LSE Events | Prof. Richard Rumelt | Good Strategy/Bad Strategy: the difference and why it matters

good evening I'm Gordon Baris um I am visiting professor at lsse ideas where I deal with strategy something that follows on from 30 odd years in the foreign office and the cabinet office and 10 years also advising price Waterhouse Coopers on how to develop their business in China it is really very nice uh to be here and I would like to welcome you all this evening on behalf of the management department of lsse to hear Richard rumold the professor of management studies at UCLA Anderson which is their management school who will be speaking about uh

his book good strategy bad strategy what is the difference and why it matters but before I go further with introductions I was told that there is an important announcement that I have to make to to impact one is that we are hoping we are recording this uh performance and it should be online uh in the next day or so but the more important announc M was one that gave me a little trouble because I was told you should say this and I was told that for those of you who tweet this will make sense but

for those of you who don't tweet you may wonder whether it has something to do with the distribution of illegal smoking substances because the message is code hash lsse strategy or one word has nothing to do with those substances please don't let there be any misunderstanding but we're very privileged tonight to have Richard here to speak because Richard is a preeminent figure in the world of strategy not simply in terms of a business strategy but also in terms of military strategy as well which is a rare comp ation he started his career perhaps slightly surprisingly

as an engineer working on the concept design for Voyager one which was launched I think in 1977 there about the mid '70s yes in the mid 70s has been up in space now for some 34 or more years and is now reaching the edge of our solar system and Richard said that this was in one respect the first chance that he had to really think strategically about a problem it was a design problem of this voy but he then got himself catapulted from the jet propulsion laboratory to the Harvard Business School and in no time

at all had completed his Doctorate and had started his travels around the world helping other people to understand business strategy he spent three years three or four years in Teran um in and was there in 1973 when the hike in oil prices really did bring home to people the need to think more about future later on he had taught at inad and many other distinguished business schools around the world those of you who had a chance to see the cover of the book you can't quite see it here is Richard is described as the strategist's

strategist now that is certainly true strategy WS really do have great respect for Richard and all the pioneering work that he's done but that term strategist strategist does sort of perhaps imply that other people wouldn't be able to understand understand quite as much about what he is saying and that is not the case his book is wonderfully accessible uh as you go through it you're not only getting the concepts that he's wishing to develop C clearly set out before you but you actually get a feeling that you're sitting with him in discussions with Steve Steve

Jobs and other luminaries of the business world as well as of course some of the top strategy people in the Pentagon and elsewhere I think you have heard enough from me Richard may I invite you to take the floor please welcome our guest wow what an introduction thank you uh it's a pleasure to be here at the London School of economics and in London um I had the the privilege of living in London for about 6 months way back when when I was waiting to see if I would get my tenure a stressful time but

I did enjoy the city a lot I lived in France for three or four years and was over here a lot because when you live in the font blue farest you come to London for the sunshine this book good strategy bad strategy came out of me because of a growing frustration in the gap between what one thinks of as strategy and what passes for strategy in so many companies and so many politicians mouths so many government agencies and so many nonprofits universities school systems they say they have a strategy but they don't they have about

something else something I call bad strategy and bad strategy is not the absence of strategy it's an active force uh of mistaken belief in how to think strategically and how to create strategies and so this book aims to try to paint these two pictures also for those of you who are studying here at the lon School of Economics you might know that business strategy today is conceptualized mainly in terms of economics in terms of competitive positioning within an environment a competitive environment of some kind a bu an industry structure and that competitive Advantage within that

industry is the coin of the realm what I'm going to do today is talk about a different view of strategy I'm not going to say that the economics view is incorrect because it's not it's quite correct but it is only one view that if we're going to talk about strategy for a nation state or a hospital or a government agency or a school or a business firm we have to use a language other than competing within their industry because that's that's only one possible regime so that's the introduction to what we're going to do I

want to take you back to think about strategy to 1996 and a company called Apple was almost bankrupt now this is the first time I had some interactions with Steve Jobs who's recently passed away this is business we cover the fall of American Icon they're basically writing the obituary for apple and what has killed Apple is Windows 95 that Microsoft has come out with a graphical user interface mice and windows which was originally the Apple Innovation and given that Apple's market share has taken out an extreme dive and in in October of 1996 when Steve

Jobs come back comes back to take the position of CEO for no pay Apple's two months from bankruptcy that's how much cash it has that's how quick the cash burn is now the advice from Outsiders what was it Wall Street people said to a deal get yourself bought by Sony get yourself bought by Sun get yourself bought by IBM get yourself bought by H Packard you're basically out of business the techies the Silicon Valley people said well maybe you should sell your software to Microsoft or maybe you should invent something new and cool maybe you

should do voice recognition or 3D when Steve Jobs came back he had a reputation of being a technical person sort of although he wasn't an engineer the the investment Community wasn't very hopeful they didn't know what was going to happen but they didn't think much they figured he would do a deal now what did he do he didn't sell himself to IBM these are recommendations from Wired Magazine he didn't do licensing his name to everyone he didn't do these popular recommendations what he did do might be called business 101 first of all he did a

nice deal with Microsoft he got them to give his company $150 million now I would like to do that for Microsoft how did you do that well Microsoft was under anti-rust threat for being a monopolis something that happens all the time in the US a little bit more here a little bit less here in the UK every time we have a successful company you get Su um so Microsoft was under antitrust threat the last thing Microsoft wanted was for Apple to go bankrupt so $150 million came in that was a big help that puts bankruptcy

off by about six months they had 16 models of desktop computer they were trying to sell this is after the CEO had struggled to fix this company for three years Steve Jobs cut the 15 models down to one he threw them out he said to me my wife's sister asked me which computer to buy and I looked at the computers we were selling and I couldn't figure out which one to recommend and he said I'm the CEO and if I can't figure it out how can a customer figure it out we only need one so

he dropped everything but one he dropped all the printers and peripherals no more printers no more scanners no more he dropped all software development all software canceled it fired the software Engineers everybody was amazed Steve Jobs he's this he's the technical guy he cut the hardware Engineers back to the bone in his view they were making bad Hardware why did he want so many hard he cut six five of the Six National retailers well they had many retailers he cut it back to one it was Comp USA he moved all the manufacturing to Taiwan no

longer would we make any Apple products in the United States and he opened up a web store to sell direct to customers now what do these actions all add up to what's the strategy here excuse me keep simp keep it keep it alive at one level you can say hey it's just C cutting it's business 101 every single step step he did here and he did this very quickly in a matter of four months he's aimed at survival we're about to go bankrupt we're not going to do R&D we're not going to do product development

we're not going to have all these we're going to cut it back to a core that can survive you cut off the extremities now people were surprised why were they surprised because they don't expect to see anybody actually perform this kind of focused action people are surprised when they see an actual strategy they don't expect to see a strategy we expect to see our leaders espouse fluffy goals and try to do everything oh we're going to have everything we're going to have better education and better health care and better social services and faster Railways we're

going to have it all and down that road lies nothingness on strategy that's vacuous promises strategy is about focus and everything that jobs did here was focused on a single short-term objective which was survival that's it that's what he was after here and I sat down with him a year later and I said okay you're survived you got 4% of the desktop Market the windows Intel machines have still won what's your long-term thing here what's your real strategy I understand the focus on Survival Bo and he looked at me and he said I'm going to

wait for the next big thing that's what he said and I was I was bowled over I had just spent six months interviewing something like 75 Executives in electronics both in Europe and the United States these were division managers and CEOs of electronics companies and I had asked each one of them several simple questions one why first question is who's the most successful player in your industry in your business everybody could identify that they knew who it was and then I'd asked them how did that player get to be so successful and of course this

was 1996 97 98 electronics and they all had basically the same story the story was something had changed some new technology had appeared some new window of opportunity had opened and this company the successful one was the first one to jump through that in a in a clever or in a Droid way so then I'd say okay what is your strategy what are you guys doing and they give me this long list of things they're doing they say oh we are forming Network relationships and we are moving software to Firmware and we are doing 360°

feed back and we are transferring best practices they're doing everything but what they said success comes from which is waiting for a window of opportunity to open and then jumping through it full force with a huge amount of energy and focus to take to take that next opportunity that's what JNS was saying he was saying I'm going to wait for the next big thing that was an intelligent answer in in that industry at that moment and he did the next big thing for him was the iPod and then the iPhone and then the iPad and

in each case there was a window of opportunity that opens and he went after it full force full Focus that whole list of things the software the hardware the manufacturing the distribution the design all of those things focused on pushing that product through to to Excellence that's strategy a man named Chad Logan hired me to take a look at his company he said I need your help with strategy please come by and talk to me and my people I came by and I said Chad you know you're a graphics Arts company uh he inherited the

company from his own Uncle his uncle had passed away a couple years before he was a high school football hero turned graphics artist now manager I said what's what's the Strategic issue here he said well we have a plan I call it the 2020 plan 20% growth in revenues a year and 20% after tax profits that's the plan I said oh okay those are great goals but what's the strategy how is this fairly ordinary Graphics Arts company going to do this he said well one thing I learned as a football player is you have to

have the will to win that's the main thing and we're just going to push until we achieve this I said you have a strategy other than 2020 he said yes yes you had a plaque actually up in the wall it's at our strategies we're going to be the graphics Arts firm of choice we will Delight our customers we'll then the two key things we'll grow our Revenue 20% a year we'll maintain a profit margin of 20% or better we have a culture of commitment uh we'll Foster honest and open work environment uh we'll support the

broader community in which we serve this is a little before everybody put sustainability and a Greener World in their strategies but there's nothing here that's about strategy it's all puff it's all about things we think are nice plus results we'd like to achieve that's bad strategy now if Chad Logan and his Graphics art company was the only place you saw this kind of thing it wouldn't be a big deal but in company after company in hundreds thousands of Corporations that's what you get this is a corporation I was attending their their big strategy meet they

had they had two or 300 senior Managers from around the world it's a big company uh the picture I had to clip from a US election campaign uh but there was a big release of balloons which is why I clipped that picture and the CEO they had a a movie of the of the company's products specially produced they had specially uh music uh that was played the CEO gave a speech about the new strategy and and the strategy was we're going for Global Leadership we're going for growth and we're going for shareholder return and then

there were breakout sessions where individual managers sort of had to get together and buy in to this Vision where's the strategy it's not there so you think okay well this is a motivational thing they must have a planning system behind that to develop some methods yeah they do they have an annual strategic plan it looks three years ahead and every uh September they start a new one and at every June they finish the annual strategic plan and the first year of each annual strategic plan becomes next year's budget what it is it's a forecast of

the economy and a forecast of their revenues and a forecast of their profits it's a bunch of financial results it's not a strategy a strategy is not what you hope your performance will be strategy is about how you're going to get there it's bad strategy I developed the phrase bad strategy at an National Security conference in 2007 where we were looking at fairly classified and unclassified documents there were only nine of us in the room there was a former head of CIA a former head of the Department of Defense I was the lightweight in the

room and their big complaint was there's no strategy what we got is National goals you know we got democracy got to end terrorism we want to not have people have weapons of mass destruction but then you look down and you say ah okay how are we going to do that and says we will pursue a world in which there are no weapons of mass destruction in the hands of our enemies okay yeah and then how you going to do that doesn't say it didn't used to be that way used to have sort of the difficult

here's what we're going to do we're going to focus on this bad strategy now before you pull out your anti-depressants there are plenty of good strategies out there and here's Lou gersner his turnaround of IBM when he walked in IBM in 1993 was a difficult moment IBM's Mainframe business had gone like that the PC business had commoditized was a mess L gersner looked at it the advisors came in the Wall Street advisors Investment Banking advisers everyone was prepared to split IB up IBM up into pieces the idea was that the computer industry had fragmented that

instead of integrated companies making all aspects of computing like IB and NCR and so on there are now operating system companies memory companies hard disc companies Etc and so IBM itself should fragment to match and Gerson said no no no that's crazy I if you fragment you're going to lose the base of competence and you're going to lose the knowledge about all the different customers in the world so what we're going to have to do is stop being an integrated company and turn and be a Solutions provider and if the solution is a non IBM

product that's the way it's going to be we're no longer IBM was no longer going to be a company that pushes its own products now to do that took eight nine years most of the challenges he faced were organizational they had Thoms all over the world that fought this the head of IBM India great guy he rewrote the memos that he passed on to people they came in from headquarters there was a huge amount of opposition to this and it it got handled it got handled over time this is a dramatic change in strategy and

everything that gersner put in place the the firing of 75,000 people the re rehiring of many people the the huge reductions in the in in the internal processes and Outsourcing many many processes the enormous pressure to change processes to become speedier and and higher quality all of that was focused around this goal of that kind of change now that that's a strategy he understood the problem and he devised an approach to dealing with the problem he didn't say oh we're going to return to 10% growth that's not a strategy that's a hope that's an aspiration

so what's a strategy excuse me a bad strategy and a good strategy I'm going to give you the Hallmarks a bad strategy first four big Hallmarks I'm going to say what's a good strategy and then I'm going to emphasize some of those pieces for you a bad strategy is when it's all goals this is a an old graph but it should be familiar to anybody who's looked at corporate uh strategic plans it's a perfect hockey stick it shows profits down and then plan to go up this is International Harvester strategic plan in 1979 uh and

their their attempt to grow profits over the next 5 years actually in 1990 in 1980 there and 81 they went bankrupt they own out of business so the plan didn't work why didn't the plan work CEOs will say oh we had a great plan but we had problems implementing it suggesting somehow that that if only people had worked harder these numbers could have been met what this plan left out was the elephant in the elevator International Harvester at that point in time had the worst Labor Relations probably of any company certainly in the US maybe

the world Harvester was the scene of the Hay Market riots back at the early late 1800s places you know workers were machine gun their labor relations were terrible their wage costs were high the work rules were disastrous their their costs were higher than anybody else in the industry it was amazing that they were alive all right given that environment their strategy should have been to deal with that problem somehow there's several ways you could try to do it it's very difficult you probably want to split yourself into separate companies from trucks and agricultural equipment and

so on because it's hard to change a big company you probably want to try to move some of your plants out of where they exist and you probably want to try to really dramatically change your labor relations problem that's critical that's your strategy that's your bottleneck instead they did this ridiculous Financial forecast they ignored their basic problem so strategy that's all goals bad strategy you know it's a bad strategy when it's all fluff it's all vaporous Concepts there's a bank that I became acquainted with and they said our strategy is customer oriented disintermediation they're Retail

Bank of course they're customer oriented and dis ammunation that means you're a bank so the strategy is we're a bank but they fluffed it up how many times have you seen that fluff is not a strategy people confuse the idea of strategy with abstract words it's not strategy is focused you know it's a bad strategy when there's no problem if we go back to International Harvester the problem there was they didn't address the problem lots of bad strategies key thing about them is it's all about the future it's not about what are challenges it's all

about where we hope to get but the problem that we're facing every organization every country every government every business every nonprofit every school has a challenge of some kind some essential set of forces that they're struggling with and unless you identify that and focus on it and think about it and analyze it you can't develop a strategy and after you develop a strategy other people can't evaluate whether it's good or bad unless you said stated what's the problem that it's trying to solve now the Obama Administration wants to have a jobs strategy in the United

States that's great well why aren't there jobs what happened to the economic growth unless you figure that out you can't have a job strategy the job strategy has to treat the disease it has to deal with how come economic growth is flatlined isn't Flatline because there isn't enough stimulus you can't stimulate an economy every month forever we've been stimulating US economy every quarter for 11 years now that's not a stimulus anymore when you when you give someone amphetamines every quarter for 11 years they become comos maybe that's why we're flatlined you know when you drop

interest rates down to 1% and keep it there for four or five years you get huge property Bubbles and asset bubbles you think oh I'm stimulating the economy so you don't get economic growth from stimulus and the lack of economic growth is not because you don't have a stimulus stimulus might conceivably be the right response to a recession but the fact is countries like ours that have mine that have run their debt Up So High by constantly stimulating the economy there's no there's no slot left you've already done that all right so you need to

analyze what's happened to the economy and one of the things that's happened is we don't have any technologies that are employing anybody all through the 20th century every invention we had create a huge amounts of employment whether it's railroads or airplanes or electricity or chemicals or television or computers or automobiles or roads millions and millions of people were employed Manufacturing Distributing and fixing that stuff Google employs 10,000 people that's it it's a small town it's a village what about everybody else YouTube how many people work for YouTube hardly anybody it just it's a bunch of

servers and so our new technologies while they're very exciting they don't employ anyone and the old Technologies are all are being shifted abroad so that's a problem problem when you begin to identify the problem you begin to think about strategies for somehow coping with it you know it's a bad strategy when it's a dog's dinner dog's dinner is a long list of things that's what committies produce 75 items so we have to pay attention to clean up the sidewalks fix the seats that kind of thing I call it a dog Skinner what's a strategy this

is Back to Basics I'm not getting into the five forces I'm not getting into how to innovate I'm getting back to basics legendary coach Vince Lombardi in the United States football coach at the beginning of the Season used to hold up a football and point to it and say to the Green Bay Packers in their first training session of the Year gentlemen that's a football is getting back to basics is reminding people of what's going on what are we there for the basics of strategy is a strategy is a coherent mix of policy and action

designer surmount a difficult usually High States challenge that's what it's about that's what it is it's not an industry analysis it's not a goal it's it's not a wish list it's a design of policy and action to deal with the high stakes challenge good strategy has something I call a kernel kernel isn't the whole thing but the kernel is like the the center of a seed it is an essential thing from which a strategy grows the colonel has three components diagnosis which I've talked about what's what's the problem here what's the nature of the challenge

why do we have flatlined economic growth why do we have a European debt crisis why are 40% of the kids dropping out of school in the Los Angeles School District what is the nature of the problem and you will find over and over again that when you enter these Arenas that people are putting forth ideas about what to do with no diagnosis oh let's hire better teachers oh let's spend more on books well wait a minute is that the problem is the problem that we don't have enough books or better books is it that the

teachers aren't smart enough I had some dumb teachers and I learned don't know but you got to do the diagnosis guiding policy is how are we going to solve this problem what's our basic approach what's our basic approach now these are decisions to some extent your diagnosis is a decision you choose a diagnosis there may be multiple ways of diagnosing a problem a social scientists will always diagnose it in a way that has maximum causal explanation but often no levers for change nothing you can do about it a good strategist will try to find a

diagnosis that suggests here's something you can do to change things and then coherent action is the third element those three elements if they're not all present they don't have a strategy that's as powerful as it could be I'm going to cover seven or eight key things to look for to create powerful and good strategies one that I've said over and over again I'm going to just say it again diagnose the challenge what do we got here uh I talked about why is there a debt crisis in Europe why are students dropping out why is there

a debt crisis in Europe what is the problem run out of money what's the problem let's just take gree there's the there's the there's the key hot button right now what's going on there Greece can't pay back its debt why did a country borrow more money than it can pay back how'd that happen think about it how's that happen did they make a mistake did they not do their sums what's going on there so you're going to say well they anticipated growth that didn't happen Greece hasn't had any economic growth for 15 years neither's Italy

so anyway they're borrowing in the anticipation that things will get better or they're borrowing if you want to be a little bit less sanguin about it they're borrowing in order to buy votes and then hoping something will happen in the future to take care of it that's sort of why American administrations borrow money they borrow money to buy votes and then hope that somehow in the future someone will cover the debt all right so that's half of the question the other half is why is anyone lending the money why would you lend money to Greece

what are you nuts the bankers there's Bankers in France in Germany they're lending money to why are they doing it I guess if you're economists because economists always believe people are rational uh they figure they'll get bailed out I'm not so sure about that Bankers I saw lending money inrease what they saw is that they could get a little half a 1% extra yield and that was it it's like the the mouse following a little trail of cheese into the Trap oh this tastes good this tastes good bang it's my op and then there's other

elements of the problem but if we look at the problem it's not going to be solved by bailing out Banks or bailing out greas it's a it's a systemic Behavior problem of national governments within the EU itself and with banks if you want to fix it more money it's just a palet it's just like taking aspirin for cancer once you do a diagnosis you can begin to confront what actually needs to be done make your actions coherent focus is the heart of strategy 216 BC Hannibal anals taking on the the Romans at Kai animals got

about 50 55,000 troops the Romans have we're not sure we think somewhere between 80 and 120,000 soldiers we think they they actually tried to minimize the number after they were beaten so badly Hannibal had been raging around the Italian Peninsula his idea was to was to beat the Romans over in a number of battles and and then sue for a settlement what he wanted was trading rights in the southern Mediterranean he wanted Carthage to be able to to resume its trading and figured that by military Adventure he could get that kind of a deal the

Battle of Kanai shapes up the Romans decide to face him face him down they sent a a record six Legions under uh paus and varl two cils and Hannibal arranges his troops in an arc they're the Red Blocks there in the middle are the the soldiers he's picked up in Spain and Gaul and at the flanks he's got his carthaginian heavy infantry and then he's also got Cavalry on the right and the left now in Ancient Warfare cavalry's job was to go out and defeat the other guy's Cavalry and then race around picking up Loot

and killing stragglers doing stuff like that Hannibal bowed his troops out and when the two armies came together the bow began to flatten and it flattened and then it bowed Inward and the Romans seeing this figured oh the spani Gs are retreating that means we won so here they are with the bow flat and the Romans pushing the center back and it looks like Victory and Romans begin to shout their Victory cries and push together in the center to break through the center that would be a great strategic Victory the center bows back even further

they don't seem to notice that here and here the carthaginian heavy inry is not really involved they're just hang hanging around the bow pushes even further back and then stops and these soldiers from Gaul and Spain instead of sort of backing up Suddenly turn and hold some few reinforcements come in the heavy infantry from the side comes in the Cavalry unexpectedly comes in from the rear and closes with the Roman soldiers the Romans are now encircled because they're encircled the Romans in the middle of the mass are ineffective the only effective Fighters are on in

the edge of the blob and so suddenly the numbers have been reversed anals got more effective Fighters than the Romans the Romans are mostly facing the wrong way they're jammed together so hard that many of them can't lift their weapons they stand there we think for 3 to four hours as they slowly all die 55 to 60,000 Romans died that day in Kanan more than any other Battle in History before or since more than at the sum more than Gip more than at Gettysburg was the biggest s military disaster in history and so it's been

studed what happened here what was Hannibal now you could say it's a bit of luck on Hannibal's part but the trouble with that is he did this over and over again for 10 years he's called the father of strategy because he taught through these kind of destructive battles a Romans to think strategically instead of just charging ahead and trying to fight you look at this strategy and you it had almost nothing to do with business so I'm going to have to go up many levels of distraction but if you look at what he did it

was a coordination in time and space that was unanticipated clever and Adroid was a coordination of forces a design where the Romans Own Strength their own courage their own Mobility was turned against them strategy exploits your predictable nature of of the World whether it's your enemy or the weather or business cycles and it you coordinate your forces you coordinate things around what you're trying to accomplish the competitive advantage of strategy is that Focus that coordination if everybody did it it wouldn't give you an advantage but as I said at the very beginning it's surprising when

we see a strategy here's Hannibal statue in the Loof semi modern he's counting the rings of the 80 Senators that were killed at Kanai now the Romans gradually recover from this takes them a long time they they outlaw the word peace every male is brought into military service and it takes him 10 years to finally chase down H never really defe battery they finally do is go back to Carthage and burn it Focus coordination let me show you a company doing this this is a flight simulator in the early 1980s to build a flight simulator

you have to do 3D Graphics you have to build a mathematical model of the environment you want to fly in and then you have to have a a virtual camera looking at that and you have like a TV screen that that says this is what you would see out of that cockpit and you have a joy stick where you fly that space shuttle complicated to do 3D Graphics in the early 90s it became clear that we could begin to do 3D graphics on personal computers but nobody knew what it' be good for people opine well

maybe what's going to happen here is we'll have 3D tours of foreign cities you able to go around Paris with your virtual camera or surgeons will look inside bodies and learn with 3D stuff or Architects will sell designs with 3D Graphics but that's not what happened what happened is 3D Graphics was pulled into the market by the invention of violent video games this one right here is Doom uh from 1995 let's see if I can get it to play all right so this is a video game where you run around with a shotgun and shoot

monsters as you can see the graphics quality is not great but on the other hand once you get into it it can be terrifying why is this thing not want to go okay so in 1996 a company named 3dfx brought out the first card that you could plug into a PC and make this stuff work fast now now if you were a teenage boy killing your friends on the Internet by playing Doom where you were one of these guys running around and your friends were other guys running around you're shooting at each other if your

video card isn't fast and is incapable you get killed constantly so in order to avoid that you want to buy a video accelerator and 3dfx came out with the first effective one SGI is a company that had invented all these Concepts Jim Clark the CEO left to form Netscape the new CEO from H Packard said our goal is 50% a year growth he ignored this burgeoning Market he was after workstations Nvidia the company I want to focus on put brought out a a a card that was aimed at this it failed it was the wrong

technology they went back to the drawing board they put together a strategy committee they thought about the nature of the problem and they came up with a way of dealing with it and dealing with the fact that intel was about to enter the business they tried to understand the situation their diagnosis their understanding was that these Gamers they'll they'll pay for almost any power we can deliver they really want high quality graphic that the industry works on an 18-month cycle that's basically Mo's law turned into an industrial machine and every 18 months Intel and everybody

else comes out with a new architecture based on smaller smaller size pieces of chips that Intel CPUs on one chip so as they get more and more as as their as their designs get more Compact and smaller they tend to put more chips on a wafer and try to reduce the cost the people at Nvidia reasoned that the 3D Graphics is spread over many chips over software and what we can do is gradually push this stuff onto one chip more integration and by doing that we can move this performance much faster than mois law two

to three times faster than mois law and they believe they can introduce a new version a new chip every six months very tough because the industry works on an 18mon cycle to introduce a new chip every month every six months however if we look at the technology Frontier the blue curve and we say okay here's Intel the red line going along every 18 months with a new chip we can we can see that Intel is going to be at the frontier here an 18 months later their new chip will be at the frontier and then

18 months later their their new chip will be at this Frontier if you go every six months you'll be at the frontier more frequently and on average you'll be have higher performance in the market you'll also have more buzz if if the market can absorb it so what they did and here's the key thing the focus like Hannibal the different moves in time and space to make this work they put together three overlapping teams each was going to work on an 18-month cycle but each was six months offset from the other so every six months

there'd be a new design coming out wow every six months a new design the trouble with that is any kind of delay screws it all up it's a mess the biggest and worst delays you get are when you put a design out to a semiconductor fabricator and they it comes back they send you five or 10 chips their first run and you put them in the you plug them in and they don't work oh my God now what you got to figure out why they don't work and send them back usually it's some kind of

design flaw on the electrical characteristics Nvidia with their second round of venture capital built the world's largest simulation facility to simulate the electrical characteristics of these things so there wouldn't be any rework to build the software typically the way the industry work worked is you got the Chip And then you programmed the software on a chip Nvidia said we can't wait we've got to build complex emulation facilities that that emulate what this Chip is going to be like and so we could start the software development the way the industry worked was people developed these chips

and then they sold them to board makers companies like ATI or companies like Champion or companies with other names and they would put the chip in their board and they would develop the software and viid said no we can't do that that's too slow we're going to have to develop our own software and we're going to have to go around the board makers we're going to find no name board makers in Asia who are willing to put our chips on the board and our software on the board we don't want to get in the board

business it's problems they did a bunch of other things but this is the core Nvidia is Graphics chips became more and more complicated faster and faster they became more complicated than Intel CPUs there about 1999 2000 they continue to be the most complex chips in anybody's computer the world's fastest computer was put together a year and a half ago by a group of engineers in Beijing and what they used was in videographics chips to build it these are amazing machines Nidia raced ahead of its competitors 3dfx went bankrupt Intel tried twice to get into this

business of 3D graphics and twice it failed it could not deal with a shift from its 18-month cycle to a six-month rapid Evolution cycle it's a big company a technical company very competent company and this is a small small Market compared to its Major Market and it just couldn't make shift so we see the the key things here in a successful strategy the focus around accomplishing something and the anticipation that a competitor has certain limitations has certain Behavioral or structural limitations this is uh a modern video game Modern Warfare 3 I'm not in favor of

violence but look at the graphics this is all triangles millions and millions and millions of triangles that people create these images out of it's not a movie it's 3D graphic some reason the market for this stuff remains kids that like to see things blow up create the next global conflict number three Insight strategies is about Insight there's no way around it it's not about looking at a matrix or a graph or a curve and picking your strategy it's not about the eight boxes and your strategy is the one on the left it's just not that

way any more than a a great film director it's about pick one of the four plots anybody triy to sell you that it's a fake it's an Insight number five number four you got to create proxim objectives strategy is not about the far future it has to do with the future it has to do with us getting to the Future and not being stuck but the way we get to the future is doing something now doing something now to push through the challenges and problems we have a proximate objective is one that's feasible it's one

that we can actually achieve in the near term I like near-term one year 18 months two years Max it doesn't have to be near-term but it has to be pretty feasible what do I mean by pretty feasible a reasonable expectation that it can happen what do I mean by reasonable well you know what I mean means not blue sky the United States has a goal of stopping the drug trade that's blue sky ain't going to happen ever John Kennedy his goal of putting someone on the Moon by the end of the 60s was approximate objective

how do I say that this is often held up as some kind of big hairy audacious skull or a giant leap into the unknown no it wasn't we knew how to put people on the moon you want to put people on Saturn right now we can do it just expensive you put them in a big steel tank it sticks in gas in there some oxygen put some food in there and send it off the technical problem we had to solve to do this the real technical problem first you need big Rockets but secondly we needed

a throttleable rocket so you could land on you needed something could throttle because there's no air there you can't do parachutes why did he do this he did it for strategic reasons he asked the vice president what should we do to beat the Russians vice president president had no idea so he wrote to our captive Nazi rocket scientist Veron Brun and said what can we do to beat the Russians and Von BR wrote back this letter April 29th 1961 do we have a chance of beating the Soviets and putting a laboratory in space or trip

around the moon and Von says no they got bigger Rockets their Rockets are this big our Rockets are this big they're going to beat us in a lot of things but he said if we look beyond that if we look to Rockets aren't this big or this big but this big then because we have more industrial base than they do we can probably build that rocket faster and that rocket it'll take people to the Moon in back and so that's a goal we can beat them at one month later John Kennedy gives a speech says

we're going to go to the moon in back approximate objective it was feasible and very strategic by looking at that very big rocket he figured we could beat the Soviet Union that's the kind of Rocket it took to go to the moon the one on the right and back these are the Rockets we had when he made the speech that's the USA rocket the little tiny one there and these were the Soviet Union's Rockets so that was the idea the idea was well we just have to make a bigger rocket that's that's not rocket science

that's just big Rockets ride the Wake great companies come out of technical change they come out of changes in the world that you take advantage of and ride people could see for a long time that Computing and Telecommunications Were Somehow going to convert this is nec's vision of that put together in the late 70s and the vision is sort of that there's going to be this big battle between telecommunication companies and computer companies well it didn't work out that way what happened was microprocessors upset the whole the whole thing and companies like Cisco Systems and

Microsoft were're able to ride that wave of change adroitly if you look at Apple the wave of change Steve Jobs was writing was a shift from desktop to mobile platform links matter chain links are situations where to have Excellence you have to have a bunch of things all work any one of them doesn't work the Excellence isn't there just like a chain is only as strong as the weakest link in a chain link technology or chain link system each piece has to work right it's not a production function it's additive it's not like if you

don't have enough capital you can stick in more labor both F all the factors of production have to be of high quality or equal quality for the thing to work I'm going to skip over some analysis here that's expect entropy and inertia would be my seventh principle good strategy understand that the real world out there things are a mess competitors are not alert your own company may be your biggest challenge it's hard to get things to change other companies don't change easily other nations don't change easily expect entropy and inertia here for example is General

Motors in 1919 that's its product line for it's comp has got the Model T down there these are the price bands and General Motors is a car conglomerate 1919 it's got Chevrolet Oakland almobile Sheridan scrips Booth Buick Cadillac it was put together by Acquisitions Pier deont Alfred Sloan senior managers deont tell Sloan put together a product policy for this company figure out what it should do takes him three months of hard work of thinking and he writes the product policy the company and this is what he comes up with each division should have its own

price category Chevrolet competes with Ford Oakland which eventually becomes Pontiac is priced above Chevrolet Buick above Oakland oldmobile above Buick Cadillac above Odenville each division has its own price land that it lives in this concept of what General Motors was about catapulted this company into being the world's largest Industrial Corporation by 1950 in 1956 you could walk down any Suburban Street in the United States and tell who lived there by the car out front Ordinary People drove Chevrolets the foreman drove a poniac the manager of buck and the CEO of Cadillac what happened over the

years here's a situation 2008 as General Motors goes bankrupt look at its product line is there any clear pattern there of which product or which brand is which Toyota above looks more like General Motors in 1921 in 2008 General Motors has 15 products at the 22,000 dollar Point how does that happen how does that happen how can you have corporate strategy year and a year out and let your products become so undifferentiated as in when Steve Jobs walked into apple and said I 15 computers here I don't know which one to tell someone to buy

just happens and I call it entropy this happens because the original plant gets mushed over time it gets disorganized you can imagine that if you're in the Buick division you're sitting there and saying geez our job is to have this high- priced car but you know if we had a car that was lower priced we could sell more units and get a bigger bonus so let's push headquarters to allow us to have a lower PRC car now headquarters job is the same job that parents have when the 13-year-olds come in and say we want to

have beer at the party headquarters job is to say no that's not the way it's done around here your job is to stay up there but over time it's hard to say no and Buick starts putting out cheaper cars and Chevrolet starts putting out expensive cars and so on until everything is muched together now it's not only just much together but the company's competing with itself all these different models are price competing with each other and each of them requires their own advertising budget advertising the same price point and the same characteristics so they're like

a whole industry that's become price competitive through their own internal craziness entropy good strategy bad strategy it's hard to do but it's not that hard to describe bad strategy is fluff it's here's where we're going to go without how are we going to get there it's not defining the nature of the challenge so that when you put forward a plan no one can assess whether it's a good plan or bad plan because you don't know what to trying to deal with you don't know what the difficulty is good strategy has a lot of characteristics a

few that I put forward primary one Focus energy don't disperse it in all different directions Focus particularly on proximate objective something critical that can be accomplished in the near future good strategy bad strategy thanks for your attention Richard thank you so much for that fascinating presentation the lectures public lectures at lsse are normally characterized by the audience being very interested in what the speak speaker is saying but I have rarely seen so many people taking notes while someone has been speaking and I take that as a great compliment to your uh performance we do have

time for questions about 20 minutes so if any of you would like to pick up particular points with Richard please do the gentleman in the middle yes my name is Mr stefanon I am from Ox for sustainable development dealing with strategies my question is yes it's I appreciate the your approach what I would like to have let's say more opinion this concept of focusing how you can focusing in something once you don't know in the in the diagnosis phases in other words in order to have the problem we have to have the information we have

to have the data and then from the data you can develop what you call policy your strategy and then you can start focusing so the first step in your approach I think is not so much emphasize second question is yes I do appreciate that you push about technology I do work with IBM IBM has develop it I mean has developed this concept of information management system where he Focus mainly on how you manage the information from the bottom until the strategies thank you you know part of your question is how do you develop effective policy

in a world of uncertainty where you don't really know enough to have an accurate diagnosis is that my a good strategist is a bit like a scientist you're working with empirical data you're forming a strategy is fundamentally a hypothesis about what going to work we'd like to have a hypothesis that we're sure it's going to work but we're barely really are vou safe that kind of certainty uh what we try to do in the in in the best of cases is develop a some some tests some experimental data from the world that tells us more

about what's the nature of the problem uh companies that that you can have multiple countries or multiple Outlets or multiple stores or multiple initiatives and see which one is working better they can move more quickly um in in in government and and in policy areas uh collecting information sufficient to analyze the nature of the problem uh is uh is costly the worst strategic situations are where there's a huge amount of uncertainty and we only get one try because you know then we have to have an accurate diagnosis we have to formulate a plan we have

to carry it out and it either works or it doesn't there's no in between incremental Improvement so we we try as strategist to to create situations we're able to make these these improvements over time rather than the one big leap um I hope that helps questions yes the vum yeah there's a microphone coming to you hi I'm Nisha I'm a student at the NSE and uh what I wanted to ask you is that if you had to recommend the United States of America uh give some recommendations uh what they should do in uh to get

out of the current economic mess they are in what would they be the government has to become more efficient it is in incredibly inefficient in what it does which has created a voter a group of Voters a large group of Voters that do not trust it to do anything they see it spend a million dollars a year to put one soldier in Afghanistan what is that they see it throw money at Banks build trillions they see it when there's a horrible flood a catastrophe in New Orleans the federal government can't get its trucks there truck

drivers didn't have permits to cross state lines I mean this is incompetence and inefficiency at a larger level the government has to become more efficient so that we can trust it to do things the government should provide Healthcare to everybody but does anybody trust it to do that in a way that isn't politically skewed or horribly inefficient so there's a there's an efficiency issue secondly I have to say basic thing is the dollar is too high the dollar is just way too high that we have priced American labor out of the World Market with a

high dollar now why is it so high we got interest rates at zero why is the dollar so high my Economist friends can't explain it but that's the thing that has to be tackled the dollar is way too high uh it keeps us from from competing effectively with the rest of the world in exports I mean there are other issues you can get at you can get at infrastructure and fast trains and education but primarily no none of those seem to be solved by a government that's inefficient and does things totally politically rather than in

some kind of reasonable way so those are the two key problems key problem problems are the dollar is too high and the government's inefficient maybe better uh yes I'm wondering if you might provide an illustration or two or comment on where good strategies might be uh employed being employed currently at the state or local level in the States and what kind of political leadership it takes to employ them well it takes imaginative political leaders it takes political strength political power is the power to do things on your own that that aren't just what your supporters

want so it takes some political power uh in my state where I have uh a call it my vacation home but I try to spend more time there than just vacation is New Mexico that's when one of the poorest states in the United States it's basically very rural uh it's very beautiful one reason I like it it's a giant state with only 3 million people so it's empty I find that Charming a lot of empty space the governor put in the last Governor put in a very interesting set of policies about moving Film Production to

New Mexico and what's interesting about it is they didn't just put in a tax break they put in a tax break for Film Production but they also put in college courses on film Technology College courses on film editing college courses on they put together you know Studios where you could do this kind of work so in in the sense of focus there was four five six different actions and policies all of which happened in a fairly short period of time focused around making New Mexico a a a location not only a choice for filming not

just going there because of the interesting settings but it's a place where the skills were going to be developed and the skills would resign and okay that's a pretty cool strategy it's fairly simple um and it's working fairly well I mean it also depends on Hollywood being uh uh uncompetitive increasingly uncompetitive increasingly hostile to its own business hello my name is Alex as you said Steve Jobs told you that the strategy strategy was to wait and I can call him a great leader to have a good strategy and to succeed in it does the the

organization or a country need a great leader to do that because if there are many of the managers and so on this creates uncertainty so basically I'm from Russia and there's only Putin and that's that's why this question is interesting for me as well hopefully nation states don't need complex strategies you know unless they're going to go to war should basically provide the hygiene factors that allow everybody to get on with life you know decent infrastructure certain amount of Education stuff like that um do we need a great leader I'm not going to say that

the trouble with great leaders is sometimes they're horrible and sometimes they're good it's like monarchs you know there are moments when monarchs create Golden Ages because they're long lived and they're really smart but once you go to monarchy then you're going to have some really terrible monarchs that take you down into hell so you don't want to commit yourself to that system what a strategy is it is an imposition on a system other words if we look at a at a system either a country or an organization or a business and we say what will

this business do over the next 3 to 5 years if left to its own devices we can sort of figure out what it's going to do strategy is to change that is to is to create some kind of coherence between disate pieces Nokia was at one point the top of the panel in smartphones and then it began to sort of Let each piece of the business do its own thing and now it's flailing but it isn't so much you need a great leader as you need this coherence and you need the people involved to believe

that there needs to be some coherence it it's like a symphony orchestra there has to be some kind of tempo that is set doesn't mean it's an autograph there's something going on besides everybody doing their own thing that's the nature of strategy Richard you were saying the other evening when we were talking about this that the power of someone to take an idea with a Clarity of thought and begin to impose it upon an organization that was the the value of their contribution was to have the idea and the strength within that system to get

people to pay attention it's it's human nature when we form organizations or nation states or anything for the separate pieces the geographies to go off and pursue their own interests and that's Freedom that's we like that we want people to pursue their own interests but there's certain kinds of things that are lost when we do that and strategy is about trying to identify the key thing that we don't want to lose and trying to get that coherence around that uh it's terribly important in military Affairs less important in National Affairs very important in in in

in fast growing businesses um pulling in different directions dilutes the competitive punch and you lose now I know there were questions down in the front R but I do see a gentleman at the back in the middle of that thank you yeah I would be very interested in having your perception on the um strategic Consulting profession and uh your views on their contribution in putting together good bad strategies for their clients strategy Consulting is all over the place there are high quality firms and high quality people and then there's scams I've got a uh an

email and I actually meant to put it in my my deck and I I wasn't able to get it in there and it's an advertisement to go to a meeting in Los Angeles last week at which a gentleman is presenting what he calls the 60-minute strategy and the 60-minute strategy it's three steps First Step maybe it's two steps I'm trying to remember but the first step is to imagine the best possible thing that can happen and then the second step is to write down a plan around that and the third is to give it to

Senior Management that's strategy now that's a scam but people want to believe that there's a magical way to get success books about how to succeed that's what I should have written it's so easy the secrets of success three secrets of success number one aim high if you aim low you'll never wind up high number two never give up if you give up you'll never get there number three don't think too much so you won't question number one and too that's could be a bestseller but in terms of value to someone who has a difficult challenge

that's about as useful as saying go carve your company name on a tree and bury a dead cat under the tree it's Superstition and yet the human heart has an affinity for that stuff we hope that it's that easy never give up I'm coming back to the front zo there's a gentleman at the back thank you very much um uh My Name Is AO and I run a product and packaging design consultancy here in London serviceing East and West Africa a very small company I'm very curious uh to know what your opinion is uh about

developing strategies in SM for in within smes servicing uh markets that are very asymmetrical well I hope your company gets bigger Hoopes hopes hope what's the problem in developing countries why is it so hard I mean I'm 68 years old and developing countries have been developing my whole life we get we we begin to need a different word the problems if you look at my chapter in my book about chain link systems and a piece on my website about that I think that the issues are chain linked in developing countries that means when you fix

one thing it's not good enough that you say oh let's have better ports well the better ports don't help if you don't have better roads say okay let's have better ports and better roads well what doesn't help if there are pirates who are stealing the stuff on the roads you say let's get safe roads and better ports said well that doesn't help if the government's corrupt let's get rid of the corruption and the fix the ports and fix the roads and get rid of the Pirates well that doesn't help because the imported products are putting

the local people out of business so there's there's problem after problem after problem and it's very hard to deal with chain link systems unless you get a bunch of things moving together to improve this is like an automobile company you can improve the design and you can improve the marketing but if the car falls apart the manufacturing is faulty no one wants to buy the car um on the other hand you know some forms of Excellence out there are of the opposite it's where you have five or six things all working well and that's what's

so hard for other people to copy and so I call that a chain link situation and one of the reasons it's it's hard is because efforts to fix one part don't repay their investment cost you have to fix a bunch of parts to get a result and I know that's very vague and very abstract but you know I've I've worked with people in developing world and that's sort of what I see is there's so many different pieces that have to be put together to work that's the issue does that help it's opens more questions well

I don't know I'm afraid we'll have to move on to another questioner um in the front row please in the second row here please and then we'll have time just for one last question hello I'm and student in LC idea um even if a strategy focuses on Focus the resources on a very clearly and correctly identified problem it would somehow turn out to be a failure so my question is um do you equate good strategy with success and bad strategy with failure thank you no no I don't I mean bad strategy can succeed and good

strategy can fail uh the world is uncertain uh companies succeed from luck sometimes they succeed because look at Groupon I mean Groupon strategy is to try to get a lot of money from stock investors that's it they don't have a sustainable business uh what's wrong with trying to become a billionaire um so maybe that's the strategy but it's it's flaky from a business policy Viewpoint or a business strategy Viewpoint um so companies The Arc of companies is that they usually do something right countries do something right and then they begin to succeed they begin to

grow they begin to have all sorts of great things happen and as I said the other night um then you get in the habit of extrapolating that you begin to think oh strategy is looking at next year's increment of growth and next year's increment of New Wealth you know that's what we do it's happening we're growing we're great and you lose the habits of critical evaluation because you don't need to because the rain is falling and the sun is shining and the harvests are coming in and it's 15 years down the road or 10 years

down the road suddenly there's a blight and a drought and what what what what's happening let's project future growth oh yeah okay you project future growth next year there's another blight another drought things aren't working youve you've forgotten about how to deal with adversity you've forgotten that you should be putting grain aside for the bad years remember the Bible seven fat years seven Leon years this is not like new wisdom but we forget to do it because things are good and we don't put aside resources for when things are not go good that's it's the

nature of The Human Condition so one of the things about the human condition is that there is this cycle in the Affairs of people where Good Times lead eventually to sloth and decadence which leads to bad times which leads maybe to a strengthening and the return of good times and maybe it just leads to Easter aisle the last question hi my name is Luke um just one quick question you touched on it slightly in your uh Speech earlier um as a strategist um what do you feel is a strategy or maybe have they even thought

about strategy in uh central banks governing bodies and countries throwing money at the economic problem at the moment I.E qe1 QE2 probably Q3 3 four five and so on I think it's uh it's a fantasy uh they started out throwing money at Banks because they they they formed an erroneous belief that the problem was Banks weren't lending money it is now clear and it was clear then that it wasn't that Banks weren't lending money people didn't want to borrow so throwing money into Banks to increase liquidity didn't didn't do anything then they put interest rates

down to zero which really hurts guys like me that saved money all their life and now I can't earn anything they sort of wanted that to happen what they wanted people to do is get their money out of Safe things and put them into risky things and drive up prices because their theory was if they drove up asset prices people would feel richer and go out and spend well that hasn't worked either and it really doesn't make much sense I think central banks should stop trying to fine-tune economies I think they shouldn't bail out Banks

I think if a bank makes a lot of bad loans the bank should be nationalized the manager should be fired it should be recapitalized and spun off the sweds did this they did it with great skill and speed uh I was a consultant to some national people at the time and I suggested that they use Guantanamo Bay to take the banks through Rapid bankruptcies but uh I I was lefted out of the room but the the issue is not Manan B the issue is the the legal system does not allow you to do anything quickly

to take a bank through bankruptcy and reconstitute it in the US without using enormous executive power basically War Powers would require 10 to 15 years and while the lawyers fought and fought and fought and so the the fundamental problem is is not the the the Federal Reserve System or the central banks it's the legal structure certainly in the US and I I can't say about the UK that that prevents you from doing very much about these organizations but certainly uh they shouldn't be bailed out and if they're too big to fail I don't think splitting

them into small pieces is the answer to too big to fail because basically the much of the risk they have is counterparty risk and so the more counterparties there are the more risk there is I think uh I think limiting the crazy incentives that people work on which allows them to become wealthy beyond the dreams of mindus by taking hidden risks it's an unwise way of running financial institutions financi Banks and insurance companies have the same problem which you can increase you can always make current results look better by taking a hidden risk that's under

the table and people do it and they walk home with $30 million bonuses well ladies and gentlemen you've had the trailer uh the film so to speak is available outside I do commend it to you and would like us all to thank Richard very much for giving us such a stimulating evening