Richard Rumelt

April 30, 2012

Strategies to Survive Major Global Problems

Renowned strategist Richard Rumelt puts his knowledge to work

LOS ANGELES -- Professor Richard Rumelt gained a worldwide reputation with his book, "Good Strategy/Bad Strategy," and has been called "Strategy's Strategist," by the McKinsey Quarterly. He has been elected to Thinkers 50, a group of the 50 most influential business thinkers in the world.

Professor Rumelt says that strategy is most effective as a concept when talking about what an individual organization or executive should do. Strategy becomes more complicated, he says, when applied to collections of independent actors. This brings the need for communication, consensus building and collective action. Despite these challenges, Rumelt has helped numerous firms, government agencies and educational institutions develop good strategies.

In the following interview, Professor Rumelt explores the issues involved in applying the "good strategy" concept to complex global issues.

What is a good strategy?

A good strategy is a mixture of policy and action designed to surmount a high-stakes challenge. It stands in stark contrast to bad strategy. When you learn to spot it, you will see bad strategy flourishing at all levels, from a local urgent care center to the White House. The hallmarks of bad strategy are a failure to define the challenge, mistaking visions and financial goals for strategies, using fluffy concepts and language to disguise the lack of actionable ideas, and generating long lists of so-called "priorities" rather than having a coherent way of exploiting a point of leverage.

Good strategy has a simple logical structure I call the Kernel. These three elements are (1) a clear-eyed diagnosis of the challenge being faced, (2) an overall guiding policy explaining how the challenge will be met, and (3) a set of coherent actions designed to focus energy and resources.

Can the concept of good strategy be applied to critical global problems?

Yes it can. But there is almost always a severe problem of collective action in global problems.

To begin, a key step is generating a workable diagnosis of the problem. A good diagnosis is a bit like a scientific hypotheses - it is an educated guess about the nature of the difficulty. The more important the problem, the more you want to back up your diagnosis with data and analysis by the best minds available. It is also very important to have a diagnosis that is actionable - that defines the problem in a way that allows something useful to be done about it.

For example, the current European debt and deficit crisis is being treated as one of money supply and government spending. But the deeper problem is that many governments have bought votes by spending borrowed money that cannot be repaid. This is true in Greece, Italy, Spain. But, this is only part the story. The other half is that banks have lent money to these governments, earning short term fees but exposing themselves to huge longer-term risks. And the final dismal part of the story is that these same banks can be fairly confident that other politicians will push national governments to bail them out rather than risk the consequences of default. So, in my view, there is an unhealthy cycle of myopia and payoffs between political and financial elites. The ultimate source of the problem is political as lawmakers ultimately set the ground rules through which both business and politics are carried out.

Given a diagnosis like this, one can immediately see the weakness, or "badness," of most of the responses being made to the debt crisis. They are like treating a severe infection with Advil; some immediate pain is relieved, but the underlying condition continues to fester. A real solution must set boundaries on borrowing and lending.

In this case, as in so many large global challenges, the nub of the difficulty is the issue of collective action. That is, no one actor has the power to compel others to play complementary roles in solving the problem.

There are three traditional solutions to this kind of collective action problem. First, one can wait for an explosive crisis. When the whole collective faces destruction, it is more likely that members will pull together to save the whole. Second, members of the collective can appoint a temporary czar who enforces rules on the collective. Thus, during the Republic, ancient Romans would elect a "dictator" to lead in time of war. With some foresight, this can happen before the emergency actually bites.

Third, a dominant actor may be able to put aside myopia and cajole and compel other members to abide by new rules. The usual way in which this happens is for the dominant member or clique to create a new organization which only extends membership to others who hue to certain rules and policies. (Unfortunately, the designers of the European Union botched this opportunity, a large cause of the current crisis.)

Does the private sector have a role in solving global problems and an advantage in taking collective action?

Companies are economic engines. Just as a diesel engine or a turbine engine can be harnessed to any kind of pulley or gear system to various kinds of physical work, companies are economic engines that can be harnessed to a wide variety of economic purposes. However, you're not going to get charity out of companies. They're not organized to do charity any more than the U.S. Marine Corps is organized to deliver charity. It's an inappropriate use of the organization. Private companies can be very efficient, but you have to pay them and you have to engineer a reasonable amount of competition among them. You should consider them as engines and harness them to tasks that need to be done.

Can a problem like the global need for energy be resolved by making energy production or conservation more profitable?

Yes, in certain situations it can make sense to subsidize an activity for a while. One case is where there are many different activities to be coordinated, so that no one company is willing to step forward. For example, converting automobiles to electricity or hydrogen fuels requires complementary investments in energy production, energy distribution, entirely new energy delivery means at "gas" stations, automobile design, and more. Unless you are willing to let a company enjoy the fruits of monopolizing this new business for a generation, you may have to provide special incentives to get the ball rolling.

Where there are very long lead times and terribly expensive R&D, as in fusion power or large-scale desalinization, there is a role for extra-market incentives. There is nothing really surprising about having to do these kinds of things - it is what many corporate and business strategies are actually about. Senior management looks at the plans of each division or department and reaches a judgment that, "these individual actions, taken together, are not going to solve our key problems or capture the future." They then impose a system of policy and incentives to get something going in the company that is "not natural." In the same way, a society may come to the realization that there is something really important that the present system of independent action is not going to accomplish. So, we have to impose a logic on that system.

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