This is my summary of the book ‘Good Strategy / Bad Strategy: The Difference And Why It Matters’ by Richard Rumelt, quoting and paraphrasing the content.
The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.
A leader’s most important responsibility is identifying the biggest challenges to forward progress and devising a coherent approach to overcoming them.
A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.
The kernel of a strategy contains three elements:
The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis.
Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy.
The most basic idea of strategy is the application of strength against weakness.
Two huge, incredibly important natural sources of strength:
A good strategy has coherence, coordinating actions, policies, and resources so as to accomplish an important end.
Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests.
Looking at things from a different or fresh perspective can reveal new realms of advantage and opportunity as well as weakness and threat.
To detect a bad strategy, look for one or more of its four major hallmarks:
Bad strategy is the active avoidance of the hard work of crafting a good strategy.
One common reason for choosing avoidance is the pain or difficulty of choice. When leaders are unwilling or unable to make choices among competing values and parties, bad strategy is the consequence.
A second pathway to bad strategy is the siren song of template-style strategy – filling in the blanks with vision, mission, values, and strategies. This path offers a one-size-fits-all substitute for the hard work of analysis and coordinated action.
A third pathway to bad strategy is New Thought – the belief that all you need to succeed is a positive mental attitude.
The kernel of a strategy contains three elements:
A good strategy works by harnessing power and applying it where it will have the greatest effect.
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. I call this source of power leverage.
One of a leader’s most powerful tools is the creation of a good proximate objective – one that is close enough at hand to be feasible. A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm.
A system has a chain-link logic when its performance is limited by its weakest subunit, or “link”. When there is a weak link, a chain is not made stronger by strengthening the other links.
If you are in charge of one link of the chain, there is no point in investing resources in making your link better if other link managers are not.
The first logical problem in chain-link situations is to identify the bottlenecks, and Marco did that – quality, sales’ technical competence, and cost.
The second, and greatest, problem is that incremental change may not pay off and may even make things worse. That is why systems get stuck.
Marco’s solution to this problem was to take personal responsibility for the final result and direct others’ attention to the three bottlenecks, one after another. There were no immediate returns to the first campaign, but he did not stop nor did he operate a system that heaped blame on his department managers. Instead, he congratulated them for achieving the proximate goal of the first campaign and moved on to the second.
There are little or no payoffs to incremental improvements in chain-link systems, but Marco avoided this problem by shutting down the normal system of local measurement and reward, refocusing on change itself as the objective.
Turning around a chain-link system requires direct leadership and design. Conversely, the excellence achieved by a well-managed chain-link system is difficult to replicate.
Three aspects of strategy:
There are furious debates over the best balance, in a strategy, between prior guidance and on-the-spot adaptation and improvisation, but there is always some form of prior guidance. By definition, “winging it” is not a strategy.
A fundamental ingredient in a strategy is a judgment or anticipation concerning the thoughts and / or behavior of others.
Many effective strategies are more designs than decisions – are more constructed than chosen.
I am describing a strategy as a design rather than as a plan or as a choice because I want to emphasize the issue of mutual adjustment. In design problems, where various elements must be arranged, adjusted, and coordinated, there can be sharply peaked gains to getting combinations right and sharp costs to getting them wrong. A good strategy coordinates policies across activities to focus the competitive punch.
Most of the work in systems design is figuring out the interactions, or trade-offs, as they were called. The moment you tried to optimize any one part, that choice immediately posed problems for other parts.
Each part of the system has to be reconsidered and shaped to the needs of the rest of the system.
A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation.
Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions.
Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.
Success leads to laxity and bloat, and these lead to decline. Few organizations avoid this tragic arc. Yet it is this fairly predictable trajectory that opens the door to strategic upstarts.
To see effective design-type strategy, you must usually look away from the long-successful incumbent toward the company that effectively invades its market space. There you will find a tightly crafted and integrated set of actions and policies.
This particular pattern – attacking a segment of the market with a business system supplying more value to that segment than the other players can – is called focus.
Here, the word “focus” has two meanings:
The problem with diving into the growing PET industry was that growth in a commodity – such as cement or aluminum or PET containers – is an industry phenomenon, driven by an increase in overall demand. The growing demand pulls up profit, which, in turn, induces firms to invest in new capacity. But most of the profits of the growing competitors are an illusion because they are plowed back into new plant and equipment as the business grows. If high profits on these investments can be earned after growth slows, then all is well. But in a commodity industry, as soon as the growth in demand slows down, the profits vanish for firms without competitive advantages. Like some sort of economic black hole, the growing commodity industry absorbs more cash from the ordinary competitor than it ever disgorges.
The problem with engineering growth by acquisition is that when you buy a company, especially a public company, you usually pay too much. You pay a premium over its ordinary market value – usually about 25 percent – 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.
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.
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.
No one has an advantage at everything. Teams, organizations, and even nations have advantages in certain kinds of rivalry under particular conditions. The secret to using advantage is understanding this particularity. You must press where you have advantages and side-step situations in which you do not. You must exploit your rivals’ weaknesses and avoid leading with your own.
The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than can competitors, or if it can deliver more perceived value than can competitors, or a mix of the two, then you have a competitive advantage. Subtlety arrives when you realize that costs vary with product and application and that buyers differ in their locations, knowledge, tastes, and other characteristics. Thus, most advantages will extend only so far.
Defining “sustainability” is trickier. For an advantage to be sustained, your competitors must not be able to duplicate it. Or, more precisely, they must not be able to duplicate the resources underlying it. For that you must possess what I term an “isolating mechanism”, such as a patent giving its holder the legally enforceable right to monopolize the use of a technology for a time. More complex forms of isolating mechanisms include reputations, commercial and social relationships, network effects, dramatic economies of scale, and tacit knowledge and skill gained through experience.
A competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.
Increasing value requires a strategy for progress on at least one of four different fronts:
Start by defining advantage in terms of surplus – the gap between buyer value and cost. Deepening an advantage means widening this gap by either increasing value to buyers, reducing costs, or both.
Extending an existing competitive advantage brings it into new fields and new competitions.
Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead at the special skills and resources that underlie a competitive advantage.
A competitive advantage becomes more valuable when the number of buyers grows and / or when the quantity demanded by each buyer increases. Technically, it is the scarce resources underlying the advantage that increase in value.
Note that higher demand will increase long-term profits only if a business already possesses scarce resources that create a stable competitive advantage.
An isolating mechanism inhibits competitors from duplicating your product or the resources underlying your competitive advantage. If you can create new isolating mechanisms, or strengthen existing ones, you can increase the value of the business. This increased value will flow from lessened imitative competition and a consequent slower erosion of your resource values.
The most obvious approach to strengthening isolating mechanisms is working on stronger patents, brand-name protections, and copyrights. When a new product is developed, its protection may be strengthened by stretching an already powerful brand name to cover it. When an isolating mechanism is based on the collective know-how of groups, it may be strengthened by reducing turnover. When protections are unclear, legislation or courtroom verdicts may clarify and strengthen certain positions.
Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators. In a static setting, rivals will sooner or later figure out how to duplicate much of your proprietary know-how and other specialized resources. However, if you can continually improve, or simply alter, your methods and products, rivals will have a much harder time with imitation.
Along the same lines, continuing streams of innovations in methods and products are more difficult to imitate when they are, themselves, based on streams of proprietary knowledge. For example, a company that innovates by using scientific knowledge will have, in general, weaker isolating mechanisms than one that combines science with information fed back from lead customers or proprietary information gleaned from its own internal operations.
Much of academic strategy theory concerns more and more intricate explanations for why certain types of economic high ground are valuable. But such discussions sidestep an even more important question: how do you attain such an advantaged position in the first place? The problem is that, as valuable as such positions are, the costs of capturing them are even higher. And an easy-to-capture position will fall just as easily to the next attacker.
One way to find fresh undefended high ground is by creating it yourself through pure innovation.
The other way to grab the high ground – the way that is my focus here – is to exploit a wave of change. Such waves of change are largely exogenous – they are mostly beyond the control of any one organization. No one person or organization creates these changes. They are the net result of a myriad of shifts and advances in technology, cost, competition, politics, and buyer perceptions. Important waves of change are like an earthquake, creating new high ground and leveling what had been high ground. Such changes can upset the existing structures of competitive positions, erasing old advantages and enabling new ones. They can unleash forces that may strengthen or radically weaken existing leaders. They can enable wholly new strategies.
An exogenous wave of change is like the wind in a racing boat’s sails. It provides raw, sometimes turbulent, power. A leader’s job is to provide the insight, skill, and inventiveness that can harness that power to a purpose. You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground – become valuable and defensible – as the dynamics play out.
After a wave of change has passed, it is easy to mark its effects, but by then it is too late to take advantage of its surge or to escape its scour. Therefore, seek to perceive and deal with a wave of change in its early stages of development. The challenge is not forecasting but understanding the past and present. Out of the myriad shifts and adjustments that occur each year, some are clues to the presence of a substantial wave of change and, once assembled into a pattern, point to the fundamental forces at work. The evidence lies in plain sight, waiting for you to read its deeper meanings.
When change occurs, most people focus on the main effects – the spurts in growth of new types of products and the falling demand for others. You must dig beneath this surface reality to understand the forces underlying the main effect and develop a point of view about the second-order and derivative changes that have been set into motion.
The work of discerning whether there are important changes afoot involves getting into the gritty details. To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts. As changes begin to occur, the air will be full of comments about what is happening, but you must be able to dig beneath that surface and discover the fundamental forces at work. Leaders who stay “above the details” may do well in stable times, but riding a wave of change requires an intimate feel for its origins and dynamics.
Software’s advantage comes from the rapidity of the software development cycle – the process of moving from concept to prototype and the process of finding and correcting errors. If engineers never made mistakes, the costs of achieving a complex design in hardware and software might be comparable. But given that they do make mistakes, software became the much-preferred medium (unless the cutting-edge speed of pure hardware was required).
The simplest form of transition is triggered by substantial increases in fixed costs, especially product development costs. This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges.
Many major transitions are triggered by major changes in government policy, especially deregulation.
Regulated prices are almost always arranged to subsidize some buyers at the expense of others.
In seeing what is happening during a change it is helpful to understand that you will be surrounded by predictable biases in forecasting. For instance, people rarely predict that a business or economic trend will peak and then decline.
Another bias is that, faced with a wave of change, the standard forecast will be for a “battle of the titans”. This prediction, that the market leaders will duke it out for supremacy, undercutting the middle-sized and smaller firms, is sometimes correct but tends to be applied to almost all situations.
A third common bias is that, in a time of transition, the standard advice offered by consultants and other analysts will be to adopt the strategies of those competitors that are currently the largest, the most profitable, or showing the largest rates of stock price appreciation. Or, more simply, they predict that the future winners will be, or will look like, the current apparent winners.
This guidepost points to the importance of understanding the structure of incumbent responses to a wave of change. In general, we expect incumbent firms to resist a transition that threatens to undermine the complex skills and valuable positions they have accumulated over time.
In thinking about change I have found it very helpful to use the concept of an attractor state. An industry attractor state describes how the industry “should” work in the light of technological forces and the structure of demand. By saying “should”, I mean to emphasize an evolution in the direction of efficiency – meeting the needs and demands of buyers as efficiently as possible. Having a clear point of view about an industry’s attractor state helps one ride the wave of change with more grace.
An attractor state provides a sense of direction for the future evolution of an industry. There is no guarantee that this state will come to be, but it does represent a gravity-like pull. The critical distinction between an attractor state and many corporate “visions” is that the attractor state is based on overall efficiency rather than a single company’s desire to capture most of the pie. The “IP everywhere” vision was an attractor state because it was more efficient and eliminated the margins and inefficiencies attached to a mishmash of proprietary standards.
Two complements to attractor-state analysis are the identification of accelerants and impediments to movements toward an attractor state. One type of accelerant is what I call a demonstration effect – the impact of in-your-face evidence on buyer perceptions and behavior.
In business, inertia is an organization’s unwillingness or inability to adapt to changing circumstances. Even with change programs running at full throttle, it can take many years to alter a large company’s basic functioning.
Weakly managed organizations tend to become less organized and focused. Entropy makes it necessary for leaders to constantly work on maintaining an organization’s purpose, form, and methods even if there are no changes in strategy or competition.
Inertia and entropy have several important implications for strategy:
Organizational inertia generally falls into one of three categories:
The heartbeat of any sizable business is the rhythmic pulse of standard procedures for buying, processing, and marketing goods. Its more conscious actions are guided by less rhythmic but still well-marked paths. Even the breathless chase after an important new client, the sizing of a new facility, and the formulation of plans are familiar moves in a game that has been played before. An organization of some size and age rests on layer upon layer of impacted knowledge and experience, encapsulated in routines – the “way things are done”. These routines not only limit action to the familiar, they also filter and shape managers’ perceptions of issues. An organization’s standard routines and methods act to preserve old ways of categorizing and processing information.
Inertia due to obsolete or inappropriate routines can be fixed. The barriers are the perceptions of top management. If senior leaders become convinced that new routines are essential, change can be quick. The standard instruments are hiring managers from firms using better methods, acquiring a firm with superior methods, using consultants, or simply redesigning the firm’s routines. In any of these cases, it will probably be necessary to replace people who have invested many years developing and using the obsolete methods as well as to reorganize business units around new patterns of information flow.
We use the word “culture” to mark the elements of social behavior and meaning that are stable and strongly resist change.
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.
A lack of response is not always an indication of sticky routines or a frozen culture. A business may choose to not respond to change or attack because responding would undermine still-valuable streams of profit. Those streams of profit persist because of their customers’ inertia – a form of inertia by proxy.
Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams.
This effect may be magnified because the customers who switched away from the inert incumbent are, by self-selection, the most sensitive to a better offer.
On the other hand, if the attacker has been successful in building bonds of cost and loyalty with newly acquired customers, then the incumbent’s return to a competitive posture may fail to gain back its lost buyers.
One can sense a business firm that has not been carefully managed. Its product line grows less focused; prices are set low to please the sales department, and shipping schedules are too long, pleasing only the factory. Profits are taken home as bonuses to executives whose only accomplishment is outdoing the executive next door in internal competition over the bounty of luck and history.
This section of the book presents a number of ways of thinking about thinking that can help you create better strategies.
Good strategy is built on functional knowledge about what works, what doesn’t, and why.
A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment.
An anomaly is a fact that doesn’t fit received wisdom. To a certain kind of mind, an anomaly is an annoying blemish on the perfect skin of explanation. But to others, an anomaly marks an opportunity to learn something, perhaps something very valuable. In science, anomalies are the frontier, where the action is.
Making a list is a basic tool for overcoming our own cognitive limitations. The list itself counters forgetfulness. The act of making a list forces us to reflect on the relative urgency and importance of issues. And making a list of “things to do, now” rather than “things to worry about” forces us to resolve concerns into actions.
The kernel is a list reminding us that a good strategy has, at a minimum, three essential components: a diagnosis of the situation, the choice of an overall guiding policy, and the design of coherent action. The concept of the kernel defines the logic of a strategy – the bare-bones minimum. For a strategy to have any bite, it must chart a direction based on a diagnosis of the situation. Absent a diagnosis, one cannot judge one’s own choice of an overall guiding policy, much less someone else’s choice. A strategy must also translate the overall directive into coordinated action focused on key points of leverage in the situation.
People normally think of strategy in terms of action – a strategy is what an organization does. But strategy also embodies an approach to overcoming some difficulty. Identifying the difficulties and obstacles will give you a much clearer picture of the pattern of existing and possible strategies. Even more important, you will gain access to how changes in some factors may radically alter the mix of efficacious strategies. To gain this change in perspective, shift your attention from what is being done to why it is being done, from the directions chosen to the problems that these choices address.
A new alternative should flow from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives. The creation of new higher quality alternatives requires that one try hard to “destroy” any existing alternatives, exposing their fault lines and internal contradictions.
Good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose.