Why Doesn’t Every Business Have a Good Strategy?Review of Good Strategy, Bad Strategy: The Difference and Why It Matters by Richard P Rumelt
This is one of the best business books ever written. It clearly explains what makes for good strategy. The mystery is why bad strategy is still so common…
Review by Gareth Williams
Good Strategy, Bad Strategy is the best business book I’ve ever read. The nub of it is that strategy isn’t ambitions, visions or financial goals. Rumelt defines good strategy as the development of a coherent plan to achieve a proximate goal using distinctive strengths to overcome particular challenges. This is very much a summary and Rumelt unpacks and explains each nuance and layer of the process. It’s a clear description of a practical job. It’s certainly helped me with the big questions of what a business is for and what it should do.
Its thesis seems totally obvious once you’ve read it. But nevertheless it is widely ignored, even amongst the best paid and most qualified managements in the world. Indeed, the most enjoyable parts of the book are when Rumelt uses real-world examples to highlight bad strategy in the light of his definition of the good. Some of the wrong-headedness beggars belief, even in the most prestigious of firms.
Indeed, bad strategy still abounds ten years after publication of this very clear and practical guide to good strategy. Why? I have puzzled over this and here are some explanations...
Managers are flawed human beings. Management cares about things other than strategy. It’s more important to them to look good, be popular, interfere with detail, do down internal competitors. Not a lot you can do about this other than make sure such people aren’t given power over a firm.
Field knowledge is also important. Whilst the framework with which to develop a good strategy is provided by Rumelt, to make its specific content effective requires a deep and wide knowledge of a firm and its sector. Identifying a realistic goal, the pivotal strengths needed to achieve it, the likely challenges one will face, all require one to understand a whole range of things. Intimate knowledge of the market, the competition, the customer, and your own business and its capabilities is just the start. You have to be able to identify the way you are going to move them all in such a way that will create material commercial benefit (i.e. achieve your goal). If you have the proverbially long lever and the fulcrum on which to place it, you can move the world. But how do you get hold of the right sort of lever and spot a suitable fulcrum? This is as much an imaginative exercise as it is a rational one. One has to imagine lots of ‘what-ifs’, see things dynamically in terms of action and reaction, have an intuitive feel for what will work, what will make an impact. So theory is easy (at least, once it’s explained by Rumelt). Practice not so much.
Sometimes the world changes and leaves your once-good strategy obsolete. Many larger, established firms were founded on good strategy. For instance, the founder had a commercial vision that worked - that’s how the firm got to be big. This approach to the world became embedded in how the firm operates; the founder’s strategy becoming institutionalised. Successive generations of management were content to live off this implicit strategy, to amortise the intellectual property, so to speak. They didn’t have to be strategic leaders: being cheerleaders and operators was enough. The successful business just needed motivation and optimisation. However, this state of affairs works until it doesn’t. Either the business loses its institutional memory of the founding mission and strategy, or the market changes to make the founding strategy ineffective. The absence of a ‘living’ strategy can then become terminal, and developing a new and relevant one is often a hugely difficult task.
Constraints force you to focus. Serving a customer in such a value-creating way that they come back for more whilst you get to keep a surplus is good strategy in action. That is, profitability is a goal you’ve achieved by deploying distinctive strengths to overcome particular challenges. Many VC-funded startups today don’t need to make a profit for quite a while and so aren’t forced to think strategically in this way. This is probably compounded by the tendency to regard being an entrepreneur as a lifestyle or as a form of self-expression rather than an exercise in solving a problem for a customer in order to make money. In my experience, a surprising number of startups lack an effective strategy and these reasons may be why.
You’ll find illustrations of these in Rumelt’s book. Taken together, I feel these situations go quite a way in explaining why good strategy isn’t ubiquitous. But there’s another factor that isn’t so tangible. Good strategy seems to go together with good judgment. And good judgment seems to be an elusive, multifarious quality. I’m not sure that there is a reliable way one can develop it. But Charlie Munger seems like a good model.