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Why do so many organizations get strategy wrong? Even some of the world's biggest organizations do strategy poorly, and incorrectly credit their success to their personal decision-making skill. Leaders often do what makes them feel good, whether it helps their company or not.
We read the book Good Strategy, Bad Strategy by Richard Rumelt and will break down the key insights between good and bad strategy. The "kernel" of good strategy contains three main components: diagnosis of a problem; an appropriate guiding policy; and a set of coherent actions. If each stage isn't treated carefully, bad strategy is inevitable.
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Useless 'strategy' has pervaded the psyche of organizations worldwide. Why? Because good strategy is hard work. From redundant vision-building to lazy law-of-attraction thinking, people do what makes them feel good, whether it helps their company or not. It's easy to declare wishfully; it's much harder to put together a plan to ensure execs' wishes are granted.
Good strategy cannot be stumbled upon by chance. Even some of the world's biggest organizations do strategy poorly, and incorrectly owe their success to their decision-making skill. Conversely, many organizations do strategy expertly, from which much can be learned. The 'kernel' of good strategy contains three main components: diagnosis of a problem; an appropriate guiding policy; and a set of coherent actions. If each stage isn't treated carefully, bad strategy is inevitable.
A paragon of organizational strategy, Richard Rumelt walks readers around the many landmines lying in wait should leaders misstep in their strategy. At its core, strategy is the identification of critical factors in a situation, then the skillful design of coordinated actions to deal with said factors. It requires awareness of one's resources and capabilities and a sharp understanding of one's industry and its surrounding space. Though there is much to learn, fundamentally strategy is very difficult leg work, not easily replaced with template-style vision building or any other form of pseudo-strategy.
Rumelt first dispels what some believe constitutes strategy. It has little to do with ambition, leadership, vision or the economic logic of competition. The core of strategy work is "discovering the critical factors of a situation and designing a way of coordinating and focusing actions to deal with those factors."
Bad strategy is not only the absence of good strategy; bad strategy is itself a hodgepodge of misunderstood or misapplied concepts. Leaders often "mistakenly [treat] strategy work as an exercise into set goals rather than solve problems."
When Steve Jobs first returned to Apple, he didn't do much that was remarkable. Given Apple's shrinking market share (about 4% of the PC market when he rejoined), he did what any right-thinking strategist would do, according to Rumelt: he made a series of shrewd, necessary business choices that made sense.
Jobs made (necessary) cuts across the board, simplifying and focusing the company's processes. Jobs took 'focused action'—something that is all too rare in business, writes Rumelt. He first steadied the ship and then stood poised and waited for the perfect opportunity to explode the company into life again.
There were many technologies on the brink of launch, and Jobs knew that. Despite Windows-Intel's seemingly insurmountable market lead, Jobs knew that if he made the right decision at the right time, he had a chance to skyrocket Apple to the top. So he steadied the ship, simplified product selection, made tough but necessary decisions, and waited.
Jobs' strategy was focused, self-aware, and action-oriented throughout. "Good strategy itself is unexpected," Rumelt writes.
The Jobs formula
Jobs has an amusing, and incredibly simple, approach to business, which Rumelt, a foremost academic of organizational strategy, loves. It has four stages:
Often the greatest business leaders, like Jobs, or Elon Musk, have simple approaches to strategy, even if technically they are complex. "Good strategies are usually 'corner solutions,'" Rumelt writes. "That is, they emphasize focus over compromise."
"Half of what alert [MBA students] learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance," Rumelt writes as he details the case of Wal-Mart in 1986. Rumelt's students would theorize why Wal-Mart did so well (computerised warehousing and trucking system, non-union, low admin expenses and so on), but no one considered why, if this was so simple, competitors didn't copy the formula. "Looking just at the actions of a winning firm, you see only part of the picture."
Kmart was the most notable failure. Eventually filing for bankruptcy in 2002, they focused on international expansion throughout the '70s and '80s, "ignoring Wal-Mart's innovations in logistics and its growing dominance of small-town discounting."
Overall, it is the coherence of structure, policy, and actions that made Wal-Mart so difficult to compete with. Isolated examples, such as the introduction of barcode scanners at checkout, are not enough; Kmart also had barcode scanners in the early '80s. The difference between it and Wal-Mart is coherence, a total strategy as opposed to "some imagined 'best practice' form. … The network, not the store, became Wal-Mart's basic unit of management."
Competitors must integrate the entire design of Wal-Mart's strategy to emulate its success. It is the coherence of its strategy that buttresses its advantage.
There is a difference between what Rumelt in 2007 coined 'bad strategy' and no strategy at all. There are four major hallmarks of bad strategy:
Fluff is "a form of gibberish masquerading as strategic concepts or arguments. It uses … words that are inflated and unnecessarily abstruse and apparently esoteric concepts to create the illusion of high-level thinking."
A humorous example of fluff in business, the likes of which are to be avoided at all costs: "Our fundamental strategy is one of customer-centric intermediation" – a major retail bank that Rumelt worked with as a consultant. In other words, its fundamental strategy was to be a bank.
Failure to face the challenge
Bad strategy fails to recognize or define the challenge, which makes overcoming it near impossible. DARPA, a US military research organization, explicitly outlines what governs its actions (a good example):
On this, Rumelt writes: "DARPA's strategy is more than a general direction. It includes specific policies that guide its everyday actions." DARPA has led to advancements in various fields, including stealth technology, GPS, nanotechnology, and much more.
Don't mistake goals for strategy
Statement of goals is not a strategy; a bad strategy often contains no action points.
Cookie-cutter annual 'strategic planning' accounts for most of corporate 'strategy': "Importantly, opportunities, challenges, and changes don't come along in nice annual packages. The need for true strategy work is episodic, not necessarily annual."
Bad strategic objectives: Strategic objectives must help an organization reach its desired end. Bad strategic objectives often fail to address critical issues or are impracticable. Rumelt suggests using the following definitions:
Goal: a word used to express overall values and desire. For example: The United States' foreign-policy goals of freedom, justice, and democracy
Objective: used to denote specific operational targets. For example: defeat the Taliban, rebuild infrastructure
Chen Brothers, a distributor of specialty foods, was under threat by the growth of Whole Foods. Whole Foods was applying pressure on the smaller stores that Chen Brothers supplied.
Chen Brothers' stated goals were to 1) Grow profit; 2) be a good place to work; 3) be seen as the go-to distributor of organic foods.
Chen Brothers' stated objectives were to first categorize customers into three tiers; then, the most important objectives for each tier were as follows: the Top tier was to achieve shelf-space dominance, the middle tier was promotional parity or better, and the lowest tier was to grow market penetration.
But Chen Brothers spotted the threat of Whole Foods and adapted. The company kept its goals the same but adjusted its strategic objectives. Its strategy became the linking together of the various smaller stores that Chen Brothers supplied to, formulating a common brand that would be sold through Whole Foods. It formulated a dedicated Whole Foods team, combining production, marketing, advertising, financial expertise, and distribution under one roof.
Chen Brothers were successful in their attempts and were right about Whole Foods eventually dominating the specialty food market.
Two key takeaways from this example:
The three most common pathways to bad strategy begin with the unwillingness or inability to choose. In short, strategy decisions are difficult to make. Having the conviction and the foresight to make big, tough decisions is a necessary step when putting together a strategy.
Second, a template style strategy that includes fill-in-the-blanks template ideas like "The Vision", "The Mission", "The Values" and "The Strategies." This alone is not an actual "strategy."
Third, there is now a fetishization of quasi-religious, law-of-attraction thought in the US that has its roots in 19th-century Protestant Christian individualism. This "new thought" has had a knock-on impact on business strategy, which often leads to a shallow motivational mantra rather than a strategy for success.
Rumelt defines the 'kernel' of good strategy as "an effective mixture of thought and action with a basic underlying structure." It contains three elements: 1) A diagnosis, 2) a guiding policy, and 3) coherent actions.
A good "guiding policy" sets the stage for focused action. For example, George Kennan was the American diplomat in the USSR for more than a decade. He witnessed first-hand much of the terror for which the USSR was responsible. In 1946, he wrote the so-called 'long telegram', which explored the nature of Soviet ideology and power. He surmised that the Soviets positioned themselves explicitly against capitalism, and as such, Kennan's proposal was to treat the Soviet ideology as a virus that must be contained until it dies out.
This was a sliding-doors moment in foreign policy. If the challenge was diagnosed another way —for example, if the Soviet Union were enticed into the world community through a policy of engagement as opposed to containment— the Vietnam War, Berlin Airlift, Korean War, and many other horrific events might not have happened. Kennan's framing of the problem was absent of actionable objectives, and because of that, future American leaders struggled to turn the guiding policy into action.
A guiding policy can be an advantage in and of itself if it anticipates actions and reactions of others, reduces the complexity and ambiguity of a situation, by exploiting leverage, and by creating policies and actions that are coherent.
Nvidia, a designer of 3D-graphics chips, had a rapid rise to the top, passing apparently stronger firms, including Intel, along the way in the 3D-graphics market. Since Jen-Hsun Huang became CEO in 1999 the company's shares increased 21-fold, even beating Apple during that same period.
Diagnosis: recognizing that 3D-graphics chips were the future of computing (given the almost infinite demand for graphics improvement that came from PC gaming).
Guiding policy: the shift from a holistic multi-media approach to a sharp focus on improved graphics for PCs through the development of superior graphics processing units (GPUs).
Action points: 1) The establishment of three separate development teams; 2) reducing the chance of delays in production/design by investing heavily in specific design simulation processes; 3) reducing process delays involving the lack of control over driver production, by developing a unified driver architecture (UDA). All Nvidia chips would use the same downloadable driver software, making everything run more smoothly at all stages (for both Nvidia and its customers).
Nvidia grew at a rate of about 67% per year from 2001 to 2007 and circumnavigated the design and production bottlenecks faced by companies like Intel. Despite similar growth to Nvidia during that period, Intel had the effects of its performance increases dulled by process issues. Nvidia, meanwhile, won consumers over with more frequent top-tier GPUs.
Where competitors like Silicon Graphics spread themselves too thin, Nvidia's strategy during that time was intuitive, focused, and executed well.
The Kennedy administration was careful not to claim the US would beat the Soviet Union to put up a manned orbiting lab, or an unmanned vehicle on the moon; these feats, the US concluded, would not be achieved before the Soviets did so because of the latter's superiority in heavy-lift rockets. Kennedy chose his goal of putting a crew on the moon very carefully, because he knew that it was not only possible but probable that they would beat the Soviet Union: "…the moon landing would require much larger rockets than either nation possessed, giving the United States an advantage because of its larger base of resources."
It is vital for execs to choose proximate objectives.
When you design a strategy, business leaders should consider three key stages:
Many great strategies are more like bespoke designs than decisions. Seeing strategy as a 'choice' or a 'decision' may in fact be a poor reflection of its true nature; often leaders are faced with unique challenges, to which they are forced to formulate a novel response.
Sometimes an early advantage, such as Xerox's plain-paper-copying patent, can lead to inertia. Such a big market lead can lead to complacency when management doesn't believe it needs to stay abreast of new developments.
Applied to strategy, 'focus' has two meanings: first, it denotes the coordination of policies that produces extra power through interactions and overlapping effects. Second, as introduced by Michael Porter in Competitive Strategy, it denotes the application of that power to the right target.
The dynamics of change are important to consider when formulating strategy. Sensing waves of change in society, or in a given industry, is crucial.
As computer technology progressed in the 20th century, the focus shifted from interconnected individual computer systems—that were made and maintained by companies like IBM and DEC who specialized in integrated systems—to a series of component parts driven by the microprocessor. Now each part was 'smarter', and didn't require expertise of holistic integration. The industry had shifted, and IBM had to readjust.
Here are five 'guideposts' to read the shifting dynamics of an industry:
Inertia and entropy, defined by Rumelt as resistance to change, are responsible for much bad strategy. The inertia of Blockbuster as it failed to abandon its retail stores meant that Netflix surpassed it and is now an industry leader. Understand the inertia of rivals, as it is vital as understanding your own strengths. As Rumelt wrote, "An organization's greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia."
Organizational inertia usually falls into one of three categories: 1) the inertia of routine; 2) cultural inertia, and 3) inertia by proxy.
If you can maintain composure and 'keep your head', even while those around you lose theirs, you are at a great advantage, Rumelt writes, who warns not to put blind faith in the stock market. He uses the example of the telecommunications industry and details a time around the beginning of the 21st century when everybody else had blind faith in the company Global Crossing, whose stock was grossly overvalued given the dynamics of its industry. This included the ease of entry for competitors, as it was not as hard as it seemed for others to do what Global Crossing was doing. In 2001, the company filed for bankruptcy amid an inability to keep up with bandwidth capacity — something that was clear to anyone that had looked close enough. Despite what everyone else thinks, conduct your own analyses, and do not be swayed by social herding. Keep your head.
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