Four Rules of Good Strategy

This article sets out a new framework for strategic thinking based on four simple rules. It explains how the rules work and shows why they form a useful and complete set. Finally, it considers how some of the rules interact and what you may be able to do about it.

This is one of a series of articles on strategy for entrepreneurs.

Introduction

What is strategy? Richard Rumelt’s classic book ‘Good Strategy/Bad Strategy: The Difference and Why it Matters’ says:

Strategy is a coherent response to an important challenge.

Two things follow from this concise insight:

• Firstly, if you are facing an important challenge then finding the best way to respond to it really matters. Strategy is, by definition, important.
• Secondly, in as much as important challenges will be different, so will the strategies that respond to them. It is unlikely that there will ever be a fool-proof system for generating a good strategy.

However, while strategies are important and individual, they are all bound by four rules:

1. Focus; concentrate your resources.
2. Competitive Advantage; establish and exploit your competitive advantage.
3. Synergy; make your activities mutually reinforcing.
4. Risk Management; choose your risks and manage them carefully.

If you follow these rules when you formulate your strategy you will greatly increase your chances of success.

Now let’s look at these rules in more detail.

Rule 1: Focus

Resources are scarce. You need to use them wisely and not spread them too thin. Your chance of success will be greatly improved if you can bring a substantial force to bear on a limited area.

So the best strategies do a few things well in a limited number of areas and develop in stages. This rule is about what you do, where you do it and in what stages you develop.

In terms of what you do, ‘What can we stop doing?’ is always a useful question.

Steve Jobs’s key insight when he returned to Apple and started the process of rebuilding was that they were offering far too many products. He cut the product range by 70% to just four models and rebuilt from there.

Businesses like Facebook, Twitter and Uber are radical examples of focus. They all operate traditional businesses that have been reconfigured to remove an important (and costly) part of the traditional operation. Facebook and Twitter operate media businesses without paying for content production. Uber runs a taxi company that doesn’t own any taxis or employ taxi drivers. In effect, all these businesses enjoy the advantages of a restaurant where the diners bring and pay for their own food. Of course those costs are still there, they have just been reallocated within the overall economy — but that is another story.

In relation to development in stages, Richard Rumelt makes a strong case for setting ‘proximate objectives’ i.e. achievable intermediate goals that make a significant step towards the ultimate objective.

The Apollo project worked this way and so did the Wright Brothers’ development of the airplane. For an example of a staged approach in action see this case study on Art UK’s strategy.

Rule 2: Competitive Advantage

Do what you do best. Don’t undertake to do things that you are not equipped for, or that others can do better. Know your weaknesses. Don’t fight battles that you are not equipped to win.

This issue arises in digital strategy where organisations often start from a competitive disadvantage trying to resource unfamiliar digital operations. Typical digital strategy questions include: ‘Why write generic digital content when others already do it better?’; ‘Why build a digital technology team when you have limited capability to manage and nurture it?’; ‘Why develop custom software when there are off-the-shelf solutions?’

Deciding where to compete and how is a strategic issue for all organisations, even the largest technology giants. Another of Steve Jobs’s brilliant early moves on his return to Apple was to kill the development of its next generation operating system. A vital success factor in Apple’s recovery was his decision to build Mac OS X (and later iOS) on a leading open-source implementation of UNIX.

The two underlying questions here are:

• What makes you think that you can do [X] better than your competitors?
• Even if you can (or could) do [X] better, is this a good use of your time and resources?

For more on this subject see the companion article ‘Competitive Advantage for Entrepreneurs’.

Rule 3: Synergy

Synergy is the miracle that occurs when your activities systematically add value to each other.

Military strategy exploits this effect using different kinds of military force. For example, in the era before aviation, artillery, cavalry and infantry were deployed together. None was sufficient on its own, but each, if correctly used, added value to the other two. When done properly the resulting three-part force was much stronger than the sum of its parts.

In digital strategy, you might consider how each of your digital programmes can reinforce the others and how your digital programmes can reinforce your non-digital programmes and vice versa. In the case of a museum and its digital programmes, perhaps your online catalogue can drive traffic to your exhibition listings and vice versa? Perhaps the posts from your social media programmes can enliven your website and drive social media subscriptions in the process?

One of the eureka moments in the development our business, Cogapp, was the realisation that we could use outputs from our innovation programme (blog posts, proof-of-concept demos, etc.) to drive our marketing in a way that was not only more effective but much more fun and much less expensive than the conventional marketing techniques we had been using before.

The more your strategy can create synergy between your various activities the more efficient and effective it will be.

Rule 4: Risk Management

Any strategic plan involves risk. You cannot foresee how your plans will turn out but you can anticipate and provide for future difficulties. Alternative plans will differ in the risks that they entail. Some will be riskier than others.

One way to compare alternative strategies is to review the associated risks and see which set is least unattractive.

If any of the risks associated with your plan are potentially fatal then you should ensure that your strategy accounts for the need to monitor that risk and explain how you will mitigate it, or accept that it cannot be avoided. Sometimes that may be the right decision. No strategy can guarantee success.

We once tried to build a technology business that relied on two competing mobile operating systems. In order for us to succeed both systems had to provide a particular facility that made our product viable. When one of them stopped supporting it our venture crashed. We hadn’t properly identified this risk and when it materialised we could not mitigate it. Ouch! Two years work, down the drain. A more thorough risk assessment might have saved us a great deal of wasted effort.

Bear in mind that risk management can easily get out of hand. A ten page risk register is a useless distraction. The critical thing is to identify and manage all and only the critical risks and let everything else come out in the wash of good general management practice. Of course, if good general management is not something you can rely on then that itself is a key risk.

Why These Four Rules?

To see why these rules are what they are and why they form a complete set, let’s consider a generic model of strategy.

• Resources: you only have a limited number of resources.
• Activities: you can only undertake so many activities.
• Environment: your activities and resources take place in, and interact with, a dynamic environment in which other actors are also operating. The environment and the other actors may be more or less hostile/favourable. By directing your resources and activities within the environment you can decide, to some extent, which parts of it you interact with.
• Time: everything unfolds over time, the future is uncertain.

Using this model, any strategic challenge is going to occur somewhere in the interaction of these four elements. You could say that every strategic challenge can be framed as some version of ‘our resources and activities, operating in our current environment, are not giving us (or going to give us) the outcomes we want, in some timescale’.

For example, Wellington at Waterloo faced an extremely hostile environment. He had limited resources. He could only undertake so many activities and he was operating under great uncertainty about the future. In formulating their strategy, Wellington and his generals had to understand and optimise their competitive advantage in relation to Napoleon and in the context of the environment, marshal their resources so that they were well focussed (not too concentrated, not too dispersed) and, as far as possible, make them mutually reinforcing. In making their choices, they had to be mindful of the risks and consider how to manage them.

So you can see how the rules relate to the model and why they form a useful and complete set:

• Focus is about making choices that affect the relation between your resources and activities and the environment;
• Competitive advantage is about understanding how your resources and activities will fare relative to those of other actors in that area of the environment where you are focussed;
• Synergy is about making sure that your activities are mutually reinforcing in, and relative to, the environment.
• Finally, risk considers how all this may play out over time.

Tension between the Rules

If the four rules were simple to apply and worked independently then strategy would be much easier than it is. But in reality their application has a nasty tendency to interact and cancel each other out.

One common tension occurs between Focus and Risk.

The more you focus, the more you concentrate your resources. Greater concentration increases your relative strength and that increases your chances of success in the areas where you focus.

But…

What if your chosen area of focus is not the best? What if you encounter unexpected difficulties? What if external factors make your chosen focus area suddenly unattractive. Should you not spread your bets across a greater number of areas? But that then reduces your relative strength and that reduces your chances of success.

And so on…

Planning the spread of your activities in order to balance focus and risk, is always a critical issue.

On this subject, it is worth noting that strategies are (inevitably) assessed in hindsight and more attention is paid to winners than losers. Those who focussed very single-mindedly and succeeded may look, in retrospect, like strategic geniuses when, in truth, they were just gamblers who got lucky putting all their money on a single number on the roulette table.

One way to reduce the tension between Focus and Risk is to exploit a third theme, Synergy, as a way to reduce the cost of spreading your bets.

For example, can you find a way to use one technology platform to deliver competitive products for two different specialist markets? If you can, then every hour spent developing that platform will do double duty.

That kind of approach, combining focus, competitive advantage, synergy and risk management in one approach is what strategy is all about and why good strategy is so valuable.

This article has been inspired by many years experience running my own business and advising clients, then, more recently, several years spent reading, studying and writing about strategy.

Authors who have been particularly helpful include Steve Blank and Richard Rumelt. Rumelt’s book ‘Good Strategy, Bad Strategy: The Difference and Why it Matters’ is particularly good.

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