Bad strategy abounds, says UCLA management professor Richard Rumelt, otherwise known as the strategist’s strategist. In an interview with McKinseyQuarterly, he reminds us about the hallmarks of good strategy.
First, strategic plans should not be confused with strategy. The former often involves 3-year or 5-year rolling budgets that are in reality management tools to co-ordinate the deployment of resources. They should more aptly be called “long term resource plans”.
Strategy itself should be a pathway to achieving substantially higher performance through exploiting changes in the environment e.g. in technology, consumer tastes, laws, resource prices, or competitive behaviour. As those changes do not come along in nice annual packages, strategy work should be a separate non-recurring, opportunity-driven process.
Strategic thinking involves speculative judgements, such as taking positions and investing in resources that will be made more valuable by changes that are happening. Positions that will pay off cannot be predicted from the start as ambiguity and uncertainty are the flip side of opportunity. If you want certainty and clarity, wait for others to take a position and see what works but you will then likely be too late to profit from that knowledge.
A predatory approach is required i.e. taking a position quickly when the industry changes and the window of opportunity opens as well as staying focused on those big wins. Those changes are often visible but the skill comes from being able to access assets that are not usually combined e.g.knowledge of the music industry, knowledge of the hardware and knowledge of the web in case of the i-pod.
Most strategy concepts used today such as core competencies, experience curves, market share, entry barriers, scale, corporate culture, etc are essentially static. They no longer work in the rapidly changing modern business world. Only a more dynamic approach enables the identification of changes that are important and of which resources to combine, e.g. which changes shift each dimension of an industry. Would the industry become more concentrated or less? More integrated or less? Would there be more product differentiation or less? More segmentation or less? Given consumer desires and available technologies, how should the industry or business look in, say, ten years? Where are the economic forces trying to take you? Should your strategy ride those forces or fight them?
Few exercises can help trigger inductive insights:-
a. Listing the common biases: The list helps people look beyond the standard consensus view of what is happening e.g. most people overestimate the importance of scale and underestimate the inertia of buyers, so what happens if we adjust our views to control these predictable biases?
b. Rethinking the metaphor: During the telecom boom of the 90s, people thought that fiber optic would totally restructure telecoms in the way the microprocessor had revolutionized the computer industry. But the metaphor was specious as excess cable capacity has a very different effect as compared to excess PC capability. As network capacity is a shared resource, excess capacity can slam prices down to variable cost, which is virtually zero. By contrast, overpowered PCs have no real effect on price, because there is no market for using excess CPU cycles or excess memory. Once you see the underlying metaphor, you can adjust your expectations.
c. Identifying the “value denials”: These are products or services that are both desired and feasible but are not being supplied to the market. The concept combines insights into demand and potential supply. A classic example is an airline ticket guaranteeing that your luggage will not be lost. There must be a price at which airlines would hand-carry luggage to the baggage compartment. There are times when we would pay the premium, but those services are not offered. That is a value denial. A value denial is a business opportunity. One useful way to think about change is to turn aside from the central innovation and ask yourself what value denials it will uncover. How will they be fixed? And what value denials will then be uncovered by that fix?
Those type of strategic insights are essentially puzzles that are better solved by individuals or very tightly-knit teams. Writing three coherent paragraphs about what is changing in an industry and what is the best way to assess opportunities can lead to substantially higher performance.
More on the original interview with McKinsey Quarterly can be found HERE.
