McKinsey Quarterly interviewed Richard Rumelt in November 2007. Rumelt is author of Good Strategy, Bad Strategy and a professor at UCLA’s Anderson School of Management. “In 1972 he became the first person to uncover a statistical link between corporate strategy and profitability, finding that moderately diversified companies outperform more diversified ones… Being good at what you do matters a lot more, no matter what industry you’re in.”
« Around 1980 the received wisdom was to decentralize into business units, which would each generate a strategic plan… That approach has all but disappeared, and we’ve seen a dramatic recentralization of strategy work. »
« Most corporate strategic plans have little to do with strategy. They are simply three-year or five-year rolling resource budgets and some sort of market share projection. »
« These resource budgets simply cannot deliver what senior managers want: a pathway to substantially higher performance. There are only two ways to get that. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment—in technology, consumer tastes, laws, resource prices, or competitive behavior—and ride that change with quickness and skill. This second path is how most successful companies make it. Changes, however, don’t come along in nice annual packages, so the need for strategy work is episodic, not necessarily annual. »
« Speculative judgments like these are the essence of strategic thinking… »
« I saw an interesting pattern. Most executives easily explained how companies became market leaders: some sort of window of opportunity opened, and the leader was the company that was the first to successfully jump through that window. Not exactly the first mover but the first to get it right. »
« Then in 1998 I had the chance to talk with Steve Jobs… “So what are you trying to do? What’s the longer-term strategy?” … He just smiled and said, “I am going to wait for the next big thing.” … You couldn’t pick up a magazine without reading about Napster… Enter Jobs. He was perfectly positioned because he was a bit of an insider in the entertainment industry but didn’t have any of those asset positions that were being threatened. He didn’t need to make a fantastic leap of imagination into the far future. He found a set of ideas that needed to be quickly and decisively acted upon. »
« There is no substitute for entrepreneurial insight, but almost all innovation flows from the unexpected combination of two or more things, so companies need access to and, in some cases, control over the right knowledge and skill pools. »
« Strategy dynamics studies how those changes would shift each dimension of an industry. Would the industry become more concentrated or less? More integrated or less? Would there be more product differentiation or less? More segmentation or less? Given consumer desires and available technologies, how should the industry or business look in, say, ten years? Where are the economic forces trying to take you? Should your strategy ride those forces or fight them? »
« There are tools and exercises that help trigger inductive insights about dynamics. One is a list of common biases… Another useful exercise is to rethink the metaphor… I use another tool I call “value denials.” These are products or services that are both desired and feasible but are not being supplied to the market….So one useful way to think about change is to turn aside from the central innovation and ask yourself what value denials it will uncover. How will they be fixed? And what value denials will then be uncovered by that fix? »
« One other thing. If I had my way, small groups like this would be absolutely prohibited from doing PowerPoint presentations! Using bullet points so much drives out thinking… If you ask a group to put aside the bullet points and just write three coherent paragraphs about what is changing in an industry and why, the difference is incredible. Having to link your thoughts, giving reasons and qualifications, makes you a more careful thinker—and a better communicator. »
« The Quarterly: Why are the highly diversified companies less profitable?
Richard Rumelt: It seems that the more complex an organization gets, the more likely it is that inefficient and unproductive businesses accumulate in the nooks and crannies and back alleys—and sometimes right up there in center aisle. These businesses are subsidized by their cousin, brother, and sister businesses that are doing well, and they stick around for too long because there’s a bias against shutting things down. Often we’ll find that these are pet projects of senior management and cutting them would cause a huge ego blow. It’s extremely unrewarding to a person’s career to weed the garden inside a company. It is much easier and more popular politically to grow the company than it is to go around and disrupt everybody’s neighborhood.
One of the things we see happening in private equity is highly incentivized people assuming this very unpleasant task of taking a company private, weeding its garden, and then taking it public again. It hasn’t happened with highly diversified companies yet, but we see that, essentially, something like that is happening as relatively complex organizations are cycling through private equity. »
« The most important job of any manager is to break down a situation into challenges that subordinates can handle. In essence, the manager absorbs a good chunk of the ambiguity in the situation and gives much less ambiguous problems to others. »
« We create our competencies by making bets and putting the right resources in place to develop those competencies. We have to understand that competencies are created by activity. If you internalize enough of those activities, you actually get good at them, and they give you a sustainable advantage for a certain period of time. »