Thursday, January 18, 2018

Review of Good Strategy / Bad Strategy by Richard Rumelt

Found out about Good Strategy / Bad Strategy from another blogger who reviewed it last year. The author Richard Rumelt was an electrical engineer who worked at JPL and then became a strategy consultant and UCLA management professor later in life. Here he is giving a talk about the book at the LSE:

As Rumelt says, "bad strategy is not the absence of strategy, it's an active force of mistaken belief". And he is right - this shows up time and time again in business and in government and anywhere else one needs a strategy.

For example, Donald Trump ran into a problem articulating a strategy last August. Watch this speech he gave about the new strategy for the war in Afghanistan. [Previously on Afghanistan: 1,2,3,4.]

Or read it:

I arrived at three fundamental conclusions about America’s core interests in Afghanistan.

First, our nation must seek an honorable and enduring outcome worthy of the tremendous sacrifices that have been made, especially the sacrifices of lives.
Oh no! The tremendous sacrifices that have been made are a sunk cost now. What are relevant are the potential costs and benefits (if any) of continued involvement in Afghanistan, starting from now, which is what should be evaluated and discussed. Poor reasoning about sunk costs is a sure way to torpedo a strategic deliberation.

Trump also did not elucidate any interests in Afghanistan that would qualify as "core interests." As Steve Sailer says,
Afghanistan is the sort of quagmire that ideally, you'd lure your greatest enemies to attempt to occupy. “Oh no, stay out of Afghanistan! It’s the strategic center of Asia, controlling all of the mountain passes. It’s a veritable Gibralter or Constantinople of strategic world locations.”
A clear understanding of the core interests would have been important for understanding what benefits could be derived from the Afghanistan activities, which could then be compared to the costs. One of the interests that Trump did put forth was that involvement in Afghanistan could somehow prevent future terrorist attacks in America and Europe.

Of course, Afghanis had nothing to do with the 9/11 attack, and for the more minor attacks (like Barcelona which Trump mentions), the best strategy would be to make America and Europe Muslim-free zones. As a CBS correspondent summarized Trump's speech,
1) How long we will be in Afghanistan, how many of us, and what we will be doing there will remain a secret, so the bad guys can’t guess what to do. He can choose among any of the options the globalists give him, and we don't need to know about it.
2) We will win*, and that will stop Muslims in America from stabbing, shooting, blowing up and running over people, because they get their orders directly from goat herders in Afghanistan who shtup little boys.
*3) Winning is undefined. He won't decide when to leave or what to do based on anything specific, because he's a problem-solver and you have to decide on the fly as things change. This way, we can stay there forever.
The result of this muddled Trumpian mess of lies and confusion is a Bad Strategy. So what would a Good Strategy look like?

Rumelt describes the structure that underlies a good strategy as a "kernel", which contains three elements:
  1. A diagnosis that defines or explains the nature of the challenge, helping to simplify the complexity of reality by identifying the most critical, salient aspects of a situation.
  2. A guiding policy for dealing with the challenge; an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. 
  3. A set of coherent actions that are designed to carry out the guiding policy, which are coordinated with one another to work together in accomplishing the guiding policy.
Rumelt presents interesting cases where the decisionmakers seemed to follow this approach. However, see my comments from the reviews of Billion Dollar Lessons and Why Most Things Fail about possible limitations to strategic thinking.



CP said...

"A good strategy has an essential logical structure that I call the kernel. The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. […] Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy."

CP said...

"Once you gain a facility with the structure and fundamentals of a good strategy, you will develop the parallel ability to detect the presence of bad strategy. […] For example, looking at the U.S. government's 'strategy' for dealing with the 2008 financial crisis, you will see that essential elements are missing. In particular, there was no official diagnosis of the underlying malady. So, there can be no focus of resources and actions on a cure. There has only been a shift of resources from the public to the banks."

CP said...

"In the summer of 1998, I got an opportunity to talk with Jobs again. I said, 'Steve this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just to strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?'

He did not attack my argument. He didn't agree with it, either. He just smiled and said, 'I am going to wait for the next big thing.'"

CP said...

"I told him that I would explain my point of view and then let him decide whether he wanted to work with me on strategy. I said:

'I think you have a lot of ambition, but you don't have a strategy. I don't think it would be useful, right now, to work with your managers on strategies for meeting the 20/20 goal. What I would advise is that you first work to discover the very most promising opportunities for the business. Those opportunities may be internal, fixing bottlenecks and constraints in the way people work, or external. […] The end result will be a strategy that is aimed at channeling energy into what seem to be one or two of the most attractive opportunities, where it looks like you can make major inroads or breakthroughs.'"

CP said...

"To see effective design-type strategy, you must usually look away from the long-successful incumbent toward the company that effectively invades its market space. There you will find a tightly crafted and integrated set of actions and policies. Look at Canon, working around Xerox's parents and creating a radically new business model based on reliable desktop copying, rather than centralized high-speed high-volume copiers. Look at the young Microsoft besting IBM; the young Wal-Mart besting Kmart; the young Dell taking business away from HP, Compaq, and IBM; upstart FedEx pushing aside the traditional air-freight carriers; Enterprise Rent-A-Car competing effectively with Hertz and Avis with a new business model; Nvidia coming out of nowhere to steal domination of the graphics chip market away from Intel; and Google redefining the search business and taking it away from Microsoft and Yahoo! In each case you will find the upstart wielding a tightly coordinated competitive strategy."

CP said...

"Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities. It is the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity. This kind of growth is not just an industry phenomenon. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit."

CP said...

"Digging into the financial statements I began to untangle layers of complexity. The main source of confusion was the treatment of capital. The company's return-on-capital measure for each retail outfit mixed apples and oranges. One location purchased in 1950 had cost $5,000 per acre and one bought in 1989 had cost $95,000 an acre. The computed return-on-investment figures for these locations made the older one look like a huge winner compared with the newer one. This way of measuring business performance confounded retailing with real estate investment gains. To put each location on a comparable basis, I devised a new measure of operating profit I called gain to operating..."

CP said...

On software:

"'Are software engineers less expensive than hardware engineers?' […]

As is often the case, restating a general question in specific terms helped. We quickly developed an answer that has since stood up to scrutiny by a number of other technical groups: good hardware and software engineers are both expensive. The big difference lies in the cost up prototyping, upgrading, and, especially, the cost of fixing a mistake. Design always involves a certain amount of trial and error, and hardware trials and errors are much more costly. […]

Thus, software's advantage comes from the rapidity of the software development cycle - the process of moving from concept to prototype and the process of finding and correcting errors. [...G]iven that [engineers] do make mistakes, software became the much-preferred medium (unless the cutting-edge speed of pure hardware was required)."

CP said...

"Continental's system for projecting airfares for the new era of competition was the same one it had used all during the regulation era to suggest and justify fares in negotiations with the CAB. This projection had nothing to do with competition, supply demand, capacity, or market forces. It took costs and added a markup. It 'predicted' what the CAB would do in setting fares. The Boeing Planner was a fine tool, but it wasn't a fare predictor unless you had a regulator guaranteeing that you would make a 12 percent return flying half-full airplanes."

CP said...

"At rival Silicon Graphics, founder Jim Clark left the company in 1994. The new CEO, Ed McCracken, aimed the firm at selling large workstations and servers to corporate America, instructing his lieutenants to 'think out of the box and figure out how to grow 50 percent.' They attempted to engineer growth through the acquisition of a raft of workstation firms. The challenge for SGI and its acquired firms was that Windows-Intel-based workstations were gaining in power and surpassing those based on their proprietary processors and operating systems. The strategy of agglomeration did nothing to meet that challenge."