Richard Rumelt is considered a giant in the world of business strategy. He has authored numerous articles for Harvard Business School and two fantastic books on strategy. His latest book, The Crux, goes beyond explaining what strategy is, to actually laying out how Rumelt helps companies design their strategy. Below are the three biggest takeaways I had:
1. Strategy is a Journey
The biggest takeaway for me is that strategy is a journey. Strategy is not just setting 3 or 4 arbitrary goals at a corporate retreat and seeing where you end up at year-end. Strategy takes real time to understand where the organization wants to go, and what challenges stand in the way of getting there. Even specific goals, such as earning 15 percent on capital, are more decisions than strategy. And without having thought long and hard about what the strategy should be, these specific goals become unsupported goals, which Rumelt calls Dilbert-style corporate management. They are decisions management has made, without any real strategy behind them.
The critical thing that people miss about strategy is that it must be constantly evaluated. Good strategy leads to defined policies, procedures and actions. However, without measuring these things, there is no way to tell if your strategy continues to be an effective one. Actions taken during the first strategy sessions may lead to results that require a change in strategy further down the road. This is where goals come in. Given a set strategy and its resulting actions, there are goals that can be made to measure efficiency and effectiveness. It is the consistent switching between addressing challenges, defining strategy and measuring its effectiveness that results in a successful journey.
2. The Crux is an Addressable Strategic Challenge
I had never heard of a Crux before, but Rumelt defines it as a gnarly problem. We’ve all faced these over the years, and there doesn’t seem to be an easy answer to fixing them. This is where focusing on your Crux becomes important to strategy. It may be impossible to address an entire gnarly problem at one time, but if you can define all of the challenges the problem causes, it provides an avenue for finding those that are both critically important and addressable.
Not all challenges are created equal. Some are thorny and cause severe pain at certain times, while others are milder in pain but always present. It is the responsibility of management to determine which of these challenges are critically important to the organization’s future, meaning it strikes at a vital part of the future. There will likely be several, but the key is not all of them will be addressable. Addressability is the degree to which the challenge appears solvable. The Crux lies where critically important challenges are indeed addressable, and it is called an addressable strategic challenge. These are the areas that leadership should spend their time understanding what needs to be done and defining a solid strategy. Depending on resources available, it might be possible to address two or more strategic challenges at the same time, but this is where the majority of resources should be focused.
3. Don’t Confuse Financial Results with Strategy
As an accountant, this one jumped off the page at me. Strategy and financial results are not perfectly correlated in the short term. For one thing, the current profitability of a company may be the result of actions and investments taken in the past. Secondly, current earnings do not represent the current value of a company. The value of a company depends on all future dividends and other payments it may make to shareholders. Amazon provides a perfect example of this. For years, its strategy was to grow as fast as possible and gain as much market share as possible The result was low to zero profitability for more than a decade. However, that strategy began to pay dividends more than a decade later once it has reached a certain size, and now it is one of the most profitable companies on the planet.
Organizations need strong leaders who can define a strategy and stay with it in the face of short-term distractions.