Good Strategy & Bad Strategy

Introducing Richard Rumelt

Friends,

With one theory central to aspiration (the A of ABCDE) in the proverbial books, we today move to the next. In the pantheon of strategic management thinkers, Richard Rumelt unquestionably stands among the all-time greats. Though he may be most known to the broader strategic community for his immensely readable Good Strategy, Bad Strategy, his resume as both an academic and a practitioner speaks loudly for itself. Personally, as those who have read my written work over the years will be aware, I have especially found value in his research on corporate coherence and organizational chain-link effects.

On this particular occasion, however, we are going much more basic by looking closer at one of the three central premises in Rumelt’s famous strategy kernel: the guiding policy.

Good strategy, in his words, is a coherent mix of policies and actions designed to surmount a difficult, usually high-stakes, challenge. The guiding policy is central to this endeavor as it reflects the overall strategic approach chosen based on what was discovered during the preceding diagnosis phase. In turn, it informs subsequent actions so as to ensure that they are coherent.

While defined by the unearthed problem, the purpose of the guiding policy is ultimately to create a competitive advantage. Just as a lever uses mechanical advantage to multiply force, Rumelt argues, the strategic advantage designed by the guiding policy should multiply the effectiveness of resources at hand and paths taken. Since advantage is a relative term, the reasoning carries an underlying assumption of an ability to predict competitive movement. In fact, to quote him directly, he writes:

A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than canceling one another out.

I will find reason to come back to this point further down, but for the time being, it is enough to think of guiding policies as means of resolving uncertainty about what to do, about how to compete, and about how to organize. Although one could very easily interpret his quote as being about the ‘best’ way forward – advantages creating at least transient superiority etc. – good is often enough in lack of easily identifiable optimal choices. Without any guiding policy at all, actions and resource allocation becomes inconsistent and incoherent, with decisions potentially cancelling one another out.

The policy could therefore be said to act a bit like the guardrails of a highway, directing and constraining action in a given direction; not necessarily defining precisely what to do, but ensuring that movement is coordinated and serves an established purpose. Consequently, it is not a list of things the organization thinks are nice plus a couple of goals it would like to achieve. There has to be a certain degree of information about how to achieve the strategic ambition and, at least in broad terms, the first round of action.

So, a guiding policy is the result of identifying not just the symptoms of a strategic problem but too its causes, and then deciding and defining the general direction forward needed to overcome them. Its inherent exclusion of precise details on what to do (guidance not being the same thing as instruction) separates it from many other common schools of thought, as does its aim to create coherence, not alignment. However, I would nonetheless assume that the general approach of diagnosis-formulation-action appears familiar to most of you.

My issue with Rumelt’s reasoning, now that we get to my reflections, is that despite his promotion of the pragmatic, the exercise easily becomes exclusively theoretical. To explain, let us begin where he does with the step that precedes the guiding policy, that is, the diagnosis.

Assumed in his work is that one can deduce the root cause of a problem; he uses a visit to the doctor’s office as a metaphor and notes that one does not go there to be told one has a sore throat (a symptom), but in order to be told that one has, say, the flu (the cause of the symptom) and what to do as a result. And it is obviously a fair and true point; a lot of business advice is offered without even a rudimentary understanding of the underlying issues. To reuse a label I once put on this modus operandi at a conference, it is Jeopardy consulting - the answer is provided long before the question. Far too often in corporate settings, as John Kay once wrote, value is indeed measured not by the accuracy of the diagnosis but by the confidence with which the prescription is dispensed.

But yet, what if one is unable to correctly diagnose the problem?

It is not a question simply of skill or lack thereof. In many cases, particularly when one is dealing with complexity, identifying the root cause to observed symptoms is not just difficult but literally impossible. I recently shared on social media an excellent ten-minute video featuring Chris Fields that explains why. If you have not watched it, I strongly recommend that you do before reading on (for what it may be worth, it is brilliant both in terms of Fields’ provided insights and the easy-to-follow way in which he provides them).

Given the non-existence of reduction and aggregation in complex adaptive systems such as firms and markets, the notion of strategy as a problem-solving mechanism becomes a bit of a figment of imagination. This is a rather big worry. By Rumelt’s logic, if we cannot know the root cause, we cannot define the solution. If we cannot define the solution, we cannot create the guiding policy. If we cannot create the guiding policy, we cannot define what makes subsequent actions coherent. Creating a strategy becomes impossible.

The way that he solves this conundrum is by retrospectively looking at what a handful of successful companies did, which as much as I like him is an analytical faux pas (it tells us nothing about whether unsuccessful companies did the same or at least similar). One of his favorite illustrations is that of Apple, and Steve Jobs’ work upon returning as a CEO when the company struggled. Cutting dead weight ferociously, Jobs focused on the short-term objective of survival. It made sense, of course. But then Rumelt goes on to tell the following story which, amidst the many myths of Apple, has become one of the most repeated and, to be blunt, annoying.

In the summer of 1998, I got an opportunity to talk with Jobs again. I said, “Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just too strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?”

He did not attack my argument. He didn’t agree with it, either. He just smiled and said, “I am going to wait for the next big thing.”

Jobs did not enunciate some simple-minded growth or market share goal. He did not pretend that pushing on various levers would somehow magically restore Apple to market leadership in personal computers. Instead, he was actually focused on the sources of and barriers to success in his industry — recognizing the next window of opportunity, the next set of forces he could harness to his advantage, and then having the quickness and cleverness to pounce on it quickly like a perfect predator.

There are two inescapable, fatal flaws to this argument.

Firstly, being able to identify the next big thing – the next great use of a previously discussed metaphorical screwdriver – is extremely difficult, not to say impossible in complexity, and therefore scarcely more to most than a matter of luck and leverage. One thing in theory, another entirely in practice.

Secondly, even if one were to somehow have the magical capability to foretell the future, it would be pointless unless one also had the requisite capacity to capitalize. Obviously, keeping thousands of employees on standby for an unknown length of time is entirely unrealistic, and funds set aside for predator-like pouncing could be reinvested elsewhere. In other words, not only will there always be lag effects, but also unavoidable and significant ‘waiting-for-opportunity’ costs.

As I have argued before, the pragmatic approach is to instead run safe-to-fail parallel experiments (in addition to that which one is already doing), whether in own R&D/innovation, M&A activities, portfolio structures or whatever else.

So, where does this all leave us?

Well, Rumelt’s concept of the guiding policy is clearly very helpful as a tool with which to enable coherent behavior, but relies in the strategy kernel on a previous step that may or may not be possible. Somewhat ironically given his view that bad strategy is (among other things) merely a list of goals and targets, his own approach thus ends up being most effective when there is a set objective to reach and the problem to solve is temporal (as in, for example, a marketing strategy with a defined end point).

When the problem that we face is unsolvable, or we cannot know what the root cause is, the best we can do is to manage it. And, it seems to me, that is often what business strategy in practice must end up being: a continuous attempt at managing a large-scale problem in increasingly effective ways – through learning, adapting, improving and evolving.

Next week, we are going to look at whether Roger Martin’s popular approach of Where to Play/How to Win can help us further towards that end.

Until then, have a lovely weekend.

Onwards and upwards,
JP