One of the most interesting commentators on strategy is Richard Rumelt, author of Good Strategy/Bad Strategy (2011). The book opens with a brief account of Admiral Horatio Nelson’s naval victory at the Battle of Trafalgar in 1805, when the British fleet consisting of 27 ships defeated the combined forces of the French and Spanish, which numbered 33 ships. Nelson won the day by adopting an unconventional strategy. Flouting the naval convention of the time, he divided his smaller fleet into two columns and sailed them perpendicularly into the enemy fleet to cut the Franco-Spanish line.
Nelson knew that his lead ships would be vulnerable to Franco-Spanish guns until they could close on the opposing fleet. He gambled that the less well-trained enemy gunners would not be able to capitalize on their advantage. He was proved right. The French and Spanish canons were not able to compensate for the heavy swell and missed their opportunity to sink the British ships while they could not return fire. Once the battle was joined, the superiority of the British seamanship was decisive. The French and Spanish lost 22 ships. The British lost none. This, as Rumelt points out, is an example of a good strategy.
“Nelson’s challenge was that he was outnumbered. His strategy was to risk his lead ships in order to break the coherence of his enemy’s fleet. With coherence lost, he judged, the more experienced English captains would come out on top in the ensuing melee. Good strategy almost always looks this simple and obvious and does not take a thick deck of PowerPoint slides to explain. It does not pop out of some “strategic management” tool, matrix, chart, triangle, or fill-in-the-blanks scheme. Instead, a talented leader identifies the one or two critical issues in the situation—the pivot points that can multiply the effectiveness of effort—and then focuses and concentrates action and resources on them.
Rumelt provides a timely reminder that strategy is all about matching the resources at your disposal to a specific situation or context and using them in unexpected ways to create an advantage or overcome a disadvantage. Usually, that involves using strengths against weaknesses. But a good strategy also has a coherence of design that minimizes risks and maximizes the chances of success. In short, a good strategy is a joined-up strategy. Leaders must appraise the situation facing the organization and find a way to overcome the obstacles to reach objectives. Sometimes that requires it to take a risk. But it should always be a calculated risk – and one that is taken without leaving the organization unnecessarily exposed or vulnerable.
As Rumelt explains: “A leader’s most important responsibility is identifying the biggest challenges to forward progress and devising a coherent approach to overcoming them. In contexts ranging from corporate direction to national security, strategy matters. Yet we have become so accustomed to strategy as exhortation that we hardly blink an eye when a leader spouts slogans and announces high-sounding goals, calling the mixture a “strategy.”
He contrasts Nelson’s high-risk strategy with that of Lehman Brothers. By 2006, the US property market had peaked. A rise in the Fed’s interest rates led to an increase in foreclosures. Lehman’s CEO Richard Fuld’s strategic response was a strategy of continuing to gain market share by growing faster than its competitors. To do so Lehman would increase its “risk appetite” as Wall Street parlance put it. It would take on the deals that other banks were rejecting. Unfortunately, this was not a rounded strategy – it lacked a response to the problems of taking on greater risk. Without this it was little more than blind ambition – and a very bad strategy indeed.
“Operating with only 3 percent equity, and much of its debt supplied on a very short-term basis, this policy should have been accompanied by clever ways of mitigating the increased risk,” observes Rumelt. “A good strategy recognizes the nature of the challenge and offers a way of surmounting it. Simply being ambitious is not a strategy. In 2008, Lehman Brothers ended its 158 years as an investment bank with a crash that sent the global financial system into a tailspin. Here, the consequences of bad strategy were disastrous for Lehman, the United States, and the world.”
Rumelt’s work offers a cautionary tale for all strategists. There are two dimensions, he says, to a good strategy. “Having a coherent strategy — one that coordinates policies and actions. A good strategy doesn’t just draw on existing strength; it creates strength through the coherence of its design. Most organizations of any size don’t do this. Rather, they pursue multiple objectives that are unconnected with one another or, worse, that conflict with one another.
“The creation of new strengths through subtle shifts in viewpoint. An insightful reframing of a competitive situation can create whole new patterns of advantage and weakness. The most powerful strategies arise from such game-changing insights.”
Richard Rumelt, Good Strategy Bad Strategy, Profile, 2012
This was originally published in What we mean when we talk about strategy by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).