Richard Rumelt is a Professor Emeritus at UCLA Anderson School of Management. He is a prominent contributor to the study of business and corporate strategy. He has authored four books including the widely read Good Strategy, Bad Strategy.
In conversation with Martin Reeves, Chairman of BCG Henderson Institute, Rumelt discusses his new book, The Crux: How Leaders Become Strategists, suggesting that good strategy is about identifying specific gnarly challenges and finding a way to conquer them.
Let’s start with the title of your book, Richard. It’s an unusual title. Actually, when I looked up the title, I found that there was another book called “The Crux,” which was about climbing. And of course, that turns out to be not entirely an accident. But tell me about why you called a book on strategy “the crux.”
The crux is an idea that comes from climbing, as you know. It means the hardest pitch or the hardest move on a climb. And the central message of the book is about focusing your strategic thinking on the hardest problem you face that you can actually do something about. And so that’s where the crux concept intersects the climbing idea.
The actual idea for that came to me when I was walking in the forest of Fontainebleau watching boulderers and there was a young climber who said, “I love to climb. And I like to climb the most challenging mountains where I’m able to handle the crux.” Which reminded me of competent strategists, who tackle issues they can actually handle, which are crux issues for their organizations or companies.
It sounds to me like you’re talking about a fairly perennial issue in strategy, which we’re going to get into. But was there a particular reason to write it now?
When I wrote “Good Strategy, Bad Strategy,” and that’s over a decade ago now, I got a lot of positive responses, particularly about bad strategy. People wrote to me and said, “Oh my goodness, I’m so thankful someone has finally blown the lid off all this silly nonsense that’s called strategy that’s really just a bunch of fancy words.” And I was hoping I’d see practice improving because of my book.
Well, not so much. Actually, I think practice has gotten worse in many companies over the years. And working with companies more deeply I began to think that their core problem was putting goals first. To put it in simple terms, lots of companies, when they have their strategy retreat or meeting, they start with the financial goals they want to achieve. We want to have a higher stock price. We want to have a higher profit margin. We want to have a higher return on capital. We want sales to expand. This is not a strategy. These are aspirations. There’s a difference between ambitions and aspirations, and actual actions. And so the strategy question, in the end, is about what are you going to do?
There’s a long tradition in strategy about understanding the forces at work, in which BCGs has been a leader. But in the end, strategy, after you understand the forces at work, is about what are you going to do?
Let me ask a bit more about goals. So I think it’s clear that strategy is not the goal. It’s the thing that you do to reach your goals. But I had the impression that you’re actually saying something even stronger than that, which is it’s a bad place to start a strategy process with goals. Am I right? And if so, why?
Yes, Martin, you’re absolutely right. So, of course, there’s nothing wrong with having goals. We all have goals, but it’s a bad place to start because it short circuits the logic. If you say our goal is to accomplish such and such an end state, you’re basically making a decision about what everybody’s going to do and work on. Unfortunately, when you state financial goals, typically people work on accounting results because that’s all they can control. And you can use up a day in foreplay before you get to the actual issues that a company faces. But by looking at challenges, you generate much more interesting strategic questions, actions, and issues than you do if you start with aspirations and goals.
Let me ask another sort of broad question about the book. Often a strategy process emphasizes growth because the financial theorists know that most excess long-term shareholder returns come from differential growth. But you make another counterintuitive statement about growth — you warn against prioritizing growth, which you say can lead to bad strategy. Tell us about that.
Well, growth is the outcome of success. And it is the outcome of having, typically, a superior product or superior service, or superior strategy in a market that’s capable of dealing with expanding demand and growth. The problem is when you try to engineer growth through artificial means, through acquisitions, and through pumping up certain activities. you get yourself into trouble.
There is obviously a correlation between growth and share price appreciation. It’s not as strong as people think. And it’s one of the things I treat in the book, but it’s there a bit. That doesn’t mean that growing your revenues is going to pop your share price. You might notice that people who live in big houses also have big cars. And so you say, “Geez, we need a bigger house. Let’s buy a bigger car.” Doesn’t work that way. These are associations, not causal relationships. And profitable growth is the secret sauce that everybody wants a part of. But just wanting it doesn’t get you there.
Well, let’s come to the idea of the crux. The core idea is that strategy proceeds by identifying and focusing on the key challenge. So the first question is how do you identify the right problems to address? How do you identify the crux, the problem that should be the focus of your thinking?
A great question, and not an easy one to answer. Good strategy, in the end, is a design created by judgment. How do you create a good song, or how do you create a great building or great painting? Not easy to explain. Strategy is a bit easier than that. But it’s in the same area of design-type problems. My intuition and my understanding of what works in strategy and what doesn’t work is that it’s better to start by looking at challenges.
And then, of course, there are many challenges that any organization or person faces, and you have to decide on which ones are important, or critical, and which ones are addressable; which ones can you do something about. And you want to narrow the field to — in extreme cases — the single most important thing you can actually do something about. Now, people don’t do this naturally.
For example, the Defense Department’s recently published a national defense strategy, says that there’s increasing competition from China and Russia, and other peer competitors. And we have threats from a whole bunch of countries. And therefore, we have to be prepared to prevail in military confrontations, and we’re going to do this by integrating our force structure more completely. The end. There’s no statement of the problem. Now, why is this difficult? What’s holding us back? A crux issue for the United States is energy independence, which we’re just seeing play out in Europe. Can we import all our lithium batteries and solar panels from China and avoid economic dependence? That issue is not addressed. And so you don’t wind up with a good strategy because you haven’t identified the important addressable issues.
And this is your idea of ASCs, addressable strategic challenges. That’s the same thing as the crux, right?
Sort of, yes. They’re connected ideas: there may be several addressable strategic challenges. The crux is narrowing it down to something special. I believe, although some may disagree with me, that the most fundamental concept in strategy is concentration and focus. The oldest strategic teachings are: you focus your strength on where your opponent is weakest, or where the market opportunity is the greatest. And that focus, that concentration, is the crux in some sense. This has to be part of a good strategy. You can’t try to do everything at once. You’ll fail.
You tell a story in the book about a CEO that resisted this idea of the addressable strategic challenge, because he thought that focusing on the next addressable strategic issue was in a sense not thinking long term enough about the issues that you’ll eventually need to face. And it’s a reasonable objection on the face of it. So tell us just a little bit about that.
Well, this particular executive said he wanted to address longer-term challenges than I was looking at. Which makes sense. I mean, it’s not a crazy thought. But my recommendation for people is that strategy is a journey. You know, if you take the climbing metaphor, you climb to a ledge, you look around. You go up a crack for 10 feet. Then you climb to another ledge, and so on. It’s a series of challenges that you overcome.
Now, of course, all of that happens within the overall context of trying to get to the top. And saying, okay, our long-term strategy is to get to the top. Okay. But it doesn’t tell you what to do at the next ledge. I find that too many companies that I get hired to help, or that I talk with, or that I visit, get bemused by this long-term vision. And it distracts them from concentrating force on the immediate problems that they face.
One of the problems here comes from economics. Economics tells us there’s a thing that we need to maximize, whether it’s profit or value or shareholder return. And that’s an obvious long-term goal. The trouble is that’s not real. It’s not operational, number one. Number two, that’s not the way humans operate and organizations operate. We as humans have multiple ambitions. We want to be wise. We want to be respected. We want to be healthy. We want to be rich. We want to have good families. You know, there’s a lot of ambitions that we have. And companies are the same way. They have the same list of things that they would like to achieve. A higher stock price is one of them. What we do as strategists is, we face opportunities and challenges, and we try to decide which of our ambitions we can advance today. Because we can’t advance all of them every day.
And it’s that balance that I was disagreeing with this fellow about.
Let’s suppose we’ve followed your advice, and as a company, we’ve identified the crux, the rate-limiting issue, the key issue. I guess the next question is how do we know what to do about that issue? Now, of course, you emphasize that there’s no sort of linear, universal formula to solve these issues. But nevertheless, you’ve written a book about bringing your experience to bear against such problems. How do we address the crux?
Well, you know, BCG is an expert at addressing cruxes. It’s given us some of the most useful tools in history for looking at this stuff. And I don’t mean the experience curve and the matrix. I mean all the use of microeconomic analysis, and pulling apart internal operations, and what works and what doesn’t work inside a company. And that’s part and parcel of figuring out what to do about a crux problem. But all of that analytical toolkit is in support of the insight about what to do and how to design a solution. And that requires judgment and experience — there’s no other way of getting around it. It requires intellect, judgment, and experience. And you’ve got to bring people with those together.
Now I have a chapter in the book called Rumsfeld’s question. This is back during the invasion of Iraq, and I was interviewing him. He asked me something, “Well, you’re a professor of strategy. Can you help me with this? Because I’ve got experts on everything here. I’ve got experts on the weather, and the family structures of the different tribal groups, and the Turks.” And he went on and on about all the different expertise he had access to. He said, “But how do you put all that together into a strategy? Each morsel of expertise comes with an agenda, either hidden or stated, like a career, or a company that they want to help out. None of the expertise is actually neutral. And then it’s often conflicting advice. How do you cook that together into a strategy?”
And I had to say to him at that time, “Well, we haven’t learned much since the Egyptians about this. You put 10 people in a room who are smart and you hope for the best.” And that kind of triggered my investigations into, “well, how should you actually get a group of smart people to do strategy?” And my first insight into this is that you start with challenges, not with goals.
In your book, you give some different ways of searching for the solution to the crux. You talk about finding an edge. You talk about innovating. And interestingly, you talk about solving for organizational dynamics, which seems to be a very different type of thing. Tell us about the significance of organizational change in solving the crux.
That’s an interesting question. I’ve been a strategy professor for 45 years, and most of the time, when people talk about strategy, they’re talking about competition and competitive advantage and some kind of marketplace supremacy. And they’re usually looking at product-market dynamics in some way or costs. Yet when you actually work with a group of executives on strategy, you find that a lot of their problems are actually themselves; that their organization isn’t functioning well; that there’s something wrong. That they’re blunting their own actions with cross purposes, with policies that are negating each other. What they’re doing in a strategy conversation is really competing with each other for resources or power. So a strategic challenge can be organizational dysfunction. And if you can help solve that organizational dysfunction, then these people can usually do strategy. Strategy isn’t that mysterious.
Yes, that very much coincides with my own experience for two reasons. One of them is that if strategy is a tool, then it’s anything that gets the job done. And sometimes we need to think about the organizational impediments to get the job done. And empirically, I haven’t seen a pure strategy challenge for as long as I can remember. It always comes with technology. It always comes with organization. Is this in line with your views?
Yes. There are cases where, you know, some kind of clever insight is the big deal. But usually, there’s an organizational impediment that’s keeping the company from employing its full competitive strength. Or there’s an internal political problem where people are unwilling to speak the truth about what’s going on. There are unsayable things in the room that can’t be said. And these kinds of human and organizational hang-ups and difficulties are often the core of the problem. They don’t expect a strategy consultant to attack those things, but those are strategic issues. Strategy isn’t just about product market competition. It’s about your basic capabilities, which are restricted by your organizational ability.
Your book is full of good examples. Could you maybe share one with us which illustrates these two ideas: identifying the crux and is addressing it. What would be a good example?
Well, there’s a sad example that I spend some time on, which is Nokia. Which kind of began to fall apart after Apple brought out its iPhone. But you know, if you look more deeply at Nokia, you find that it was organizational dysfunction at a high level that kept the company from being able to respond to this competitive threat. They knew about the iPhone from competitive intelligence. They knew about the touch screen and all of that. They just didn’t have the capability to focus resources on such a thing. They had actually spread their resources across hundreds of different mobile phone designs, partially to keep the mobile phone people from getting too powerful inside the organization! So, a sad story there.
In terms of finding the crux, I have a nice example at the end of the book. And it’s a company that’s in farming, basically farming technology. They make automated watering, chemical, and fertilizing tools for farmers. They’ve grown, gotten themselves fairly big coming out of a European base, but they’re losing some profitability and they’re losing market share. And they have a hard time identifying the crux and they look at this and look at that. And then, they sort of know that they’re doing it wrong. The CEO says, “We’ve lost our competitive edge and we are not admitting it to ourselves.” But that’s in a private conversation to me.
And finally, as we get those thoughts out, on the end of the second day of doing a workshop together, they begin to see that they’re trying to compete where the value add of their technology is not so high. And they need to rethink what they’re doing as a company. And they begin then to rethink it. And they begin to say, “Well, we ought to really be in the high-value food stuffs and fruits, not in corn. We’ve grown into the wrong places where we have no advantage. And what we need to do is refocus. Now, that was a crux issue for them. And they could solve it, but it took a certain amount of mindset shaking for them to realize that that was the issue, and then to get the courage to actually do something about it.
Let me maybe focus a bit more on the process of strategizing. Towards the end of the book, you describe a technique that you use called the “strategy foundry”, which seems to be a small group strategy challenge session to answer Rumsfeld’s question: how do you bring together minds in the right configuration to progress an important strategy question? What have you learned about strategizing and how do you apply that in the strategy foundry?
The Foundry is challenge-based. And I have a whole chapter on some of the tools that you can use in a Foundry to loosen things up, to get people to rethink things, and to look at the problem in a different and new way. But generally, the Foundry starts with standard strategy stuff. What’s changing in your industry? Where do you think you’ll be in three to five years? Where are the opportunities? Where are the risks?
And then, what have you done recently that’s worked? Why has it worked? What have you done that hasn’t worked? Why didn’t it work? And then that takes a while and it loosens people up and they get used to talking to each other more frankly than they did at the start, and more frankly than if they had to talk about goals. Then I ask what are the real challenges here? And typically, people will generate eight or ten challenges. And then if you take any one of those and look at it more closely, it breaks into a few more. The most I’ve ever had in a Foundry experience was 27 different challenges identified.
And that’s fine. Now we have to sort them. We can’t deal with all of them. We have to focus and concentrate. We have to find the crux. Which challenge is the most important one that we can actually do something about. And so, they screen to eliminate a whole bunch. And then there’s an argument about which ones are actually important. People will differ on this.
When I ran a Foundry like this for one of the intelligence agencies we had people come up and sign the different challenges. And the ones with the most signatures got to be part of the next level of discussions. So, there’s a winnowing down; we have to decide which of these problems can we actually do something about that’s actually an important problem. It’s as simple as that, but it’s hard for a group of executives to actually do that winnowing down.
Let me wrap up by asking you a broader question Richard because you’ve been in the strategy field a long time. You have a section in the book on not being distracted by what you call “bright, shiny objects”. Are you implying that in spite of all the managerial fashions, frameworks and worldly trends essentially there’s nothing new in strategy? It’s a gnarly design problem and always has been. Or conversely, has the field changed in some essential ways since you entered the profession?
I believe the essence of strategy hasn’t changed much in several thousand years. The word comes to us from Greek, meaning an overall military leader, or a political leader. If you’ll stare at the root words, they come from Indo-European, stratos- and agete-, which means to lead a herd.
We have developed a lot more understanding of the context in which strategy takes place. We’re much better at understanding products and markets and costs and consumers and stock markets. We have a much better understanding of the field in which we operate. But the actual formulation of a strategy, the design of something, still rests on human judgment. As it should.
When I work with a group of executives, they really know what their problems are. And they really know what some of the ways to tackle them are. They’re usually hung up in some way, and maybe I can help them. If you’re hired by the Department of Defense and they want to know about what color uniforms are best or the effects of weather on soldiers, okay, those are expert issues. If they want to know how to fight a war, then they should fire themselves because it’s their job to know that stuff. Usually it’s not that they don’t know. It’s that there’s a barrier between the way they’re thinking about things and decisive action. They’re hung up in some way. And you can help them with that.
Richard congratulations on the book and thank you for sharing your ideas with us today.