Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.

A leader’s most important responsibility is identifying the biggest challenges to forward progress and devising a coherent approach to overcoming them.

Simply being ambitious is not a strategy.

Strategy cannot be a useful concept if it is a synonym for success. Nor can it be a useful tool if it is confused with ambition, determination, inspirational leadership, and innovation.

good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.

A good strategy has coherence, coordinating actions, policies, and resources so as to accomplish an important end. Many organizations, most of the time, don’t have this. Instead, they have multiple goals and initiatives that symbolize progress, but no coherent approach to accomplishing that progress other than “spend more and try harder.”

Having conflicting goals, dedicating resources to unconnected targets, and accommodating incompatible interests are the luxuries of the rich and powerful, but they make for bad strategy.

Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.

use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.

Bad strategy, I explained, is not the same thing as no strategy or strategy that fails rather than succeeds. Rather, it is an identifiable way of thinking and writing about strategy that has, unfortunately, been gaining ground. Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable. It uses high-sounding words and phrases to hide these failings.

If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.

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.

Grove recalls the turning point in 1985 when he gloomily asked Intel’s chairman, Gordon Moore, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Moore immediately replied, “He would get us out of memories.” Grove recalls that he went numb and then finally said, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”4

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.

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.

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.

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.

Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.

One of a leader’s most powerful tools is the creation of a good proximate objective—one that is close enough at hand to be feasible. A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm. For example, President Kennedy’s call for the United States to place a man on the moon by the end of the 1960s is often held out as a bold push into the unknown. Along with Martin Luther King Jr.’s “I Have a Dream” speech, it has become almost a required reference in any of today’s “how to be a charismatic leader” manuals extolling the magical virtues of vision and audacious goals. Actually, however, landing on the moon was a carefully chosen proximate strategic objective.

Many leaders fail badly at this responsibility, announcing ambitious goals without resolving a good chunk of ambiguity about the specific obstacles to be overcome. To take responsibility is more than a willingness to accept the blame. It is setting proximate objectives and handing the organization a problem it can actually solve.

fundamental ingredient in a strategy is a judgment or anticipation concerning the thoughts and/or behavior of others.

A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.

This particular pattern—attacking a segment of the market with a business system supplying more value to that segment than the other players can—is called focus. Here, the word “focus” has two meanings. First, it denotes the coordination of policies that produces extra power through their interacting and overlapping effects. Second, it denotes the application of that power to the right target.*

The growing demand pulls up profit, which, in turn, induces firms to invest in new capacity. But most of the profits of the growing competitors are an illusion because they are plowed back into new plant and equipment as the business grows. If high profits on these investments can be earned after growth slows, then all is well. But in a commodity industry, as soon as the growth in demand slows down, the profits vanish for firms without competitive advantages. Like some sort of economic black hole, the growing commodity industry absorbs more cash from the ordinary competitor than it ever disgorges.

Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities. It is the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity.

For an advantage to be sustained, your competitors must not be able to duplicate it. Or, more precisely, they must not be able to duplicate the resources underlying it. For that you must possess what I term an “isolating mechanism,” such as a patent giving its holder the legally enforceable right to monopolize the use of a technology for a time.2 More complex forms of isolating mechanisms include reputations, commercial and social relationships, network effects,* dramatic economies of scale, and tacit knowledge and skill gained through experience.

For Stewart Resnick, and now for me, a competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.

An attractor state provides a sense of direction for the future evolution of an industry. There is no guarantee that this state will come to be, but it does represent a gravitylike pull. The critical distinction between an attractor state and many corporate “visions” is that the attractor state is based on overall efficiency rather than a single company’s desire to capture most of the pie. The “IP everywhere” vision was an attractor state because it was more efficient and eliminated the margins and inefficiencies attached to a mishmash of proprietary standards.

call this a hump chart. Whenever you can assign profit or gain to individual products, outlets, areas, segments, or any other portion of the total, you can build a hump chart. I

McCracken’s “grow by 50 percent” is classic bad strategy. It is the kind of nonsense that passes for strategy in too many companies. First, he was setting a goal, not designing a way to deal with his company’s challenge. Second, growth is the outcome of a successful strategy, and attempts to engineer growth are exercises in magical thinking. In this case, the growth SGI engineered was accomplished by rolling up a number of other firms whose workstation strategies had also run out of steam.

Good strategy is built on functional knowledge about what works, what doesn’t, and why.

An organization creates pools of proprietary functional knowledge by actively exploring its chosen arena in a process called scientific empiricism. Good strategy rests on a hard-won base of such knowledge, and any new strategy presents the opportunity to generate it. A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment.

In science, you first test a new conjecture against known laws and experience. Is the new hypothesis contradicted by basic principles or by the results of past experiments? If the hypothesis survives that test, the scientist has to devise a real-world test—an experiment—to see how well the hypothesis stands up. Similarly, we test a new strategic insight against well-established principles and against our accumulated knowledge about the business. If it passes those hurdles, we are faced with trying it out and seeing what happens.

A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment. And there isn’t anyone more educated about your businesses than the group in this room.

To expect to make money from a new business, the entrepreneur should know something that others do not, or have control of a scarce and valuable resource.

Today, we are offered a bewildering variety of tools and concepts to aid in analysis and the construction of strategies. Each of these tools envisions the challenge slightly differently. For some it is recognizing advantage; for others it is understanding industry structure. For some it is identifying important trends; for others it is erecting barriers to imitation. Yet, there is a more fundamental challenge common to all contexts. That is the challenge of working around one’s own cognitive limitations and biases—one’s own myopia. Our own myopia is the obstacle common to all strategic situations. Being strategic is being less myopic—less shortsighted—than others. You must perceive and take into account what others do not, be they colleagues or rivals. Being less myopic is not the same as pretending you can see the future. You must work with the facts on the ground, not the vague outlines of the distant future. Whether it is insight into industry structures and trends, anticipating the actions and reactions of competitors, insight into your own competencies and resources, or stretching your own thinking to cover more of the bases and resist your own biases, being “strategic” largely means being less myopic than your undeliberative self.

It is a good point. Malcolm Gladwell’s Blink is a great read, a fascinating book. He argues that we all have the ability to process certain kinds of complex information quickly and come up with a judgment and yet not know how we got there. We all know this is true, especially with regard to making decisions about other people and social settings, and about matching patterns—seeing that one thing has characteristics that remind us of another. These are lightning-quick computations. Gladwell makes the case that we should trust these judgments made in the blink of an eye, especially when they are made by people with good experience. Our instincts can often produce amazingly good judgments. But our instincts also tell us, incorrectly, that our instincts are always right. You should recognize which situations require deeper reflection. Are competitors or nature leading us into a trap? Can we set a trap for less-wary adversaries? I explain that Blink judgments may work for people situations and certain kinds of pattern matching. Unfortunately, there is also a good deal of research revealing that most people are poor at making many kinds of judgments, whether done in a blink or in a month. Of special concern are judgments about the likelihoods of events, about one’s own competence relative to others’, and about cause-and-effect relationships. In estimating the likelihood of an event, even experienced professionals exhibit predictable biases. For example, people tend to place more...

Facing a complex situation like this makes most people uncomfortable. The more seriously you take it, the more you will see it as a real and difficult challenge that requires a coherent response. And that realization will, in turn, make you even more uncomfortable. It is so ill-structured. There are too many variables, so many factors, too many unknowns, no clear list of potential actions and no way to make clear links between actions and outcomes. You are not even sure what the problem is. Like a swimmer dropped into very choppy waters, it is hard to get your bearings. Under pressure to develop a way out of the difficulty, that first idea is a welcome relief. Thank goodness, here is something to hang on to! It feels much better to get oriented. The problem is that there might be better ideas out there, just beyond the edge of our vision. But we accept early closure because letting go of a judgment is painful and disconcerting. To search for a new insight, one would have to put aside the comfort of being oriented and once again cast around in choppy waters for a new source of stability. There is the fear of coming up empty-handed. Plus, it is unnatural, even painful, to question our own ideas. Thus, when we do come up with an idea, we tend to spend most of our effort justifying it rather than questioning it. That seems to be human nature, even in experienced executives. To put it simply, our minds dodge the painful work of questioning and letting go of our first early judg...

This personal skill is more important than any one so-called strategy concept, tool, matrix, or analytical framework. It is the ability to think about your own thinking, to make judgments about your own judgments.

In strategy work, knowledge is necessary but not sufficient. There are many people with deep knowledge or experience who are poor at strategy. To guide your own thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and for guiding your own attention. Second, you must develop the ability to question your own judgment. If your reasoning cannot withstand a vigorous attack, your strategy cannot be expected to stand in the face of real competition. Third, you must cultivate the habit of making and recording judgments so that you can improve. What follows are a few techniques that I

The kernel is a list reminding us that a good strategy has, at a minimum, three essential components: a diagnosis of the situation, the choice of an overall guiding policy, and the design of coherent action. The concept of the kernel defines the logic of a strategy—the bare-bones minimum. For a strategy to have any bite, it must chart a direction based on a diagnosis of the situation. Absent a diagnosis, one cannot judge one’s own choice of an overall guiding policy, much less someone else’s choice. A strategy must also translate the overall directive into coordinated action focused on key points of leverage in the situation.

Trying to destroy your own ideas is not easy or pleasant. It takes mental toughness to pick apart one’s own insights. In my own case, I rely on outside help—I invoke a virtual panel of experts that I carry around in my mind. This panel of experts is a collection of people whose judgments I value. I use an internal mental dialogue with them to both critique my own ideas and stimulate new ones. I try to do this before putting my ideas before others.

The same principle applies to any meeting you attend. What issues do you expect to arise in the meeting? Who will take which position? Privately commit yourself in advance to some judgments about these issues, and you will have daily opportunities to learn, improve, and recalibrate your judgment.

The benefits of the U.S. financial system’s innovative new tools were claimed without sufficient evidence. Just because there were a lot of clever swaps and new securities, and just because they had not yet crashed and burned, did not mean they could not or would not. It takes long-term real-world stress testing in a wide variety of conditions—through up and down real estate markets, up and down economic cycles, low and high interest rates, low and high inflation, and other conditions—together with various combinations of all of these, to warrant the kind of confidence these financial luminaries exuded.

Social herding presses us to think that everything is OK (or not OK) because everyone else is saying so. The inside view presses us to ignore the lessons of other times and other places, believing that our company, our nation, our new venture, or our era is different. It is important to push back against these biases. You can do this by paying attention to real-world data that refutes the echo-chamber chanting of the crowd—and by learning the lessons taught by history and by other people in other places.