Good Strategy, Bad Strategy

Richard Rumelt Also available in audiobook: Download our app for free listening.

Developing and implementing a strategy for a business is the central task of a CEO. And this book presents some great examples to show the differences between a good and a bad strategy. Also, the author delimits the characteristics of both types of strategy and presents the most important points to have a good strategy in your business. With this book, you will learn how to think like a strategist and stand out in the market! You will also learn how to develop and maintain a good strategy, cultivate good habits, and succeed in your business!

THE CHARACTERISTICS OF STRONG AND GOOD STRATEGIES

A bad strategy is more than the lack of a good strategy. Bad strategy often consists of banalities, unrealistic goals, and confusing slogans. Already the good, specific strategy how the organization should focus its resources to respond to challenges and move forward. The good strategy has three parts: diagnosis, guidance policies and coherent actions.

For any business, there are two sources of strength that are very important. These sources are: having a good strategy and being able to discover new strengths.

The reality is that good business strategy is rare and unexpected. Most organizations do not have a strategy with coherent actions, policies, and resources that can be applied to achieve a final goal.

The four hallmarks of a bad strategy are:

Smoothness - the strategy is strange or superficial, mixing obvious words and jargon. Example: "Our basic strategy is customer-centric intermediation. " What does that mean? This is an empty phrase. It's like a bank saying, "Our main strategy is to be a bank. "

Failure to face challenges - A strategy is a way to respond to a challenge or overcome an obstacle. If the challenge is not defined, it is impossible to assess the quality of the strategy.

Incorrect goals for strategy - For example, "We are going to increase our revenue 20% a year, while maintaining a profit margin of at least 20%", this is not a strategy. It's a goal. There is nothing wrong with setting goals, but they are not strategies. Managers need to identify obstacles to growth and develop coherent approaches to overcome them. And that's how a coherent strategy comes about.

Use bad strategic goals - you fail to solve critical problems or think about impractical issues. A good strategy has its focus on energy and resources. If you have random goals, you do not have a strategy.

THE STRENGTHS OF GOOD POWER STRATEGIES

A good strategy works by finding and applying power where it will have the greatest effect. There are nine fundamental forces of power that can and should be used in good strategies.

To apply a good short-term strategy, you may need to attack a competitor or problem with a clever combination of policy, attitudes, and resources. In the long run, the good strategy involves using policies and resources to develop capabilities that will be valuable in the future. In both cases, good strategy represents the effectiveness of actions, finding and applying viable sources of power.

With this in mind, it makes a lot of sense to familiarize yourself with the power sources used by good strategies. The more you know about them, the more cohesive your strategy will be. Finally, good strategy helps the organization move forward, but your ability to do so will be enhanced if you use the tools at your disposal. Knowing the nine sources of power is a good idea.

1. Leverage: means that you attract a performance power by focusing on the minds, energies, and attitudes of everyone working in your organization. A good strategy will use an effort application to achieve a fundamental goal promptly.

Leverage comes from a mixture of three elements:

Anticipation - you discover where future demand will be stronger. For example, you buy land before development plans are announced. By buying before, you gain value in the future.

Insights at central points - areas where small adjustments can yield great results in the future. A retailer may find that customers value cleanliness and service more than mark them in stock. Core points generate leverage because you know your customers more than your competitors.

Concentration - Focusing on fewer goals generates greater rewards. For example, politicians will favor a plan that delivers clear benefits to a small but powerful group, rather than great benefits scattered across the population. Companies also prefer to spend their resources where they can generate large and visible differences.

When the world's largest computer company knocked on the door of Bill Gates wanting an operating system, he was cunning enough to answer, "Yes, we can do that, but I want to retain the rights to sell the software to other people as well. "This is the perfect example of leverage, which comes when you anticipate events that may arise in the future, have insight into the central or critical issues of the situation, and strive at your application. Leverage can be an incredible power force for your business strategy.

2. Immediate Objectives: The second source of strategic power is to remove complexity and ambiguity and set an ambitious and precise goal for your organization. Instead of saying "let's sell a lot of these things," you say "next year, we will manufacture and sell 10 million units. "This creates power because people can get busy trying to figure out how to achieve that specific goal.

By reducing all the things an organization could do, for just one or two things it must do, it makes everyone more focused and cooperative.

3. Chain Link Systems: A system has a chain link logic when its overall performance is limited by its weakest drive. If you have a weak link somewhere in the chain, strengthening all other links will only generate a limited impact. If you have an insight into how a weak link or a limiting factor can be removed, then you may be more successful than a competitor who does not understand it.

A strategist has power if he knows what he must do to get the organization out of these terrible loops. If a bottleneck can be identified and a realistic solution can be created, impressive things can happen. One way out for companies to build and sustain strategic advantage is to create countless activities that are tied together.

4. Project: The strategy always has three main components:

Premeditation - where you plan which problems may arise.

Anticipation - where you try to figure out how your competitors will respond.

Coordinated Actions - where you try to get your team working to achieve a common goal.

If you can design and implement a cohesive combination of these three components, you have a valuable power-force. A good strategy will coordinate policies and actions between activities, to focus on competitiveness.

The main challenge in business strategy is usually to devise resources that can not be imitated by competitors without suffering a net economic loss. If you are in a strong position, then designing your best strategy will be easy. If you do not have access to unique resources, then the strategic challenge will be to find a way to build a sensible and coherent strategy that minimizes the need for what you do not have. If you have few resources, you need to devise a strategy that combines actions intelligently. The dynamics here are simple, who can design the best strategy, will have greater power in any situation.

5. Focus: Focus emerges whenever a company targets a specific market segment with a business system that provides customers with more value than other players. When this happens, this firm can capture much of the value that is generated. And that can make a smaller player make more money than a big player in the industry. If you can fit into this situation, you will have more power.

To illustrate, Crown, Cork & Seal manufacture metal containers. They specialize in gaseous soft drinks, so they compete with companies like Continental Can, National Can and American Can. While the other companies are chasing big customers and have 4 to 5 percent returns, Crown offers a return of 19 percent a year.

How can the company do this?

Crown emphasizes customer service and technical support. If a customer has a problem, the CEO of the company is happy to find out what is going on. Crown works very close to its customers.

Crown has small plants and is therefore prepared to run smaller runs. This means the company is prepared to take urgent orders.

Insights at central points - areas where small adjustments can yield great results in the future. A retailer may find that customers value cleanliness and service more than mark them in stock. Core points generate leverage because you know your customers more than your competitors.

Concentration - Focusing on fewer goals generates greater rewards. For example, politicians will favor a plan that delivers clear benefits to a small but powerful group, rather than great benefits scattered across the population. Companies also prefer to spend their resources where they can generate large and visible differences.

When the world's largest computer company knocked on the door of Bill Gates wanting an operating system, he was cunning enough to answer, "Yes, we can do that, but I want to retain the rights to sell the software to other people as well. "This is the perfect example of leverage, which comes when you anticipate events that may arise in the future, have insight into the central or critical issues of the situation, and strive at your application. Leverage can be an incredible power force for your business strategy.

2. Immediate Objectives: The second source of strategic power is to remove complexity and ambiguity and set an ambitious and precise goal for your organization. Instead of saying "let's sell a lot of these things," you say "next year, we will manufacture and sell 10 million units. "This creates power because people can get busy trying to figure out how to achieve that specific goal.

By reducing all the things an organization could do, for just one or two things it must do, it makes everyone more focused and cooperative.

3. Chain Link Systems: A system has a chain link logic when its overall performance is limited by its weakest drive. If you have a weak link somewhere in the chain, strengthening all other links will only generate a limited impact. If you have an insight into how a weak link or a limiting factor can be removed, then you may be more successful than a competitor who does not understand it.

A strategist has power if he knows what he must do to get the organization out of these terrible loops. If a bottleneck can be identified and a realistic solution can be created, impressive things can happen. One way out for companies to build and sustain strategic advantage is to create countless activities that are tied together.

4. Project: The strategy always has three main components:

Premeditation - where you plan which problems may arise.

Anticipation - where you try to figure out how your competitors will respond.

Coordinated Actions - where you try to get your team working to achieve a common goal.

If you can design and implement a cohesive combination of these three components, you have a valuable power-force. A good strategy will coordinate policies and actions between activities, to focus on competitiveness.

The main challenge in business strategy is usually to devise resources that can not be imitated by competitors without suffering a net economic loss. If you are in a strong position, then designing your best strategy will be easy. If you do not have access to unique resources, then the strategic challenge will be to find a way to build a sensible and coherent strategy that minimizes the need for what you do not have. If you have few resources, you need to devise a strategy that combines actions intelligently. The dynamics here are simple, who can design the best strategy, will have greater power in any situation.

5. Focus: Focus emerges whenever a company targets a specific market segment with a business system that provides customers with more value than other players. When this happens, this firm can capture much of the value that is generated. And that can make a smaller player make more money than a big player in the industry. If you can fit into this situation, you will have more power.

To illustrate, Crown, Cork & Seal manufacture metal containers. They specialize in gaseous soft drinks, so they compete with companies like Continental Can, National Can and American Can. While the other companies are chasing big customers and have 4 to 5 percent returns, Crown offers a return of 19 percent a year.

How can the company do this?

Crown emphasizes customer service and technical support. If a customer has a problem, the CEO of the company is happy to find out what is going on. Crown works very close to its customers.

Crown has small plants and is therefore prepared to run smaller runs. This means the company is prepared to take urgent orders.Crown plants have overcapacity, so they are always ready to help with seasonal or unexpected demands. Crown can charge more for that. Because Crown runs smaller productions, each plant has several customers (like local beverage makers), rather than just one big customer. This means that Crown does not need to renegotiate prices.

This all means that Crown managers can capture a greater proportion of the value that is generated. The company has a well-designed and logical strategy that works very well.

6. Growth: Everyone loves growth. The belief that acquisition growth creates value for shareholders is rooted in business thinking. The reality is that unless you buy a company for much less than the real, that sum equals zero.

Why do companies seek growth by making aggressive acquisitions? Reasons include:

Administrative costs may fall because they will be spread across a larger customer base.

Senior executives will be retained because they will be able to switch to peripheral operations that can be managed while waiting for the opportunity to lead the entire company.

Leaders of large firms usually receive more than small-company leaders - so growth is good from executive compensation.

The combined entities will have greater cash flow and therefore will be in a better position to do business in the future.

Better economies of scale will be available.

There is more value in being a global brand than a multinational.

In practice, it is very rare for any of these benefits to happen. The bottom line is that most firms end up paying a high value to control the companies they are acquiring. And for that, many benefits end up not happening.

And that all means that if you can craft healthy growth, you can have a great source of power while developing your business strategy. Healthy growth is the result of increased demand for the capabilities and skills you offer. It is a natural result of superior products and abilities. Healthy growth is the reward for innovation, intelligence, efficiency, and creativity. Find out how to gain market share and a higher rate of return, and you will have a great source of power.

7. Advantage: No one has an advantage at all. If you can figure out what your strength is that is also a weakness of your competitor, you will have a great strategic power strength. You can then decide where to exploit the weakness of your rivals and keep your weaknesses from being obvious to everyone. Great leaders understand the asymmetries and turn them into competitive advantages in the marketplace.

Having a competitive advantage does not automatically mean high profitability. To create value using a competitive advantage, your strategy needs to use that advantage in one of these ways:

You deepen your advantage - reducing your costs, increasing your selling price, or both.

You extend the breadth of your advantage - working with your strengths and entering new markets, entering additional areas or applying your brand to new genres.

You create more demand for your products or services - doing things that increase the a number of potential buyers. For example, you can fund studies that prove that what you sell is better than what your competitors offer.

Making it hard to copy you - gaining intellectual property rights or increasing your brand name to encompass new products. You can also make it difficult for the competition by bringing in new generations of products based on new knowledge that you have developed.

8. Dynamics: When the dynamics of the market changes, it generates numerous second-order changes. For example, when microprocessors became so inexpensive that they could be included in most products, the competitive advantages in the personal computer industry changed from those who had systems integration skills (such as IBM) to those who had networks of relationships. The industry has become modularized into a horizontal structure rather than vertically integrated.

If you can anticipate how industries will transform with new technologies, and with market changes, you can gain a valuable advantage. With the changes in the general market, industry transitions are often triggered by the same factors:

Fixed costs rise everywhere - which may mean that in the future, only major players will be concerned with the development of new products.

Deregulation can change competitiveness overnight - so always notice that major changes in government policies are announced.

All predictions are inclined - people expect current trends to be extrapolated. The real world is never smooth, but unexpected changes will always happen. Things rarely happen as they should.

Market leaders are always reluctant to change - so never expect changes in the industry to appear first in major players.

Industries Evolve Towards Efficiency - New Ideas That Increase Efficiency Always Attract Interest. Despite this, everyone knows that online news is cost-effective, but traditional newspapers are still out there. 9. Inertia and entropy: Inertia in business is an inability of the organization to change to adapt to different circumstances. Entropy refers to the fact that weak companies are often less organized and less focused, and therefore leaders need to work hard even when the market is stable. If you can diagnose the causes and effects of entropy and inertia, create a policy that drives change, and devise a set of efficient actions, you will have access to a valuable source of strategic power.

Inertia can arise in different ways:

  • Outdated financial models.
  • Predominant corporate cultures.
  • From the desire not to cannibalize lucrative offers.

The entropy also:

  • Clutter and waste can accumulate gradually.
  • Things can get blurred at the edges.
  • Competitive energy can be directed internally.

Strategic power increases when you recognize the problems of inertia or entropy in your business and respond appropriately, or when you can see the inertia and inefficiency of a rival. A great example of this was the way Netflix overtook Blockbuster because it could not / did not want to abandon its focus on physical stores.

The entropy of a rival can also be exploited. If you can see that an organizational renewal is their priority, they will be so busy with it that they will not naturally pay attention to other things. You should then take some action while they are busy dealing with internal issues.

THINKING LIKE A STRATEGIST

To create better strategies, think about how you think about strategy.

1. Think of your strategy as a hypothesis: An intelligent way to see strategy is to think of it as a hypothesis that needs to be proven.

To illustrate how this works in the real world, look at the example of Howard Schultz. In 1983 he visited a bar-cafeteria in Milan and was impressed by the fact that Milan, a city the size of Philadelphia, had 1,5000 cafe-bars. He wondered if he could recreate the experience in the United States.

The idea of ​​opening a coffee shop was not new in the United States, but Schultz developed a copy of the Italian express bar. His new shop had Italian decor and had no chairs because the cafe-bars in Milan were like that. The espresso was served in small porcelain cups, in the background, an opera was played, and the waiters wore butterflies ties.

If Howard Schultz had stopped there, he would own his local express bar, but Schultz did a much deeper thing. He began to experiment and analyze how his client responded to the experience, so he:

He got rid of the opera and printed his menu in English instead of Italian.

He made his baristas dress more casual and comfortable.

He changed the menu and added skim milk to the lattes to create handmade drinks.

With these changes, Schultz made his bar-cafeteria adapt to American tastes. Within a few years, the company was profitable, and Schultz began to open and operate other coffee shops. In 1992, Starbucks became public with 125 stores and 2,000 employees. Ten years later, Starbucks became an American icon with 4,700 points of sale worldwide and $ 2.6 billion in revenue.

Certainly, Starbucks was managed very well and took full advantage of it, but the key to its growth was that Howard Schultz treated his strategy as a hypothesis that needed to be proven or discredited. He proposed an idea, gathered data, studied what the data represented, and developed a new and improved hypothesis that was also tested. This iteration process is called "scientific induction" and is a critical element in any successful business.

If you want to develop a robust business strategy, go to the market and find out what works and what does not. You can learn a lot. Make educated guesses about what will or will not work and see if you are right.

2. Accept Criticism: To create a good strategy, you need to be less myopic than everyone else. And this is difficult because creating a strategy requires a lot of knowledge, and the more knowledge about the industry you accumulate, the harder it is to think differently. You end up tackling the challenges the same way everyone else does.

To develop better strategies, cultivate three habits:

Always remember the central model of strategy - which states that a good strategy needs to have: The diagnosis of the situation; Valuable guidance policies; Consistent actions to move forward.

Insights that lead to a great strategy can reach any of these three elements - as you diagnose what is happening, think about the policies of orientation or create plans of action.

Think about strategy regarding problems/solutions - clearly identify the problem you want to solve and the advantage of the solution you are offering. Change your attention from what is being done, to 'why' you are doing something. If you do, your strategy will have more relevance.

Always look for extra insights by subjecting your strategy to your biggest critics - and let them show you what is wrong or what is missing in your thinking. If you know someone who is going to do it brutally, but honestly, thank and enjoy. If you do not know, think of a mental dialogue. Imagine that you present your idea to Steve Jobs, visualize if he would describe your idea as "great" or "the dumbest idea in the history of the universe."

3. Be independent and make judgments: It is not uncommon for strategists to base their strategies on recent signals from the stock market or other external factors that are obviously irrelevant. The 2008 financial crisis was an illustration of what could happen in a credit bubble. Easy credit and less stringent lending standards have boosted real estate and stock prices. Quickly, borrowers became very leveraged, and the entire deck of cards collapsed as banks realized that the assets used as security had only a small fraction of their negotiated value.

Many times you look at what others are doing and assume that they know something that you do not know. And this can lead to many kinds of foolish decisions. This type of attitude arises when you assume that "the other person" is paying attention to the details, and therefore you can agree with what she is doing.

Along with this behavior is the tendency of people to assume that "this time will be different," and that the old rules no longer apply to the new world. This kind of inner vision was evident in the internet bubble in the late 1990s, and more recently in the financial crisis of 2008.

FINAL NOTES

Now that you have understood the difference between good and bad strategies, and what are the sources of power of good strategies, you can start applying your knowledge in your own business!

Do not forget to treat strategy as a hypothesis, accept criticism and always seek to improve with it. Also, cultivate good habits to develop the best strategies and exploits the powers and advantages of your business.

Finally, if you want to develop and execute a good strategy, do not abandon your judgment. You need to form your judgment on important issues and develop your strategy to deal with the most important challenges.

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