Strategy’s
strategist: An interview with Richard Rumelt PART I
A giant in the field of strategy ruminates on
strategic planning, diversification and focus, and the role of the CEO.
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 3G1cellular
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 Christensen2 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.
The Quarterly: So how does a company take a good position?
Richard Rumelt: Well, one big factor is a predatory posture
focused on going after changes. Back in the mid-1990s I was researching
strategy in the global electronics industry. I interviewed 20 to 30 executives,
CEOs, and division managers and asked fairly simple questions. Which company
was the leader in their market? How did that company become the leader? What’s
their own company’s strategy?
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.
But when I asked these same executives
about their own strategies, I heard a lot about doorknob polishing. They were
doing 360-degree feedback, forming alliances, outsourcing, cutting costs, and
so on. None of them even mentioned taking a good position quickly when the
industry changes.
Then in 1998 I had the chance to talk with
Steve Jobs after he’d come back and turned Apple around. I was there to help
Telecom Italia try to do a deal with Apple, but after that business was
completed I couldn’t help asking a question. “Steve,” I said, “this turnaround
at Apple has been impressive. But everything we know about the
personal-computer business says that Apple will always have a small niche
position. The network externalities are just too strong to upset the de facto
“Wintel”3 standard.
So what are you trying to do? What’s the longer-term strategy?"
He didn’t agree or disagree with my
assessment of the market. He just smiled and said, “I am going to wait for the
next big thing.”
Jobs didn’t give me a doorknob-polishing
answer. He didn’t say, “We’re cutting costs and we’re making alliances.” He was
waiting until the right moment for that predatory leap, which for him was Pixar
and then, in an even bigger way, the iPod. That very predatory approach of
leaping through the window of opportunity and staying focused on those big
wins—not on maintenance activities—is what distinguishes a real entrepreneurial
strategy.
The Quarterly: So he spotted—and then exploited—a change whose
time had come?
Richard Rumelt: Yes, which isn’t to say the changes had been
invisible. Lots of people in and out of the industry knew about music
downloading—you couldn’t pick up a magazine without reading about Napster.4 And people knew that MP3 players
were coming along. As in most times of change, you had major actors, with key
resources, that didn’t want to act—in this case, the music companies and the
music retailers.
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.
The Quarterly: What capabilities do companies need in order to
take advantage of these ideas?
Richard Rumelt: 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.
Right now I’m following a little company
called Sherline Products that makes machine tools for model makers. These are
small machine tools you can buy for about $3,000, such as computer-controlled
lathes and minivertical mills. Sherline sells them to model makers and to
companies creating prototypes. Sherline’s CEO says he wouldn’t have been able
to conceive these products if he hadn’t been both a hobbyist and a professional
machinist. The professional machinist side of him knew what capabilities the
machine tools really ought to have, and the hobbyist knew about operating in a
small space with a limited budget. So he simultaneously had knowledge of two
things that aren’t typically combined. That allowed him to create this product.
Similarly, the iPod came from knowledge
and resources being adroitly combined. There were lots of people who knew the
music industry and lots who knew about hardware and lots who knew about the
Web. But to quickly and skillfully access those three pools of resources and
knowledge was an impressive feat.
CONTINUES IN PART II
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