Getting strategy wrong—and how to do it right instead

Courtesy of McKinsey & Company

By Richard P. Rumelt

The word “strategy” means an approach to dealing with a difficult challenge, especially that of competing with a clever opponent. To have a strategy is to have an approach to overcoming critical obstacles and difficulties. However, through many years of working with companies, government agencies, and the military, I have too often seen strategies that are actually a toxic mix of wishful thinking combined with a jumble of incoherent policies.

In 2016, an S&P 500 company I’ll call Royalfield gathered 25 of its senior executives in a hotel ballroom for what was billed as a strategy discussion. I was there to give a prelunch talk on strategy and had been invited to spend the day with the group and join them for dinner.

The chief financial officer spoke first and showed clips from Marvel’s Thor movie to dramatize the financial report. A key point was that the company’s debt burden was becoming a constraint, so investments had to be carefully controlled if return on equity was to be preserved.

The chief executive officer spoke next, armed with PowerPoint slides presenting what he called the Strategic Commitment and the Success Score Card (SSC). He reminded the group that the strategic commitment grew out of a key acquisition made three years earlier and defined the newly expanded scope of the business. It comprised a description of the market being served and the admonition that the company’s products would “provide its customers with the most effective solutions to their needs.” It would also aim to “provide a high level of service” for its products.

The SSC for the whole of Royalfield was specified as a 15 percent annual growth in earnings and a 15 percent return on equity. These targets were somewhat higher than the company’s recent financial record. The CEO ended with a quote from 19-year-old Katie Ledecky, who had won five Olympic gold medals in swimming: “Set goals that, when you set them, you think they’re impossible. But then every day, you can work toward them, and anything is possible.”

During a break, uplifting music played. Each participant received a handsome marble desk weight commemorating the strategy retreat.

After lunch, the four business unit managers each presented their individual SSCs. Each offered targets for sales growth, profit rate, return on investment, and market share, along with strategies for achieving these targets. There were references to key customers and certain product improvements, but the basic language had been preset by the CEO: the language of financial performance. Their strategies, therefore, boiled down to promising to find new customers, somehow cutting costs, and keeping investment in check to boost return on equity.

The CEO’s system of defining the SSCs in largely financial-performance terms shaped the options they considered and shifted strategic thinking away from technology, product, customer, and competition and toward tactics for achieving targeted accounting results. There was no serious consideration of how the contradictory demands for increased sales and reduced costs would be reconciled.

Why had these well-trained, highly paid executives chosen this approach? One way to understand Royalfield is to recognize that the CEO’s almost daily experience was explaining the company’s financial results to investors, Wall Street analysts, pension and hedge funds, Royalfield’s board, and the Securities and Exchange Commission. His personal incentive package was framed against accounting results and stock-market returns. Thus, the world he inhabited had been engineered to make the SSCs his personal problem.

Another way of understanding Royalfield is that the company leadership had accepted the pop-culture notion that strategy is a broad statement about purpose and values. A vague strategic commitment replaced having a real strategy. With strategy seemingly addressed by the strategy commitment, the company’s strategy retreat centered on what executives saw as the real work—the setting of financial-performance targets.

Some of Royalfield’s strategic challenges seemed fairly evident. The company was still organized by regions, while the industry had become global. The technology it had invented and successfully deployed in the past had been equaled—and, in places, surpassed—by a competitor’s inventions. The company’s engineering group was competent but slow to act, responding to its own internal sensibilities rather than to competitive issues.

When, over drinks before dinner, I raised some of these issues with the CEO, he held out his hand, palm forward, asking me to stop. “I don’t want to hear negative things about the team. I don’t want them distracted from the SSCs.”

I did not work with Royalfield again. In the years since that event, each of the company’s competitors grew faster, and the share losses were greatest in Royalfield’s core business. These losses were clearly due to the company not keeping pace with the technologies offered by competitors. Yes, Royalfield cut expenses so that its net profit margin improved. But its growth rate fell behind that of its industry, and its market share dropped by 30 percent as competitors won sales by targeting key customer segments.

Royalfield had significant strategic issues that it should have faced in order to move forward. It did not do this, because the company’s leaders misunderstood the meaning and purpose of strategy itself. Instead of facing and resolving challenges, leadership asked operating managers to create strategies for achieving certain arbitrary financial outcomes.

The sad truth is that Royalfield is not an isolated case. Today, I and many other researchers and consultants have observed that too much corporate work on strategy has devolved into setting financial-performance goals rather than developing solutions to important and often imminent difficulties. Is it any surprise that most senior executives are disappointed with the outcomes of their strategy process? A McKinsey survey found that 70 percent of executives surveyed did not like their company’s strategy process and 70 percent of board members didn’t trust the results of that process. Other surveys have corroborated these findings.

A common complaint is that strategic plans don’t work out or guide actual operations. Some years ago, I asked then-CEO Robert Eckert about strategy at Mattel. Smiling, he said, “We do a great job of strategic planning. The problem is implementation.” Eckert’s observation expresses an unavoidable fact: plans cannot predict competitive outcomes. Or, as Mike Tyson so eloquently put it: “Everyone has a plan until they get punched in the mouth.”

At many businesses, nonprofits, and government agencies, so-called strategy exercises do not produce strategies—because they are designed to do something else. In commercial settings, they are often attempts to predict and control financial outcomes, nothing more than a form of budgeting. The process may glance at broader issues, but it quickly centers on financial targets and then budget allocations. In nonprofits and government agencies, the strategy activity often develops a list of ambitions that passes as “strategy.” What is missing are the elements giving strategy its bite: a realistic assessment of the obstacles blocking or slowing forward progress and a mix of policies and actions designed to focus organizational energy on surmounting these obstacles.

Why strategy is hard: Gnarly challenges

Real strategy work is hard. It is hard because serious strategy situations are much more complex than decision situations. They are what I call gnarly, resisting easy resolution.

Gnarly situations do not present easy-to-identify answers; they don’t even present readily identifiable choices. Rather, they present multiple issues where the underlying forces and logic at work are not immediately obvious. Is the engineering issue at Royalfield due to a lack of training, not enough spending, overlapping divisional responsibilities, poor leadership, a combination of the above, or something else altogether?

In a gnarly situation, clear choices must be searched for and designed or imagined. Many of the most apparent alternatives—invade or blockade, acquire BuyCo or not—have been posited with artificial clarity by shortsighted staff or parties with vested interests. There are almost always other ways to proceed.

Making matters more complex, especially in areas of public policy and defense, real-life leaders do not have a neat economist’s single measure of value. Instead, they are faced with a bundle of conflicting ambitions—a group of desires, goals, intents, values, and fears—that cannot all be satisfied simultaneously. Forging a sense of purpose from this bundle is part of the gnarly problem. Making matters most complex is the fact that the connection between potential actions and actual outcomes is unclear.

A gnarly challenge is not solved with analysis or the application of preset frameworks. A coherent response arises only through a process of diagnosing the nature of the challenges, framing, reframing, chunking down the scope of attention, referring to analogies, and developing insight. The result is a design, or creation, embodying purpose. I call it a creation because it is often not obvious at the start, the product of insight and judgment rather than an algorithm. Implicit in the concept of insightful design is that knowledge, though required, is not, by itself, sufficient.

The way through a gnarly challenge may not seem clear at first but working to grasp the structure of the challenge is often the best way of seeing a path through. As a number of problem-solving researchers have found, “at the least, problems must be deeply analyzed before an insight solution can be achieved.” Writing about how hard design problems are solved, industrial-design specialist Kees Dorst nicely described zeroing in on the heart of a difficulty:

“Experienced designers can be seen to engage with a novel problem situation by searching for the central paradox, asking themselves what it is that makes the problem so hard to solve. They only start working toward a solution once the nature of the core paradox has been established to their satisfaction.”

The skilled strategist recognizes the heart of a challenge as the thing blocking an easy solution. Attention is drawn to it because it hints at leverage—that if we could only just move the keystone, the whole wall can be breached.

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About the author(s)

Richard P. Rumelt is professor emeritus at UCLA Anderson School of Management and the author of the forthcoming book The Crux: How Leaders Become Strategists (Public Affairs, 2022). This article was edited by Rick Tetzeli, an executive editor in the New York office.