I’ve been reading Good Strategy – Bad Strategy by Richard Rumelt. I can heartily recommend this book. It explains what makes a good strategy, and how to spot one when you see one.

I had one particular aha moment when reading the book – where Richard explains how businesses make mistakes when they try to set a strategy by copying what is seen to be successful elsewhere.

His argument goes something like this:

1 – time gaps between cause and effect… A feature of complex dynamic systems (such as businesses and markets) is that there is a time-gap between action and effect. So, for example, if you decide to cancel all training in your business to save money (wow! wonderful profits!) you won’t see a deleterious effect on business performance for a few months – and then there’ll be a gradual increase in quality problems or accidents. This will seem to be a small increase at first, maybe put down to statistical variation. But in fact it is often the early part of an exponentially increasing problem, the part where problem growth appears linear and gradual. By the time the problems become pronounced they are well into the growth acceleration, with an alarming rate of increase, and the problem can be difficult to halt without significant effort. There may be a significant time disconnect between the cut of training and when the impact becomes noticeable.

2 – human perception on causes… Humans have a perception problem. If something happens, the natural state is to assume it was caused by some recent event. So, as per the previous point, because quality or accident problems are identified only when there is a noticeable jump in incidents, management will look at what caused this by considering recent events. Maybe there was a new policy, or a change in line manager, or the canteen changed its menu. Patterns will be spotted, the cause announced and the ‘guilty’ punished.

3 – wrong attribution on causes of success… because of the previous statements, if a business has a success or failure then the natural reaction is to look to recent events to explain the success or failure. For example, a business may be successful because it has a near-monopoly, and that near-monopoly is there because of a patent a previous owner had secured many years ago. Some monopolies are licenses to print money – they generate profits completely disconnected from how well or how badly they are managed. Yet, because the business is successful, the CEO is revered as a wise guru – all this management stuff they are doing must be the cause of the success. Books are written on their management style or strategy and their wonderful business results are attributed to them. (Richard points out that books even discuss things like the car park policy or dress code of the firm in revered tones, as if that makes a difference).

4 – business life-cycle … if you look at the life history of successful businesses they tend to follow a predictable path. When they are young they are lean, aggressive and focused. If they are successful they take on larger, established competition and win in their selected niche – and grow. As they grow they start to mature. They need to add the trappings of a larger organisation – a head office, a management team, corporate staff. Over time they sprout divisions and multiple product lines. Their old competition (the established companies) are vanquished, taken over, and disappear from the market. Because the business is now so big there are lots of people with different interests, directors, product managers, account managers, research managers – all with ideas about the business strategy. Internal power politics usually means the business broadens its efforts (because it can, and because it is too difficult to challenge the wishes of some power bases), doing multiple things, chasing incompatible strategies, and weakening its hunger for competition. Then it is vulnerable to a new generation of businesses – at an earlier stage of their growth – and so the decline starts, leading to eventual failure (which can take some time).

5 – fear of wasting away… management eventually find out their business has lost its edge, that it needs to be reinvigorated if it is to survive – they want to extend its life and compete effectively again in its market-space. So they look for answers. What should their business be doing to be successful? Because of point 3 they are faced with a wall of messages, books, and consultants who say ‘you can make the difference, copy these successful businesses, copy these other brilliant managers – their strategies, or business practices are causing their success’! So programmes are started to transform the business to copy the successful. And these programmes rarely work, because they are implementing superficial solutions – practices copied from businesses that are no longer sharp. Yes, some practices may add value, some may be downright dangerous, but all fail to create the basis on which business value was created in the first place, so success cannot be sustainable. If these changes fail, the diagnosis is that the change programme can’t have been run properly, the practices or strategies weren’t implemented in quite the right way, and by then there will be another trending solution to copy for the next programme.

6 – and the answer is … if successful business models take time to surface, then don’t look to the successful behemoths for examples of good strategy or practice. Look to the emerging successful businesses – these are the ones who have worked out what the market wants, what strategies and business models work, where the soft parts of established businesses are, and what business practices will succeed. If they’ve been smart in designing their business model then larger businesses will find it painful to copy them – they may have to cannibalise existing services, or shake up existing power centres, and results may suffer. But learn from them they must.

What does this mean for your business – what can you learn?

If your business is an established one – then you have to get in early, learn from the emerging businesses, adapt, use your size to compete by investing the kind of money an emerging company can’t have access to, and ideally develop a better-tuned business design than the start up because of this size advantage. (There are real risks in copying business models, which we can cover in a separate article).

What features do current emerging businesses have?

In today’s market the realities have changed. Growth isn’t automatically guaranteed. Capital is difficult to source. Emerging markets are seeing economic power tilt their way. Political change, economic and environmental change both create and destroy market opportunities. Yet some exciting and emerging businesses are successful. We have researched some of these businesses to find out what they have in common that allow them to compete so successfully in the market. In looking at a number of businesses, and talking to these business owners, we’ve been able to identify four practices that they think are important to their success:

• a deliberate, tailored, and insightful strategy (good strategies) with creative, difficult to replicate business models
• a relentless emphasis on sales, and business development, right across the company
• factual, data-driven products, business processes, plans, competitive positioning, based on sound data management principles
• fairness and flexibility, especially to customers and staff, this brings agility and responsiveness

Have a think about what this means for your business. We are here to help.

* (see Richard Rumelt, Good Strategy/Bad Strategy: The difference and why it matters; also his blog at http://www.strategyland.com/)