Good Strategy Bad Strategy: The Difference and Why It Matters

"I thought to give more variety I’d recommend Richard Rumelt. It’s not a book about investment at all. It’s a book about business strategy. The title is Good Strategy, Bad Strategy: The Difference and Why it Matters (2011). It’s very well written and I see I am quoted on the back cover saying, “This is the only book about business strategy which I didn’t want to put down.” “What I’m really against is people paying quite high fees for what is little better than an index fund” It goes back to what we were just saying about understanding the fundamentals of a business, as the key to successful long-term investment. Rumelt’s book is about businesses that are effectively developing their capabilities in line with the development of their markets; he contrasts those with the vast majority of businesses where what is said about strategy is basically fluff and statements of aspiration. If you want a guide to pick your way through sense and nonsense in what companies say about themselves this is the best book I know for helping you do it. Understand the business better. To decipher either what companies are saying about themselves or what other people are saying about these companies. There are several nice vignettes in the book where he discusses put-downs of finance people talking nonsense about business because they don’t really understand the business or anything about business in general. The bad strategy would be the classic strategy as aspiration that goes into these kinds of mission statements. ‘Our strategy is to grow profits at 20% a year, revenues at 20% a year and so on.’ Whereas Rumelt has a very interesting contrasting vignette about talking to Steve Jobs just after he went back to Apple in the ‘Second Coming of Jobs.’ He asked Jobs, ‘What are your plans for the business?’ Jobs said, ‘I’m going to wait for the next big thing.’ The next big thing in consumer electronics turned out to be music downloads. That came in ’98, ’99 with Napster and prompted Jobs to devise the iPod to facilitate downloading and maintaining of digital music: “A thousand songs in your pocket.” The iPod was Steve Jobs’s first new product when he returned to Apple. The other next big thing was the growth of text messaging and later other social media. The genius, in the end, was to put these things together and that’s our smartphones. This company, Apple, now has a dominant position in consumer electronics. I don’t know what is going to happen in this market, but I know what the capabilities of this company are. They’re going to look for new opportunities in the way technology for the market is developing. If you think about probably the three most successful investors in the world in the last 20 years, you’d point to Buffet, Soros, and the third would be Jim Simons. Simons has built a hedge fund worth tens of billions of dollars around, essentially, high frequency trading and very sophisticated algorithms. He’s a maths professor who turned to finance. What’s interesting and ironic is that none of these people use conventional finance theory at all. Indeed all of them positively disparage it. “I think reflexivity is actually very important—the notion that in this world future events depend on our beliefs about these future events” Soros’s strategy has basically been to understand macroeconomic events and their relationship to markets. He’s done that better than anyone than else, really, over that period. Of course, the greatest of all his coups was the so-called breaking of the Bank of England in 1991. Get the weekly Five Books newsletter The reason for not putting his book on the list is that if you look at these three strategic approaches, the only one you could recommend to the ordinary investor would be the Buffet one. The Simons one obviously isn’t available to retail investors. And you’d be very brave to believe that you could achieve the combination of macro analysis and market understanding which is the basis of Soros’s investment success even if you devoted yourself to it full time. Yes. He has both an understanding of the market gossip and an appreciation of the underlying macro fundamentals. Yes, he’d really rather be an academic than a very rich man. I think reflexivity is actually very important—the notion that in this world future events depend on our beliefs about these future events. That’s why economics and finance are so fundamentally different from physics and the attempt to draw analogies and techniques from physics, have limited relevance."

"Most books about business strategy are indeed terrible. The great take away of this book is that good strategy is really just about structured thinking about problems. Rumelt is a brilliant expositor of how you can do that in relation to a range of business issues. In the course of doing so he pokes brilliant fun at strategy gurus and people who sit down and have visions, essentially thinking themselves effective businesses. Rumelt is someone who is a very thoughtful observer of businesses, and has been involved in many, but has never really written very much in the course of his lifetime. This book is really the accumulation of a lifetime’s thinking. At the heart of a good strategy is organised thought about your business, what its competitive advantages are, and how they relate to the markets in which you operate or might operate in. This book is full of lovely vignettes. One of my favourites – which I can relate to from my own experiences – is when he was in discussion with an investment banker about a proposed merger and describes brilliantly the fundamental pretentious vacuity of the banker who just wants to do the deal. The discussion ended when the two of them agreed that they simply couldn’t communicate with each other."