Good strategy is problem solving tha identifies the major obstacle, creates a guiding policy and coordinates action and resources to succeed.
Author: [Richard Rumelt]
Introduction
Good leaders find critical points that can leverage the effectiveness of efforts and concentrate resources on them. The core of strategic work is discovering critical factors in a situation and designing a way to coordinate actions to deal with those factors.
A good strategy identifies the greatest challenges and includes a set of coherent actions to overcome them.
Strategy is usually used a synonym of ambition, success or innovation.
Logical structure of strategy (the kernel):
- Diagnosis: Identifies obstacles
- Guiding policy: Approach to deal with obstacles
- Coherent action: Coordinated policies, resource commitments, and actions to carry out the guiding policy.
Good strategy is not goal setting, but problem solving.
Good strategy involves applying strengths (resources) to obtain advantages in the most promising opportunities. Natural sources of strength:
- Coherent strategy: creates strength through the coherence of is design, the coordination of policies and actions.
- Subtle shifts of viewpoint. A reframing of competitive situation can create advantage and weaknesses.
Part I Good and bad strategy
1. Good strategy is unexpected
Most companies don’t have good strategy so having one is a source of natural advantage. The don’t expect you to have a coherent strategy that involves resources, coordinated actions, policies and resources to overcome an important obstacle.
Apple
Two months away from bankruptcy, Jobs rejoined Apple. He cut Apple to the core, from 15 Desktop models to 1, killed printers and peripherals, emulated Dells supply chain in Asia and brought operating system from Next.
His next strategy was to wait for the next big thing (window of opportunity). This is not a recipe for success
Desert storm
Left hook maneuver to attack Irak. It was military strategy 101, butgood strategy is unexpected.
Coordinating and focusing resources is important instead of dedicating them to unconnected targets
2. Discovering power
Viewing things from fresh perspective uncovers strengths advantages threats and weaknesses.
David and Goliath story shows that apparent weaknesses and apparent strength can be overcome.
Walmart
Case study that helps uncover hidden power in situations. Conventional wisdom said that “A full line discount store nerds a population vase of at least 100k”.
In a strategy exercise you should consider the competition even when it is not at the core of the exercise.
In this case the tipping point is that the operating unit is not the store but a network of stores.
Cold war strategy
Us advantage was technology but the strategy was to to engage in developments that imposed exorbitant costs in USSR, by focusing in areas that were expensive to counter.
Use your relative advantages to impose out of proportion costs on the opposition and complicate his problem of competing with you
This is the discovery of the Hidden power in the situation.
Bad strategy
It is not the absence of good strategy it is the result of dysfunctional leadership and specific misconceptions
- Fluff: inflated words to create the illusion of high level thinking
- Failure to face the challenge fails to recognise the challenge
- Mistaking goals for strategy. Statements of desire instead of plans to face the obstacles
- bad strategic objectives: when fail to address critical issues or impracticable
bad strategy is long on goals and short on policy and action
Fluff
Buzzwords combined with superficial and obvious statements.
Failure to face the problem
A strategy must define a challenge problem or obstacle and state a response or approach to overcome it.
Mistaking goals for strategy
Find the most promising opportunities for the business looking at who your buyers are, who you compete with and what opportunities exist. Then build a strategy that channels your energy to one or two of the most attractive opportunities.
Performance goals or rolling budgets are not strategies
bad strategic objectives
A general manager or CEO decides the general strategic objectives and subgoals for each part of the organisation.
A leader uses strategy to bridge the path between overall goals and actionable specific objectives.
A long list of objectives is not a strategy. A good strategy focuses energy and resources on very few pivotal objectives.
Another form of bad strategic objectives is to pursue unattainable objectives no one knows how to tackle with current resources and skills.
When a leader characterizes the challenge as underperformance, it set the stage for bad strategy. Underperformance is a result. The true challenges are the reasons of underperformance.
Why so much bad strategy?
Bad strategy is the result of:
- Unwillingness to choose: avoidance of taking decisions facing opportunity costs. Strategy requires focus and setting aside some goals. Universal buy-in might indicate the absence of choice. In organisations the older the inertia the larger resistance to change. See Arrow decision theory and Condorcet’s paradox
- Template style strategy. Max Weber’s charismatic Vs formal leaders. Peter Drucker did not agree on the need of charisma to be an effective leader. Charismatic, transformational leadership has led to Template style strategic planning which usually involves things like vision, mission, values. This frees people to think on the true challenges they are trying to csolve.
- Positive thinking displaces critical thinking and good strategy
The kernel of good strategy
Elements
- Diagnosis: Describes the challenge. Answers the question “What is it going on here?“. So diagnosis is a judgement of facts, a simplified model that allows us to tackle complexity and advance in problem solving. This model focuses in factor that can be addressed with policy. **It is the why.
- Guiding policy: Overall approach to face the challenge. Provides direction without explicitly defining what to do. Many people call strategy to guiding policy, but stating a diagnosis you can find alternative guiding policies. A good guiding policy tackles the challenge in the diagnosis by leveraging sources of advantage. It can be in itself an advantage, for instance by reducing the uncertainty of what to do, how to compete how to organise. It also helps focusing resources on specific set of challenge. **It is the what.
- A set of coherent actions that carry out the guiding policy in a coordinated way. Strategy must decide priorities, and a great way to sharpen strategy is the necessity to act. We always hope that with a great design we can accomplish several conflicting objectives but the truth is that we need strategy to choose what to do and what to abandon. The coordination and coherence of action acts as a prominent source of advantage. Coherence imposed by a system by design, not adhoc, the kind of unnatural coordination that would not exists if it weren’t without strategy. Centralization has many caveats (coordination interrupts and de specialized people, among others) but some benefits only appear if decisions are properly coordinated. **It is the how.
Part II Sources of power
Using leverage
Concentrate force, focus, energy and minds in pivotal objectives.
- Anticipation of market demand and competitors behaviour and reactions.
- Pivotal objectives magnify the effects of focused energy and resources.
- Concentration means that sometime focusing on a limited number of objectives you reach a threshold level (a critical level of effort necessary to affect the system). It is also wise to increase perceived effectiveness by concentrating on targets that catch attention.
Proximate objectives
Create feasible objectives with the skills and resources at hand. Sending man to the moon Vs the war on drugs.
- Solving ambiguity. Proximate objectives does wonders to organizational energy and focus. Challenges usually appear impossible because of complexity and uncertainty. A good leader can pass the organisation a simpler and solvable problem.
- Taking a strong position and creating options. The more dynamic the situation the poorer your forecast. In uncertain scenarios make moves that improve your position and create opportunity.
- Hierarchies of objectives. Your goal when you know how to crawl, must be to learn to walk. Once you learn to walk you can aim at running.
Chain-link systems
Chain link systems are those limited by its weakest link. Once there exists a weak link ain’t no point in strengthening the rest of the system.
- Getting stuck. Higher quality in a link that is not matched with higher quality in other links may cause worse results.
- Getting unstuck. Quality matching in chain link systems requires working without inmediate returns.
- Excellence. A well designed chain linked system is really difficult to replicate. For instance many IKEA policies are different from the norm (traditional furniture retailers does no carry large inventories, normal retailers don’t do own designs or use catalogs instead of sales people) and work coherently in a chain like logic.
Using design
We can learn from military strategy the importance of design:
- Premeditation. Prior guidance with design and planning in advance.
- Anticipation. Of the thoughts and behaviours by others.
- Design of coordinated action. Choreography of a designed plan. Strategists are designers working to solve a problem not decision makers that choose among different options that are presented to them.
Design must find sweet spots which must balance with coordination among activities to make the whole strategy effective. Each part of the system must be reconsidered to the needs of the rest of the system. This means that design has to optimise performance while keeping in mind tradeoffs between capabilities and tight integration. The greater the challenge the greater need of resources or the greater the need for coherent, integrated, design-type strategy. Resources and integration are partial substitutes of each other. Integration costs are related to the difficulty to create tight integrations, narrower focus, more fragile and less responsiveness to change..
Potent resource position can eventually lead to produce profit without great effort.
Easy life breed laxity: success leads to laxity that leads to decline
Current profit is usually thought to be the result of current actions but it may be the harvest of planting seasons long past.
The challenger usually faces the incumbent by leveraging a tight design -type strategy.
Most incumbent will loosen their tight integration and begin to rely more on accumulated resources and less on clever design. They will lose the discipline of tight integration, allowing independent fiefdoms to flourish and adding so many products and projects that integration becomes impossible. Faced with the natural slowing of growth over time, they will try to create the appearance of youthful vigor with bolt-on acquisitions. Then, when their resource base eventually becomes obsolete, they, too, will become prey to another generation of upstarts. It is the cycle of life.
Focus
In order to identify a company’s strategy byou have to do your own analysis you cannot fully buy what HBR is telling.
To begin you usually start by examining the competitive environment.
Then look at each policy of the company and notice those that are different from the norm in the industry. We then try to distinguish the target they are trying to accomplish.
Focus is the coordination of policies that produces extra power by interacting and overlapping effects. It denotes the application of that extra power to the right target.
Real world has an inner logic that is no secret but usually is under the radar. To spot the real strategy you must work hard analysing qualitative information. Truth is that not all companies have a strategy. Strategy requires focus and many large companies pursue multiple goals at once without taking the max out of them.
Growth
Growth by acquisition to ramp up KPIs without thoughtful strategy eventually leads to worse performance. Moreover when you buy a company, specially a public one you pay way too much.
Healthy growth it is the outcome of growing demand for special capabilities. It is the outcome of better products and services. The correct innovation processes usually leads to higher market share and a superior rate of profit.
Using advantage
Advantage results from asymmetries from competition. No company or organisation can have advantages at everything. You must exploit where you have advantages and avoid situations you are weak.
You might be great at running 1500 meters, and you can do a good job running 10k, but probably you cannot wrestle a gorilla.
Porter’s competitive advantage is either lower costs than your competitors, or greater perceived value for your customers or a combination of the two.
Sustainable competitive advantage requires that competitors cannot duplicate it. Isolating mechanisms are patents, reputation, network effects, huge economies of scale…
Competitive advantage is interesting when it can be updated, engineered and improved.
Wealth increases when competitive advantage increases and for that you need:
- Deepening advantages. This could be achieved by cutting costs via improving processes a la Taylor or by increasing value by improving products via product development.
- Broadening the extent of advantages by applying them to new markets. Extending a competitive advantage requires building on your strengths. Extensions based on proprietary know how might even enhance knowledge. Extensions based on brand reputation are risky because they can damage the core. For instance, pirates of Caribbean extend Disney brand to adventure movies.
- Creating higher demand for advantaged products or services. That higher demand might be because we add more users or because each buyer demands more. The process of engineering higher demand
- Block easy replication by competitors. The value of your business can be increased by reducing the risk of imitative competition. Patents, copyrights and brand recognition are entry barriers. Also creating a moving target, a product that is constantly evolving (not saying improving, just moving) makes it more difficult to be imitated.
Using dynamics
Dramatical technical inventions and business model innovations create competitive advantages.
Another way is to exploit exogenous changes such as technology shifts, competition, politics and buyer perceptions. These changes might erode old advantages weakening existing leaders or enabling new ones.
The role of a leader is to ride waves of change and ensure the resources and innovation are channeled toward positions that will become advantages.
The importance is not in forecasting but in understanding past and present and to be able to take advantage of a wave of change. For instance, the basis of success lately is related to software written by small teams.
In order to really challenge the experts you need to deep dive into the details and understand the fundamentals.
In order to ride the waves of change you do not need to understand them completely right, just to do it better than your competitors.
Ways to understand industry transitions:
- Rising fixed costs: Growing fixed costs forces the industry to consolidate.
- Deregulation: Changes in the rules that govern a market cause heavy modifications in the competitive landscape. Deregulated players and former monopolists are myopic of their actual costs so they might chase for years unprofitable market segments once the subsidies are gone.
- Predictable biases: People usually do not see that surges in demand peak and the decline to normal levels.
- Incumbent response: incumbents resist change and transition.
- Attractor states: Potential efficient equilibrium that might be reach by the market.
Inertia and entropy
Inertia is the inability to adapt to changing circumstances. Understanding the inertia of rival can create windows of opportunity to win a market.
- Inertia of routine. Standard routines define how an organisation process information and deal with change. You can overcome obsolete routines by hiring managers with better methods, or redesigning processes.a
- Cultural inertia. Simplification helps breaking organizational culture inertia.
- Inertia by proxy. Inertia created by old streams of profit when customers are too slow to replace products despite relative price or quality differences.
Entropy affects weekly managed organizations that tends to become less organised and focused.
Organizational renewal helps reducing risks associated to inertia and entropy.
The science of strategy
A new strategy is a hypothesis and it’s implementation, an experiment.
Functional knowledge is created by experimenting with different strategies.