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Richard Rumelt

American economist

QuotesEdit

  • Changes don't come along in nice annual packages, so the need for strategy work is episodic, not necessarily annual.

Strategy, structure, and economic performance. (1974)Edit

Richard P. Rumelt (1974)., Strategy, structure, and economic performance. Harvard University Press. Revised edn, 1986

  • [ Diversification strategy is] a firm’s commitment to diversity per se, together with the strengths, skills or purposes that span this diversity, shown by the way in which business activities are related one to another.
    • p. 29
  • [In related businesses] common skill, market or resource applies to each.
    • p. 29
  • The enhanced ability to obtain external funding and ... capacity to deploy capital internally to the most promising of a wide range of divisional ventures.
    • p. 119
  • It is commonly accepted that successful performance of a firm hinges on restricting activities to cultivating a related and familiar range rather than 'bold moves into uncharted'.
    • p. 156

"Diversity and Profitability", 1982Edit

Richard P. Rumelt, "Diversity and Profitability", Strategic Management Journal, 3.4 (1982): 359-369.

  • Prior work has shown an association between diversification strategy and profitability. This paper replicates that association using more recent and complete data and goes on to investigate the sources of the association. Theoretical arguments are advanced which predict the association which will remain once the effects of varying industry profitability are removed. Empirical tests verify this prediction and permit the discrimination between the effects of industry and diversification strategy on profitability.
    • p. 359; Abstract

"Uncertain imitability", 1982Edit

Steven A. Lippman and Richard P. Rumelt. "Uncertain imitability: An analysis of interfirm differences in efficiency under competition." The Bell Journal of Economics (1982): 418-438.

  • Ambiguity as to what factors are responsible for superior (or inferior) performance acts as a powerful block on both imitation and factor mobility.
    • p. 420
  • In summary, uncertain imitability obtains shen creation of new production functions is inherently uncertain and when either causal ambiguity or property rights in unique resources impede imitation and factor mobility.
    • p. 421

"How Much Does Industry Matter?", 1991Edit

Richard P. Rumelt, "How Much Does Industry Matter?", Strategic Management Journal, 12.3 (1991): 167-185.

  • This study partitions the total variance in rate of return among FTC Line of Business reporting units into industry factors (whatever their nature), time factors, factors associated with the corporate parent, and business-specific factors. Whereas Schmalensee (1985) reported that industry factors were the strongest, corporate and market share effects being extremely weak, this study distinguishes between stable and fluctuating effects and reaches markedly different conclusions. The data reveal negligible corporate effects, small stable industry effects, and very large stable business-unit effects. These results imply that the most important sources of economic rents are business-specific; industry membership is a much less important source and corporate parentage is quite unimportant.
    • p. 167; Abstract

"Towards a strategic theory of the firm." 1997Edit

Richard P. Rumelt, "Towards a strategic theory of the firm." Resources, firms, and strategies: A reader in the resource-based perspective (1997): 131-145.

  • I consider myself a mainstream researcher in the field of business policy, and the ideas I want to describe in this paper concern the foundations of a theory of business strategy that is rooted in economics. But is such a paper, whatever its merits, really appropriate at a conference entitled 'Non-traditional Approaches to Policy Research'? Surprisingly, it is. The use of economic theory to model and explicate business strategy, as it is understood within the field of business policy, is distinctly non-traditional.
    • p. 131; Lead paragraph
  • A major advancement in the strategy field is the development of models where firm heterogeneity is an endogenous creation of economic actors.
    • p. 134
  • For Schumpeter the most important firms are those that serve as the vehicles for action of the real drivers of the system — the innovating entrepreneurs.
    • p. 134

"McKinsey Quarterly interview," 2007Edit

Richard P. Rumelt in: Dan P. Lavallo and Lenny T. Mendonca, "McKinsey on Strategy – Interview with Richard Rumelt," in McKinsey Quarterly, August, 2007.

  • Some of the biggest changes have been in the process of generating business strategies—what I call “strategy work.” Around 1980, the received wisdom was to decentralize into business units, which would each generate a strategic plan. These plans were then amalgamated up the hierarchy, in some portfolio way, for senior management. That approach has all but disappeared, and we’ve seen a dramatic recentralization of strategy work.
    • Response to the question: "You’ve been teaching about, researching, and consulting on business and corporate strategy for 35 years. What changes have you seen in that time?"
  • Back in the mid-1990s I was researching strategy in the global electronics industry. I interviewed 20 to 30 executives, CEOs, and division managers and asked fairly simple questions. Which company was the leader in their market? How did that company become the leader? What’s their own company’s strategy?
I saw an interesting pattern. Most executives easily explained how companies became market leaders: Some sort of window of opportunity opened, and the leader was the company that was the first to successfully jump through that window. Not exactly the first mover but the first to get it right.
But when I asked these same executives about their own strategies, I heard a lot about doorknob polishing. They were doing 360-degree feedback, forming alliances, outsourcing, cutting costs, and so on. None of them even mentioned taking a good position quickly when the industry changes.
  • About strategy starts with identifying changes, and companies taking position (1)
  • Then, in 1998, I had the chance to talk with Steve Jobs after he’d come back and turned Apple around. I was there to help Telecom Italia try to do a deal with Apple, but after that business was completed I couldn’t help asking a question. “Steve,” I said, “this turnaround at Apple has been impressive. But everything we know about the personal-computer business says that Apple will always have a small niche position. The network externalities are just too strong to upset the de facto “Wintel” standard. So what are you trying to do? What’s the longer-term strategy?”
He didn’t agree or disagree with my assessment of the market. He just smiled and said, “I am going to wait for the next big thing.”
  • About strategy starts with identifying changes, and companies taking position (2)

Good Strategy Bad Strategy, 2011Edit

Richard P. Rumelt, Good Strategy Bad Strategy: The Difference and Why It Matters 2011

 
British admiral Lord Nelson had a strategic insight...
  • In 1805, England had a problem. Napoléon had conquered big chunks of Europe and planned the invasion of England. But to cross the Channel, he needed to wrest control of the sea away from the English. Off the southwest coast of Spain, the French and Spanish combined fleet of thirty-three ships met the smaller British fleet of twenty-seven ships. The well-developed tactics of the day were for the two opposing fleets to each stay in line, firing broadsides at each other. But British admiral Lord Nelson had a strategic insight. He broke the British fleet into two columns and drove them at the Franco-Spanish fleet, hitting their line perpendicularly. The lead British ships took a great risk, but Nelson judged that the less-trained Franco-Spanish gunners would not be able to compensate for the heavy swell that day. At the end of the Battle of Trafalgar, the French and Spanish lost twenty-two ships, two-thirds of their fleet. The British lost none. Nelson was mortally wounded, becoming, in death, Britain’s greatest naval hero. Britain’s naval dominance was ensured and remained unsurpassed for a century and a half.
    • p. 1; Lead paragraph introduction
  • Nelson’s challenge was that he was outnumbered. His strategy was to risk his lead ships in order to break the coherence of his enemy’s fleet. With coherence lost, he judged, the more experienced English captains would come out on top in the ensuing melee. Good strategy almost always looks this simple and obvious and does not take a thick deck of PowerPoint slides to explain. It does not pop out of some "strategic management" tool, matrix, chart, triangle, or fill-in-the-blanks scheme. Instead, a talented leader identifi es the one or two critical issues in the situation—the pivot points that can multiply the effectiveness of effort—and then focuses and concentrates action and resources on them.
    • p. 1-2
  • Despite the roar of voices wanting to equate strategy with ambition, leadership, “vision,” planning, or the economic logic of competition, strategy is none of these. The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.
    • p. 3
  • The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action.
    • p. 7
  • Given that background, I was interested in what Steve Jobs might say about the future of Apple. His survival strategy for Apple, for all its skill and drama, was not going to propel Apple into the future. At that moment in time, Apple had less than 4 percent of the personal computer market. The de facto standard was Windows-Intel and there seemed to be no way for Apple to do more than just hang on to a tiny niche.
In the summer of 1998, I got an opportunity to talk with Jobs again. I said, "Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says that Apple cannot really push beyond a small niche position. The network effects are just too strong to upset the Wintel standard. So what are you trying to do in the longer term? What is the strategy?"
He did not attack my argument. He didn’t agree with it, either. He just smiled and said, "I am going to wait for the next big thing."
  • p. 14; Similar story in Rumelt (2007)
  • Having conflicting goals, dedicating resources to unconnected targets, and accommodating incompatible interests are the luxuries of the rich and powerful, but they make for bad strategy. Despite this, most organizations will not create focused strategies. Instead, they will generate laundry lists of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources. Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.
    • p. 20
  • A leader’s most important job is creating and constantly adjusting this strategic bridge between goals and objectives.
    • p. 52
  • When organizations are unable to make new strategies — when people evade the work of choosing among different paths in the future — then you get vague mom-and-apple-pie goals everyone can agree on. Such goals are direct evidence of leadership’s insufficient will or political power to make or enforce hard choices.
    • p. 64
  • The kernel of strategy contains three elements:
  1. A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.
  2. A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.
  3. A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.
  • p. 77
  • A strategy coordinates action to address a specific challenge. It is not defined by the pay grade of the person authorizing the action.
    • p. 92

Quotes about Richard RumeltEdit

  • Throughout his long career Rumelt published little. But his influence grew slowly, and interest in his ideas was reignited in 2007 by a widely read interview published in McKinsey Quarterly. His most influential thoughts were contained in just two articles published some ten years apart. In 1982 he demonstrated that there was a statistical link between corporate strategy and profitability, showing that somewhat diversified companies performed better than highly diversified ones. And in 1991 he published a controversial paper arguing that neither the ownership of a business nor the industry that it was in could explain the bulk of the difference in profitability between different businesses. Being good at what you do, he maintained, counted for a lot more.
  • Professor Rumelt’s research has centered on corporate diversification strategy and the sources of sustainable advantage to individual business strategies. His current research interests center on the dynamics of industry transitions with a focus on the patterns and forces shaping the evolution of complex industries.

External linksEdit