Demystifying "strategy"

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Today’s post covers the key insights & takeaways from Good Strategy, Bad Strategy by Richard Rumelt. We’ll explore:

• 3 characteristics of bad strategy

• 3 elements of good strategy

• 9 key sources of strategic power

• how to think like a strategist

In 12 minutes, right here, right now - plus probably if you bookmark this page - you’ll gain the knowledge and tools you’ll need to aid your future strategy development efforts.

• Most organizations are uncoordinated and un-concentrated, and have no approach beyond “spend more” and/or “ try harder”

• Too many organizations spread, rather than concentrate, resources

• Organizations need to be able to identify the next window of opportunity and leap through it. They way too often don’t.

1/ Fluff - e.g. esoteric concepts to create the illusion of high-level thinking

2/ Failure to face the challenge - e.g. the strategy doesn't recognize, define, or analyze the obstacles to overcome

3/ Mistaking goals for strategy - e.g. statements of desire rather than plans

• Strategy transforms goals into a coherent set of actions. It answers “What has to happen for [goal] to be realized?

• You need more than just willpower, spirit, and aggressiveness

• Strategic objectives are bad when they either fail to address critical issues or when they’re impractical

• A long list of things to do or objectives is not a strategy

• Underperformance is a result, that's not the fundamental challenge

1/ Diagnosis

• Essentially answers "what's going on here?"

• It's a judgment about the meaning of facts; often, really, an educated guess

• Most strategic changes are brought about by a change in diagnosis (e.g. the definition of the company's situation)

2/ Guiding Policy

• Often people mistakenly define this what as the strategy but it also needs the why and how

• Guiding policy defines a method and rules out a vast array of possible actions

• It needs to anticipate actions and reactions of others

• It needs to reduce the complexity and ambiguity in the situation

• Should build on strength or create leverage

3/ Coherent actions

• Actions should coordinate, build upon one another, and focus organizational energy

• Specialize on the right activities and impose only the essential amount of coordination

1/ Leverage

• Channeling focused minds, energy, action onto a pivotal objective at the right moment

• 3 ways in which leverage arises:

  • a/ Anticipation

    • Seeing around corners, especially with respect to buyer demand and competitive reactions

      • It’s about considering the habits, preferences, and policies of others

  • b/ Pivot points

    • On decisive aspects of the situation

  • c/ Concentration

    • Invest your resources on the fewer objectives that would make the largest and most visible difference

2/ Proximate objectives

• Lay out proximate objectives to help reduce the complexity and ambiguity of the situation

• Enables you to pass on a simpler problem it can solve

3/ Chain-link systems

• The idea that performance is limited by its weakest link

• Removing limiting factors = huge skill

• Need to, first, identify the bottlenecks

• Often you need to focus on all bottlenecks one at a time 

4/ Design (coordinated actions)

• Size is the consequence, not cause, of success; the cause is about having offerings that are most preferred by customers

• You're rarely handed a clear set of alternatives

• Incorrect tendency to associate current profit with recent actions

• Organizations can discover power by uncovering insights into new sources of strengths and weakness

  • E.g. Walmart redefined the notion of "store" -> each store is embedded in a network of computing and logistics; their policies fit together (bar codes, integrated logistics, just-in-time deliveries, large stores with low inventories, etc.)

5/ Focus

• Attacking a segment of a market and bringing more value to it than other players through some advantage

• Need to first examine the competitive environment

• Need to independently analyze a company’s strategy. To do so, (1) notice what policies are different from the industry's norm and (2) try to figure out what those coordinated policies are aiming to accomplish

6/ Growth

• Healthy growth isn’t engineered. It's the outcome of growing demand; the outcome of a firm having superior products and skills

• the proposition that growth itself creates value is so deeply entrenched in the rhetoric of business that it's become an article of unquestioned faith that growth is a good thing (it’s not)

• Growth through acquisition = you usually pay too much

7/ Advantage

• Advantages are rooted in differences - leader needs to identify which asymmetries are critical to turn into advantages

• A company that claims their products/services confers an advantage to all buyers is a contradiction

• By providing more value you avoid being a commodity

• How to increase a business’s value?

  • deepen your advantage through (a) value increases, (b) cost decreases, or (c) both

    • Costs = searching for a product, evaluating it, waiting for it, switching to it, installing it, learning how to consume it, etc.

    • Improvements come from reexamining the details of how work is done

    • To excel at product improvement, you must study the attitudes, decisions, and feelings of buyers; develop a special empathy for customers and anticipate problems

  • can also broaden the extent of your advantages or stimulate higher demand

8/ Dynamics

• About exploiting a wave of change, ideally in its early stages of development, when you can take advantage of it

• Often as a result of shifts & advances in technology, cost, competition, politics, and buyer perceptions

• Seek to understand the forces driving the change and have a point of view about the second-order changes

• 3 key mental guideposts for detecting a wave of change

  • Rising fixed costs - especially product development costs; typically, then, only the largest competitors can cover them

  • Deregulation - regulated prices subsidizes some buyers at the expense of others

  • Predictable biases / mistakes

    • E.g. people rarely predict a trend will peak then decline but that occurs regularly, esp. for durable goods

    • E.g. people suggest adopting the strategies of the largest, most profitable competitors (meh)

    • E.g. people think the future winners will be the current apparent winners (not always…)

9/ Inertia & Entropy

• Organizations are challenged by both

• Inertia = resistance to change

  • Inertia of routine, culture, or proxy (i.e. customer’s inertia)

    • First step to overcome culture inertia is to simplify

• Entropy = a system's degree of disorder

  • External consulting = mostly about undoing entropy

  • About data-driven management and transfer of successful practices

• Weakly managed orgs tend to become less organized and less focused

1/ Think like a scientist 

• Strategy is a hypothesis; its implementation an experiment

• Key = proprietary functional knowledge within an org (aka knowing things others do not)

• Vertical integration = allows you to capture the info generated by each element of your biz

• Test a new strategic insight against well-established principles and against your accumulated knowledge about the business

• In a rapidly changing world, it can't be about “more of the same!”

• The presumption that all important knowledge is already known deadens innovation

• Pay intense attention to data and to what works

• Anomalies are the frontier of the action

2/ Use your head

• Make a list of what’s important and actionable (we often forget our larger purposes)

• Being strategic is about being less myopic - less shortsighted - than others

• Most people solve problems by grabbing the first solution that pops into their head because it’s uncomfortable to try to solve problems that have too many variables and unknowns, that have a lack of link between action and outcomes, and have unknown problem definitions; that first idea is a welcome relief!

• While it’s uncomfortable to question our own ideas, we need to be able to think about our own thinking, to make judgments about our own judgments

• Techniques

  • Gather experience = creates associations between situations and "what works" or "what can happen"

  • Shift attention from what is being done to why; identify the obstacles it's trying to overcome

  • question your own judgment / destroy your own ideas - e.g. imagine a panel of experts in your head answering "What is wrong with this approach?” “What would you do here?"

  • make & record judgments so you can improve

3/ Keep your head

• Collapses in our society occur due to intertwined errors in human judgment and behavior .. 5 key ones are:

  • (1) Systems have failure modes & consequences that nobody could understand or predict

  • (2) We mistakenly assumed a lack of recent storms means there's no risk

  • (3) We have risk-seeking incentives, especially when you have upside-risk only (e.g. bailouts)

  • (4) Social herding = when we don’t know something, we look at the behaviors of others … “everything is okay (or not) because everyone else is saying so"

  • (5) The mistakenly belief that this case is different/special

• Need to keep your head on even while others are “sure” they know what’s going on

• Biggest keys are to pay attention to real-world data that refutes the echo chamber and to learn lessons taught by history and by other people in other places

1/ Assess your buyers, who you compete with, what is changing in the business, identify what opportunities currently exist, etc.

2/ Identify the most promising opportunities or how you might get a jump on the competition

3/ Choose 1-2 most attractive opportunities where you can make major inroads (e.g. ask: “What single feasible objective, when accomplished, would make the biggest difference?”)

With deep appreciation,
Phil

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