Good Strategy, Bad Strategy Richard P. Rumelt | Free Book Summary

Good Strategy, Bad Strategy Richard P. Rumelt

Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished

Sources of Power

A good strategy works by harnessing power and applying it where it will have the greatest effect.

The fundamental sources of power are:

• Leverage
• Proximate objectives
• Chain-link systems
• Design
• Focus
• Growth
• Advantage
• Dynamics
• Inertia
• Entropy.

Sources of Strategic Leverage: Anticipation

Consider the habits, preferences, and policies of others together with inertias and constraints on change

Focus on the predictable downstream effects of changes that have taken place

Example: Toyota built hybrid engines because they foresaw that higher oil prices would create demand for greater fuel economy.

Sources of Strategic Leverage: Pivot Points

Pivot points magnify the effects of focused energy; a small adjustment can unleash pent up energy.

In Japan, customers want variety, so they have hundreds of food varieties that constantly change.

In China, customers want service, so their stores are spotless.

Using Design

• Many good strategies today are more designs than decisions, in other words, you’re building something not making a choice.
• In design problems, getting the right combination of elements that complement each other produces massive gains, being slightly off imposes massive costs.
• Tightly integrated designs are very effective but are harder to create, narrower in focus, and less flexible in the face of change.
• Strategic resources are long-lasting and cannot be duplicated without creating a net economic loss.
• Many upstart companies have a tightly integrated strategy that unseats incumbents.

Focus

Focus is attacking a segment of the market with a system supplying more value to that part of the market than anyone else can.

To find a company’s focus, look at its distinctive policies and ask what all of those policies are aimed at.

Many large companies have no strategy and no focus.

Growth and Advantages

• Growth by acquisition usually results in paying too much
• Healthy growth is a response to the demand for special capabilities
• It should be accompanied by superior profits

Advantages

• Advantages are rooted in differences from opponents
• Identify which differences are most important and maximize their impact
• Press where you have the advantage, and avoid situations where you don’t
• Interesting advantages are ones that you can increase with strategic skills, like growing a fruit that you can market more effectively using your special marketing skills. 

Using Dynamics

• Exploit a wave of change by seeing its effects before others do.
• Waves of change are exogenous: They occur because of reasons outside your company.
• Most industries are stable most of the time; without change, there may be few strategic opportunities.
• Look for a present effect, understand the forces underlying the effect and the second-order changes that these forces will create.

Inertia and Energy: Routine

Airline deregulation: Even after deregulation ended, airlines used the same rules of thumb they’d used during the period of regulation

Assumptions like “we’ll always make 12% return on capital” may be baked into decision processes but no longer apply in the new environment.

Fix these by changing the perceptions of top management.

The Science of Strategy

• Good strategies are hypotheses about what will work.
• Strategy is inductive, not deductive. You don’t already know all the basic principles you need in order to solve the problem.
• Hypotheses may arise from intuition. The best can be tested without excessive investment.
• If the strategy requires tight coordination among many different elements, it may be necessary to own each element rather than contract it out.

The Kernel of Good Strategy

• Problem-solution: force yourself to tie your action to a diagnosis by framing strategic analysis in the form of problem-solution
• Create-Destroy: Force yourself to question prior judgments by actively trying to destroy your initial intuitions
• Commit to a judgment: Force yourself to decide what is most important and write it down.