What is strategy and do you do it well? Useful pointers can be found in the McKinsey Quarterly (2007 Number 4) in the article, Strategy’s Strategist: An Interview With Richard Rumelt.
Richard Rumelt is a professor of strategy at UCLA’s Anderson School of Management. The Quarterly observes that in 1972 Rumelt discovered (the now accepted rule) that moderately diversified companies outperform more diversified ones.
In another first, the Quarterly adds that in 1991 Rumelt noted that it is far more important to be good at what you do than to pick the “right industry” to be in.
It’s worth reading the full interview [registration required], from which Lightbulb draws these four key ideas and supporting quotes from Rumelt:
- What is strategy? Successful strategy is a quick and skilful predatory leap or response to market changes.
- “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.”
- Is there a relationship between opportunity, ambiguity and uncertainty? The antonym for a business opportunity is ambiguity or uncertainty. The challenge for entrepreneurs is reduced if ambiguity and uncertainty can be reduced.
- “Another useful exercise is to “rethink the metaphor.”
- When does diversification work? Moderate diversification in corporate activity works OK, but greatly diversified conglomerates with decentralised business units have tended to fail. Organisational complexity can breed inefficiency and scrubby growth, thus creating opportunity for private equity “weeders”.
- “Puzzles are solved by individuals or very tight-knit teams. … Companies begin thinking about diversification only when their growth has plateaued and opportunities for expansion in the original business have been depleted.”
- What is required of CEOs given stock market price volatility? CEOs need nerves of iron and an ability to be detached to cope with stock market price volatility, which often fails to truly reflect underlying business performance.
- “Research has shown that lots of variation in stock prices has little to do with corporate or economy-wide performance. An engineer would say that the signal-to-noise ratio is very low.”