instructor Hood's Key Ideas from The Crux
by Richard P. Rumelt

Consider Elon Musk’s ambition to colonize Mars. Sending a ship into orbit was costly, but Musk saw re-entry into the atmosphere as the crux – the core problem. Before his innovations, discarding a rocket ship in space was more economical than reusing it. Musk recognized that rocket ships are more expensive than fuel. To avoid the destructive heat of re-entry, he suggested carrying surplus fuel to slow the ship and enable it to land gently. 

In 2015, SpaceX’s Falcon 9 became the first rocket to make a slow, soft landing, a process that cost much less than landing the space shuttle. Musk calculated that reaching Mars would cost $9 billion, less than a twentieth of the cost NASA had estimated.

A goal is not a strategy, because it does not imply action.

Netflix, for example, took a truly strategic approach in 2018. Having begun renting DVDs by mail in 1998, the firm shifted to online streaming 12 years later, licensing content from major studios. In 2013, Netflix started to produce original shows. Subscription revenue grew, but Netflix remained in the red.

“The ‘art of strategy’ is not decision-making – that discipline assumes that you have been handed a list of possible actions from among which to choose.”

Adept strategists spot which issues they must tackle. They don’t rely on the fashionable strategies they see in consultants’ PowerPoint presentations. They know strategy can’t be a deductive conclusion that springs from evergreen assumptions. And they don’t regard strategy as just a matter of enunciating a desired future state of affairs, though they may be ambitious about the future.

Instead, wise leaders regard strategy as a means of dealing with problems as they arise. Identifying a problem’s crux often turns out to be a major component of creating a strategy. Some situations lack a clearly delineated problem to solve, and your courses of action may not appear as readily. 

“Resolution of the crux will usually help resolve major parts of the larger issue.”

“There is an old aphorism that the key to strategy is playing the games you can win.”

Large companies may find growth difficult due to their already enormous size. For example, to double its size, Walmart would have to acquire Amazon and AT&T. But such companies can find realistic growth through new ventures or specific product lines.

Data show that growth is random. A company whose growth suddenly jumped, for example, from single digits to 20% would see a jump in its stock price. Then, if growth flattened, the stock price would plunge.

To accelerate share price appreciation, surprise the market with new value creation. Bringing that value to more products or buyers is a “strategic extension.”

“Creating value means being able to provide products and services that buyers value more highly than it costs to make them.”

“Strategy statements’ aren’t really strategies. Rather, they are a pop-culture literary form, like the ‘business plans’ business students are asked to invent.”

Consider a winning boxer who might have a greater reach than his or her opponent – that is a competitive edge. Amazon’s edge, for example, is its constant focus on its customers and speed of delivery.

To develop a strategy, consumer product companies need to understand what customers want and how they behave. In the 1920s, a Procter & Gamble executive mobilized women to visit homes and learn how they used P&G cleaning products.

“In a case where costs will come down with scale or experience, the strategist normally seeks out the least-price-sensitive buyers for early versions of a product.”

The very aspect responsible for an organization’s success may become a problem in time. In the 1950s, General Motors ranked among the top companies, but by the 1990s it had fallen from grace. Although GM entered a joint venture with Toyota, it did not learn important lessons from the Japanese innovator. GM had a pioneering innovation in Saturn cars, but could not build on that success. The structure and culture at GM prioritized fitting in, which meant suppressing improvements, efficiency and innovation. GM’s bankruptcy in 2009 offered the opportunity for the company to make necessary changes.

“If a challenge is not owned, it cannot be surmounted. Good strategy can only flow from senior executives who own the critical challenge.”