‘Good Strategy Bad Summary’ by Richard Rumelt - Book Summary

This is my summary of ‘Good Strategy Bad Strategy’ by Richard Rumelt. My notes are informal and tailored to my own interests at the time of reading. They mostly contain quotes from the book as well as some of my own thoughts. I enjoyed this book and would recommend you read it yourself (check it out on Amazon).

What makes a good strategy?

• Simple. Good strategy almost always looks simple. A talented leader identifies the one or two critical issues in the situation - the pivot points that can multiply the effectiveness of effort - and then focuses and concentrates action and resources on them.

• Actionable. A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them. And the greater the challenge, the more a good strategy focuses and coordinates efforts to achieve a powerful competitive punch or problem-solving effect.

• A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. As results appear, good leaders learn more about what does and doesn’t work and adjust their strategies accordingly.

• 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.

• A good strategy has coherence, coordinating actions, policies, and resources so as to accomplish an important end:

  • Coherent actions. They are not “implementation” details, they are the punch in the strategy.

• Example of good strategy:

  • Lord Nelson’s challenge was that he was outnumbered. His strategy was to risk his ships in order to break the coherence of his enemy’s fleet. With coherence lost, he judged, the more experienced English captains would come out on top of the ensuing melee.

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What does NOT make a good strategy

• Mistaking goals for strategy. Despite the roar of voices wanting to equate strategy with ambition, leadership, “vision”, planning, or the economic logic of competition, strategy is none of these. Many bad strategies are just statements of desire rather than plans for overcoming obstacles. When the “strategy” process is basically a game of setting performance goals - so much market share and so much profit, so many students graduating high school - then there remains a yawning gap between these ambitions and action. Strategy is about how an organization will move forward.

• Fluff. Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses inflated and unnecessarily abstruse words and esoteric concepts to create the illusion of high-level thinking. It’s superficial restatement of the obvious combines with a generous sprinkle of buzzwords.

  • Example: Our fundamental strategy is one of customer-centric intermediation. (retail bank)

• 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. If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.

• 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. A long list of “things to do”, often mislabeled as “strategies” or “objectives”, is not a strategy. It’s just a list of things to do.

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The choices you need to make: elements of strategy

• Diagnosis - answers the "why"

  • Defines or explains the nature of the challenge. At a bare minimum, a diagnosis names or classifies the situation, linking facts into patterns and suggesting that more attention be paid to some issues and less to others. A good deal of strategy work is trying to figure out what is going on.

  • The diagnosis for the situation should replace the overwhelming complexity of reality with a simpler story, a story that calls attention to its crucial aspects. This simplified model of reality allows one to make sense of the situation and engage in further problem-solving.

  • A diagnosis is generally denoted by metaphor, analogy, or reference to a diagnosis or framework that has already gained acceptance.

  • Diagnose the specific structure of the challenge rather than simply naming performance goals.

  • In business, most deep strategic changes are brought about by a change in diagnosis - a change in the definition of the company’s situation.

• Guiding policy - answers the "what"

  • Specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a sign post, marking the direction forward but not defining the details of the trip.

  • Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions. “Maximize profit” is not a helpful prescription, because the challenge of making, or maximizing, profit is an ill-structured problem.

  • A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage. Just as a lever uses mechanical advantage to multiply force, strategic advantage multiplies the effectiveness of resources and/or actions.

  • How to create advantage (using leverage):

    • Anticipate the actions and reactions of others

    • Reduce the complexity and ambiguity in the situation

    • Exploit the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation

    • Create policies and actions that are coherent, each building on each other rather than cancelling each other out.

• Coherent action - answers the "how"

  • Feasible policies, resource commitments, and actions designed to carry out the guiding policy. Should be consistent and coordinated. Strategy is about action, about doing something.

  • In many situations, the main impediment to action is the forlorn hope that certain painful choices or actions can be avoided - that the whole long list of hoped-for “priorities” can all be achieved. It is the hard craft of strategy to decide which priority shall take precedence.

  • Coordination by itself can be a source of advantage. It is often underappreciated. Strategic coordination, or coherence, is imposed on a system by policy and design.

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How to think of your existing resources and advantages

• Existing resources can be the lever for the creation of new resources but they can also be an impediment to innovation. Well-led firms must from time to time cast aside old resources, just as they retire obsolete machinery. Yet strategic resources are embedded deeply within the human fabric of the enterprise, and most firms find this a difficult manoeuvre.

• Example: Xerox. They build a world-class fast-response repair and maintenance service to take care of its installed base of copying machines. Thus, its initial resource - the patent on plain-paper copying - was used to create a new strategic resource. But the service system’s value lay in keeping the base of failure-prone leased machines running. And its complement was a profitable business in “special” Xerox-branded plain paper, which jammed the copiers less frequently. The next step should have been to build a world-class paper-handling capability. That would have opened the door to an early position in personal copiers, printers, fax machines, and so on. But it would also have reduced the immediate value of the Xerox service-system resource. Resting on its laurels, Xerox let Canon, Kodak and IBM develop superior paper handling technology, while it struck off on the futile search for a way to enter the computer business with a resource base specialized around maintaining failure-prone mechanical devices.

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Sources of power in strategy

• In very general terms, a good strategy works by harnessing power and applying it where it will have the greatest effect. You need to find and use sources of power.

• Sources of power according to Rumelt:

  • Leverage

  • Proximate objectives

  • Chain-link systems (bottlenecks)

  • Designs

  • Focus

  • Growth through acquisitions

  • Competitive advantage

  • Dynamics

  • Inertia

  • Entropy

• Leverage:

  • Leverage means focusing minds, energy, and action. That focus, channeled at the right moment onto a pivotal objective, can produce a cascade of favorable outcomes. Leverage is a type of advantage that is context free, not being rooted in the particular mechanisms of a business, industry, or situation.

  • Leverage arises from a mixture of:

    • Anticipation. The strategist may have insight into predictable aspects of others’ behavior that can be turned to advantage. In competitive strategy, they key anticipations are often of buyer demand and competitive reactions. Anticipation does not require psychic powers. In many circumstances, it simply means considering the habits, preferences, and policies of others, as well as various inertias and constraints on change. Examples:

      • A strategy of investing in Manhattan real estate is based on the anticipation that other people’s future demand for this real estate will raise its value.

      • While the SUV craze was booming in the US, Toyota invested more than $1bn in developing hybrid gasoline-electric technologies. There were two anticipations guiding this investment. First, management believed that fuel economy pressures would, over time, make hybrid vehicles a major product category. Second, management believed that, once presented with the chance to license Toyota’s technology, other automakers would do so and not invest in developing possibly superior systems.

      • It is now clear that US military plans for the invasion of Iraq in the spring of 2003 failed to anticipate the rise of a vigorous insurgency.

    • Pivot points: insight into what is most pivotal or critical in a situation

    • Concentration: making a concentrated application of effort. Returns to concentration arise when focusing efforts on fewer, or more limited, objectives generates larger payoffs. Business strategists will often prefer to dominate a small market segment over having an equal number of customers who represent only a sliver of a larger market. The strategist can increase the perceived effectiveness of action by focusing effort on targets that will catch attention and sway opinion. People’s perception of efficacy affect their willingness to support and take part in further actions. Examples:

      • It may have more impact on public opinion to completely turn around two schools than to make a 2% improvement in two hundred school.

• Proximate objectives:

  • 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. It names a target that the organization can reasonably be expected to hit, even overwhelm.

  • 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.

  • The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be.

• Chain-link systems (bottlenecks):

  • 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.

  • Examples:

    • Real estate. In assessing a property’s potential, one should identify the limiting factors. If a house is near a noisy highway, that is a limiting factor. No matter how much marble is put in the bathrooms or how fine the cabinetry is in the kitchen, the noise will limit the house’s value. As an investor, one wants to find limiting factors that can be fixed, such as paint, rather than factors that cannot be fixed, such as highway noise.

• Design:

  • It is often said that a strategy is a choice or a decision. The words “choice” and “decision” evoke an image of someone considering a list of alternatives and then selecting one of them. There is, in fact, a formal theory of decisions that specifies exactly how to make a choice by identifying alternative actions, valuing outcomes, and appraising probabilities of events. The problem with this view, and the reason it barely lightens a leader’s burden, is that you are rarely handed a clear set of alternatives.

  • Many effective strategies are more designs than decisions - are more constructured than chosen. In these cases, doing strategy is more like designing a high-performance aircraft than deciding which forklift truck to buy or how large to build a new factory.

  • I am describing 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.

  • Tight integration comes at some cost. One does not always seek the very highest level of integration in a design for a machine or a business. A more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change (e.g. F1 car vs. Subaru Forrester). With less challenge, it is normally better to have a bit less specialization and integration so that a broader market can be addressed.

  • Example: Systems engineering at the jet propulsion lab at NASA. Performance is the joint outcome of capability and clever design. In particular, given existing capabilities, such as rocket throw weight or power supply efficiency, to get more performance out of a system you have to integrate its components and subsystems more cleverly and more tightly. On the other hand, if capabilities (technologies) could be improved, the demand for tight, clever integration, was lessened. That is, more powerful booster rockets or lighter components would let us meet the weight constraint with less work on tight integration. This trade-off way of thinking about design, has, for me, become central to my view of strategy.

• Competitive advantage:

  • 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 where you do not.

  • You have a competitive advantage 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.

  • Subtlety arrives when you realize that costs vary with product and application and that buyers differ in their location, knowledge, tastes, and other characteristics. Thus, most advantages will only extend so far. Example: Whole Foods has an advantage of Albertsons supermarkets 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. More precisely, they must not be able to duplicate the resources underlying it. You must posses an isolating mechanism, such as:

    • Patents

    • Reputation

    • Commercial and social relationships

    • Network effects

    • Dramatic economies of scale

    • Tacit knowledge and skills 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.

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