Author
Richard P.Rumelt
Year
2011
Review
What is it about? Was it worth reading?
I keep coming back to the core concepts of this book. Before reading it I thought the concept of strategy seemed vague - I appreciate the clarity and structure the author brings to the subject. The examples bring the concepts to life. Personally I feel like I’m more able to assess the quality of a strategy now. Thanks to this book I know to look for: a clear plan of action - that focuses effort - against a key point of leverage - that gives you the greatest chance of solving the core challenge.
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Key Takeaways
The 20% that gave me 80% of the value.
The Kernel
Strategy is defining a way to overcome a challenge. The kernel of a good strategy has three elements: a diagnosis, a guiding policy and coherent action.
- A diagnosis identifies the nature of the biggest challenge to forward progress. The critical factors.
- A guiding policy is a cohesive response that focuses and coordinates actions to overcome the challenge. To achieve a powerful competitive punch or problem-solving effect. It signposts the way forward (but not too detailed).
- A coherent action plan is a feasible coordinated set of policies, resource commitments and actions designed to carry out the guiding policy.
Together the three elements describe the why (diagnosis), the what (the guiding policy) and the how (the coherent action plan.
Strategy shouldn’t be confused with blind ambition or determination. It’s also distinct from leadership, which is more about inspiring and motivating self sacrifice. Strategy is about figuring out what is worth pursuing, and what is capable of being accomplished
Good Vs Bad Strategy
Good Strategy | Bad Strategy |
Defines a critical challenge | Fails to face the problem and doesn’t address the critical issues |
Has focus | Lacks focus and tries to do too much |
Builds a bridge between the challenge and possible actions | Sets goals without a plan to overcome obstacles |
Focuses resources onto connected targets - that each build on the other | Dedicates resources to unconnected targets |
Can be achieved with existing resources and competence | Sets lofty desires without a practical chance of being implemented |
Includes a significant meaningful insight about how to win | Is fluffy, restates the obvious, uses buzzwords |
Focuses energy and action at the right moment onto the pivotal objective | Accommodates incompatible interests or conflicting goals |
Good strategy is often so powerful because it’s rare that your opponent has a good strategy. It can often look simple and obvious in retrospect.
Spotting bad strategy is the first step to learning to create good strategy. So much bad strategy exists for two reasons. It’s hard to craft good strategy. Leaders don’t like saying no and focusing.
Common Tactics
- Take advantage of windows of opportunity
- Apply strength against weakness and towards the biggest opportunity
- Leverage deception to make your competitor think you’re doing something they expect
- Create advantage by anticipating the actions and reactions of others
- Exploit the leverage of focused effort
- Create or draw on a source of advantage
How to create a good strategy
- The diagnosis must simplify the overwhelming complexity of reality by identifying certain aspects of the situation as critical. It must identify the key challenge. Doing so can transform one’s view of the situation, bringing a radically different perspective. Once the challenge is clear, you can evaluate the effectiveness of the rest of the strategy. In business the challenge is often in dealing with change or competition.
- The guiding policy must address the challenge. It must define the approach to overcoming the challenge. It guides action and sets direction without dictating what exactly should be done. Good guiding policies are not goals, visions or end states. They are methods. They reduce the complexity and ambiguity in the situation. The guiding policy creates policies and actions that are coherent - so that each builds on the other. Good policies exploit the leverage of focused effort and draw on a source of advantage.
- The coherent actions are designed to carry out the guiding policy. To have punch, the actions should coordinate and build upon one another, focusing organisational energy. Coordination of action is the most basic source of leverage or advantage available in strategy. Proximate objectives do wonders for energy and focus.
Aspects of strategy
- The power of leverage is focusing energy and action at the right moment onto the pivotal objective. Doing so can cause a cascade of favourable outcomes. Mastering leverage requires anticipation, focus and identifying the pivotal objective.
- Anticipation is predicting the behaviours of others, forecasting downstream results of events and spotting routines or patterns of behaviour.
- Focusing efforts on fewer objectives generates larger payoffs. Concentration is powerful because resources are limited, your attention is limited, your rivals will find it hard to match. Focus can help you overcome threshold effects, where a minimum force is required to affect the system.
- Identifying the pivot points that magnify the effect of effort is key. Look for a spot where a relatively small adjustment can unleash much larger pent-up forces
- To discover power notice asymmetry. See what others don’t have. Use your advantages to impose disproportional costs on your competitor
- Proximate objectives are close enough to be actionable. Naming targets you can reasonably expect to hit and even overwhelm. Does wonders for energy and focus. The more dynamic and uncertain the situation the more proximate a strategic objective must be.
- Objectives can cascade down through hierarchies. High level proximate objectives create goals for lower level units, which in turn, create their own proximate objectives. They can cascade down hierarchies of problem solving at finer and finer levels of detail.
- Skills come in hierarchies too. You may have to acquire one skill before moving onto something else. Layer skills like rungs on a ladder and you’ll be able to do some things others can’t. Concentrating on one thing, assumes many others will be taken care of.
- Chain link systems are when performance is limited by the weakest link. For example the reliability of a system is only as good as the weakest component, an assembly line is only as fast as the slowest process. On chain link systems incremental change won’t work unless you’re focusing on the right place. You have to sequence change carefully, and may only see delayed results. E.g. Solve for Quality → Sales → Costs in that order. Ikea has many differentiating policies that combine in a chain link system to achieve something truly differentiated.
- Strategy should be designed (not chosen) as problems are unstructured and systems complex. Premeditated strategy requires anticipating the thoughts and behaviours of others. Designing also requires the coordination of action.
- If you don’t have many resources, you need to tightly coordinate them and make the most of them. Resources and tight coordination are partial substitutes. The greater the challenge, the greater the need for a good, coherent, design-type strategy that makes the most of your resources. The best strategies often come form those with little resources.
- Press where you have an advantage. Nobody has an advantage at everything, most only extend so far and apply only in certain conditions.
- Sustaining an advantage requires an isolating mechanism (patents, reputation, relationships, network effects, economies of scale, knowledge gained through experience)
- The 4 ways to increase an advantage in business
- Deepen your advantage (increase value or reduce costs)
- Broaden the extent of the advantage (bring into new areas of competition)
- Create higher demand for the products or services (growing the number of buyers)
- Strengthen the isolating mechanisms that block easy replication or imitation
- Exploit dynamic situations. Consider exploiting a wave of change (most industries are stable most of the time). In moments of industry transition strategy skills are most valuable. You strategy doesn’t have to be perfect, just better than your rivals. Industries are often in transition when fixed costs are rising, or regulation is changing.
How to improve your strategy and decision making
- Think of strategy as a hypotheses and its implementation as an experiment. Update your strategy once results come in. Good strategy is an educated judgment, there are no sure things.
- In a world of change and flux “more of the same” is rarely the right answer, even if it worked before.
- Treat anomalies as a chance to learn something
- Privileged information is valuable resource
- Don’t commit to your first idea. There are better ones.
- Spend more time questioning your strategy than justifying it
- Defining a problem and a potential solution is at the heart of strategy.
- You can create better strategies by destroying your own. Convene a virtual panel of experts to question your strategy - encourages you to create a better one
- Improve your judgement by committing strategy to writing. Pre-committing to a position allows you to evaluate your own judgement later
- Keep your head and don’t follow the crowd. Make an independent assessment of the situation
Deep Summary
Longer form notes, typically condensed, reworded and de-duplicated.
⚠️ Caution: These are particularly ugly and unstructured notes ⚠️
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Context | 1805 Napoléon had conquered big chunks of Europe and planned the invasion of England. |
Challenge | Nelson was outnumbered |
Strategy | · Risked his best ships to break the formation of the enemy fleet.
· Drove two columns at the Franco-Spanish fleet, hitting their line perpendicularly, cutting them into three.
· With coherence lost, he judged, the more experienced English captains would win the ensuing melee (British had more experience, seas were rough)
· Animation here
|
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Redesigned the whole business logic around a simplified product line sold through a limited set of outlets.
“The product lineup was too complicated and the company was bleeding cash. A friend of the family asked me which Apple computer she should buy. She couldn’t figure out the differences among them and I couldn’t give her clear guidance, either. I was appalled that there was no Apple consumer computer priced under $2,000. We are replacing all of those desktop computers with one, the Power Mac G3. We are dropping five of six national retailers—meeting their demand has meant too many models at too many price points and too much markup”
- Cut desktop models from 15 to 1.
- Cut all portable and handheld models back to one laptop.
- Cut out all the printers and other peripherals.
- He cut development engineers. He cut software development.
- He cut distributors and cut out five of the company’s six national retailers
- He cut out virtually all manufacturing, moving it offshore to Taiwan. With a simpler product line manufactured in Asia, he cut inventory by more than 80 percent
- A new Web store sold Apple’s products directly to consumers, cutting out distributors and dealers
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- Created networks of 150 stores - centralised key processes (range, distribution, purchasing) and created supply chain management
- The network of 150 stores became the unit of management, not single stores
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- USA had more resources and better technology
- So they focused the Cold War competition on resource intensive activities, that they’d be better at, causing great strain on Russia
- Increase the accuracy of missiles, or quietness of submarines caused the Soviets to have to innovate and update equipment
- shift from thinking about pure military capability to one of looking for ways to impose asymmetric costs on an opponent.
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- steps along the way: unmanned exploration, larger booster rockets, parallel development of liquid and solid fuel rockets, and the construction of a landing vehicle
- This objective was feasible because engineers knew how to design and build rockets and spacecraft. Much of the technology had already been developed as part of the ballistic missile program
- Soviets were ahead - but they wouldn’t be able to use their current rockets to put a man on a moon. It was about 10x more difficult so would require a rethink. The Americans set a different goal
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- IKEA has coordinated policies that make it a very different type of furniture business
- large inventory
- their own stores
- their own designs (not usual for retailers)
- don’t use sales people (use catalogues instead)
- Adopting just one of these policies isn’t enough, you have to adopt them all
- In 50 years nobody has replicated the business model
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Context | Battle of Cannae 216 B.C |
Challenge | Hannibal was outnumbered (85k Romans, 55k Hannibal) |
Strategy | · Present a long line to the Romans
· Allow the middle of the line to look like it’s collapsing, draw in Romans
· Use cavalry advantage to advance on either side
· Close the Roman Army in on all sides, compress them so those in the middle can’t fight |
For 10 years in Italy, Hannibal schooled the Romans on strategy. Hardening them to the point that they’d conquer Europe for 500 years
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- Most can makers compete on price. Doing long production runs at scale.
- It’s very costly to do a short run
- Crown has positioned itself as a short run specialist. Thus it hasn’t lost its bargaining power, and the others can’t match its flexibility and speed.
What strategy is not: ambition, determination, inspirational leadership or innovation.
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- Leadership and strategy often confused as they can be joined in the same person
- Leadership inspires and motivates self-sacrifice
- Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished
- Strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge.
- The core content of a strategy is a diagnosis of the situation at hand, the creation or identification of a guiding policy for dealing with the critical difficulties, and a set of coherent actions. I will explore the three elements of the kernel one by one. (Location 1401)
The Core of Good Strategy is the Kernel
1) Diagnosis (why)
- Identifying the nature of the biggest challenges to forward progress. The critical factors.
2) Guiding Policy (what)
- A cohesive response that focuses and coordinates actions to overcome the challenge
- To achieve a powerful competitive punch or problem-solving effect.
- Signposts the way forward (not too detailed).
3) Coherent Action Plan (how)
- Feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy
Good Strategy ...
- Often looks simple and obvious
- Often involves the application of strength against a weakness
- Often strength applied to the most promising opportunity
- Is often more powerful than traditional advantages (first mover: scale, scope, network effects, reputation, patents, brands etc)
- Is powerful, because opponents often don’t have a good strategy themselves
- Takes advantage of windows of opportunity (Steve Jobs waited out the ‘Wintel’ years, looking for the ‘next big thing’ that could propel apple forward)
- can leverage deception to make your competitor think you’re doing something they expect
- requires a leader who is willing to say no to a wide variety of actions and interests
- is as much about what you don’t do
- transforms vague gaols into a coherent set of actionable incentives
- builds a bridge between the challenge and the action
- defines a critical challenge and builds a bridge between that challenge and action, between desire and immediate objectives that lie within grasp. Has a good chance of being accomplished, given existing resources and competence
- is scarcity’s child - it is to choose one path and eschew others
- the craft of figuring out which purposes are both worth pursuing and capable of being accomplished
- a significant meaningful insight about how to win
Bad Strategy ...
- Once you learn to spot bad strategy, you’ll get better at creating good strategy
- Has 4 major hallmarks
- Fluff: restatement of the obvious with a sprinkling of buzzwords
- Failure to face the problem: if the challenge is not defined, you can’t assess the strategy
- Setting goals not strategy - there’s no plan for overcoming obstacles
- Bad objectives - fail to address critical issues or are impractical
- Lacks focus
- trying to do too much
- dedicating resources to unconnected targets
- accommodating incompatible interests / conflicting goals
- Too Blue-Sky → lofty desire is set, without a practical chance of being implemented
- Often comes from rank or HIPPO
- Crowds out good strategy
Examples of Bad Strategy:
- Grow at 20% a year, and maintain a 20% profit margin (this is just a goal)
- Spend more, try harder (no focus)
- Sending WW1 troops over the top again and again expecting a different result (failure to create an advantage)
- Stope the use of illegal drugs (it’s not proximate, not feasible)
How to generate good strategy
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- what’s going on here
- a judgements about the meaning of facts
- defines a domain of action
- allows you to evaluate the rest of the strategy - change it over time if the situation changes
- names or classifies the situation, links facts into patterns and suggest more attention be paid to some issues and less to others
- insightful diagnosis can transform one’s view of the situation, bringing a radically different perspective
- in business, the challenge is often in dealing with change and competition
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- It is “guiding” because it channels action in certain directions without defining exactly what shall be done.
- 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
- creates advantage by anticipating the actions and reactions of others
- reduces the complexity and ambiguity in the situation
- creates policies and actions that are coherent - each builds on the other, rather than canceling one another out
- exploits leverage of focused effort
- creates or draws on a source of advantage
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- To have punch, actions should coordinate and build upon one another, focusing organizational energy
- The coordination of action provides the most basic source of leverage or advantage available in strategy
- coordination, by itself, can be a source of advantage
- Consider using a proximate objective
- actions are imposed on a system, centralised power, used to overcome the natural workings
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- The power of leverage is focusing energy and action at the moment onto the pivotal objective. Doing so can cause a cascade of favourable outcomes.
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- predict the behaviours of others (enemies)
- predicting downstream results of events
- spotting routines or patterns of behaviour
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- focusing efforts on fewer objectives generates larger payoffs
- you have to concentrate because
- limited resources
- rivals can’t react if you do
- concentrate your attention
- threshold effects - have to push hard enough to affect the system, efforts below a threshold don’t change anything.
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- pivot points that magnify the effect of effort
- relatively small adjustment can unleash much larger pent-up forces
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- Noticing asymmetry
- Discovering a pivotal objective and create an advantage
- Seeing what others have not
- Using your advantages to impose disproportional costs on your competitor
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- Pool useful information
- Look internally and externally
- Review customers, competition
- Review whats changing
- Channel energy into 1 or 2 of the most attractive opportunities.
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- Proximate Objective - close enough to hand to be actionable
- Naming a target you can reasonably expect to hit and even overwhelm
- Does wonders for energy and focus
- The more dynamic the situation - the poorer your foresight. The more uncertain and dynamic the situation, the more proximate a strategic objective must be.
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- high level proximate objectives create goals for lower level units, which in turn, create their own proximate objectives
- Cascade down hierarchies of problem solving at finer and finer levels of details.
- The cascade down hierarchies and in time
- Concentrating on one thing, assumes many others will be taken care of
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- You might have to achieve one thing before achieving something else. Flying a helicopter
- Learn to take off an land, fly at night, fly in formation, in combat, land on a ship, on a mountain getting shot at.
- Skills at coordination are higher rungs on a ladder. Layering skills shows how some organisations an do things others cant \
- Concentrating on one thing, assumes many others will be taken care of
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- When performance is limited by the weakest link.
- Reliability - only as good as the weakest component
- Property value - limiting factors that can’t be changed
- Identify bottlenecks.
- Incremental change may not work.
- You have to move through them. You may not see results until the end.
- Quality → Sales → Cost
- Ikea has many different policies, that work together in a chain to achieve something different.
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- Premeditation - design and plan in advance
- Anticipation - thoughts and behaviours of others
- Coordinated action - was able to coordinate 50k people to pull this off
- Strategies are constructed not chosen. There are so many things you can do, you’re rarely choosing from a list.
- Coordinate policies across activities to focus the competitive punch
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- Given a bundle of resources, the greater the competitive challenge, the greater the need for cleaver, tight integration of resources and actions
- Resources and tight coordination are partial substitutes! The greater the challenge, the greater the need for a good, coherent, design-type strategy.
- The cleverest strategies throughout the years often come form those with little resources
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- The problem with inorganic growth by acquisition is that you pay a premium (25%). So you don’t create value from expansion.
- Healthy growth is usually the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency and creativity.
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- Nobody has an advantage at everything. Most only extend so far.
- Often advantages are specific to specific conditions
- Press where you have the advantage, side-step when you don’t
- The US Army can’t win in Afghanistan. It doesn’t have an advantage there.
- Sustaining an advantage requires an isolating mechanism (patents, reputation, relationships, network effects, economies of scale, knowledge gained through experience)
The 4 ways to increase an advantage...
- deepening advantages (increase value or reduce costs)
- broaden the extent of the advantage (bring into new areas of competition)
- create higher demand for the products or services (growing the number of buyers)
- strengthen the isolating mechanisms that block easy replication or imitation
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- exploit a wave of change - most industries are stable most of the time
- design always involves a certain amount of trial and error, they are less costly in software
- in moments of industry transition that skills at strategy are most valuable
- strategy only has to be more right than your rivals
- Guideposts
- Rising fixed costs
- Deregulation
- Predictable Biases (forecasts, adopting strategy of market leader)
- Inertia - resistance to a change in motion
- break with simplification - strip things down, simplify them
- Entropy - degree of disorder increases with isolation (requires constant work to maintain shape)
- Attractor states (describe how the industry should work, demonstration effect)
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How to think about your own thinking
- Strategy is a hypothesis. It’s implementation is an experiment.
- Good leaders update their strategies as results appear
- Asking for a strategy that’s guaranteed to work is like asking for a hypothesis that is guaranteed to be true - it is a dumb request.
- Good strategy is educated judgment
- in a world of change and flux, “more of the same” is rarely the right answer
- The presumption that we know everything important, or we can know it through consultation with others deadens innovation
- anomaly marks an opportunity to learn something, perhaps something very valuable
- One of the most important resources a business can have is valuable privileged information—that is, knowing something that others do not
- Make a list - prioritise it
- Don’t commit to your first idea, there might be a better one. Spend more time questioning your strategy than justifying it
- Knowledge about the specifics. Associations between situations. What works, or what can happen.
- Problem - solution is the heart of strategy.
- Create better strategies, by destroying your own. Find out where they are weak as you look for better ones. Invoke a virtual panel of experts to question your strategy. C
- Improve your judgement by committing them to writing. Pre-commit to a position - then you can subsequently evaluate your own judgement
- Keep your head - don’t follow the crowd. Make an independent assessment
- Terrible industry
- product is commodity
- everyone has the came costs and technology
- buyers are price sensitive, knowledgable and willing to swap
- 2008 - Financial Crisis
- Smooth sailing fallacy - assumed the end of boom and bust
- Risk seeking incentives - high upside, no downside to risk
- Social hearding - presses us to think everything is OK or not OK because everyone else is saying so
- Inside view - this case is different - data ignored - couldn’t happen to us
Problems
- Executives who complain about execution problems have usually confused strategy with goal setting
- Leaders don’t identify underperformance as the challenge. Underperformance is likely the result of the true challenges
- Bad strategy is active avoidance of the hard work it takes to craft a good strategy
- A guiding policy on it’s own doesn’t make a good strategy - Common mistake
- Without a diagnosis - it’s hard to evaluate alternatives
- Without coherent actions - you can’t be sure your guiding policy can be implemented
- Good strategy isn’t just “what” you are trying to do. It is also “why” and “how” you are doing
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- Don’t put in the hard work to craft a good one
- The unwillingness or inability to choose
- Leaders use templates.