The way to understand that a new strategy is fatal for the company - an article by Helen Edwards

Here is the translation of the article by Helen Edwards, SKOLKOVO Library Project Manager, published on Forbes.ru. The original text in Russian is available here.

The way to understand that a new strategy is fatal for the company
Experts have studied mistakes of others

A company announces a new strategy. And really often that strategy sounds as follows: “We’ll provide our clients with one-of-a-kind service”, “Our income will rise at N% a year”, “Our market share will annually expand that fast, and our earnings will be increased that much”, “Fairly soon we’ll become a global company, and our expenses will be annually reduced that much”… Richard Rummelt, author of the well-known best-seller “Good Strategy, Bad Strategy”, is concerned that none of the statements mentioned above can be described as strategy. Such statements themselves are a really bad strategy.

How can a bad and a good strategy be told apart

Having researched a lot of companies Rummelt highlighted moments that’d better been avoided. Among them are: high-sounding announcements having nothing real behind them; ambitious targets without mentioning the way they will be reached; lots of discordant goals without any priorities. At that Rummelt warns that all that may be covered with lots of charming words and figures. Reports of sadly known Enron were always full of convincing figures and facts confirming all plans and so called strategies. Herewith the fact that the market outlet for the company’s products seriously differs from the gas and electric power market outlet was left out or concealed on purpose.
The skill to ban a strategy is not enough; the skill to identify a good one is desired as well. According to Mr. Rummelt, each real strategy must comprise three components: a problem that a company is facing, a set of solution ways and a set of exact actions the company is going to undertake. The essence of the first component is clear – the range of possible and real difficulties has to be narrowed in order to understand what aspects are crucial for the company. However to get what exactly defines a winning strategy is challenging not only for outsiders but for the company’s top-managers as well. That is why on MBA-programmes students are always provided with cases comprising all possible information – from the financial state of the company itself and CEO’s personal background to the current market situation. Students are to find and determine possible success factors and pitfalls themselves. At the end of the day neither the mission nor the strategy may contain what is that the company is banking on.
For instance, let’s consider the Wal-Mart slogan “Save money, live better”. The company opens its stores outside cities and in places that never had discounters. The key to the company’s strategy is not hidden in the location of single stores. Even a reader far from retail would get that if there were few people in a village the demand on products in the store would also be low. However the company’s true strategy is in the way the network functions; due to the great number of stores it’s easier to distribute goods among them and overcome competitors. It’s essential that it’s really difficult to repeat that strategy as it is more challenging to create a store network that a single shop.


Risk that can be avoided

The book “Great by Choice” by Jimm Collins (author of the bestseller “Good to Great”) and Morten Hansen provides a chance to follow up which strategies in the past led to success and which to a failure. In their book Collins and Hansen call successful companies as 10Xers. They are ten companies that business has increased ten times more during the last 15 years. At that only the companies are considered that have clearly understood their plans and drafted neat strategies.
The authors compare the process of the companies’ growth itself with a 20 miles marathon. In order to cover such distance energy should be correctly accounted. It means that a company should count on itself and less on external circumstances. Moreover that refers both to the moments when circumstances are awful and when they favour the company’s business. In their book Collins and Hansen describe how carefully Southwest Airlines has managed its business’s growth. The company has added only 4 cities to its route map a year despite that hundreds of cities were interested in it at the certain moment. As a result Southwest Airlines was on the top at the moment of crisis.
It seems that the difference between average companies and successful ones is defined by the skill to foresee difficult times. In fact the motto “In order to succeed one should take risks and act quickly” is the straight way to disappear. Collins and Hansen recommend all young entrepreneurs to be “constructive paranoids” – look before you leap, be conscious, and don’t try to find a moment to apply the whole potential, but think what may go wrong. Experiment so that in case the experiment failed you wouldn’t regret it. And the most important thing – don’t reject the tested working ideas in favour of new ones even if they seemed progressive. Bill Gates kept on working on Windows even when his OS2 had appeared on market. And Steve Jobs was carefully developing the Apple network. Don’t forget: if you want to act quickly it is either the gregarious instinct or self-asserting confidence that “your case is unique”. Bring yourself to a stop and try to become a cold provident strategist.