What is Good Strategy?

June 05, 2018

Case categories include: Founder’s Insights   Strategy & Planning   

Over the years, I’ve learned the concept of strategy varies widely. My own indoctrination to corporate strategy started in the late 1980s, when I was promoted to the general manager position for a $300 million business for Air Liquide America. I was immediately expected to produce a business plan, which was due in three weeks. The “plan” was essentially a budget and it required many long days and nights to submit on time. A month later, our Paris headquarters sent us a revised budget, which became “our plan.” Needless to say, the process failed to produce any insights or fresh thinking.

I believe in direct, candid communication and suggested to our board that this planning process was a complete waste of time. Of course, it wasn’t long before they asked me to create a better way to develop strategy for our $1 billion U.S. business. We didn’t have a Strategy Department, so I decided to bring together a cross-functional team of executives from throughout the company to get diverse perspectives on how to improve our competitive situation and performance.

As we got together, it became apparent that each member of our team thought they knew our business pretty well. However, we all struggled to identify any new ideas beyond the normal choices: raising prices, decreasing costs, developing new products, acquisitions and so forth.

We had some intense debates and, after three days, we came to a realization. Our company had multiple products, produced by numerous manufacturing plants, distributed in several methods to thousands of customers in different quantities to various locations. But none of us were able to prove that we understood how and where we made money. Before we could begin to develop new strategic initiatives, we decided to begin with a rigorous analysis of our current business.

I thought of this experience while recently re-reading one of my favorite books on strategy - Richard Rumelt’s Good Strategy/Bad Strategy. One of the world’s most influential thinkers on strategy and management, Rumelt believes that good strategy is the exception and not the rule. He says leaders often think of strategy as an exercise in goal setting or wishful thinking, but good strategy results from rigorous analysis of the facts and the willingness to challenge their most basic assumptions.

Rumelt believes that the kernel of a good strategy includes three elements:

  • A Diagnosis that identifies the most critical aspects of the situation.
  • A Guiding Principle, which is the specific approach chosen to address challenges and overcome obstacles.
  • A set of Coherent Actions designed to carry out the guiding principle.

When I reflect back to my corporate strategy experience in 1991, it’s interesting how well our actions matched Rumelt’s advice – only we had to learn the hard way. For example, our team initially hoped to develop a brilliant, innovative strategy as quickly as possible. Instead, we ended up doing what Rumelt would later advise – we stepped back and took the time to diagnose our current situation as completely as possible.

For us that meant bringing in ten bright, young MBAs to combine all available data from our mainframe computers, then develop algorithms that would intelligently allocate every penny of expenditures. We carefully learned what critical factors drove profitability and why.

Only after we arrived at a shared understanding of our current situation did we begin to discuss strategic options.

As one might guess, industrial gases is a capital-intensive industry. Major competitors built large-scale plants and grew sales so they could run at full capacity. Competitors fought hard for every customer. Although our total U.S. business was profitable, we found many customers were unprofitable on a fully-burdened cost analysis.

Our team decided our new guiding principle would be to identify customers that we could service more profitably than our competitors, and build win/win relationships. We knew this was risky. We were consciously deciding to lose customers – plus it would require a major cultural change.

Our team discussed how we would go about changing our organization. We knew that simply communicating our new strategy would not change behavior. We needed to develop action steps designed to reinforce the strategy. Our plan included the following steps:

  1. After communicating the new strategy to the top executives, we asked each of the five Business Unit Managers to develop and present their customized business plans to the Chairman & CEO in three months. We provided support, but by presenting their personally designed plans, the managers would take ownership for their success.
  2. To simplify the guiding principles for the salesforce, we created the A.C.T. Strategy. It required our sales reps to offer unprofitable customers three alternatives: Attain a sufficiently profitable price; Convert the customer to a more profitable product; or Terminate our relationship.
  3. We redesigned our business planning processes, objectives and compensation programs to align with our guiding principles. In doing so, we knew that compensation would not drive strategy, but if it was carefully designed to align with the guiding principles, it would reinforce any momentum created by successful actions.

In the end, we didn’t develop any grandiose strategies. We simply took the company off the self-destructive path of competing solely on price in a “race to the bottom” and focused on those customers for which we could provide the most value.

Good Strategy/Bad Strategy was not yet on the shelves back then, but we would have definitely benefited from its advice. The key to creating good strategy is understanding that the world is constantly changing and that markets evolve in both predictable and unpredictable ways. To succeed, leaders must continuously review their current situations, challenge their assumptions and, when appropriate, be willing to change their strategic direction.