Rumelt’s Good Strategy Bad Strategy

Richard Rumelt Good Strategy/Bad Strategy: The Difference and Why It Matters Profile Books 2011

‘A business classic’ Management Today

Aimed at helping business leaders to apply the notion of ‘strategy’ from military thinking. Part 3 ‘Thinking Like a Strategist’ is of more general interest, as is much of the other parts if read in the light of this final ‘thinking’ part.

Introduction

A word that can mean anything has lost its bite. … [The term] should mean a cohesive response to an important challenge. (Here, to be a challenge there must be no straightforward way of responding.)

A good strategy has an essential logical structure … . The kernel of a strategy contains … : a diagnosis, a guiding approach and coherent action.

Bad strategy [is] a false edifice built on mistaken foundations. [It] may actively avoid analyzing obstacles because a leader believes that negative thoughts get in the way. [Or it may be treated] as an exercise in goal setting rather than problem solving. Or they may avoid hard choices … .

Part 1: Good and Bad Strategy

[There are] two huge, incredibly important natural sources of strength: Having a coherent strategy – one that coodinates policies and actions.The creation of new strengths throughsubtle shifts in viewpoint.

Chapter 1: Good Strategy is Unexpected

Many organizations, most of the time, don’t have [a good strategy]. Instead, they have multiple goals and initiatives that symbolize progress, but no coherent approach to accomplish that progress other than “spend more and try harder”.

Chapter 2: Discovering Power

Looking at things from a different or fresh perspective can reveal new realms of advantage and opportunity as well as weakness and threat.

Chapter 3: Bad Strategy

Bad strategy … grows out of specific misconceptions and leadership dysfunctions. [Look out] for one or more of its major hallmarks:

  • Fluff.
  • Failure to face the challenge.
  • Mistaking goals for strategy
  • .Bad strategic objectives.

Chapter 4: Why So Much Bad Strategy?

Bad strategy [is] held aloft by the hot hope that one can avoid dealing with these tricky fundamentals and the difficulties of mastering them.

Chapter 5: The Kernel of Good Strategy

[This] contains three elements:

  1.  A diagnosis. [This] simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.
  2. A guiding policy for dealing with the challenge.
  3. A set of coherent actions … designed to carry out the guiding policy. … .

Chapter 6: Using Leverage

A good strategy draws power from focusing minds, energy and action, … channeled at the right moment onto a pivotal objective [which] can produce a cascade of favourable outcomes. I call this leverage. [This is a generic, context-free concept.]

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.

Chapter 7: Proximate Objectives

[A] good proximate objective [is] one that is close enough at hand to be feasible. (It typically resolves ambiquity, takes a strong position and creates options and has a heirarchy of objectives.)

Chapter 8: Chain Link Systems

A system has a chain-link logic when its performance is limited by its weakest subunit or “link”.

Getting Stuck

When each link is manged somewhat separately, the system can stuck in a low-effectiveness state. [If] you are in charge of one link … there is no point in … making your link better if other managers are not.

To make matters even more difficult, striving for higher quality in just one of the linked units may make matters worse!

Getting Unstuck

[Identify] the bottlenecks … take … responsibility for [them] and direct … attention to [them], one after the other. [Focus] on change itself as the objective.

Excellence

[The] excellence achieved by a well-managed chain-link system is difficult to replicate.

Chapter 9: Using Design

[If] you are careful about the level of abstraction, you can take certain fundamental lessons from military history and be the wiser for doing so.

The father of Strategy

[From Cannae we appreciate the importance of] premeditation, the anticipation of others’ behaviour, and the purposeful design of coordinated actions.

The parts of a whole

I am describing as strategy as a design rather than as a plan or a choice … to emphasize the issue of mutual adjustment.

The trade-off

[Resources] and tight coordination are partial substitutes for each other.

The arc of enterprise

[It] is the disconnect between current results and current action that makes the analysis of the sources of success so hard and, ultimately, so rewarding.

Sucess leads to laxity and bloat, and these lead to decline. [This] opens the door to strategic upstarts.

Order out of chaos

(This is an specific example, but possibly of general interest is:)

[The threats] are not specific new products or competitive moves, but changes that undermine the logic of its design.

Chapter 10: Focus

[“Focus”] has two meanings: …the coordination of policies that produces extra power through their interacting and overlapping effects [and] the application of that power to the right target. [Rumelt credits Michael Porter’s Competitive Strategy.]

Chapter 11: Growth

Healthy growth is not engineered. It is the outcome of growing demand for … capabilities. It is the reward for succesful innovation, cleverness, efficiency, and creativity.

Chapter 12: Using Advantage

It is the leader’s job to identify which asymetries are critical – which can be turned to importnat advantages.

Competitive advantage

For an advantage to be sustained, your competitors … must not be able to duplicate the resources underlying it. [You] must possess … an “isolating mechanism”.

“Interesting” advantages

[A] lag in competetive response [can provide] both the financing and a window of opportunity to build a large-scale [system].

Some advantages are more “interesting” than others

[A] competitive advantage is interesting when [there are] things you can do … to increase its value.

Value-creating changes

[Increasing] value requires a strategy for progress on at least one of four different fronts:

  •  deepening advantages,
  • broadening the extent of advantages,
  • creating higher demand for advantaged products or services, or
  • strengthening the isolating mechansism that block easy replication and imitation by competitors.

Chapter 13: Using Dynamics

[One] way to grab the ‘high ground’ … is to exploit a wave of change.

Chapter 14: Inertia and Entropy

  • Successful strategies often owe a great deal to the inertia and inefficiency of rivals. ..
  • An organisation’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia. … Leaders must … design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.

Inertia

A business may choose not to respond to change or attack because responding would undermine still-valuable streams of profit [which] persist because of their customers’ inertia – a form of inertia by proxy. [This] disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams. This can happen quite suddenly … .

Entropy

It is not hard to see entropy at work.

Planning and planting a garden is always (sic) more interesting than weeding it, but without constant weeding and maintenance the pattern that define a garden – the imposition of a special order on nature (sic) – fades away and disappears.

Chapter 15: Putting It Together

(This is an extended example. I pull out some commentary and analysis:)

A change in technology will often set in motion a change in industry structure. [Often, few foresee] the importance of this shift.

[In] general, if you have a “me too” product, you prefer fragmented retail buyers. On the other hand, if you have a better product, a powerful buyer … can help it see the light of day.

Part 3: Thinking Like A Strategist

(This is the more widely significant part, which helps to apply the ideas of the previous parts more broadly.)

[It] is often important to take on the viewpoint of others [but] this advice skips over what is possibly the most useful shift in viewpoint: thinking about your own thinking.

Chapter 16: The Science of Strategy

Good strategy is built on functional knowledge about what works, what doesn’t, and why. … The most precious functional knowledge is … only available to your organization.

An organization creates pools of … knowledge by actively exploring its chosen area in a process called scientific empiricism. Good strategy rests on a hard-won base of such knowledge, and any new strategy presents the opportunioty to generate it. A new strategy is … a hypothesis, and its implementation is an experiment. As results appear, good leaders learn more about what does and what doesn’t work and adjust their strategies accordingly.

Strategy is a hypothesis

[As in science,] a good business strategy deals with the edge between the known and the unknown. [It] is competition … that pushes to edges of knowledge.

In science, you first test a new conjecture against known laws and experience. Is the new hypothesis contradicted by basic principles or by the results of experiments? If the hypothesis survives that test, the scientist has to devise a real-world test – an experiment – to see how well the experiment stands up.

Similarly [in business].

Given that we are working on the edge, asking for a strategy that is guaranteed to work is like asking a scientist for a hypothesis that is guaranteed to be true – it is a dumb request. The problem of coming up with a good strategy has the same logical structure as the problem of coming up with a good scientific hypothesis.

[This is not what engineers call] winding the crank.

Enlightenment and science

In a changing world, a good strategy must have an entrepreneurial component. That is, it must embody some ideas or insights into new combinations of resources for dealing with new risks and opportunities.

The presumption that all important knowledge is already known, or available through consultation with authorities, deadens innovation. [It] stifles change in traditional societies and blocks improvement in organizations and societies that come to believe that their way is the best way. To generate a strategy one must put aside the comfort and security of pure deduction and launch into the murkier waters of induction, analogy, judgement and insight.

[Scientific empiricism] is the centerpiece of scientific thinking -the idea of refutation. … The worth of a hypothesis is determined by empirical data drawn from the physical world … .

In science one seeks explanations for broad classes of events and phenomena, in business one seeks to understand and predict a more particular situation. But the lack of universality does not make business unscientific. Science is a method, not an outcome, and the basic method of good businesspeople is intense attention to data and to what works.

Anomalies

An anomaly is a fact that doesn’t fit receive wisdom. [It] makes an opportunity to learn something, perhaps something very valuable. In science, anomalies are the frontiers where the action is.

[Anomalies appear through comparison. They] are not in nature but in the mind of the acute observer, revealed by a comparison between the facts and refined expectations.

Chapter 17: Using Your Head

To guide your thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and guiding your own attention. Second, you must develop the ability to question your own judgement. … Third, you must cultivate the habit of making and recording judgements so that you can improve.

Many attempts at strategy lack a good diagnosis. Hence, it is useful to have mental tools for working backword from a guiding policy to the realm of diagnosis and fact.

[Shift] your attention from what is being done to why it is being done.

Overcoming quick closure is simple in principle: you look for additional insights and strategies.

The creation of new higher-quality alternatives requires that one try hard to “destroy” any existing alternatives, exposing their fault lines and any internal contradictions … create-destroy.

I invoke a virtual panel of experts … people whose judgements I value.

Thinking through how a particular well-remembered expert might respond to a problem can be a richer source of criticism and advice than abstract theories or frameworks.

Chapter 18:Keeping Your Head

Good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose. Bad strategy follows the crowd, substituting popular slogans for insights.

Being independent without being eccentic and doubting without being a curmugeon are some of the most difficult things a person can do.

[Some disasters are] the result of five intertwined errors in human judgement and behaviour:

  1.  Engineering overreach.
  2. The smooth-sailing fallacy.
  3. Risk-seeking incentives.
  4. Social herding.
  5. The inside view … the tendency to ignore related pertinent data – to believe that “this case is different”.

Social herding presses us to think that everything is OK ( or not) because everyone else is saying so. The inside view presses us to ignore the lessons of other times and other places, believing that our company, our nation, our new venture, our era is different. It is important to push back against these biases. You can do this by paying attention to real-world data that refutes the echo-chamber chanting of the crowd – and by learning the lessons taught by history and by other people in other places.

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