Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

To help clarify this distinction it is helpful to use the word “goal” to express overall values and desires and to use the word “objective” to denote specific operational targets. Thus, the United States may have “goals” of freedom, justice, peace, security, and happiness. It is strategy which transforms these vague overall goals into a coherent set of actionable objectives—defeat the Taliban and rebuild a decaying infrastructure. A leader’s most important job is creating and constantly adjusting this strategic bridge between goals and objectives.

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Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes. One form of bad strategic objectives occurs when there is a scrambled mess of things to accomplish—a “dog’s dinner” of strategic objectives.

The second form of bad strategic objectives is one that is “blue sky.” A good strategy defines a critical challenge. What is more, it builds a bridge between that challenge and action, between desire and immediate objectives that lie within grasp. Thus, the objectives a good strategy sets should stand a good chance of being accomplished, given existing resources and competence. (See the discussion of proximate objectives in chapter 7.) By contrast, a blue-sky objective is usually a simple restatement of the desired state of affairs or of the challenge. It skips over the annoying fact that no one has a clue as to how to get there. A leader may successfully identify the key challenge and propose an overall approach to dealing with the challenge. But if the consequent strategic objectives are blue sky, not much has been achieved. The purpose of good strategy is to offer a potentially achievable way of surmounting a key challenge.

When a leader characterizes the challenge as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reasons for the underperformance. Unless leadership offers a theory of why things haven’t worked in the past, or why the challenge is difficult, it is hard to generate good strategy.

Not miscalculation, bad strategy is the active avoidance of the hard work of crafting a good strategy. One common reason for choosing avoidance is the pain or difficulty of choice. When leaders are unwilling or unable to make choices among competing values and parties, bad strategy is the consequence.

A second pathway to bad strategy is the siren song of template-style strategy—filling in the blanks with vision, mission, values, and strategies. This path offers a one-size-fits-all substitute for the hard work of analysis and coordinated action.

A third pathway to bad strategy is New Thought—the belief that all you need to succeed is a positive mental attitude. There are other pathways to bad strategy, but these three are the most common. Understanding how and why th...

Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others. When this hard work is not done, weak amorphous strategy is the result.

Only the prospect of choice inspires peoples’ best arguments about the pluses of their own proposals and the negatives of others’. As in the law, disciplined conflict calls forth stronger evidence and reasoning. Second, both Chips and Solutions represented dramatic transformations of the firm, and each would require developing wholly new skills and work practices. One wouldn’t choose either risky alternative unless the status quo Boxes strategy was failing. And one wouldn’t choose to do both Chips and Solutions at the same time because there was little common ground between them. It is not feasible to do two separate deep transformations of a company’s core at once.

There has been a lot of ink spilled on the inner logic of competitive strategy and on the mechanics of advantage. But the essential difficulty in creating strategy is not logical; it is choice itself. Strategy does not eliminate scarcity and its consequence—the necessity of choice. Strategy is scarcity’s child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others. There is difficult psychological, political, and organizational work in saying “no” to whole worlds of hopes, dreams, and aspirations. When a strategy works, we tend to remember what was accomplished, not the possibilities that were painfully set aside.

Any coherent strategy pushes resources toward some ends and away from others. These are the inevitable consequences of scarcity and change. Yet this channeling of resources away from traditional uses is fraught with pain and difficulty.

Strategies focus resources, energy, and attention on some objectives rather than others. Unless collective ruin is imminent, a change in strategy will make some people worse off. Hence, there will be powerful forces opposed to almost any change in strategy. This is the fate of many strategy initiatives in large organizations. There may be talk about focusing on this or pushing on that, but at the end of the day no one wants to change what they are doing very much.

In organizations and politics, the longer a pattern of activity is maintained, the more it becomes entrenched and the more its supporting resource allocations are taken to be entitlements.

Oddly enough, the study of charisma has led to a common type of bad strategy. The path starts with the recognition that truly inspirational leaders—ranging from Moses to Churchill to Gandhi to Martin Luther King Jr.—occupy a different space than leaders who draw authority from birth or organizational rank. The path then passes through the dry baked clay of academic sociology before cutting through the shifting sand dunes of management consulting.

The transformational leader, they argued, unlocks human energy by creating a vision of a different reality and connecting that vision to people’s values and needs.

The general outline goes like this: the transformational leader (1) develops or has a vision, (2) inspires people to sacrifice (change) for the good of the organization, and (3) empowers people to accomplish the vision. Some experts place more emphasis on the moral qualities of the leader, others on commitment, and others on the leader being intellectually stimulating.

Whatever you think about this definition of leadership, a problem arises when it is confused with strategy. Leadership and strategy may be joined in the same person, but they are not the same thing. Leadership inspires and motivates self-sacrifice. Change, for example, requires painful adjustments, and good leadership helps people feel more positively about making those adjustments. Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished.

There is no denying the power of charismatic vision to move people. It is a potent way to overcome inertia and motivate both action and self-sacrifice. But in 1212, as in many other times, thousands sacrificed to no end. To achieve great ends, charisma and visionary leadership must almost always be joined with a careful attention to obstacles and action, as Gandhi was able to do in India. There, his carefully orchestrated demonstrations, marches, publicity, and times in jail built his base and eroded the British rulers’ self-image of fairness and morality. His charisma and vision, coupled with a good strategy, gave India both independence and a proud heritage.

The Protestant Reformation was founded on the principle that people did not need the Catholic Church to stand between them and the deity. In the 1800s, starting with Ralph Waldo Emerson’s “transcendentalism,” American theology began to develop the idea that each person’s individual communication with God was possible because everyone has a spark of the divine within themselves, experienced as certain states of mind.

Good strategy is coherent action backed up by an argument, an effective mixture of thought and action with a basic underlying structure I call the kernel. A good strategy may consist of more than the kernel, but if the kernel is absent or misshapen, then there is a serious problem. Once you apprehend this kernel, it is much easier to create, describe, and evaluate a strategy. The kernel is not based on any one concept of advantage. It does not require one to sort through legalistic gibberish about the differences between visions, missions, goals, strategies, objectives, and tactics. It does not split strategies into corporate, business, and product levels. It is very straightforward.

The kernel of a strategy contains three elements: A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical. A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

I call this combination of three elements the kernel to emphasize that it is the bare-bones center of a strategy—the hard nut at the core of the concept. It leaves out visions, hierarchies of goals and objectives, references to time span or scope, and ideas about adaptation and change. All of these are supporting players. They represent ways of thinking about strategy, stimulating the creation of strategies, energizing groups of people, denoting specific sources of advantage, communicating, summarizing, and analyzing strategies, and so on. The core content of a strategy is a diagnosis of the situation at hand, the creation or identification of a guiding policy for dealing with the critical difficulties, and a set of coherent actions. I will explore the three elements of the kernel one by one.

THE DIAGNOSIS After my colleague John Mamer stepped down as dean of the UCLA Anderson School of Management, he wanted to take a stab at teaching strategy. To acquaint himself with the subject, he sat in on ten of my class sessions. Somewhere around class number seven we were chatting about pedagogy and I noted that many of the lessons learned in a strategy course come in the form of the questions asked as study assignments and asked in class. These questions distill decades of experience about useful things to think about in exploring complex situations. John gave me a sidelong look and said, “It looks to me as if there is really only one question you are asking in each case. That question is ‘What’s going on here?’ ”

A great deal of strategy work is trying to figure out what is going on. Not just deciding what to do, but the more fundamental problem of comprehending the situation.

At a minimum, a diagnosis names or classifies the situation, linking facts into patterns and suggesting that more attention be paid to some issues and less to others. An especially insightful diagnosis can transform one’s view of the situation, bringing a radically different perspective to bear. When a diagnosis classifies the situation as a certain type, it opens access to knowledge about how analogous situations were handled in the past. An explicit diagnosis permits one to evaluate the rest of the strategy. Additionally, making the diagnosis an explicit element of the strategy allows the rest of the strategy to be revisited and changed as circumstances change.

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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 the observed facts. Rather, a diagnosis had to be an educated guess as to what was going on in the situation, especially about what was critically important. 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.

A diagnosis is generally denoted by metaphor, analogy, or reference to a diagnosis or framework that has already gained acceptance.

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THE GUIDING POLICY 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.

Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions.

This “vision” communicates an ambition, but it is not a strategy or a guiding policy because there is no information about how this ambition will be accomplished.

I have found that defining a strategy as just a broad guiding policy is a mistake. Without a diagnosis, one cannot evaluate alternative guiding policies. Without working through to at least the first round of action one cannot be sure that the guiding policy can be implemented. Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.

A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage. Indeed, the heart of the matter in strategy is usually advantage. Just as a lever uses mechanical advantage to multiply force, strategic advantage multiplies the effectiveness of resources and/or actions. Importantly, not all advantage is competitive. In nonprofit and public policy situations, good strategy creates advantage by magnifying the effects of resources and actions.

A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than canceling one another out.

COHERENT ACTION Many people call the guiding policy “the strategy” and stop there. This is a mistake. Strategy is about action, about doing something. The kernel of a strategy must contain action. It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring concepts down to earth. To have punch, actions should coordinate and build upon one another, focusing organizational energy.

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There was no magical solution to his problem of wanting strong country-based marketing, Pan-European initiatives, and no noses out of joint, all at the same time. As long as strategy remained at the level of intent and concept, the conflicts among various values and between the organization and the initiative remained tolerable. It was the imperative of action that forced a decision about which issue was actually the most important. This executive’s problem was primarily organizational rather than rooted in product-market competition. Yet the kernel of strategy—a diagnosis, a guiding policy, and coherent action—applies to any complex setting. Here, as in so many situations, the required actions were not mysterious. The impediment was the hope that the pain of those actions could, somehow, be avoided. Indeed, we always hope that a brilliant insight or very clever design will allow us to accomplish several apparently conflicting objectives with a single stroke, and occasionally we are vouchsafed this kind of deliverance. Nevertheless, strategy is primarily about deciding what is truly important and focusing resources and action on that objective. It is a hard discipline because focusing on one thing slights another.

Coherence The actions within the kernel of strategy should be coherent. That is, the resource deployments, policies, and maneuvers that are undertaken should be consistent and coordinated. The coordination of action provides the most basic source of leverage or advantage available in strategy.

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The simplest business strategy is to use knowledge gleaned by sales and marketing specialists to affect capacity expansion or product design decisions—coordination across functions and knowledge bases. Even when an organization has an apparently simple and basic source of advantage, such as being a low-cost producer, a close examination will always reveal a raft of interrelated mutually supporting policies that, in this case, keep costs low. Furthermore, it will be found that these costs are lower only for a certain type of products delivered under certain conditions. Using such a cost advantage to good effect will require the alignment of many actions and policies.

Strategy is visible as coordinated action imposed on a system. When I say strategy is “imposed,” I mean just that. It is an exercise in centralized power, used to overcome the natural workings of a system. This coordination is unnatural in the sense that it would not occur without the hand of strategy. The idea of centralized direction may set off warning bells in a modern educated person. Why does it make sense to exercise centralized power when we know that many decisions are efficiently made on a decentralized basis?

As a simple example, salespeople love to please customers with rush orders, and manufacturing people prefer long uninterrupted production runs. But you cannot have long production runs and handle unexpected rush orders all at the same time. It takes policies devised to benefit the whole to sort out this conflict.

To specialize in something is, roughly speaking, to be left alone to do just that thing and not be bothered with other tasks, interruptions, and other agents’ agendas. As is clear to anyone who has belonged to a coordinating committee, coordination interrupts and de-specializes people. Thus, we should seek coordinated policies only when the gains are very large. There will be costs to demanding coordination, because it will ride roughshod over economies of specialization and more nuanced local responses. The brilliance of good organization is not in making sure that everything is connected to everything else. Down that road lies a frozen maladaptive stasis. Good strategy and good organization lie in specializing on the right activities and imposing only the essential amount of coordination.

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A good strategy draws power from focusing minds, energy, and action. That focus, channeled at the right moment onto a pivotal objective, can produce a cascade of favorable outcomes. I call this source of power leverage.*

Archimedes, one of the smartest people who ever lived, said, “Give me a lever long enough, a fulcrum strong enough, and I’ll move the world.” What he no doubt knew, but did not say, was that to move the earth, his lever would have to be billions of miles long.1 With this enormous lever, a swing of Archimedes’ arm might move the earth by the diameter of one atom. Given the amount of trouble involved, he would be wise to apply his lever to a spot where this tiny movement would make a large difference. Finding such crucial pivot points and concentrating force on them is the secret of strategic leverage.

Seize the moment, as James Madison did in 1787, turning colleague Edmund Randolph’s ideas about three branches of government with a bicameral legislature into the first draft of the Constitution, and you just might found a great nation.

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In general, strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.

The strategist may have insight into predictable aspects of others’ behavior that can be turned to advantage. At the simplest level, a strategy of investing in Manhattan real estate is based on the anticipation that other people’s future demand for this real estate will raise its value. In competitive strategy, the key anticipations are often of buyer demand and competitive reactions.

If you do standard “scenario” forecasting, you wind up with a graph with three lines labeled “high,” “medium,” and “low.” Everyone looks at it and believes that they have paid attention to the uncertainty. Then, of course, they plan on “medium”! But they are missing the risk. The risk is not that the price of oil may be high or may be low. The risk is that it will go high, suckering you into a major investment, and then turn and dive to low, leaving you with useless assets.

Anticipation does not require psychic powers. In many circumstances, anticipation simply means considering the habits, preferences, and policies of others, as well as various inertias and constraints on change.

To achieve leverage, the strategist must have insight into a pivot point that will magnify the effects of focused energy and resources.

A pivot point magnifies the effect of effort. It is a natural or created imbalance in a situation, a place where a relatively small adjustment can unleash much larger pent-up forces. The business strategist senses such imbalances in pent-up demand that has yet to be fulfilled or in a robust competence developed in one context that can be applied to good effect in another. In direct rivalry, the pivot point may be an imbalance between a rival’s position or disposition of forces and their underlying capabilities, or between pretension and reality.

Of course, Reagan did not expect Gorbachev to do any such thing. The speech was directed to Western Europeans, and its purpose was to highlight, and thereby exploit, the imbalance between a system that allowed the free movement of people with one that had to restrain its citizens with barbed wire and concrete.