Masterstroke or Misstep: The Dichotomy of Strategy
"Strategy is scarcity's child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others."
In this article, I summarize the wisdom and practical knowledge Richard Rumelt has accumulated throughout his extensive experience in the realm of strategy. His book, Good Strategy / Bad Strategy, pivots around "the kernel of good strategy", to which Rumelt dedicates the rest of the substance.
In this edition:
What I Think You Need To Know: "Things become known through their opposites," goes the Arab proverb. Knowing what makes strategies bad will often allude to what makes them good.
This Should Make You Smarter: On zero-based thinking and the law of holes, and how they relate to strategy making.
Through The Systems Thinker’s Lens: How systems thinking can help with strategic leverage.
What I Think You Need To Know
Rumelt, whose doctoral thesis at Harvard Business was published as a book in 1974, probed the Configuration School, in the sense of Mintzberg's classification. The key thesis of that school of strategy thinking is related to how resources and capabilities of an organization are mobilized in existing or new configuration (such as lines of businesses, etc.). It is this mobilization in response to identified challenges that warrants the development of an action plan (without implementation details) that led Rumelt to develop his kernel of good strategy, the indivisible whole that is "the bare-bones center of strategy" (p. 79):
Often leaders confuse strategy with policy, and this is why we observe half-baked strategic approaches at challenges. This is obviously flawed because the diagnostic knowledge would be missing. "Good strategy is not just 'what' you are trying to do. I tis also 'why' and 'how' you are doing it," argues Rumelt (p. 85).
A good strategy is not buzzwords or fluff, as we observe in many modern strategic documents, from which we gather that "strategy has become a verbal tic" (p. 5). A good strategy is one that accounts for the problems and challenges being faced and provides a way forward by leveraging resources and investing effort to tackle those challenges. The kernel requires that such way forward include inter-coordinated, coherent actions that implement the guiding policy in response to the identified pivotal challenges during the diagnostic efforts. The key is not to lose coordination between your resources.
"Strategy is scarcity's child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others. There is difficult psychological, political, and organizational work in saying 'no' to whole worlds of hopes, dreams, and aspirations" (p. 62).
Perhaps to understand what qualifies strategies as good, we should examine the key features of bad strategies. Rumelt lists "four hallmarks" of bad strategies (p. 32), the presence of at least one of which can help raise an alarm:
Fluff, or the illusion of high-level thinking. We see this often in vision and mission statements, which are then not backed by substance (i.e., policy and coherent actions)
Failure to define and explain the pivotal challenges (i.e., lack of serious diagnostics). A good strategy responds to one or two pivotal challenges. Resorting to prescriptive approaches, such as templated strategy-making or simply SWOT analyses, is "out of fashion" (p. 43), and provides an inkling to the modern "template-style, fill-in-the-blanks strategic planning approaches as typical recipes for bad strategies.
Confusing strategy with goals. Often, bad strategies list goals and sub-goals in painstaking details without any explanatory power. "Bad strategy is long on goals and short on policy or action" (p. 36).
Failing to address strategic issues and focusing instead on low-hanging, low-impact fruit
Besides attempting to use templates or "New Thought" in responding to challenges, what leads to bad strategies is often the inability or stagnation in making a practical choice. This is often the result of power gaps, where a diversity in agendas and values as well as highly interdependent resources make it difficult to move forward. This leads some organizations to come up with sophisticated choice schemes that may miss the point of strategy making altogether.
It is important to make a choice to move forward with substance. Distilling the output of the diagnostic endeavor is often a great way to foster consensus because "without diagnosis, one cannot evaluate alternative guiding policies. Without working through at least the first round of action, one cannot be sure that the guiding policy can be implemented. Good strategy is not just 'what' your are trying to do. It is also 'why' and 'how' you are doing it" (p. 85).
It seems to me here that Rumelt alludes to the power of capability-based planning because the guiding policy tackles challenges by establishing and drawing upon sources of advantage. "The coordination of actions provides the most basic source of leverage or advantage available in strategy" (p. 91). Like capability-based planning, good strategy must outline consistent and coordinated actions to be taken in response to the challenge. "Performance is the joint outcome of capability and clever design ... making a design-type strategy an adroit configuration of resources and actions that yields an advantage in a challenging situation" (pp. 133-4). However, the stronger your resource position, the lesser the need to come up with intricate designs for strategic advantage, as intelligently-done capability-based planning also has it.
In addition to sources of advantage, Rumelt lists the following sources of power good strategy harnesses:
Leverage: Focusing your effort and intellect in high-leverage intervention points -- context-free as they are -- "is the secret of strategic leverage" (p. 97).
Proximate Objectives: "A proximate objective names a target that the organization can be reasonably expected to hit, even overwhelm" (p. 106). These are the kinds of objectives the strategist should pursue, especially in volatile, dynamic situations with higher unpredictability. And, as if my magic, they cascade hierarchically in an organization.
Chain-Link Systems: This is the weakest-link problem applied to various components of an organization (business units, capabilities, resources, etc.). These components are chain-linked. Any ecosystem is chain-linked, in the sense of system dynamics, thus those must be considered in any strategy-making effort.
Design: In a level of abstraction for strategy formulation, there are three ingredients: "premeditation, anticipation of others' behavior", and the purposeful design of coordination actions" (p. 121). Thus, you need a balance between formulation and adaptation on the go -- the strategy will also emerge, as Mintzberg has argued.
Focus: We can identify a company's strategy "by looking at each policy of the company and noticing those that are different from the norm in the industry" (p. 145). Given that distinguishing factor, we can infer what they are trying to accomplish by examining what their policies are trying to target under a focus, which "has two meanings. First, it denotes the coordination of policies that produces extra power through their interacting and overlapping effects. Second, it denotes the application of that power to the right target" (p. 150).
Growth: Strategic growth doesn't happen because of, say, simple inorganic arithmetic additions of two cash flows resulting from the merger of two companies. The real growth power lies in the strategic capabilities a company has as a result of "superior products and skills. It is the reward of successful innovation, cleverness, efficiency, and creativity" (p. 159).
Advantage: Leverage wherever you have an advantage, "which is rooted in differences among rivals," but dodge where you don't (p. 160). To increase value, deepen your advantages and retain whatever makes you unique to sustain value-creating advantages.
Dynamics: Developments beyond your control may provide you with an advantaged position, provided that you develop a perspective to understand "the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high grown as the dynamics play out" (p. 179). This is why learning an organization's (or, more broadly, an ecosystem's) history is a critical perspective.
Inertia & Entropy: The inability or unwillingness to change (inertia) and "cleaning up the debris and weeds that grow in every organization's garden" (entropy, p. 214) should be on the strategist's radar. Routine- or culture-induced inertias, whereby existing processes and procedures as well as cultural artifacts are rigidly entrenched, require decisive, strategic action. For instance, replacing the team lead or the manager of a business unit to introduce a new culture is one radical, but effective, way to mitigate inertia and introduce change in line with the kernel of good strategy.
This Should Make You Smarter
"A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. As results appear, leaders learn more about what does and doesn't work and adjust their strategies accordingly" (p. 241).
Deduction is not fruitful for strategy development; instead, one must resort to induction and judgment.
Make a list of what's important and actionable, since it's "a basic tool for overcoming our own cognitive forgetfulness" (p. 260).
Try to come up with strong alternatives, which are not merely shallow to your first stab, but address its weaknesses as well.
Experience and knowledge in strategy making are strong but insufficient assets. You also need certain skills or struggles. Rumelt lists three (p. 268): build tools to fight your myopia; question your judgment; record judgments you make so you can improve over time.
Avoid these two common biases:
Social herding: going with the flow
Inside view: ignoring the lessons of other times and other places, believing that we're somehow different, if not better. This point will be the focus of one of our upcoming editions, where I discuss Gaddis' On Grand Strategy.
Mind these two phenomena:
Zero-Based Thinking: If you realized you've made a bad decision, appeal to your resilience in accepting it and moving on. This will help you cut your losses as well as prevent further resource damages that your ego so capriciously may require.
The Law of Holes: Have a divestment strategy - if you realize you're in a hole, stop digging and pursue a different strategy (course of action)
"Good strategy grows out of independent and careful assessment of the situation; bad strategy follows the crowd" (p. 276).
Through The Systems Thinker's Lens
The leverage source of power Rumelt lists above is exactly what systems thinking advocates: deeper behavioral structures where effective change can happen, especially given the reality of chain-linked organizations. This helps with what Rumelt calls the power of anticipation in scenario analysis by "considering the habits, preferences, and policies of others, as well as various inertias and constraints on change" (p. 100). Thus, a pivot point with high leverage harnesses some imbalance in your organization where a small change would have a major effect!
"Chain-link systems can be changed and made excellent. It takes insight into the key bottlenecks. Plus, it take leadership and the willingness to absorb short-term losses in the quest for future gains" (p. 121).
People often react to events, such as the effects of change, instead of "digging beneath the surface to understand the forces underlying the main effect" (p. 180). This requires analyzing details, but also synthesizing the story behind the observed dynamics, especially when industry shifts are imminent.
Happy Strategizing!