Going by the book

 

AS A DOCTORAL student at Harvard Business School in 1967, Richard Rumelt had to write up a study of a local business. “I interviewed a divisional manager for three hours, asking seven or eight questions, plus follow-ups, and covering 15 pages of foolscap notes,” he says. “At the end, the manager shook my hand and said: ‘That was the most useful conversation I’ve had all year.’

“Eventually I realised that this guy never got to talk business problems through with someone who had no agenda except to learn. And that is where the secret of good strategy is to be found: in careful study of the realities and identifying at what points pressure can be applied to bring about results. The study of strategy is a lifelong pursuit. The starting point is knowing what strategy is.”

An electrical engineer by training, Rumelt worked at Anderson School of Management at the University of California for most of his working life with three years on secondment to Insead, the business school near Paris, in the 1990s. While teaching and consulting, Rumelt was also watching and listening to business people and examining their planning processes.

He is now recognised as a leading authority on strategic decision making who looks beyond the trite and superficial for answers. The Economistputs him among the 25 most influential living influencers of management and corporate practice. In London this month to promote his book Good Strategy Bad Strategy, he says he found it hard to write for a wider audience.

“Finding the right voice was difficult, so much business writing is either hooray stuff, motivational stuff, the five steps to this et cetera. Only after a business has failed do you get away from this breathless applause,” Rumelt says.

“Slogans do not a strategy make. Far too many people come up with a financial project and think that’s a strategy. Strategy means co-ordinating various elements around an identified keystone.”

Businesses either invent their way to success or they spot some change in the market and exploit it skilfully. Either way, they need a strategy. Not a visionary call to arms.

“At a lunch at a conference I attended, the chief executive of a web services company said, ‘strategy is never quitting until you win’. I could not have disagreed more, but I was not there to argue or lecture.”

You need to be able to recognise what strategy is, Rumelt says. Strategy is what changed at Apple when founder Steve Jobs returned and simplified its product line and its retail network. Jobs had been appalled when a friend asked him to recommend an Apple computer and he could not, even though there were lots of models available.

Thinking about that made Jobs realise the product line had to be simplified and prices cut. Thus the Mac G3 was born. Having ensured the survival of Apple, Jobs was asked what he intended to do about market domination by Microsoft and Intel. Jobs replied, “I’m going to wait for the next big thing.” So strategy does not operate on a 12-month cycle either.

Strategy demands insight too. The first Gulf War in 1991 demonstrated that. Iraqi ground troops in Kuwait had dug in for the “inevitable” full frontal assault.

Gen Norman Schwarzkopf quietly shifted 250,000 troops into position in the empty desert north and west of the Iraqis. As a token force of US marines moved forward seemingly to begin the frontal attack, the real attack was launched on the Iraqis from the side. The ground fighting was over in a few days.

Had Hussein’s advisers consulted the US army’s Field Manual 105, published five years earlier and on sale for $25 (€16), they would have seen Plan A, helpfully illustrated by a diagram. Hussein’s army was outflanked by a standard operating procedure.

“When I asked my students to examine why two American supermarket chains, introducing barcode scanning equipment simultaneously, fared so differently, they were confused,” Rumelt says.

How did the underdog WalMart successfully displace the market leader K-Mart? The difference was seen in a key strategic decision. For WalMart, the business unit was the network, but for K-Mart the business unit was the individual store. But the individual store was not a viable market entity in itself. “WalMart got that, but K-Mart didn’t,” he says.

“Good strategy arises out of an independent and careful assessment, harnessing individual insight to carefully crafted purpose. Bad strategy follows the crowd, substituting popular slogans for insights.”

Enron, which is analysed in Rumelt’s book, is probably the big one when it comes to bad and self-deluding strategy, and Global Crossing is up there with it.

Perhaps most instructive is examining the strategy that is not a strategy. Often it is a wish list, a catchphrase or rallying cry. Rumelt cites a chief executive of a graphics company who believed he had a strategic concept. The 20/20 plan set the objective of increasing revenue and profit by 20 per cent per year.

He asked Rumelt to help by coaching senior people to get the required extra productivity.

Rumelt declined, but another consultant, who specialised in “visioning” was hired. This vision master called for more ambitious targets. “Mistaking willpower for strategy is very common. Bad strategy can do great damage to a business,” says Rumelt. There was no happy ending to that story.

Case Histories

Nothing flat about Ikea’s strategy

Big suburban stores, take-home flat pack products, with mail-order replacing a large sales force, Ikea has worked hard at perfecting its operation and becoming invulnerable because of the chain-link logic of its strategy, says Rumelt.

Unless Ikea starts to cut corners or a competitor builds a whole new Ikea, it will stay ahead of the competition. Ikea knows it must remain very good at its core activities, providing quality products in a way that consumers value.

“Those activities must be chain-linked (integrated) in such a way that no competitor can copy one aspect, say flat pack or mail order and, by doing it well, take business from Ikea. The chain-linked ideas, the combination of design, manufacture, sourcing, logistics must make a portfolio of skills and industry knowledge that is difficult to replicate.”

Jury out on Groupon

Groupon, the largest online daily deal coupon provider, has begun the flotation process and is expected to offer shares to investors in the autumn. However its operating losses of $540 million since 2008, and the ability of competitors to copy its offering, have raised doubts among potential investors.

Rumelt says: “Groupon has an interesting business plan, promoting and marketing its services to small enterprises. It works well with services where the margins are high and online daily discount coupons can bring in extra business.

“The business model is expensive, using lots of people on the ground to promote the services, and this, for Groupon, can be a useful impediment to competitors who might want to muscle in on the business.

“The clear strategy is to grow at a very rapid rate. The flotation helps by generating extra hype around Groupon. However the founders have taken their money out before the flotation, and investors may be disappointed as the founders will not have the same incentive to make the enterprise succeed as they did in the early stages.”

NEC – bad strategy

An example of bad strategy is the “fluff” strategy with high-flown phrases concealing lack of content.

For example, NEC Corporation in Japan says it aspires to be “a leading global company leveraging the power of innovation to realise an information society”, and hopes to develop a “sustainable ubiquitous knowledge-based ICT platform” .

Its accounts show it cannot afford the research and development programmes to realise these lofty ambitions.

This sort of guff is sometimes accompanied by the search for a transformational leader who will at a stroke lead the failing business into the promised land. The yearning for such a leader ignores the fact that some of the most successful leaders, such as Dwight Eisenhower, George Marshall and Harry Truman were not charismatic.