Here is an excerpt from an interview of Richard Rumelt co-conducted by Dan P. Lovallo and Lenny T. Mendonca and featured by McKinzey & Company’s McKinsey Quarterly (November 2007). To read the compkete interview, please click here.
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A giant in the field of strategy ruminates on strategic planning, diversification and focus, and the role of the CEO.
Source: Strategy Practice
As a mountaineer Richard Rumelt, a professor of strategy at UCLA’s Anderson School of Management, has achieved a number of first ascents. The same holds true in Rumelt’s academic career. 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—a discovery that has held up after more than 30 years of research. Rumelt also challenged the dominant thinking with his controversial 1991 paper, “How much does industry matter?” His study, published in the Strategic Management Journal, showed that neither industries nor corporate ownership can explain the lion’s share of the differences in profitability among business units. Being in the right industry does matter, but being good at what you do matters a lot more, no matter what industry you’re in. This study was one of the first entries in what has since become a large body of academic literature on the resource-based view of strategy.
Rumelt holds the Harry and Elsa Kunin Chair in Business and Society at the Anderson School. Recently, he met in San Francisco with McKinsey director Lenny Mendonca and Dan Lovallo, a professor of strategy at the University of Western Australia.
The Quarterly: Richard, you’ve been teaching about, researching, and consulting on business and corporate strategy for 35 years. What changes have you seen in that time?
Richard Rumelt: Some of the biggest changes have been in the process of generating business strategies—what I call “strategy work.” Around 1980 the received wisdom was to decentralize into business units, which would each generate a strategic plan. These plans were then amalgamated up the hierarchy, in some portfolio way, for senior management. That approach has all but disappeared, and we’ve seen a dramatic recentralization of strategy work.
The Quarterly: Last year the Quarterly’s survey on strategic planning found an enormous amount of dissatisfaction among executives. Many of them feel that they are wasting a lot of time on strategic planning. What advice would you give them?
Richard Rumelt: 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. Calling this strategic planning creates false expectations that the exercise will somehow produce a coherent strategy.
Look, plans are essential management tools. Take, for example, a rapidly growing retail chain, which needs a plan to guide property acquisition, construction, training, et cetera. This plan coordinates the deployment of resources—but it’s not strategy. 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.
Now, lots of people think the solution to the strategic-planning problem is to inject more strategy into the annual process. But I disagree. I think the annual rolling resource budget should be separate from strategy work. So my basic recommendation is to do two things: avoid the label “strategic plan”—call those budgets “long-term resource plans”—and start a separate, nonannual, opportunity-driven process for strategy work.
The Quarterly: So strategy starts with identifying changes?
Richard Rumelt: Right. Let’s take an example. Right now, the advent of 3G [i.e. third generation] cellular technology makes it possible to deliver streaming video over mobile phones. Cell phone makers, cellular carriers, and media companies all need to develop strategies for exploiting this change. Even though these changes have long-term consequences, companies need to take a position now. By “take a position” I mean invest in resources that will be made more valuable by the changes that are happening.
For example, I think high-bandwidth opportunities are being overhyped in this 3G game. As Clayton Christensen has pointed out, technologists often overshoot consumer demand. I tend to think this is happening in the 3G arena, so I am much less interested in the higher-bandwidth applications, like streaming video, than in lower-bandwidth opportunities, like streaming audio and mobile search. Give me a cell phone that combines voice recognition with location-filtered search results and you have a product that a wireless company can differentiate.
Now, speculative judgments like these are the essence of strategic thinking, and they can be the starting points for taking a position. Can you predict clearly which positions will pay off? Not easily. If we could actually calculate the financial implications of such choices, we wouldn’t have to think strategically; we would just run spreadsheets. Strategic thinking is essentially a substitute for having clear connections between the positions we take and their economic outcomes.
Strategic thinking helps us take positions in a world that is confusing and uncertain. You can’t get rid of ambiguity and uncertainty—they are the flip side of opportunity. If you want certainty and clarity, wait for others to take a position and see how they do. Then you’ll know what works, but it will be too late to profit from the knowledge.
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Dan Lovallo is a professor at the University of Western Australia, as well as an adviser to McKinsey; Lenny Mendonca is a director in McKinsey’s San Francisco office.
Note: Since this interview was conducted, Rumelt has published Good Strategy/Bad Strategy: The Difference and Why It Matters (Crown Business/Random House, 2011).
“Do what you can, with what you have, where you are.” Theodore Roosevelt
I selected the quotation for the title of my review because it expresses so well Theodore Roosevelt’s core values throughout his life. He was a man of action (mentally as well as physically) who made highly effective use of the resources available, whatever the given circumstances may be. Those who have read James Strock’s previous book, Lead to Serve, already know that he is a staunch advocate of values affirmed by Robert K. Greenwood in his essay “The Servant as Leader” (first published in 1970) and later developed into a book. Please keep that in mind.
Perhaps because he was a victim of bullies when he was a sickly child (“wobbly on pipe-stem legs, too weak to offer more than feeble resistance”), Roosevelt in his adult life considered it a privilege to protect as well as serve those entrusted to his care while a deputy sheriff in the Dakota Territory and then as a leader of the Rough Riders fighting in Cuba during the Spanish-American War. Later, his trust busting campaign challenged formidable power brokers on Wall Street and elsewhere whom average citizens could not. Ironically, while president, he expressed his outrage and enlisted support by taking fully advantage of what he characterized as the “bully pulpit.”
However, this is not a full-scale biography of the 26th president, nor does it attempt to be. The historical material serves as a context in which to focus on Roosevelt’s leadership and the lessons that can be learned from it. Consider this passage:
“Bringing the curtain down on an era when government was viewed as the handmaiden, if not the courtesan, of regnant financial and industrial combinations, Roosevelt declared that a transcendent, incontrovertible as the representative and guardian of the public interest. He was the first president to apply federal government authority on behalf of organized labor in a dispute with management. His leadership was indispensable in securing significant regulation of railroads.” Roosevelt was raised in the “Silk Stocking” district of Manhattan and schooled at home by tutors for reasons of health, later graduating Phi Beta Kappa from Harvard.
Merely listing his strengths as a leader fails to reveal personality of someone who was described by those who knew him as “a steam engine in trousers,” “pure act,” “a child of seven,” possessed of a “violent and spasmodic” mind, and widely viewed in foreign countries as “the typical American.” Roosevelt also remains the only president to be awarded the Medal of Honor and the most prolific author among those who have served as president. According to Strock, “The overriding lesson of Theodore Roosevelt is that leadership is a way of life.” His was a strenuous life indeed.
Those who wish to learn more about him are encouraged to check out these three volumes written by Edmund Morris:
The Rise of Theodore Roosevelt
Those in need of a less-comprehensive biography of him are directed to Theodore Roosevelt: The American Presidents Series: The 26th President, 1901-1909 written by Louis Auchincloss.
Coming For September At The First Friday Book Synopsis – ESPN Fun & Knowing Your Value, Mika Brzezinski
For our First Friday Book Synopsis in September, we have selected two terrific books. The first will be the well-discussed book on ESPN. (Karl really wants to present this book – he is as big a sports fan as anyone I know). There are few businesses that can match the rise, and staying power, of ESPN.
I will present a synopsis of a book that deals with a key question – a person’s vale. Especially the value of a woman in the workplace. Mika Brzezinski is the co-host of Morning Joe, and this book includes her story of her struggle to be paid what she is worth in that job. It is worth a careful look.
If you are in the DFW area, come join us on September 2. You’ll be able to register soon from the home page of this web site.
Synopsis by Karl Krayer
Those Guys Have All the Fun: Inside the World of ESPN
by James Andrew Miller and Tom Shales.
Synopsis by Randy Mayeux
Knowing Your Value: Women, Money, and Getting What You’re Worth
by Mika Brzezinski.