McKinsey on Strategy – Interview with Richard Rumelt

The McKinsey Quarterly recently published an interview with Richard Rumelt on corporate strategy.

Rumelt argued that companies become successful either through innovation, or through finding an emerging trend in the market and exploiting it earlier and more successfully than others. In Rumelt’s words:

Take, for example, a rapidly growing retail chain, which needs a plan to guide property acquisition, construction, training, et cetera. This plan coordinates the deployment of resources—but it’s not strategy. These resource budgets simply cannot deliver what senior managers want: a pathway to substantially higher performance.

There are only two ways to get that. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment—in technology, consumer tastes, laws, resource prices, or competitive behavior—and ride that change with quickness and skill. This second path is how most successful companies make it. Changes, however, don’t come along in nice annual packages, so the need for strategy work is episodic, not necessarily annual.

Rumelt’s academic research in the 1990s interviewed a number of executives in the electronics industry, and found that most of the executives interviewed saw the leaders as rising to their position of leadership through adroitly taking advantage of trends and opportunities – but they typically failed to apply these insights to their own strategic positioning:

Most executives easily explained how companies became market leaders: some sort of window of opportunity opened, and the leader was the company that was the first to successfully jump through that window. Not exactly the first mover but the first to get it right.

But when I asked these same executives about their own strategies, I heard a lot about doorknob polishing. They were doing 360-degree feedback, forming alliances, outsourcing, cutting costs, and so on. None of them even mentioned taking a good position quickly when the industry changes.

However, in the case of Apple, Jobs had a very clear strategy aligned with this insight:

. . . in 1998 I had the chance to talk with Steve Jobs after he’d come back and turned Apple around . . . I couldn’t help asking a question. “Steve,” I said, “this turnaround at Apple has been impressive. But everything we know about the personal-computer business says that Apple will always have a small niche position. The network externalities are just too strong to upset the de facto “Wintel” standard. So what are you trying to do? What’s the longer-term strategy?”

He didn’t agree or disagree with my assessment of the market. He just smiled and said, “I am going to wait for the next big thing.”

Jobs didn’t give me a doorknob-polishing answer. He didn’t say, “We’re cutting costs and we’re making alliances.” He was waiting until the right moment for that predatory leap, which for him was Pixar and then, in an even bigger way, the iPod. That very predatory approach of leaping through the window of opportunity and staying focused on those big wins—not on maintenance activities—is what distinguishes a real entrepreneurial strategy.

Of course, I am less pessimistic than Rumelt appears to be regarding the possibility of innovating effectively and sustainably, but Rumelt’s two strategic options (and the rest of the article) are certainly interesting.

One Response to McKinsey on Strategy – Interview with Richard Rumelt
  1. Bips
    August 14, 2007 | 8:05 PM

    I was going through your post and certainly Richard Rumelt has some interesting thoughts. I had the opportuity to work with him as a Teaching Assistant in his Advance Strategy class and found his classes to be extremely intense and very practical.
    It would have been interesting to know more about your thoughts on his interview. I love to track discussions on Strategy.

McKinsey on Strategy – Interview with Richard Rumelt

The McKinsey Quarterly recently published an interview with Richard Rumelt on corporate strategy.

Rumelt argued that companies become successful either through innovation, or through finding an emerging trend in the market and exploiting it earlier and more successfully than others. In Rumelt’s words:

Take, for example, a rapidly growing retail chain, which needs a plan to guide property acquisition, construction, training, et cetera. This plan coordinates the deployment of resources—but it’s not strategy. These resource budgets simply cannot deliver what senior managers want: a pathway to substantially higher performance.

There are only two ways to get that. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment—in technology, consumer tastes, laws, resource prices, or competitive behavior—and ride that change with quickness and skill. This second path is how most successful companies make it. Changes, however, don’t come along in nice annual packages, so the need for strategy work is episodic, not necessarily annual.

Rumelt’s academic research in the 1990s interviewed a number of executives in the electronics industry, and found that most of the executives interviewed saw the leaders as rising to their position of leadership through adroitly taking advantage of trends and opportunities – but they typically failed to apply these insights to their own strategic positioning:

Most executives easily explained how companies became market leaders: some sort of window of opportunity opened, and the leader was the company that was the first to successfully jump through that window. Not exactly the first mover but the first to get it right.

But when I asked these same executives about their own strategies, I heard a lot about doorknob polishing. They were doing 360-degree feedback, forming alliances, outsourcing, cutting costs, and so on. None of them even mentioned taking a good position quickly when the industry changes.

However, in the case of Apple, Jobs had a very clear strategy aligned with this insight:

. . . in 1998 I had the chance to talk with Steve Jobs after he’d come back and turned Apple around . . . I couldn’t help asking a question. “Steve,” I said, “this turnaround at Apple has been impressive. But everything we know about the personal-computer business says that Apple will always have a small niche position. The network externalities are just too strong to upset the de facto “Wintel” standard. So what are you trying to do? What’s the longer-term strategy?”

He didn’t agree or disagree with my assessment of the market. He just smiled and said, “I am going to wait for the next big thing.”

Jobs didn’t give me a doorknob-polishing answer. He didn’t say, “We’re cutting costs and we’re making alliances.” He was waiting until the right moment for that predatory leap, which for him was Pixar and then, in an even bigger way, the iPod. That very predatory approach of leaping through the window of opportunity and staying focused on those big wins—not on maintenance activities—is what distinguishes a real entrepreneurial strategy.

Of course, I am less pessimistic than Rumelt appears to be regarding the possibility of innovating effectively and sustainably, but Rumelt’s two strategic options (and the rest of the article) are certainly interesting.

One Response to McKinsey on Strategy – Interview with Richard Rumelt
  1. Bips
    August 14, 2007 | 8:05 PM

    I was going through your post and certainly Richard Rumelt has some interesting thoughts. I had the opportuity to work with him as a Teaching Assistant in his Advance Strategy class and found his classes to be extremely intense and very practical.
    It would have been interesting to know more about your thoughts on his interview. I love to track discussions on Strategy.