The Guiding Policy

...it channels action in certain directions without defining exactly what shall be done.

The guiding policy outlines an overall approach for overcoming the obstacles highlighted by the diagnosis. It is "guiding" because it channels action in certain directions without defining exactly what shall be done.

Kennan's containment and Gerstner's drawing on all of IBM's resources to solve customers' problems are examples of guiding policies.  Like the guardrails on a highway, the guiding policy directs and constrains action without fully defining its content.

ACTION POINT: Develop an outline to overcome the obstacles that are present by your diagnosis.

The Diagnosis VI

most deep strategic changes are brought about by a change in diagnosis--a change in the definition of the company's situation. 

In business, most deep strategic changes are brought about by a change in diagnosis--a change in the definition of the company's situation.  For example, when Lou Gerstner took over the helm at IBM in 1993, the company was in serious decline.  Its historically successful strategy had been organized around offering complete, integrated, turnkey end-to-end computing solutions to corporations and government agencies.  However, the advent of the microprocessor changed all that.  The computer industry began to fragment, with separate firms offering chips, memory, hard disks, keyboards, software, monitors, operating systems, and so on.    Then new industry structure was fragmented and, it was argued IBM should be broken up and fragmented to match.

After studying the situation, Gerstner changed the diagnosis.  He believed that in an increasingly fragmented industry, IBM was the one company that had expertise in all areas.  It's problem was not that it was integrated but that it was failing to use the integrated skills it possessed.  IBM, he declared, needed to become more integrated--but this time around customer solutions rather than hardware platforms.  The primary obstacle was the lack of internal coordination and agility.  Give this new diagnosis, the guiding policy became to exploit the fact that IBM was different, in fact, unique.   IBM would offer customers tailored solutions to their information-processing problems, leveraging its brand name and broad expertise, but willing to use outside hardware and software as required.   Put simply, its primary value-added activity would shift from systems engineering to IT consulting, form hardware to software.

Neither the "integration is obsolete" nor the "knowing all aspects of IT is our unique ability" viewpoints are, by themselves, strategies.  But these diagnoses take the leader, and all who follow, in very different directions.

ACTION POINT:  Consider the direction that a diagnosis will take you.

The Diagnosis V

The United States would have to keep the virus from spreading until it finally died out.

A diagnosis is generally denoted by metaphor, analogy, or reference to a diagnosis or framework that has already gained acceptance.  For example, every student of U.S. national strategy knows about the diagnosis associated with the Cold War guiding policy of containment.  This concept originated with George Kennan's famous "long telegram" of 1946.   Having served as an American diplomat in the USSR and having seen Soviet terror and politics at close hand, he carefully analyzed the nature of Soviet ideology and power.  

Kennan started with the observation that the Soviet Union was not an ordinary nation-state.  Its leaders defined their mission as opposition to capitalism and as spreading the gospel of revolutionary communism by whatever means necessary.  He stressed that antagonism between communism and capitalist societies was a central foundation of Stalin's political regime, preventing any sincere accommodation or honest international agreements.  However, he pointed out that the Soviet leaders were realists about power, Therefore, he recommended a guiding policy of vigilant counter force.

Kennan's diagnosis for the situation--a long-term struggle without the possibility of a negotiated settlement--was widely adopted within policy-making circles in the United States.   His guiding policy of containment was especially attractive as it specified a broad domain of action--the USSR was metaphorically speaking, infected by a virus.  The United States would have to keep the virus from spreading until it finally died out.

ACTION POINT:  When diagnosing a situation, consider a metaphor that may apply.

The Diagnosis IV

good strategy tends to be based on the diagnosis promising leverage over outcomes.

A good strategic diagnosis does more than explain a situation--it also defines a domain of action.  Whereas a social scientist seeks a diagnosis that best predicts outcomes, good strategy tends to be based on the diagnosis promising leverage over outcomes.  For instance, we know from research that K-12 student performance is better explained by social class and culture than by expenditures per student or class size, but that knowledge does not lead to many useful policy prescriptions.  A very different strategic diagnosis has been provided in the book Making Schools Work.  It diagnoses the challenge of school performance as one of organization rather than as one of class, culture, funding, or curriculum design.  Decentralized schools, the book argues, perform better.

Now, whether the organization of a school system explains most of the variations in school performance is not actually critical.  What is critical, and what makes this diagnosis useful to policy makers, is that organization explains some part of school performance and that, unlike culture or social class, organization is something that can be addressed with policy.

ACTION POINT: A good diagnosis should be able to be addressed with a policy.

The Diagnosis III

...diagnosis is a judgement about the meaning of facts.

At Starbucks, one executive might diagnose this challenging situation as "a problem in managing expectations."  Another might diagnose it as  "a search for new growth platforms."   A third might diagnose it as "an eroding competitive advantage."  None of these viewpoints is, by itself, an action, but each suggests a range of things that might be done and sets aside other classes of action as less relevant to the challenge.   Importantly, none of these diagnoses can be proven to be correct--each is a judgment about which issue is preeminent.  Hence, diagnosis is a judgement about the meaning of facts.

The challenge facing Starbucks was ill-structured.  By that I mean that no one could be sure how to define the problem, there was no obvious list of good approaches or actions, and the connections between most actions and outcomes were unclear.  Because the challenge was ill-structured, a real-world strategy could not be logically deduced from observed facts, Rather, a diagnosis has to be an educated guess as to what was going on in the situation, especially about what was critically important.

ACTION POINT: The diagnosis for the situation should replace the overwhelming complexity of reality with a simpler story, a story that calls attention to its crucial aspects.  This simplified model of reality allows one to make sense of the situation and engage in further problem solving.