Recognising Good and Bad Strategies – Part 3

The first element of a good strategy: The Diagnosis

This is the third article on our five part series on Richard Rumel’s book “Good Strategy/Bad Strategy”

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As we have shown in the first article, a good strategy contains the three elements DIAGNOSIS, GUIDING POLICY and COHERENT ACTION. The diagnosis is the first element and therefore the foundation of a good strategy. Moreover, a good strategic diagnosis not only explains a situation but also defines an area of action. If you make the diagnosis an explicit element of the strategy, the rest of the strategy can be constantly reviewed and adjusted as circumstances change. 

The strategic diagnosis describes and evaluates the current reality, links facts to patterns and suggests paying more attention to some issues or problems and less to others. The diagnosis can classify the situation as a specific type and benefit from the experience of how similar situations have been dealt with in the past. Nowadays, there is much talk of disruption. A particularly revealing diagnosis can see the situation in a completely new light and reveal a radically different perspective and identify possible disruptions. 

The diagnosis should also help to replace the overwhelming complexity of reality with a simpler story that draws attention to its crucial aspects. This enables the starting position to be communicated in a comprehensible way and problems to be tackled together. The diagnosis can therefore be used to convey to employees the sense of a certain strategy. 

The goal of the diagnosis is achieved when we have consensus on the assessment of the initial situation. Usually, the diagnosis can be presented in a handful of challenges. Examples are

  • The cost position is too high compared to the competition
  • The capital commitment is high
  • The market position cannot be defended – the market share is too small
  • We have too few new products or services in the pipeline – important products have reached the end of their life cycle

The challenges can either be external, typically related to market position, cost position, innovation, knowledge and know-how, productivity – but also the questions around the business model or market disruptions.

In some organisations, the external challenges seem lighter compared to the internal ones. Examples of internal challenges are outdated routines, unnecessary complexity, bureaucracy, lack of cooperation between business units, pools of entrenched interests, outdated systems, or plain-old bad management.

The guiding policy, which we will cover in our next article, will depend on the nature of the challenge identified in the diagnosis.

As you can see, Rumelt is talking here about a very concrete and practical diagnosis, leaving out everything that is called vision, mission and also values. This does not mean that he is against it, but from his point of view, this is secondary for a strategy.

What does that mean now, or how do you do that in concrete terms? 

There are a vast number of analysis tools that were created mainly by consultants and are also used by them in an artistic way. The results are then typically summarized in a SWOT, which is intended to represent the initial situation. 

However, a SWOT alone is not sufficient as a diagnosis. Only when we evaluate the results of the SWOT and derive the main challenges do we have the foundation for a solid strategy. This can later be checked against the guidelines or options at any time. 

In other words, the diagnosis is good enough for the next step once a clear list of key challenges has been established. We recommend that this list be drawn up together with the key people in a company. This means that you have the results not only on paper but also in the minds of the employees and thus it becomes the knowledge of the organization. 

In our whitepaper Diagnosis – Step by Step we describe a procedure that we have been using successfully with our customers for years. We also provide the necessary tools and forms. Of course, we have also integrated this process into the STRATEGY.APP®.

And then what?

In the next article we will show you how we are developing the strategy on this foundation.

Authors: Andreas Wettstein / Ignaz Furger

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Reference
Rumelt, R., Good Strategy, Bad Strategy, New York 2017