Recognising Good and Bad Strategies – Part 4

The second element of a good strategy: The Guiding Policy

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

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The second element of a good strategy is the “Guiding Policy”, which provides the direction to address the challenges identified in the diagnosis. The “Guiding Policy” is “pointing the way” because it directs actions and measures in certain directions without defining exactly what is to be done. Like crash barriers on a motorway, the policy guides and limits action without defining the exact content.

The “Guiding Policy” specifies how the situation identified in the Diagnosis can be managed. It should not be confused with a vision or the image of a desirable final state. A “vision” conveys an ambition, but it is not a strategy or a guideline, because there is no information on how to achieve this ambition.

But often the term “strategy” is used for what Rumelt calls “guiding policy”. He believes that it is a mistake to define a strategy only as a general thrust. Without a diagnosis, it is impossible to evaluate it; and without working through at least the first round of action, one cannot be sure that the guideline can be implemented. A good strategy is not only the “what”, but also the “why” and “how” you try to do.

When developing competitive strategies, it is common practice to start immediately with detailed descriptions of specific sources of competitive advantage. Lower costs, a better brand, a faster product development cycle, more experience, more information about customers can be sources of benefits. That’s all well and good, but it’s better to take a broader perspective at the beginning. A good “guiding policy” can itself be a competitive advantage.

A good “guiding policy” creates advantages by anticipating the actions and reactions of others, reducing the complexity and ambiguity of the starting point and using the leverage created by focusing efforts on a central or decisive aspect. It thus creates the conditions for coherent actions that build on rather than cancel each other out.

Example

Rumelt gives the following practical example as an illustration:

Stephanie owns a grocery store on the corner. She does the bookkeeping, manages the staff, sometimes runs the cash register and makes all the decisions. Nevertheless, business is going less and less well. She is considering whether she should keep prices low or offer more expensive, fresh organic products. Should she start storing more Asian staple foods for the many Asian students who lived in the area? Should the shop be open longer? Should she advertise in the local college newspaper? Should she paint the ceiling green or white? Should she offer some items for sale every week? Which one?

A consultant would tell her that she should take measures to maximize profit – technically correct but useless advice. In theory, it is simple: in the real world, however, “profit maximization” is not a helpful recipe, because the challenge of making or maximizing profit is a poorly structured problem. Because there are hundreds or thousands of possible adjustments that can be made – the complexity of the situation can be overwhelming.

Upon diagnosis, Stephanie realized that her challenge was to compete with the local supermarket. She had to poach customers from a shop that was open 24 hours a day and had lower prices. She also found out that most of her customers were students or professionals who passed by the shop almost daily because they lived or worked nearby… She came to the conclusion that she had the choice of serving price-conscious students or the more time-conscious professionals. Formulating the problem in terms of a selection from a few customer groups led to a dramatic reduction in the complexity of the issue.

So Stephanie decided to target “the busy professional who has little time to cook“. This was their guiding policy. This policy or thrust, as we also call it, helped it to create coordinated and concentrated actions and to focus its efforts. Considering the needs of the busy professionals with little time to cook, she could see that the second cash balance would help to cope with the rush at 5 pm. As well as more parking spaces in the alley. She also said that she could use the space currently used to sell snacks to students and instead offer prepared, high-quality takeaway food. Professionals, unlike students, would not come to shop at midnight, so there was no need to work very late. The busy professionals would appreciate adequate staffing after work and perhaps during their lunch break.

How do you do that in practice?

Rumelt does not give a concrete answer on how to develop a “Guiding Policy” in practice. There are a lot of approaches, from simple brainstorming to modern methods like World Cafe or Open Innovation.

A method developed by Stafford Beer, called “marketplace”, has proven to be excellent way to develop a Guiding Policy. Ideas are not only collected, but also written down, discussed and evaluated. The result is options that are not just on paper, but are immediately anchored in the minds of the employees. With the so-called “Adjacency” these options could be sorted and selected for further processing. The result is a road-map with directions that represent the Guiding Policy in in Rumelt’s sense.

In our two whitepapers Marketplace and Adjacencies we describe a concrete procedure which we apply with our clients and from which the measures for implementation are then derived.

Currently the two whitepapers are only available in German, but will be translated soon. To be informed when the whitepaper are available in English, click here.

We also provide the necessary tools and forms, and have also integrated this process into our STRATEGY.APP®.

And then what?

In the next article we will show you the methods and tools we use to initiate the implementation of the strategy on this basis.

Authors: Andreas Wettstein / Ignaz Furger

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

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