Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

the application of that power to the ...

strategy is about focus, and most complex organizations don’t focus their resources.

Five Forces framework developed by Michael Porter.

The problem was that

he left the company’s traditional competitive advantage behind without replacing it.

deeper meaning of focus—a concentration and coordination of action and resources that creates an advantage.

I started the discussion with a straightforward question. In his view, what was the rationale for the proposed deal?

“Where are the economies of scale

in combining a Caribbean operator with one in Italy, or Brazil?”

“needs to move traffic from South Amer...

a flunking response

You don’t need to own a cattle ranch to get fertilizer for your rose garden and you don’t need a $50 billion merger to move communications traffic. A contract will suffice.

Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities.

It is the reward for successful innovation, cleverness, efficiency, and creativity.

Consequence of diagnosis, policy, design, and focus.

You must press where you have advantages and side-step situations in which you do not. You must exploit your rivals’ weaknesses and avoid leading with your own.

The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than can competitors, or if it can deliver more perceived value than can competitors, or a mix of the two, then you have a competitive advantage.

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.

such as a patent

reputations, commercial and social relationships, network effects,* dramatic

economies of scale, and tacit knowledge and skill gained through experience.

“By providing more value you avoid being a commodity.

a business is ‘interesting’ when I can see ways to increase its value.

Stewart’s approach to the nut business was a complex coordinated maneuver over a decade of time.

carefully distinguish between competitive advantage and financial gain—many

the advantage isn’t interesting because there is no way for an owner to engineer an increase in its value.

owning this advantage is no more interesting than owning a bond.

a competitive advantage is interesting when one has insights into ways to increase its value.

wealth increases when competitive advantage increases or when the demand for the resources underlying it increases.

increasing value requires

deepening advantages,

broadening the extent of advantages,

creating higher demand for advantaged produc...

strengthening the isolating mechanisms that block easy replication and im...

surplus—the gap between buyer value and cost.

Deepening an advantage means widening this gap by either increasing value to buyers, reducing costs, or both.*

improvements come from reexamining the details of how work is done, not just from cost controls or incentives.

Companies that excel at product development and improvement carefully study the attitudes, decisions, and feelings of buyers. They develop a special empathy for customers and anticipate problems before they occur.

To benefit from investments in improvement, the improvements must either be protected or embedded in a business that is sufficiently special that its methods are of little use to rivals.

Extending an existing competitive advantage brings it into new fields and new competitions.

looking instead at the special skills and resources that underlie a competitive advantage.

The basis for productive extensions often resides within complex pools of knowledge and know-how.

A competitive advantage becomes more valuable when the number of buyers grows and/or when the quantity demanded by each buyer increases.

Note that higher demand will increase long-term profits only if a business already possesses scarce resources that create a stable competitive advantage.

the process of engineering increases in demand.

An isolating mechanism inhibits competitors from duplicating your product or the resources underlying your competitive advantage.

stronger patents, brand-name protections, and copyrights.

Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators.

if you can continually improve, or simply alter, your methods and products, rivals will have a much harder time with imitation.

continuing streams of innovations in methods and products are more difficult to imitate when they are, themselves, based on streams of proprietary knowledge.

combines science with information fed