Here is a brief excerpt from the transcript of an interview of Richard Rumelt for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, 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.
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 3G1 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 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.
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Richard Rumelt is one of the world’s most influential thinkers on strategy and management. The Economist profiled him as one of twenty-five living persons who have had the most influence on management concepts and corporate practice. McKinsey Quarterly described him as being “strategy’s strategist” and as “a giant in the field of strategy.”