In this digital day and age, online companies such as Google, Facebook, and Ebay are flourishing. They are highly successful, constantly developing new products and services while establishing huge profits. Taking into account that the environment they operate in is by strategists considered the worst possible, this is a fascinating fact.
Operating an online business puts you in a situation with intense rivalries, instant imitators, and customers who don’t want to pay for your services. Next to that there are few entry barriers, or specific resources needed that will put you on the road to success. After all, Yahoo! and Google started their businesses with a single computer and internet connection. So then how did these companies manage to become so successful? Did they create intelligent, complex strategies to deal with environmental complexity?
No. Rather the opposite. They use simple rules as a strategy. The chaotic markets they operate in provide an unlimited amount of opportunities. Sitting down and creating an extensive strategy on how to seize one of them isn’t going to be helpful in this rapidly changing world. Instead, they search for opportunities, gather a lot of them, and go from there. They remain flexible and shift between the many opportunities in their portfolio, and continue with the most promising ones. The most iconic example today is perhaps Google X: Google’s semi-secret lab where science-fiction-like product opportunities are assessed and possibly developed. Some, such as a space elevator or teleportation, were deemed impossible, but others such as Google Glass and Google’s self-driving cars have become reality.
Only a few simple rules, based on a few key strategic processes, guide these kind of online businesses when deciding on the exploration of promising opportunities. This doesn’t mean they have no strategy. They just have a very simple but effective strategy that is able to deal with the chaotic type of environment they operate in. Essential to this, is to pick a few key strategic processes that puts the business at the place with most opportunities. Identifying these key strategic processes is usually not very difficult, but deriving simple rules from them, and maintaining these, is.
So what are these simple rules? Eisenhardt and Sull have identified 5 types:
Next to that, simple rules shouldn’t be broad, vague, mindless or stale. And you need the right amount. How many makes the right amount? You don’t want too many of them, nor too little. Usually it’s between two and seven, but it’s rather a process of discovery for each individual business to end up with the right amount. And this right amount may shift over time if conditions change. Furthermore it is important to realize that simple rules are often not a result of hard and clever thinking, but rather develop from experience, such as mistakes. And when created and formulated rightly, the simple rules should be followed. The simple rules are actual rules, not guidelines or advice. You should stick to them, which requires alignment of people throughout the organization. And you should not change them too often. But when conditions seriously change, change your strategy rules along before its too late. In the end, simple-rules strategies are there to enable flexibility when circumstances require flexibility.
This post is written by Hester Mourik and is based on the article Strategy as Simple Rules by Prof. Dr. Kathleen Eisenhardt and Dr. Donald Sull, published in 2001 in Harvard Business Review. At the time of publication, Eisenhardt was Professor of Strategy and Organization at Stanford University (US).