Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.

Unlike a stand-alone decision or a goal, a strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.

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.

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.

Strategic objectives should address a specific process or accomplishment, such as halving the time it takes to respond to a customer, or getting work from several Fortune 500 corporations.

Motivation is an essential part of life and success, and a leader may justly ask for “one last push,” but the leader’s job is more than that. The job of the leader is also to create the conditions that will make that push effective, to have a strategy worthy of the effort called upon.

Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished.

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.

Furthermore, a good strategic diagnosis does more than explain a situation—it also defines a domain of action.

the kernel of strategy—a diagnosis, a guiding policy, and coherent action—applies

An important duty of any leader is to absorb a large part of that complexity and ambiguity, passing on to the organization a simpler problem—one that is solvable.

Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.

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.

The first guidepost demarks an industry transition induced by escalating fixed costs. The second calls out a transition created by deregulation. The third highlights predictable biases in forecasting. A fourth marks the need to properly assess incumbent response to change. And the fifth guidepost is the concept of an attractor state.

Nvidia jumped from nowhere to dominance almost purely with good strategy. Follow the story of Nvidia and you will clearly see the kernel of a good strategy at work: diagnosis, guiding policy, and coherent action. You will also glimpse almost every building block of good strategy: intelligent anticipation, a guiding policy that reduced complexity, the power of design, focus, using advantage, riding a dynamic wave of change, and the important role played by the inertia and disarray of rivals.

Progress in the semiconductor industry was based on reducing the size of a transistor. Smaller transistors meant more transistors per chip. Plus, smaller transistors were faster and consumed less power. The whole semiconductor industry coordinated around achieving a higher level of integration, based on smaller transistors, about every eighteen months. This rate of progress was called Moore’s law.

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.

Our intentions do not fully control our thoughts. We become acutely aware of this when we are unable to suppress undesired ruminations about risk, disease, and death.*

A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgment.

Locke would extend the concept of such natural laws to society and proclaim, “The natural liberty of man is to be free from any superior power on earth, and not to be under the will or legislative authority of man, but to have only the law of Nature for his rule.”

This process of learning—hypothesis, data, anomaly, new hypothesis, data, and so on—is called scientific induction and is a critical element of every successful business.

Most people, most of the time, solve problems by grabbing the first solution that pops into their heads—the first insight. In a large number of situations this is reasonable. It is the efficient way to get through life. We simply don’t have the time, energy, or mental space to do a full and complete analysis of every issue we face.

“According to Blink, a first judgment may be best.1 Gladwell says that people make complex judgments without knowing how they do it. Trying to analyze everything may lead to poorer decisions.”

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.

A new alternative should flow from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives. The creation of new higher-quality alternatives requires that one try hard to “destroy” any existing alternatives, exposing their fault lines and internal contradictions. I call this discipline create-destroy.

Since guiding the development of the Macintosh computer, Jobs’s basic operating principles have become the stuff of legend: (1) imagine a product that is “insanely great,” (2) assemble a small team of the very best engineers and designers in the world, (3) make the product visually stunning and easy to use, pouring innovation into the user interface, (4) tell the world how cool and trendy the product is with innovative advertising.

Good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose. Bad strategy follows the crowd, substituting popular slogans for insights.

There is social herding. When we don’t know about something, it may be sensible to look at the behavior of others, assuming that at least some of them know things that we do not. But if everyone else is doing the same, then this process of mutual calibration can result in all the members of a group undertaking uninformed actions or believing that the “other guy” is paying attention to fundamentals.

The inside view describes the fact that people tend to see themselves, their group, their project, their company, or their nation as special and different.

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.