Designing Bad Strategy and Arrow’s Impossibility Theorem

Richard Rumelt is expert in field of strategy, has written a book on good and bad strategy.

While discussing bad strategy, he feels that many CEOs make mistake of equating grand goals, fluff, buzzwords etc. with strategy. Grand goals is not strategy, action plan leveraging your strategic advantages is.

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Root of bad strategy is inability to choose. He gives example from game theory (Condorcet Paradox/ Arrow’s impossibility theorem) to explain the concept.

Arrow’s impossibility theorem states that a clear order of preferences cannot be determined while adhering to mandatory principles of fair voting procedures.

Taking example from application of game theory to politics, consider the following example, where voters are asked to rank their preference of candidates A, B and C:

• 45 votes A > B > C (45 people prefer A over B and prefer B over C)

• 40 votes B > C > A (40 people prefer B over C and prefer C over A)

• 30 votes C > A > B (30 people prefer C over A and prefer A over B)

Candidate A has the most votes, so he/she would be the winner. However, if B was not running, C would be the winner, as more people prefer C over A. (A would have 45 votes and C would have 70). So with this system of voting, no clear winner emerges. Kenneth Arrow won Nobel Prize for this.

Coming back to strategy, if you ask your top members to come up with clear strategy, each will come with his/her version of strategy, which at times are contradictory to each other. After discussion the CEO asks top management to come to consensus i.e. come up with one single strategy, this is where Condorcet Paradox sets in, no matter which strategy is chosen, majority prefers something else.

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Finally compromise is coming up with strategy which is combination of 2-3 different strategy, which is usually a fluffy, amorphous statement. Such a strategy does not tell what to pursue and what to forego-something which is critical for any strategy.

Richard Rumelt feels that kernel of good strategy is

1. A diagnosis: an explanation of the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as being the critical ones.

2. A guiding policy: an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.

3. Coherent actions: steps those are coordinated with one another to support the accomplishment of the guiding policy.

 

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