Good Strategy Bad Strategy: What is the Kernel of a Strategy (Part II – Diagnosis)

In this post I continue the conversation I started in the last post on the kernel of a ‘good strategy’.  Why?  Because if you are talking about a ‘customer strategy’, a ‘customer experience strategy’, or any other strategy you should know what you are talking about when you talk ‘strategy’.  And because you should know the difference between what passes for strategy (‘bad strategy’) and real strategy (‘good strategy’).

As the following diagram shows the kernel is composed of three strands: Diagnosis; Guiding Policy; and a Set of Coherent Actions.  In this post I want to explore the first strand – Diagnosis – and stress its criticality to generating a ‘good strategy’.

Diagnosis is concerned with the question “What is going on here?”

In my consulting work(as a strategist) a great deal of my time is spent in the following: creating a ‘map of the territory’; and coming up with a diagnosis.   Being an outsider I have to ‘create a map of the territory’ as it is essential to being able to come up with a diagnosis.  So I conduct high level research on the company (history, key players, organisational structure, products, markets, distribution channels, financial performance..), its industry, its competitors etc.

Once I have an adequate (usually high level) ‘map of the territory’ to orient myself I concern myself with the task of Diagnosis.  The diagnosis is always linked to the ‘strategic issue’ that requires a strategy. What might that strategic issue be?  Examples include: Why are we signing up less and less customers through our website?  Why is it that so many customers are leaving us and going to our competitors?  Why is it that our sales folks are so much less effective in selling to our business customers?  Or why is it that there is crisis around the Euro?

Lets make this discussion real through a personal example.  During August holidays my young daughter told us (her parents) that her left wrist was hurting.  It continued to hurt for several days and we could not figure out why it was hurting.  So my wife took her to a doctor.  The doctor asked various questions: when did it start; what were you doing, where does it hurt, what kinds of actions cause it to hurt…. And then he examined her arm: pressing here, pressing there, and observing her reactions.  At the end of this his answer to the question “What is going on here?” was that my daughter was most likely to have as a small fracture in her wrist.  This was later confirmed by the x-rays.

Diagnosis: insight, genuine insight, is of the utmost significance

According to Richard Rumelt in Good Strategy/Bad Strategy:

“An especially insightful diagnosis can transform one’s view of the situation, bringing a radically different perspective to bear.  When a diagnosis classifies the situation as a certain type, it opens access to knowledge about how analogous situations were handled in the past…”

What does an insightful diagnosis look like?  Allow me to share a personal example, again.  My eldest was being disruptive and obnoxious at home but only at home. So I was grappling with the question “What is going on here?”.  I came up with various answers: he eats too much junk food and that is affecting his mood/behaviour; he is bored; we are not being strong/consistent enough in enforcing discipline ……  When I discussed this with my wife she replied: “What is missing is a relationship between you and him!”  It immediately struck me that this was a game changing diagnosis: it opened up avenues that had simply not been present.  And it struck me that it was an accurate and insightful diagnosis: most poor/disruptive behaviour is a result of poor relationships. As a result I ended up with a completely different guiding policy and this triggered a radically different set of coherent actions.

Do you want examples of especially insightful diagnosis that transformed a view of the situation at hand?  You will find them (Apple, IBM) towards/at the end of this post.

Diagnosis: what constitutes a good diagnosis?

It is not always possible to come up with an insightful, game changing, diagnosis.  Sometimes we just have to settle for a good diagnosis. What constitutes a good diagnosis?  A good diagnosis according to Rumelt:

  • links facts into a pattern and at a minimum names/classifies the situation into a certain type;
  • replaces the overwhelming complexity of reality with a simpler story, a story that calls attention to its crucial aspects and thus enables/encourages more attention to be paid to some issues/feature and less to others;
  • “does more than explain a situation, it also defines a domain of action” that is to say it is actionable, it identifies one or more levers that can be pulled; and
  • is explicit and thus permits an independent person to evaluate the strategy (diagnosis, guiding policy, set of coherent actions).

Diagnosis: both a hypothesis and a decision of utmost significance

The real world is complex there are so many actors/variables that interact and are interdependent.  Put differently, challenges that really matter and which face companies/organisations/governments are ill-structured.  That is to say it is not obvious how to define the problem (the situation at hand) nor is there an obvious/sound list of guiding policies or actions.  And the linkage between actions and outcomes are not clear.  This means any diagnosis and every diagnosis in an ill-structured situation is an educated guess.

It also means the a diagnosis is a decision – a decision of substantial importance. Why?  Because the diagnosis shapes the future: the guiding policy, the set of coherent actions, and the outcomes that result.   As Rumelt says:

“In business, most deep strategic changes are brought about by a change in diagnosis – a change in the definition of a company’s situation.”

Are you wondering what he is talking about and pointing out?  Then I draw your attention to:

  • Steve Jobs who changed the diagnosis and thus did the opposite of what the experts advised – sell Apple, license the software – when he took the helm at the almost bankrupt Apple;
  • Lou Gerstner who changed the diagnosed and how he did the opposite of what experts were advising – break IBM up into seperate/distinct businesses; and
  • Stepen Eloph who has shifted Nokia from independence to being reliant on Microsoft and its operating software for smartphones.

I will continue the conversation in the next post and explore the second element within the kernel of a strategy: the Guiding Policy.

The Strategy Book: strategy is about shaping the future and other useful tips

Do you have any interest in strategy, strategic thinking, strategy making? Have you wondered what strategy is, what it involves, how to go about it? Do you consider yourself a rational/analytical person? If you have answered yes then you might just want to consider reading The Strategy Book by Max McKeown. In this post I want simply to share some of what I found interesting/useful.

What is strategy about and why is it so important?

“Strategy is about shaping the future…… Your strategy will craft a response to external waves, needs of customers and the actions of competitors.”

That pretty much says it all. The future is not simply a continuation of the past. We, collectively, co-create the future and that means that the future is open to being shaped. Most important those that shape the future are the ones that are most likely to prosper from how the future turns out. Furthermore, the essence of the world is flow/change – that is to say that the world is dynamic and as such the external environment, customers and competitors will present your organisation with opportunities and threats.

If you are not open to detecting and responding to these then you are likely to find yourself in the same space as RIM or Nokia. And RIM and Nokia are the living embodiments of what happens when you focus solely on operational excellence – doing the existing things better/faster/smarter. No execution is not enough for a business to flourish: execution is necessary yet not sufficient, strategy is required.

What does strategy require/involve?

“Strategy is about outthinking your competition. Its about vision first and planing second. That’s why it is so important that you think before you plan. And that the thinking part of what you do is given priority….Thinking like a strategist is demanding intellectual work…”

I qualified as a chartered accountant many years ago and was heavily involved in business planning and analysis. Which is another way of saying that I have hands on experience in strategic planning. What did I experience? Lots of planning and a dearth of the kind of thinking that can be called strategic. It occurs to me that most of the organisations that I have worked in/consulted for do not create a clearing for strategic thinking to show up / take place.

Yet, I am not in complete agreement with Max. Kenichi Ohmae, a strategist, pointed out a long time ago that too many companies focus too much on their competitors and not enough on customers – in particular creating superior value for customers and potential customers. Interestingly, Max is aware of this because he mentions it later in the book.

Central to strategy is thinking like a strategist: what does this involve?

“Becoming a strategic thinker is about opening your mind to possibilities. It’s about seeing the bigger picture. It’s about understanding the various parts of your business, taking them apart, and then putting them back together again in a more powerful way. It’s about insight, invention, emotion and imagination focused on reshaping some part of the world.”

Now you know why great strategy is rare. Great strategy requires strategists with a sound understanding of the business along with a combination of competencies that are rare in one individual: imagination and creative thinking; systems (holistic) thinking; and critical/analytical thinking. Which kind of suggests to me that perhaps it is better to ‘play the strategy game’ as a team, preferably the entire organisation, rather than leave it to one or two individuals.

Thinking like a strategist: 4 tips

In part two (thinking like a strategist) of The Strategy Book, Max gives four tips.

Reacting is as important as planning

“Unplanned opportunities may be your best chance of creating a great strategy, so you need to be constantly looking for them…… the greatest opportunities come from unplanned events.”

Ingvar Kamprad, IKEA founder, lived near furniture makers so he started selling furniture. He reacted to a boycott from local rivals by making his own furniture. He reacted to excessive customer demand by coming up with self-service. Then there is the ‘Honda Effect’ – Honda made a successful entry into the US market despite the original strategy being a failure. This approach to strategy is in line with Mintzberg’s view on how strategy comes about in the real world.

Taking risks

“All decisions are about the future. Since the future is uncertain, all of your decisions will have an uncertain outcome. But because you’re trying to shape the future you still have to make decisions…..”

The point is that risk is inherent in strategy making and the course of action (strategy) that is chosen to be implemented. One source of risk is that we have finite minds seeking to grasp/comprehend an infinite world. Another source of risk is simply the ‘butterfly effect’ a tiny change, changes everything and renders our strategy ineffective. Then there is the risk of choosing a strategy that the organisation is simply not fit to implement….. Then there is the risk of doing nothing.

Risk cannot be avoided the challenge for the strategist is to know what risks are involved and have a correct grasp of these risks: how likely is it that the risk will turn into actuality and what is the most likely impact. With this understanding sensible choices can be made.

Looking over your shoulder

“Strategies compete with strategies…….. You need to be aware of the competition is doing. You need to know what customers are doing. Paranoid adaptation is part of the strategy game. Look up, down, back and ahead.”

I believe that Andy Grove said it best with his book Only The Paranoid Survive. Or as I told one of my clients, the bomb is ticking the only question is when it will explode and your business will be blown out of the water.

Knowing where grass (really) is greener

“It’s a fair bet that at some point what made your company money in the past will stop making money. New products replace old products, Entirely new services replace old services. The best places to sell your products will change. And customers who mattered so much will stop (or start) buying. You need to know when (and how) to switch focus.”

The key point is that one has to be constantly open to and looking for new markets. Are there customers who are not buying your products yet would love to buy your products? What can you do about that? Are there segments of the market that are growing faster than others? Are there new entrants to the market? Clayton Christensen says be wary of the new entrants that you are most likely to ignore – those that make inferior versions of your products and who sell them cheaper to a segment you are happy to walk away from. Remember Toyota and the crappy cars it made/sold and eventually it went on to compete with Mercedes in the luxury market!

And finally

If you would like a free copy of The Strategy Book then drop me an email. The first person to email me will receive the book.