„Strategy as Simple Rules“ by Kathleen Eisenhardt and Donald Sull A) Article Summary Basically the article describes how and why companies like Yahoo, AOL or Enron use simple rules in rapidly moving markets. In the past companies were able to apply complex strategies due to a simple business landscape and stable markets, but nowadays most markets are not stable any more. Markets are fast moving and so complex themselves that companies are forced to react and to simplify their strategies.
Associated essay: The Proverbs of Administration Herbert Simon Summary
The authors’ central statement is that the traditional approach of staking out a defensible position misses the key to success in rapidly moving markets. That key is the ability to recognize and capitalize on fleeting opportunities. For dotcoms like Yahoo or AOL it’s more important to pursue opportunities than to establish position or to leverage resources. As Kathleen Eisenhardt and Donald Sull analyzed dozens of companies in unpredictable markets, they have discovered that simple rules can be divided into five categories:
How-To Rules show key features of how a process is executed. For example Enron focuses on the risk management process in its commodities trading business with two rules: 1) Each trade must be offset by another trade that allows the company to hedge its risk and 2) every trader must complete a daily profit-and-loss statement. Boundary Rules define a framework in which managers have to focus on the right opportunities and to sort out the ones which are outside the pale.
Example: Cisco focuses on the acquisition process with three rules: 1) The target must have no more than 75 employees 2) 75% of those employees must be engineers and 3) the target must be within 50 miles of headquarters. Priority Rules rank the accepted opportunities. Intel for example focuses on the process of allocating manufacturing capacity with one rule based on a product’s gross margin. Timing Rules synchronize managers with the pace of emerging opportunities and other parts of the company.
Example: Nortel focuses on the product development process with two rules: 1) The team must know when the product has to be delivered to the key customer in order to win their business and 2) the product development cycle can be no longer than 18 months. Exit Rules tell managers when to pull out of former opportunities. One high tech company focuses on new business creation by pulling the plug on new initiatives that fail to meet certain sales and profit goals within two years.
Key processes: Each of these companies has zeroed in on one or two key processes that are critical success factors. They then set up a few simple rules to guide activity in these processes in a way that balances risk with the need to move quickly. Deciding if Simple Rules will Work for You: Most dotcom managers are faced with a vertiginous number of opportunities: partnerships, acquisitions, licensing deals, new products, new markets, new ideas, all with the potential to make or break the company.
Simple Rules may be the right approach for your company to use in managing this creative chaos. B) Application The article was very interesting, it made my pensive and stimulated some new thinking. The most important thing for me – as I am a type of human being that likes complicated situations which need clever decisions to get an advantage over other competitors – was the warning about to try to apply complex strategies in rapidly moving markets. You’ll probably work 100 hours a week if you complicate your strategy. Therefore I feel this article and t’s theses as very helpful for my future career. But it is also very doubtful whether I can use this information from the outset. I think it’s going to be very difficult. A lot of experience will be necessary, especially to know which opportunities should be taken and how the accepted opportunities should be ranked. Furthermore it is complicated to sort out “yesterday’s opportunities” for a prospecting manager. It depends also on the industry the company belongs to. If you behold a company like Yahoo, it will be clear that applying simple rules is not the worst decision.
But if you look at a traditional company like ExxonMobil, you’ll see that opportunities are limited and you have to gain market share with a clever, thought-out strategy. Altogether I would say to know the three approaches and the five categories of simple rules is already a big advantage and one day I’ll be certainly able to apply this information, especially as I am looking forward to work for a company which is part of a new business landscape. C) Opinion When I started to read and recognized company names like Yahoo, AOL or Enron, I knew this article was not the newest one.
And although Yahoo is still a relatively successful company I am not quite sure whether they have always applied the right strategy. But the principle to use simple rules in a fast moving market probably is the right solution. And even I liked the article at all, I did not like the structure. Maybe because I read it on the internet and not in the Harvard Business Review Magazine, but for an article which supports a simple way of (business) life, it has a quite confusing structure. But OK, this does not bother me too much.
After I had eventually printed it and had read it a second time, I was even more fascinated. Additionally I was enamoured of the caricature on the first page. It shows how complex the business landscape nowadays is and how difficult for a managers it is to find the right way between those many possibilities or to do the next step right without a signpost or somebody who can help you to capture an opportunity at the right time or to let the wrong opportunities go. In summary I think the article is full of thought provocative examples as well as being an easy read. I highly recommend it!