is patents, brand protection, and copyright. Nespresso is a good example of this (and how it can weaken over time, needing them to continue product innovation with the Vertuo line).

8: Using dynamics

"An exogenous wave of change is like the wind in a racing boat's sails. It provides raw, sometimes turbulent, power. A leader's job is to provide the insight, skill, and inventiveness that can harness that power to a purpose. You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground-become valuable and defensible as the dynamics play out." (Page 179)

Industries are often more stable than people like to believe. Change is not that massive, and not that constant. But when change does happen, it's important to take time to understand the forces that are really at work.

"Therefore, seek to perceive and deal with a wave of change in its early stages of development. The challenge is not forecasting but understanding the past and present." (Page 180)

For example, take Cisco in the 90s. The dynamic of the time was in the midst of a great shift from the large-scale manufacturing and engineering of computer systems toward small amounts of extremely high value software. Cisco recognised this and capitalised on it.

Key to understanding the dynamics at work in any given situation is understanding the gritty detail of something. It took Intel 15 years before they realised they could make a general purpose processing chip that could later be specialised with software. Before this they would create a new chip each and every time.

Some guideposts for being "more right" than your rivals:

  1. Rising fixed costs: this forces industries to consolidate. This is usually when those costs are in product development, e.g. aerospace moving from propellors to jet turbines.
  2. Deregulation: usually means the removal of subsidies and protected areas, changes competitive landscape completely.
  3. Predictable biases: first, people rarely predict that demand should peak and then decline. Second, most assume that major change/upheaval means a "battle of the titans" when normally the titans tend to lose. Third, people believe that future winners look like current winners (they usually don't).
  4. Incumbent response: they mean to resist the ongoing transition. So, if the incumbents are resisting something, this thing is usually the dynamic.
  5. Attractor states: given all available information, how should the industry operate? Then, move towards that.

9: Inertia and entropy

Inertia: resistance to change (harder to change direction the bigger something is)Entropy: the increase in disorder and chaos over time.

Inertia of routine: when old processes and systems continue to prevail even when the landscape and conditions have changed. E.g. the airline industry in America after deregulation still making calculations based on government subsidies and fixed ticket prices.

Inertia of culture: culture is made of stable, established behaviours that are resistant to change.

"A good product-market strategy is useless if important competencies, assumed present, are absent and their development is blocked by long established culture." (Page 210)

How to change/get rid of it:

  • Simplify to reduce administration and process. Split things up and sell/spin them off where possible. Outsource what you can.
  • Fragment operating units to break social norms.
  • Change leadership in business units to people who express the right norms and values of the culture that you're looking for. Give them clear goals.

Inertia by proxy: holding onto old profit streams even when the game has significantly changed (they'll disappear eventually).

Entropy: strategies with clear design peter out over time if they are not well-managed and protected. E.g. General Motors.

Part 3: Thinking like a strategist

The science of strategy

"An organization creates pools of proprietary functional knowledge by actively exploring its chosen arena in a process called scientific empiricism. Good strategy rests on a hard-won base of such knowledge, and any new strategy presents the opportunity to generate it. A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. As results appear, good leaders learn more about what does and doesn't work and adjust their strategies accordingly." (Page 241)

Hypothesis: what might work. An idea to be tested.

We have what is already known which we can imply from deduction, but we also have: induction, analogy, judgment, and insight. It's important to test hypotheses over time. We can use this time to also gather proprietary information.

Using your head

There is a difficulty in working around our own limitations and biases. "Being strategic" usually means being less myopic. While finding an initial solution feels comforting, it crowds out other possibilities—one or two of which may be better versions.

"Facing a complex situation like this makes most people uncomfortable. The more seriously you take it, the more you will see it as a real and difficult challenge that requires a coherent response. And that realization will, in turn, make you even more uncomfortable. It is so ill-structured." (Page 266)

Techniques:

  1. The kernel: mentioned above, this kernel of good strategy must provide "an internally consistent argument." Usually, to get there, a strong diagnosis needed.
  2. Problem-solution: look purely at problems facing the company and shift your attention to why certain things are being done in response to them.
  3. Create-destroy: your initial insights may lead to a strategy that is not robust enough. Create new strategies by attempting to destroy existing ones you have posited. Dialogue, critique, conjure a mental "panel of experts."

Practicing judgment

A useful exercise is to commit to your assessment of a given situation by writing down your prediction about what will happen and why. This allows you to review those assessments and refer back to them, giving you the chance to evaluate the quality of your judgments.

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