 Good Strategy Bad Strategy: The Difference and Why It Matters by Richard Rumelt is an excellent book. It's available as a PDF online. Below I take excerpts from the book to provide a short summary of its key points. STRATEGY IS NOT SIMPLY A VISION AND A LIST OF HIGH-LEVEL GOALS Many people assume that a strategy is a big-picture overall direction, divorced from any specific action. But defining strategy as broad concepts - and leaving out action - creates a wide chasm between “strategy” and “implementation.” If you accept this chasm, most strategy work becomes wheel spinning. Echoing many others, one top executive told the author: “We have a sophisticated strategy process, but there is a huge problem of execution. We almost always fall short of the goals we set for ourselves.” You can see the reason for this complaint. A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component. Executives who complain about “execution” problems have usually confused strategy with goal setting. When the “strategy” process is basically a game of setting performance goals—so much market share, so much profit, so many new customers—then there remains a yawning gap between these ambitions and action. Strategy is about how an organization will move forward. Of course, a leader can set goals and delegate to others the job of figuring out what to do. But that is not strategy. If that is how the organization runs, let’s skip the spin and be honest—call it goal setting. BAD STRATEGY: 4 TYPES 1. Fluff. Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses words that are inflated and apparently esoteric concepts to create the illusion of high-level thinking. Fluff is superficial restatement of the obvious combined with a generous sprinkling of buzzwords. Fluff masquerades as expertise, thought, and analysis. As a simple example of fluff in strategy work, here is a quote from a major retail bank’s internal strategy memoranda: “Our fundamental strategy is one of customer-centric intermediation.” (So... your strategy is to be a bank?) 2. Failure to face the challenge. Bad strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it. 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. (e.g. hockey stick projection) 3. Mistaking goals for strategy. Many bad strategies are just statements of desire rather than plans for overcoming obstacles. Consider this so-called strategy, a common format among businesses: "
This is a set of aspirational goals, but it doesn't say why, or more importantly how, the organization could achieve those goals. 4. Bad strategic objectives. A strategic objective is set by a leader as a means to an end. Strategic objectives are “bad” when they fail to address critical issues or when they are impracticable. Some examples of bad objectives include:
Sometimes blue sky objectives are the result of not diagnosing the underlying root causes of the challenge that the company faces, and an honest assessment of why change for the company would be hard. As we'll see in the section on Good Strategy below, a proper diagnosis of the problem is the crucial first step in establishing good strategy. TODAY'S MOST POPULAR BAD STRATEGY: TEMPLATE-STYLE STRATEGY
There's nothing wrong with having a vision and mission, in fact these are important. But simply filling out a template with generic statements doesn't make a strategy, especially if it ignores the challenges faced by the business and doesn't give an a detailed, coherent plan for what to do. GOOD STRATEGY: THE KERNEL At the centre of a "good strategy" is a kernel. The kernel contains 3 elements:
1. The Diagnosis A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical. Follow the thinking of Stephanie, who owns a corner grocery store. She was considering whether she should keep prices down or offer more expensive, fresh organic produce. Should she begin to stock more Asian staples for the many Asian students who lived in the area? Should the store be open longer hours? How important was it to have a helpful, friendly staff that gets to know the regulars? Would adding a second checkout stand pay off? What about parking in the alley? Should she advertise in the local college newspaper? Should she paint the ceiling green or white? Should she put some items on sale each week? Thinking about her store, Stephanie diagnosed her challenge to be competition with the local supermarket. She needed to draw customers away from a store that was open 24/7 and had lower prices. Seeking a way forward, she believed that most of her customers were people who walked by the store almost every day. They worked or lived nearby. Scanning her list of questions and alternatives, she determined that there was a choice between serving the more price-conscious students or the more time-sensitive professionals. By framing a diagnosis in this way, it provided a dramatic reduction in complexity. 2. The Guiding Policy This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than canceling one another out. In the example of Stephanie above, she began to explore the guiding policy of “serve the busy professional.” After some more tinkering, Stephanie sharpened the guiding policy a bit more, deciding to target “the busy professional who has little time to cook.” There was no way to establish that this particular guiding policy was the only good one, or the best one. But, absent a good guiding policy, there is no principle of action to follow. Without a guiding policy, Stephanie’s actions and resource allocations would probably be inconsistent and incoherent, fighting with one another and canceling one another out. Importantly, adopting this guiding policy helped reveal and organize the interactions among the many possible actions. 3. Coherent Actions These are steps that are coordinated with one another to work together in accomplishing the guiding policy. Considering Stephanie's guiding policy of serving the needs of the busy professional with little time to cook, she could see the coherent actions that she needed to take: the second checkout stand would help handle the burst of traffic at 5 p.m. So would more parking in the alley. In addition, she felt she could take space currently used for selling munchies to students and offer prepared high-quality takehome foods instead. The busy professionals would appreciate adequate staffing after work and, perhaps, at lunchtime. Having a guiding policy helped create actions that were coordinated and concentrated, focusing her efforts. The guiding policy also ruled out actions that she should NOT do because they would be incoherent. For example, professionals, unlike students, would not come shopping at midnight, so there was no need for very late hours CASE STUDY IN GOOD STRATEGY: APPLE IN 1997 By September 1997, Apple was two months from bankruptcy. Steve Jobs, who had cofounded the company in 1976, agreed to return to serve on a reconstructed board of directors and to be interim CEO. Jobs shrunk Apple to a scale and scope suitable to the reality of its being a niche producer in the highly competitive personal computer business. He cut Apple back to a core that could survive. Jobs talked Microsoft into investing $150 million in Apple, exploiting Bill Gates’s concerns about what a failed Apple would mean to Microsoft’s struggle with the Department of Justice. Jobs cut all of the desktop models—there were fifteen—back to one. He cut all portable and handheld models back to one laptop. He completely cut out all the printers and other peripherals. He cut development engineers. He cut software development. He cut distributors and cut out five of the company’s six national retailers. He cut out virtually all manufacturing, moving it offshore to Taiwan. With a simpler product line manufactured in Asia, he cut inventory by more than 80%. A new Web store sold Apple’s products directly to consumers, cutting out distributors and dealers. The power of Jobs’s strategy came from:
He did not announce ambitious revenue or profit goals. He did not indulge in messianic visions of the future. And he did not just cut in a blind ax-wielding frenzy. SOURCES OF POWER A good strategy is an approach that magnifies the effectiveness of actions by finding and using sources of power. The book explores a number of fundamental sources of power used in good strategies:
Source of Power #1: Leverage A good strategy draws power from focusing minds, energy, and action. That focus, channeled at the right moment onto a pivotal objective, can produce a cascade of favorable outcomes. The author calls this leverage. Strategic leverage arises from a mixture of:
Source of Power #2: Proximate Objectives Every organization faces a situation where the full complexity and ambiguity of the situation is daunting. An important duty of any leader is to absorb a large part of that complexity and ambiguity, passing on to the organization a simpler problem—one that is solvable. For example, when planning the moon landing, engineering a lunar roving vehicle was daunting because no one knew for sure what the surface of the moon was like. The leader documented a key assumption about the lunar surface, which removed complexity and ambiguity and unlocked the team's ability to design a vehicle. Source of Power #3: Chain-Link Systems A system has a chain-link logic when its performance is limited by its weakest subunit, or “link.” There's no point in investing resources in making your link better if other link managers are not. The leader needs to take into account all the links and coordinate them. For example, the links could be product, sales and cost structure. There's no point in investing in sales or cutting costs if product is your weak link - it may make the situation worse. Instead, you can have a focused effort to first improve the product (the weak link), then invest in the sales team (the next weak link), and then look at reducing cost structure. If you can build a linked system where each link coherently builds on the others to form something different and valuable to a customer segment, you get a strategy that is hard for competitors to replicate. For example, Ikea structured its various business "links" in unique ways that established furniture stores can't easily copy without re-building their own businesses from scratch. Source of Power #4: Focus Focus is a pattern of attacking a segment of the market with a business system that provides more value to that segment than the other players can. Here, the word “focus” has two meanings. First, it denotes the coordination of policies that produces extra power through their interacting and overlapping effects. Second, it denotes the application of that power to the right target. By specializing in delivering more value than anyone else can to a niche market, in a way that competitors can't easily copy or don't want to copy, then you can expect to charge higher rates and be more profitable, even if you don't have big volumes. Source of Power #5: Growth The problem with engineering growth by acquisition is that when you buy a company, you usually pay too much. You pay a premium over its ordinary market value—usually about 25%—plus fees. If you have friendly investment bankers and lenders, you can grow as fast as you like by acquisition. But unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by such expansion. Corporate leaders may (erroneously) believe that administrative costs will fall with size. A poor, but common, reason for acquisitions is to move key executives to the periphery rather than let them go. The leaders of larger firms tend to be paid more. And, in a decentralized company, making acquisitions is a lot more fun than reading reports on divisional performance. In addition to all these reasons, key corporate advisers—investment bankers, consultants, mergers and acquisitions law firms, and anyone who can claim a “finder’s fee”—can earn a king’s ransom by being “helpful” in a major deal. Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities. It is the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity. This kind of growth is not just an industry phenomenon. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit. Source of Power #6: Advantage Two equally skillful chess players sit waiting for the game to begin—which one has the advantage? “Neither,” because advantage is rooted in differences—in the asymmetries among rivals. In real rivalry, there are an uncountable number of asymmetries. It is the leader’s job to identify which asymmetries are critical—which can be turned into important advantages. The basic definition of competitive advantage: if your business can produce at a lower cost than competitors, or if it can deliver more perceived value, or both. This is usually specific to a product line or market segment. For example, Whole Foods has an advantage over a typical supermarket only for certain products and only among grocery shoppers with good incomes who place a high value on organic and natural foods. For an advantage to be sustained, your competitors must not be able to duplicate it. For that you must possess an “isolating mechanism,” such as a patent, reputation, commercial and social relationships, network effects, dramatic economies of scale, and tacit knowledge and skill gained through experience. Apple’s iPhone business is protected by the Apple and iPhone brand names, by the company’s reputation, by the complementary iTunes service, and by the network effects of its customer group, especially with respect to iPhone applications. Competitors find it difficult, if not impossible, to create comparable resources at a reasonable cost. Despite all the emphasis on “competitive advantage” in the world of business strategy, you cannot expect to make money—to get wealthier—by simply having, owning, buying, or selling a competitive advantage. The truth is that the connection between competitive advantage and wealth is dynamic. That is, wealth increases when competitive advantage increases or when the demand for the resources underlying it increases. In particular, increasing value requires a strategy for progress on at least 1 of 4 different fronts:
Source of Power #7: Dynamics One way to find fresh undefended high ground is by creating it yourself through pure innovation (such as Gore-Tex, or business model innovations, such as FedEx’s overnight delivery system). The other way to grab the high ground is to exploit a wave of change. To navigate and exploit change, the author proposes guideposts:
INERTIA AND ENTROPY Successful strategies often owe a great deal to the inertia and inefficiency of rivals. For example, Netflix pushed past the now-bankrupt Blockbuster because the latter could not, or would not, abandon its focus on retail stores. Despite having a large early lead in mobile phone operating systems, Microsoft’s slowness in improving this software provided a huge opening for competitors, an opening through which Apple and Google quickly moved. An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia. Inertia is an organization’s unwillingness or inability to adapt to changing circumstances. You can have:
Entropy measures a business' degree of disorder, as weakly managed organizations tend to become less organized and focused over time. Leaders need to constantly work on maintaining an organization’s purpose, form, and methods, even if there are no changes in strategy or competition. Breaking Cultural Inertia The first step in breaking organizational culture inertia is simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency. Strip out excess layers of administration and halt nonessential operations—sell them off, close them down, spin them off, or outsource the services. Coordinating committees and a myriad of complex initiatives need to be disbanded. The simpler structure will begin to illuminate obsolete units, inefficiency, and simple bad behavior that was hidden from sight by complex overlays of administration and self-interest. After the first round of simplification, it may be necessary to fragment the operating units. This will be the case when units do not need to work in close coordination—when they are basically separable. Such fragmentation breaks political coalitions, cuts the comfort of cross-subsidies, and exposes a larger number of smaller units to leadership’s scrutiny of their operations and performance. After this round of fragmentation, and more simplification, it is necessary to perform a triage. Some units will be closed, some will be repaired, and some will form the nuclei of a new structure. The triage must be based on both performance and culture—you cannot afford to have a high-performing unit with a terrible culture infect the others. The “repair” third of the triaged units must then be put through individual transformation and renewal maneuvers. Changing a unit’s culture means changing its members’ work norms and work-related values. These norms are established, held, and enforced daily by small social groups that take their cue from the group’s high-status member—the alpha. In general, to change the group’s norms, the alpha member must be replaced by someone who expresses different norms and values. All this is speeded along if a challenging goal is set. The purpose of the challenge is not performance per se, but building new work habits and routines within the unit. Once the bulk of operating units are working well, it may then be time to install a new overlay of coordinating mechanisms, reversing some of the fragmentation that was used to break inertia. BEING STRATEGIC IS OVERCOMING HUMAN BIAS To create strategy in any arena requires a great deal of knowledge about the specifics. There is no substitute for on-the-ground experience. This experience accumulates in the form of associations between situations and “what works” or “what can happen” in those situations. But specific knowledge is not enough. You also need 3 essential skills:
For example, the author recommends a technique called Create-Destroy, where you generate one good insight, then force yourself to cast it aside and come up with a completely different alternative. This is remarkably hard to do for humans, who tend to latch on to their one idea and generate false or vague alternatives. To subject your idea to rigorous criticism, the author proposes a second technique called Panel of Experts, where you imagine what experts you've met or heard about in your life would say about your idea. "What would Steve Jobs say about this strategy?" Being strategic is being less myopic—less shortsighted—than others. You must perceive and take into account what others do not, be they colleagues or rivals. Being less myopic is not the same as pretending you can see the future. You must work with the facts on the ground, not the vague outlines of the distant future, whether it is insight into industry structures and trends, anticipating the actions and reactions of competitors, insight into your own competencies and resources, or stretching your own thinking to cover more of the bases and resist your own biases.
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