Good Strategy, Bad Strategy Richard P. Rumelt
Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished
Good Objectives
Dividing customers into three tiers based on importance and setting specific objectives for each tier, like maximizing prime shelf space with the top tier and getting some shelf space with the bottom tier
Linking small stores together to maximize their purchasing power and fight back against a large chain
The Four Hallmarks Of Bad Strategy
- Fluff: Unnecessarily long words
- Failure to face or define the challenge
- Mistaking goals for strategy. You can’t just state your desires, you need to plan to overcome obstacles.
- Bad strategic objectives. Good ones are means to an end, bad ones fail to address key issues or are impracticable.
Strategy Objectives
Good strategies focus on one or two objectives, bad ones sweep together 143 items on a to-do list that encompasses the wish list of every department or constituency in your company
A simple statement of the goal with no attention to how it will be achieved or the difficulties of achieving it
Underperformance is not a challenge; the challenges are the reasons for the underperformance
Chain-Link Systems
Systems have a chain-link logic when performance is limited by the weakest subunit or link.
Improving a single link does not improve the results of the system as a whole unless the weakest link is improved
Merely creating more pressure for higher profits wouldn’t solve the problem because multiple areas under the control of different teams each need to be improved before the results show up in increased profits
A sequential strategy works best in which leaders take responsibility for the final results and focus on one link at a time.
Sources of Strategic Leverage: Concentration
- Returns to concentration happen when focusing on fewer things generates large payoffs.
- Threshold effects are in evidence when you need to hit a certain critical mass to see a return.
- Dominating a very small market can be better than having some presence in many.
- Most organizations can only focus on a few critical problems at a time.
Why so Much Bad Strategy
A bad strategy isn’t miscalculation, it’s avoiding the hard work of crafting a good strategy. Good strategy means making priority choices.
Sources of bad strategy:
- Avoiding choices
- Vision templates
- New Thought: The Power of Positive Thinking
Using Dynamics
- Exploit a wave of change by seeing its effects before others do.
- Waves of change are exogenous: They occur because of reasons outside your company.
- Most industries are stable most of the time; without change, there may be few strategic opportunities.
- Look for a present effect, understand the forces underlying the effect and the second-order changes that these forces will create.
Inability to Choose
- Opting for all the options on the table or a consensus with something for everyone means that nobody sharpens their arguments or analysis.
- Major choices involve reshaping the firm.
- Scarcity creates a need to focus. Focus is the core of the strategy.
- Any strategy involving focus will disappoint some constituencies inside the company; this is often hard to do unless the company is under threat.
Discovering Power
Success isn’t just about what your organization does, it’s also about blocked or failed competition
For example, in setting a cold war strategy, it made little sense to match Soviet capabilities. The best method was to build on our strengths in ways that were aimed at their weaknesses.
Act so as to impose exorbitant costs on the competition using your relative advantages
The Science of Strategy
- Good strategies are hypotheses about what will work.
- Strategy is inductive, not deductive. You don’t already know all the basic principles you need in order to solve the problem.
- Hypotheses may arise from intuition. The best can be tested without excessive investment.
- If the strategy requires tight coordination among many different elements, it may be necessary to own each element rather than contract it out.
Good and Bad Strategy
- Strategy is the application of strength against weakness.
- Strategy creates new strengths through subtle shifts in viewpoint.
- Most organizations have multiple conflicting objectives that amount to little more than spending more and try harder.
- They spread resources to placate internal interests rather than concentrate resources to focus on pivot points.
- Creating a good strategy means saying no to a variety of interests.
Using Design
- Many good strategies today are more designs than decisions, in other words, you’re building something not making a choice.
- In design problems, getting the right combination of elements that complement each other produces massive gains, being slightly off imposes massive costs.
- Tightly integrated designs are very effective but are harder to create, narrower in focus, and less flexible in the face of change.
- Strategic resources are long-lasting and cannot be duplicated without creating a net economic loss.
- Many upstart companies have a tightly integrated strategy that unseats incumbents.
Growth and Advantages
- Growth by acquisition usually results in paying too much
- Healthy growth is a response to the demand for special capabilities
- It should be accompanied by superior profits
Advantages
- Advantages are rooted in differences from opponents
- Identify which differences are most important and maximize their impact
- Press where you have the advantage, and avoid situations where you don’t
- Interesting advantages are ones that you can increase with strategic skills, like growing a fruit that you can market more effectively using your special marketing skills.
The Kernel of Good Strategy
- The kernel of a good strategy has three components:
- The diagnosis that explains the challenge and highlights its most important aspects
- Guiding policy that forms the overall approach to overcome the obstacle
- coherent actions that reinforce each other to accomplish the guiding policy.
Sources of Power
A good strategy works by harnessing power and applying it where it will have the greatest effect.
The fundamental sources of power are:
- Leverage
- Proximate objectives
- Chain-link systems
- Design
- Focus
- Growth
- Advantage
- Dynamics
- Inertia
- Entropy.
The Kernel of Good Strategy
- Problem-solution: force yourself to tie your action to a diagnosis by framing strategic analysis in the form of problem-solution
- Create-Destroy: Force yourself to question prior judgments by actively trying to destroy your initial intuitions
- Commit to a judgment: Force yourself to decide what is most important and write it down.
Inertia and Energy: Routine
Airline deregulation: Even after deregulation ended, airlines used the same rules of thumb they’d used during the period of regulation
Assumptions like “we’ll always make 12% return on capital” may be baked into decision processes but no longer apply in the new environment.
Fix these by changing the perceptions of top management.
Sources of Strategic Leverage: Anticipation
Consider the habits, preferences, and policies of others together with inertias and constraints on change
Focus on the predictable downstream effects of changes that have taken place
Example: Toyota built hybrid engines because they foresaw that higher oil prices would create demand for greater fuel economy.
Sources of Strategic Leverage: Pivot Points
Pivot points magnify the effects of focused energy; a small adjustment can unleash pent up energy.
In Japan, customers want variety, so they have hundreds of food varieties that constantly change.
In China, customers want service, so their stores are spotless.
Focus
Focus is attacking a segment of the market with a system supplying more value to that part of the market than anyone else can.
To find a company’s focus, look at its distinctive policies and ask what all of those policies are aimed at.
Many large companies have no strategy and no focus.
Sources of Bad Strategy: Vision Templates
These are a company vision that inspires people to change and empowers people to accomplish that vision
All this inspiration isn’t the same as making choices to focus on the right objectives; therefore it shouldn’t be confused with strategy
Sources of Bad Strategy: New Thought
This is the idea that positive thoughts help you achieve outcomes.
Success doesn’t come from New Thought. Ford didn’t have a unique vision of building a car for the masses, nor was his vision particularly shared with the assembly line workers; what he had was the engineering skill to make it happen.