Daily Archives: September 3, 2007

Rumblings from Rumelt

The McKinsey Quarterly recently published an article by Dan P. Lovallo and Lenny T. Mendonca titled Strategy’s Strategist: An Interview with Richard Rumelt that had a number of great insights from the man himself.

Richard Rumfelt, a professor of strategy at UCLA’s Anderson School of Management, where he holds the Harry and Elsa Kunin Chair in Business and Society, is considered a heavyweight when it comes to strategy. He was the first person to uncover a statistical link between corporate strategy and profitability and his 1991 study demonstrated 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.

Rumelt notes that there has been a dramatic recentralization of strategy work in recent times, in contrast to the eighties where the wisdom was to decentralize into business units which would each generate a separate strategic plan, and that most corporate strategic plans have little to do with strategy. Rumelt has found that most corporate strategic plans are simply three-year or five-year rolling resource budgets with some sort of market share projection. Strategy needs to start with the identification of changes, not budgets.

The essence of strategic thinking is speculative judgments that allow one to take a position in a world that is confusing and uncertain. You can’t get rid of ambiguity and uncertainty, as they are the flip side of opportunity, and it’s not easy to clearly predict which positions will pay off, because if it was easy to calculate the financial implications of a choice – we could just use a spreadsheet, but that’s where the opportunity to profit comes into play. In essence, strategic thinking is a substitute for having a clear connection between the positions we take and their economic outcomes.

Most companies that become market leaders do so by being the first to jump through a window of opportunity when it opens – the first to get it right. The predatory approach of leaping through a window of opportunity and staying focused on big wins – not on maintenance activities – is what distinguishes a real entrepreneurial strategy. This should be backed up by the right knowledge and skill pools.

Rumelt also gives us some insight on how to identify which changes are important and which resources to combine. In business, change happens in years and there are earthqakes that cause massive changes which shift high and low ground all the time. When this happens, opportunities arise. Take advantage of them using “strategy dynamics”, which studies how those changes would shift each dimension of the industry. Does this increase or decrease industry consolidation? integration? product differentiation? The answers to these questions will trigger inductive insights that will help you identify which changes are important and how to address them. The answer will be like a solution to a puzzle.

Rumelt also notes that CEOs should be focusing on their job as managers – and the most important job of any manager is to break down a situation into challenges that subordinates can handle. In a focused company, the CEO will do this for the entire organization by examining the overall competitive situation and providing enough guidance to let the organization get to work – effectively defining the business problem for everyone else.

So what does this mean for you? It’s important to understand where your industry is moving, what the leaders are doing, and what opportunities they are creating or leaving on the table. Are the market leaders taking full advantage of the opportunities available to them? Are they locking up long term contracts, spot-buying, or balancing the two? Single sourcing or dual sourcing? Using leading sourcing or procurement technologies? Meeting consumer demand? Introducing products consumer wants? Expanding into new countries and markets? Whatever they are not doing, that they should be doing, that’s your opportunity. And this is true even if you only have responsibility for the sourcing / procurement / supply chain division – after all, in today’s global economy, that’s where the greatest opportunity for impact is at many companies.