A summary of “Good Strategy / Bad Strategy” by Richard P. Rumelt — Part 2

• Part 1: Good Strategy, Bad Strategy (Part I)
• Part 2: Sources of Power (Part II) and Thinking like a Strategist (Part III) — this post

Sources of power (Part II)

Good strategy comes from multiple sources that harness and apply the power where it will have the greatest impact. Such powers include leverage, proximate objectives, chain-link systems, design, focus, growth, advantage, dynamics, and inertia/entropy.

Leverage

Leverage relies on crucial pivot points, key junctures where focusing force can have the most significant impact. These points emerge through a combination of anticipation and concentrated effort.

Anticipating the behaviors and strategies of competitors or customers is paramount and entails understanding their habits, preferences, policies, and limitations. An example would be the case of 7-Eleven, which accurately grasped the local preferences of Japanese customers by actively gathering them in their stores to anticipate and harness them.

To maximize leverage, it is essential to identify a pivot point that can amplify your targeted actions, so it is crucial to focus efforts. Achieving gains often relies on “threshold effects,” where a critical level of effort is required to significantly impact a system and where efforts below this threshold tend to yield minimal results. Thus, the true power of concentration lies in “selecting an objective that can be decisively influenced by the available resources.”.

Rumelt cites Ford under Alan Mulally’s leadership as an example. Mulally’s focused efforts on key initiatives like product quality and cost reduction streamlined operations and restored profitability amid crisis instead of spreading resources thinly across various projects. Similar patterns occurred when Steve Jobs re-joined Apple or Elon Musk bought Twitter.

Proximate objectives

Proximate objectives are feasible objectives. Take, for instance, Kennedy’s ambitious goal of landing on the moon, which was accompanied by a carefully planned series of steps: initial unmanned exploration, development of larger booster rockets, simultaneous advancement of liquid and solid fuel rockets, and finally, the construction of the lunar landing vehicle. These objectives entail challenges that may not have easy solutions but are solvable. Effective leaders tackle the uncertainties and ambiguities surrounding the obstacles that stand in the way of achieving the desired goal.

Strategic objectives should be proximate and closely connected to the current situation in dynamic environments. Nonetheless, adopting a strong position while keeping options open is prudent. Drawing inspiration from chess, an optimal move increases your mobility while restricting your opponent's.

It is essential to cascade these objectives, ensuring that the attainment of lower-level objectives within the organization contributes to fulfilling higher-level objectives. This strategic alignment ensures a cohesive and synchronized progression toward overarching goals.

Chain-link systems

The primary focus should be addressing the weakest link in interconnected systems. Take, for instance, the case of the Challenger space shuttle disaster, where the failure of an O-ring caused a catastrophic explosion despite advancements in the booster technology. In such systems, quality holds paramount importance, often superseding the benefits of quantity.

Improvement efforts involve identifying and rectifying the limiting factors and bottlenecks within systems. Rumelt emphasizes that merely implementing incremental changes may not enhance the system and, in some cases, even deteriorate its performance. Recognizing the inherent tension between decentralized autonomous actions and the necessity for centralized coordination within any organization is crucial.

The excellence achieved by a well-managed chain-link system is challenging to replicate, as exemplified by the success of IKEA.
The furniture retailer has successfully integrated its store management, in-house design, and catalog-driven sales approach to create a coherent and efficient system. Merely adopting one of these practices in isolation does not yield the same success. Consequently, replicating IKEA’s success is challenging, given its interconnected core operations.

Design

Rumelt tells the story of Hannibal, who used planning and anticipating others’ thoughts and behaviors. Hannibal designed coherent actions to fight the Romans because he had fought the Romans ten years earlier. Thus, he knew how the Romans would react if, for example, they raided their camp during the night. So, he purposefully designed and orchestrated their fights based on such knowledge.

He points out that strategy creation doesn’t involve considering a long list of alternatives and decisions. Leaders are dealing with large-type design problems, where multiple elements must be arranged, adjusted, and coordinated. It’s like system design, where most work involves identifying interactions or trade-offs. The greater the competitive challenge, the greater the need for a clever, tight integration of resources and actions.
A strategic resource is a property that is long-lasting and has been constructed, developed over time, designed, or discovered by a company and that competitors can’t easily replicate without suffering a net loss.

However, Rumelt warns that initial strategic success often leads to laxity, bloat, and decline, where, over time, most will loosen their tight integration and rely on accumulated resources instead of clever design.

Focus

Begin by assessing the competitive landscape, examining companies’ focal points and the factors driving their success. Identify which policies align with industry norms and which deviate. Compile a list of these policies and their respective targets. For instance, Crown, a can producer, differentiated by specializing in shorter production runs. This strategic focus enhanced their bargaining power, distinguishing them from competitors who primarily competed on price. As a result, Crown captured a significant portion of the value it created and cultivated a competitive advantage by concentrating on a specific market segment.

Growth (by acquisition)

In business, growth is often seen as the ultimate goal. However, achieving sustainable growth can be challenging, especially for companies operating in competitive industries where profits can quickly evaporate.

One strategy companies often turn to is growth through acquisitions. While this approach can promise increased profitability, it also comes with risks. Overpaying for acquisitions is common, and integrating different companies can be a complex process that requires aligning their strengths.

Amidst these challenges, Rumelt offers valuable insight. He suggests that genuine growth isn’t something that can be forced — it arises naturally when there’s a demand for unique capabilities or when superior products gain traction in the market. Therefore, growth through acquisition should only be pursued when these conditions are met — specifically when such a growing demand for capabilities can be best met with the complementary strengths of the acquired company.

Advantage

Rumelt discusses the importance of recognizing and utilizing one’s strengths to succeed instead of competing in areas where you lack them.
He underscores that no one has an advantage at everything, but that advantages emerge within a specific context.

Gaining a competitive advantage involves producing goods or services more cost-effectively or delivering them at a superior value.
However, maintaining an advantage requires safeguarding vital assets such as patents, reputation, networks, and skills. It’s important to note that having significant wealth alone doesn’t ensure superiority; continual improvement in crucial areas such as the following is essential:

1. Deepening advantages: involves enhancing value or reducing costs by improving processes instead of increasing workload. To do so, it is important to study buyers and users to anticipate issues in product processes and invest in “isolation mechanisms” to protect and improve processes from being easily copied.
2. Broadening the extent of advantages: entails looking beyond the product and leveraging internal strengths. Examples, such as DuPont’s expansion of chemical knowledge leading to products like Lucite and Teflon, illustrate extending along the lines of one’s strengths. The lesson is to avoid assuming that general advantages can be applied universally and to build on core strengths for sustained success.
3. Creating higher demand for advantaged products/services: Increasing the value of advantages involves driving demand (capitalizing on unique selling points, compelling brand stories, marketing, etc.) while ensuring underlying scarce resources (for example, buying limited and fertile land to grow special fruits).
4. Strengthening isolating mechanisms: To prevent duplication of advantages, strong isolating mechanisms like patents, brand-name protection, and copyrights are crucial. These mechanisms contribute to the slower erosion of advantages, ensuring sustained value over time.

Dynamics

It is easier to attack than to defend, where a high ground provides the natural asymmetry for advantage, which can be attained in 2 basic ways:

• Pure Innovation involves technical innovations like Gore-Tex, revolutionary business models like FedEx’s overnight delivery, or Intel’s invention of the microprocessor, which triggered significant industry change, moving PC makers from vertically to horizontally integrated.
• Exploit waves of change means recognizing and capitalizing on external changes like a pandemic, technical shift, politics, or an earthquake. Understanding these waves' evolution and second-order effects requires a deep understanding to question expert opinions and identify fundamental forces. For example, Cisco rode a wave during the rise of networking technology by being the first to move away from proprietary protocols to IP.

Signs for such transitions include:

• Rising fixed costs: notably seen in increased product development costs driven by technological advancements, such as the shift from piston to jet aircraft engines.
• Deregulation impact: for example, changes in policies, like deregulation that alters price structures, as seen in the air travel business, where regulated airline prices favored short-distance travelers over transcontinental travelers.
• Predictable Biases in Forecasting: Common biases include the assumption of perpetual economic growth and overlooking the peak and decline. For example, for durable products like flat screens, initial rapid sales expansion is followed by saturation, leading to a sharp decline. Another bias involves the belief that battles between industry giants inevitably sideline middle-sized and smaller companies, failing to anticipate how waves of change can reshape dynamics early on.
• Incumbent Response to a Wave of Change: The inertia of established players in adapting to transformative shifts.
• Attractor States: These represent the future state of an industry, guiding it toward efficiency. For example, Cisco’s strategic vision of “IP everywhere” creates a gravitational pull toward that state. Accelerators, such as changes in buyer perception and impediments, like licensing issues for nuclear power transitioning from carbon fuel, influence the industry’s movement toward that envisioned state.”

Inertia and entropy

Inertia, as the resistance to change in motion, is rooted in the unwillingness or inability to adapt to evolving circumstances.
A parallel challenge lies in entropy, a concept dictated by the laws of physics, where disorder invariably escalates. In the face of these forces, leaders are responsible for continually upholding an organization’s purpose, structure, and methodologies.

Consider the dynamic interplay of successful strategies, which often coexist with inert competitors, and therefore, recognizing and comprehending your competitor’s inertia becomes as crucial as understanding your own strengths.

Both entropy and inertia emerge as formidable adversaries, underscoring the challenge of orchestrating the transformative journey of an organization.

Inertia, according to Rumelt, manifests in forms such as:

• The inertia of routine is often disrupted by external shocks, such as oil price drops, the emergence of the microprocessor, or regulatory changes like deregulation. A case in point is Continental, which failed to alter its planning processes despite significant deregulation in the costs of short-distance flights, ultimately leading to bankruptcy.
• Cultural inertia is exemplified by AT&T and Bell Labs, which are renowned for innovation but lacking in product development. The brilliance of a few individuals justified a contemplative approach for many, requiring a shift through simplification and dismantling intricate processes or concealed agreements between departments. Embodying new norms and values, a transformative leader must break this inertia.
• Inertia by proxy Occurs when confronting the status quo risks valuable revenue streams. Noteworthy examples are Netflix and Blockbuster. In the case of Netflix, it began as a DVD rental-by-mail service, targeting customers who found traditional video rental stores inconvenient.
  By offering a subscription model without late fees, Netflix targeted Blockbuster in a way that prevented them from easily responding by removing these fees because it would have hurt their revenue stream significantly, given their brick-and-mortar store model. A concept also called “counter positioning” in the book 7 Powers.

To explain Entropy, the book discusses the impact of mismanaged structure and lack of focus within organizations, using General Motors (GM) as a case study. It highlights how GM initially struggled with a heterogeneous portfolio in 1921, resulting in internal competition and a loss of market coherence compared to its main competitor, Ford.
Alfred Sloan proposed a strategic portfolio shift, ensuring each brand had a distinct positioning and price point. This led to GM’s eventual rise as the world’s largest automobile company by 1950.
However, in 1980, GM faced a similar challenge as Toyota successfully attacked them using a similar differentiation strategy. This historical context emphasizes the importance of actively managing organizational structure and product differentiation to maintain coherence and competitive advantage, underscoring the need for ongoing leadership involvement in addressing such issues.

Thinking like a Strategist (Part III)

Nvidia as an example

The passage traces the history of Nvidia, detailing its early struggles and eventual rise to dominance in the computer graphics industry. It highlights how the company’s initial attempts at multimedia innovation, such as the NV1, failed, prompting a strategic shift towards focusing on 3D graphics for desktop PCs. Nvidia’s commitment to shorter development cycles, paralleled with a strong emphasis on innovation, simulation, and unified driver architecture, enabled them to outpace their competitors. The company’s strategic coherence, including implementing policies to reduce uncertainty and delays, played a crucial role in its success. Meanwhile, their main competitor’s inconsistent direction and Intel’s limitations in developing graphic chips comparable to their CPUs allowed Nvidia to gain a significant performance advantage. Only when ATI adopted a similar six-month development cycle were they able to effectively compete with Nvidia.

The science of strategy

In this chapter, Rumelt presents a strategy akin to scientific inquiry with hypothesis and experimentation, emphasizing the blend of educated judgment, insight, and analysis. He advocates for an entrepreneurial approach to strategy in today’s dynamic world, highlighting the importance of adaptive leadership and continuous learning from successes and failures. Rumelt stresses the significance of empirical data in strategy evaluation, promoting a scientific and pragmatic approach that prioritizes observable facts over personal biases. He also stressed the importance of identifying anomalies, which Rumelt describes as crucial “learning opportunities”.

For example, The Starbucks case illustrates how such an anomaly, like the espresso culture in Italy, led to a hypothesis. Schultz initially faced challenges in recreating the experience in the US due to cultural differences but succeeded through iterative testing and adjusting, demonstrating a scientific induction approach.
Starbucks’ success, attributed to vertical integration, made it difficult for competitors to replicate quickly. However, Rumelt cautions that vertical integration must align with the core business strategy to avoid unnecessary expenses. Schultz’s ability to adjust ideas based on customer knowledge contributed to Starbucks’ success.”

Using your head

In this chapter, Rumelt emphasizes the importance of asking fundamental questions and encouraging reflection on strengths, weaknesses, and future directions. Reflecting on broader business problems (“zooming out”) enhances strategic thinking.

Drawing on a story about Andrew Carnegie and Fredrick Taylor, where Taylor suggested Carnegie make a list of top priorities and start with the most crucial item. The value of this exercise lies not in the list itself but in the act of creation. Strategic thinking involves acknowledging infinite opportunities, necessitating regular zooming out to focus on the most important intersection of importance and actionability.

Strategic thinking entails being less shortsighted than others and avoiding fixation on a single perspective. The Tivo story in the book illustrates the tendency to hastily jump onto the first solution, often based on limited perspectives. The chapter underscores that strategic decisions require thorough analysis and reflection, challenging the notion that time constraints justify neglecting other options.

The most experienced strategists resist the comfort of immediate closure and actively seek more insights, even when questioning their ideas is uncomfortable. Beyond tools and frameworks, the paramount skill is metacognition — thinking about one’s thinking and making judgments about judgments. In strategy work, knowledge alone is insufficient. The three key aspects include using tools to combat myopia, making informed judgments, and recording judgments for continuous improvement.

Techniques to get there

In the final part, Rumelt shares techniques and steps to get to a strategy:

• Develop a strategic kernel involving a diagnosis, guiding policies, and coherent actions, treating it as an internal dialogue that logically connects all levels.
• Generate multiple forward alternatives and avoid fixating on the first option. Instead, critically evaluate, create, and destroy alternatives for a comprehensive view.
• Form a panel of experts to assess and question alternatives critically. This involves seeking diverse perspectives from individuals with different approaches, such as Steve Jobs advocating for vertical integration and someone focused on long-term thinking. Any such panel might ask questions such as: Why should we do this? What is wrong with the approach? How does it fit with overall trends and dynamics? Does this lead to a superb experience? How does this benefit the long term? How could we sell and market this right?

When creating any such strategy, Rumelt advocates following three steps that promote learning:

1. pre-commit to your judgment.
2. choose your interpretations of what is critical, what is not, and what actions must be taken.
3. write things down and evaluate them later.

In the end, Rumelt reminds us that most good strategies are corner solutions that don’t try to be all things to all people.

Conclusions

I like and agree with most of what is in the book. The only thing I still struggle with is applying all this directly, but that is, I guess, the art and science of a “thorough” analysis as described in the book. In case you want to buy or check it out yourself further:

• The book on Amazon
• The book on Goodreads