Dan Lebrero

Posted on Nov 24, 2020 • Originally published at danlebrero.com on Nov 24, 2020

Book notes: Good Strategy, Bad Strategy

#books #strategy

These are my notes on Professor Richard Rumelt's Good Strategy / Bad Strategy.

The book is an excellent introduction about what strategy is and what is not.

You can see Rumelt talking about the content of the book in this video.

Key Insights

Basic idea of strategy: apply strength to opportunity.
Subtle shifts in viewpoints is a huge source of strength.
Most useful shift in viewpoint: thinking about your own thinking.
- Question your own ideas.
A new strategy is an hypothesis and its implementation an experiment.
Good strategy:
- Has:
  1. Diagnosis:
    - Simplifies reality by identifying the critical aspects.
    - Answers: "What is going on here?".
  2. Guiding policy:
    - It channels action in certain direction without defining exactly what shall be done.
    - Drawn upon or creates sources of advantage.
  3. Coherent action.
- Emphasize focus over compromise.
- Build on knowledge only available to your company.
- Is an advantage on itself.
Strategy is not about choice/decision but about design, more constructed than chosen.
- Most of the work in system design is figuring out the interactions.
Strategy is as much what to do as what not to do.
The secret of using advantage is understanding the advantage itself:
- Which kind it is.
- Under which conditions it is.
Quality matters when quantity is an inadequate substitute.
The more uncertain the future, the more proximate objectives must be.
- How proximate an objective is depends on the skills and accumulated resources of the organization.
Resources and tight coordination are partial substitutes for each other.
When change occurs, understand the forces underlying the main effect to find out the second order effects. These second effects are the ones to focus on.
Weakly managed organizations tend to be less organized and focused.
To change the culture, replace the alpha members.
Make a list.
Judgment can be practiced.
Learn both from successful and failing organizations.

Introduction: Overwhelming obstacles

Core of strategy work: Discovering the critical factors in a situation and designing a way of coordination and focusing actions to deal with those factors.
Good strategy honestly acknowledges the challenges being faces and provides an approach to overcoming them.
Strategy selects the path, identifying how, why, and where determination and leadership are to be applied.
Strategy must include concrete actions ("Implementation").
Goal setting != strategy.

Part one: Good and bad strategy

Basic idea of strategy: apply strength to opportunity.
Huge sources of strength:
- Having a coherent strategy, one that creates strength.
- Subtle shifts in viewpoints.

Chapter 1 - Good strategy is unexpected

Having a good strategy is an advantage because most companies do not have one and do not expect you to have one.
Apple strategy: survive and wait for the next big thing. Succeed on that next thing.
Strategy is as much what to do as what not to do.

Chapter 2 - Discovering power

When there is a successful company, there is always failing competition. Learn from both.
- What the competition was not able to copy?
Wal-Mart: did not break conventional wisdom, it broke the definition of store.
US Department of Defense: From pure military capabilities to asymmetric cost on opponent.

Chapter 3 - Bad strategy

Hallmarks of bad strategy:
1. Fluff:
  - Origin in [...] and recently in the IT industry.
2. Failure to face the challenge.
3. Mistaking goals for strategy.
4. Bad strategic objectives:
  - Fail to address critical issues.
  - Impracticable.
True expertise is making a complex subject understandable.
If a challenge is not defined, it is impossible to assess the quality of the strategy.
Strategy work is episodic, not annual.
One of the challenges of being a leader is mastering the shift from having others define your goals to being the architect of the organization's purpose and objectives.
Goal: overall values and desires.
Objective: specific operational target.
Strategy transforms goals into coherent actionable objectives.
Underperformance is not a challenge. Is a result.
- The true challenges are the reasons for it.

Chapter 4 - Why so much bad strategy?

Bad strategy is the active avoidance of the hard work of crafting a good strategy.
Pathways to bad strategy:
1. Unwillingness or inability to choose:
  - Essential difficulty in creating strategy is not logical, it is choice itself.
  - Universal buy-in usually signals the absence of choice.
2. Template-style strategy:
  - Charisma does not guarantee effective leadership.
  - Charisma (transformational) leadership:
    1. Set vision.
    2. Inspire people to change for the org.
    3. Empowers people to accomplish the vision.
3. New Thought (aka New Age):
  - The believe that thinking in success and avoiding thinking in failure is enough to be successful.
  - A shared vision within an organization being required for success is part of the New Thought.

Chapter 5 - The Kernel of good strategy

Good strategy has an essential logical structure called Kernel, that has:
1. Diagnosis:
  - Simplifies reality by identifying the critical aspects.
  - Leaders must absorb a large part of a situation/problem's complexity and ambiguity and pass on to the organization a simpler problem, one that is solvable.
  - Answers: "What is going on here?".
  - At minimum:
    - Names/classifies situation.
    - Links facts into patterns.
    - Highlights important issues.
  - It defines a domain of action:
    - If no action can be derived from it, the diagnosis is useless.
  - If a challenge is ill-structured, the diagnosis has to be an educated guess.
  - In business, most deep strategic changes are brought about by a change in diagnosis.
2. Guiding policy:
  - Overall approach to cope or overcome the obstacles identified in the diagnosis.
  - Drawn upon or creates sources of advantage.
  - It channels action in certain direction without defining exactly what shall be done.
  - Not goals or vision.
  - In nonprofit and public policy, good strategy creates advantage by magnifying the effects of resources and actions.
  - A good guiding policy itself can be a source of advantage by:
    - Anticipating actions of others.
    - Reducing complexity and ambiguity.
    - Concentrating effort on critical aspects.
    - Create coherent actions.
3. Coherent action:
  - Non conflicting and coordinated.
  - Resource commitments.
  - Coordination by itself can be a source of advantage.
Strategy is visible as coordinated action imposed on a system.
- Imposed: exercise in centralized power used to overcome the natural workings of a system.

Part 2: Sources of power

Chapter 6 - Using leverage

Strategic leverage, mix of:
- Anticipation:
  - Buyer demand.
  - Competition reactions.
- Pivot points:
  - Small adjustment magnifies effect of effort.
- Concentration:
  - Focus on few objectives.
  - Due to:
    - Limited resources.
    - Limited leadership cognition.
    - Perceived effectiveness:
      - A 100% improvement in one department seems more effective than a 10% improvement in 100 departments.

Chapter 7 - Proximate objectives

Proximate objective: one that is close enough at hand to be feasible.
Proximate objective is guided by forecast of the future.
- The more uncertain the future, the more proximate objective must be.
How proximate an objective is depends on the skills and accumulated resources of the organization.

Chapter 8 - Chain-link systems.

Strengthen the weakest link.
Quality matters when quantity is an inadequate substitute.
Find limiting factors.
Quality matching: when each link is managed separately, the system can get stuck in a low-effectiveness state:
- Quality of the chain is equal to the lowest link.
- Improving on any other link is a waste.
Problems with chain-linked:
1. Identify bottlenecks.
2. Incremental change may not pay off and even make things worse:
  - Focus success measurement on change itself.
Excellence in a chain-linked system is difficult to replicate.

Chapter 9 - Using Design

Strategy is not about choice/decision but about design, more constructed than chosen.
In design, issue of mutual adjustment:
- Sharp gain or cost on getting the combinations right or wrong.
Most of the work in system design is figuring out the interactions.
A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation.
Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions.
Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.
Resources and tight coordination are partial substitutes for each other.
Tight integration cost:
- Harder to create.
- Narrower focus.
- More fragile.
- Less flexible to change.
Strategic resource is one that competitors cannot duplicate without suffering a net economic loss.
- High quality strategic resource yielding a powerful competitive advantage makes for great strategy simplicity (think useful patents).
- But it can impede innovation.
- Current profits are rarely associated with recent action, but with actions from the past.
Success leads to laxity and bloat, and these lead to decline.

Chapter 10 - Focus

To identify a company's strategy:
1. Studying how competitors make their living.
2. Notice each policy on that company that are different from the norm in the industry.
3. Figure out the common target of those policies.
When doing analysis, do not stop at the first reasonable explanation. Test against evidence.
Focus:
1. Coordination of policies that produce extra power through their interacting and overlapping effects.
2. Application of that power to the right markets.

Chapter 11 - Growth

Growth cannot be brought through acquisitions.

Chapter 12 - Using advantage

The secret of using advantage is understanding the advantage itself:
- Which kind it is.
- Under which conditions it is.
By providing more value you avoid being a commodity.
When another person speaks, you hear both less and more than they mean.
A competitive advantage is interesting when one has insights into ways to increase its value.
Competitive advantage != high profitability.
Increasing value requires a strategy for:
- Deepening advantages: increase value or reduce cost.
- Broadening the extent of advantages:
  - Based on know-how is easier.
  - Based on customer beliefs (like brand) can damage if extension is a failure.
- Creating higher demand.
- Strengthening the isolation mechanism that blocks easy replication.

Chapter 13 - Using dynamics

Restate a general question in specific terms help to answer the general question.
To gain strategic advantage, exploit a wave of change.
Waves of change are exogenous.
Most industries, most of the time, are fairly stable.
When change occurs, understand the forces underlying the main effect to find out the second order effects. These second effects are the ones to focus on.
To discern a wave of change, you need to understand the gritty details well enough to question experts.
Guidepost:
1. Rising fixed costs, especially product development.
2. Deregulation.
3. Predictable biases in forecasting:
  - Ignore the fact that all business trends peak and then decline.
  - Market leaders will duke it out for supremacy.
  - The future winners will be the current apparent winners.
4. Incumbent response (see (chapter 14)[#ch-14]).
5. Attractors state:
  - How the industry "should" work based on demand and overall efficiency.

Chapter 14 - Inertia and entropy

Entropy: weakly managed organizations tend to be less organized and focused.
Inertia:
- Even when change programs at full speed, it can take years to alter a large company.
- Types:
  1. Routine:
    - If top management are convinced that new routines are essential, change can be quick.
  2. Culture:
    - To break:
      1. Simplification: it will highlight obsolete units, waste, bad behaviour.
      2. Fragment the operation units.
      3. Triage units: close, repair or empower.
    - To change the culture, replace the alpha members.
  3. By proxy:
    - Abandon old profit streams.

Chapter 15 - Putting it together

Nvidia strategy.

Part 3 - Thinking like a strategist

Change in viewpoint is important when creating strategy.
Most useful shift in viewpoint: thinking about your own thinking.

Chapter 16 - The science of strategy

A new strategy is an hypothesis and its implementation an experiment.
Best knowledge to build good strategy is the one available only to your company.
If new insights or ideas are not needed, deduction is sufficient.
Strategy requires induction.

Chapter 17 - Using your head

Make a short list of the most important and actionable.
- Things to do, not things to worry about.
It is unnatural, even painful, to question your own ideas.
Good strategy emphasize focus over compromise.
Judgment can be practiced:
- Write down before every meeting what issues will arise and who will take which positions.

Chapter 18 - Keeping your head

Independent, not eccentric.
Doubting without curmudgeon.
Errors in judgment:
1. Engineering overreach: when failure modes and consequences are not understood.
2. Smooth-sailing fallacy: when lack of recent failures make people overconfident.
3. Working under risk-seeking malincentives:
  - You profit if things go well, others pay if things go bad.
4. Social herding.
5. Inside view: believe "this case is different" despite data.

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