Renowned UCLA strategy professor Richard Rumelt argues that many business leaders have a misguided understanding of what truly constitutes great strategy. In his widely acclaimed book Good Strategy, Bad Strategy, Rumelt explores the reasons behind the prevalence of poor strategies in the business world and provides a clear framework for developing effective ones.
Why there is so much bad strategy
In Rumelt's view, leaders have been led astray by the rising popularity of the transformational leadership movement. The movement suggests that leaders can simply focus on developing a vision, inspiring the team, setting high level goals, and empowering the team to accomplish them. However, Rumelt believes that this model of leadership is missing one of the most critical responsibilities of the role: developing an effective strategy.
For Rumelt, a vision is not a strategy. While having a big picture overall direction is helpful, when you divorce it from the concrete steps to actually achieve it, you leave the organization rudderless and often unable to realize any part of that vision. Similarly, goals are not strategy. They are nothing more than aspirations if they aren't attached with a concrete achievable plan for accomplishing them.
When leaders do attempt to put together an actual strategy, they often fail to make the hard choices required to pursue an effective strategy. Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others. When this hard work is not done, weak amorphous strategy is the result. The enemy of an effective strategy is therefore consensus-driven cultures and a focus on achieving universal buy-in. Instead leaders should create a culture of intellectual rigor and debate, enabling colleagues to robustly make their case on what should be the chosen few areas of focus. Decision making culture isn't the only reason making choices is so hard. There is difficult psychological, political, and organization work in saying "no" to whole worlds of hopes, dreams, and aspirations. For these reasons the strategies that often come out of organizations are just a laundry list of priorities without any clear focus.
Take, for example, the story of Digital Equipment Corporation (DEC), an early leader in the minicomputer revolution. In 1992, the company was rapidly losing ground to the newer 32-bit personal computers and there were serious doubts that the company could survive without dramatic changes. In order to address the challenge, the executive team came up with three possible directions for the company: 1) continuing it's focus on developing computers, 2) transitioning to a focus on developing chips, or 3) leveraging their existing customer relationships to move into selling solutions. The CEO, Ken Olsen, mistakenly asked the leadership team to reach a consensus on the new direction to go in. But the leadership team couldn't come to any agreement on what direction to head. They instead came up with a compromise statement: "DEC is committed to providing high-quality products and services and being a leader in data processing." This fluffy, amorphous statement was, of course, not a strategy. It was a political outcome reached by individuals who, forced to reach a consensus, could not agree on which interests and concepts to forgo. Ultimately Ken Olsen was replaced given his ineffectiveness in leading DEC out of its current crisis.
What great strategy entails
A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.
Rumelt's prescription to this challenge is for every leader to take the job of strategy seriously. He encourages them to develop a strategy using the framework he calls the kernel. Rumelt believes that every great strategy should have these three critical components:
A diagnosis - explains the nature of the most pressing challenge the organization is facing
A guiding policy - specifies the approach to dealing with the obstacles called out in the diagnosis
Coherent actions - feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy Many people would define a strategy as just the guiding policy, which covers the "what". But the diagnosis tells you the "why", which then enables you to debate whether the guiding policy you have picked is likely going to be the most effective one for solving the diagnosis. Equally important are the coherent actions, which represent the "how" of the strategy. Without specific actions, its unclear whether the guiding policy can be implemented effectively.
What's makes defining a diagnosis hard is that there are invariably a whole host of challenges an organization is concurrently facing. The task for the strategist then becomes translating that complexity to a simpler story that calls attention to the most crucial of the challenges the business is facing. A diagnosis need not explain all of the challenges, but simply articulate the challenge that if solved, would have the largest potential impact on the business. In this way there isn't one right diagnosis, but a judgment that must be made to arrive at it.
The guiding policy provides a focused solution to the diagnosis. It's job is not only to point the organization in the direction of the solution, but also serves to call out everything that you are not going to do to attempt to address the diagnosis. In this way, it provides much needed focus.
Coherent actions bring the guiding policy to life through clearly articulating actions that will be taken to address the diagnosis. These actions should be coherent - that is, the resource deployments, policies, and maneuvers that are undertaken should be consistent and coordinated, amplifying the effect of each action taken.
Take, for example, the story of 7-Eleven in Japan in 2008. The company diagnosed their top challenge to be that the global model they were using in North American stores and elsewhere wasn't working in the Japanese market and they needed to rethink their approach to solve for local market needs. After studying the market carefully, they realized that in Japan, consumers are easily bored and are fond of both newness and variety in products. So they developed a guiding policy of offering broad product selection as well as rapidly releasing new products. To make this a reality, they developed several coherent actions. First, they put together a method of collecting information from store managers and employees about local tastes and forming quick-response merchandising teams to develop new product offerings. They then also developed relationships with a number of second and third-tier food manufacturers and found ways to quickly bring new offerings to market under its own private-label brand at low prices using the food manufacturers' excess capacity. The carefully constructed diagnosis, guiding policy, and coherent actions were a strategic success and ultimately turned around 7-Eleven sales in Japan.
Sources of power
Rumelt also believes that a great guiding policy draws upon some source of power. Just as a lever uses mechanical advantage to multiply force, strategic advantage multiplies the effectiveness of resources and/or actions. There are many potential sources of power that can be taken advantage of:
Leverage - focusing minds, energy, and action at the right moment onto a pivotal objective
Proximate objectives - simplifying the complexity of a problem into a single objective an organization can solve
Chain-link systems - identifying the bottleneck in your organization and directing attention to it
Design - leveraging design thinking to construct superior solutions
Market focus - attacking a segment of the market and creating more value for that segment than other players can
Growth - growing demand for special capabilities or of expanded or extended capabilities
Competitive advantage - producing at a lower cost or delivering more value than competitors can
Market dynamics - identifying and exploiting a wave of change happening in the market
Rival inertia - taking advantage of a rival's unwillingness or inability to adapt to changing circumstances The art of strategy is finding which source of power can be leveraged by your organization in your specific market to address your organization's top challenge.
Building your strategic muscle
Rumelt believes that deep knowledge is necessary but not sufficient for being a great strategist. He offers a few concrete approaches to developing these strategy skills.
The best strategies come from proprietary insights, not generally available knowledge. So it becomes critical to continually expose yourself to proprietary information from which those insights can manifest. Whether it is insight into industry structures and trends, insights into emerging customer needs, anticipating the actions and reactions of competitors, or insight into your own competencies and resources, it becomes critical to immerse yourself in the flow of such information to be able to glean such insights.
Rumelt also suggests getting into the practice of pre-committing to a position, recording that judgment, and then running a post-mortem to help you learn whether your judgment was right. Only when we treat strategy as a set of hypotheses, experiments, and test results, can we expect to learn and improve our own strategic thinking.
Finally, Rumelt believes that good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose. Bad strategy follows the crowd, substituting popular slogans for insights. Therefore being independent without being eccentric and doubting without being a curmudgeon are some of the most important, though difficult, traits to cultivate.
Next time you are contemplating a product's strategy, replace the laundry list of priorities with a diagnosis, a guiding policy with a source of power, and a list of coherent actions. In doing so, you'll end up with a far more focused, actionable, and effective strategy to pursue.
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Hi Sachin, I took your Finding PMF course at Reforge a while back and got a ton out of it. I’ve been revisiting Good Strategy / Bad Strategy and love its emphasis on diagnosis over vision/mission boilerplate.
One thing I’m grappling with is that the strategy examples in the book are all established companies that already have PMF. For a pre-PMF startup, the biggest problem is often finding the right problem to solve. How do you see the strategy kernel applying there? Is the diagnosis basically the riskiest assumption, or does the framework only really apply post-PMF?