Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

Despite the roar of voices wanting to equate strategy with ambition, leadership, “vision,” planning, or the economic logic of competition, strategy is none of these. 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 good strategy recognizes the nature of the challenge and offers a way of surmounting it. Simply being ambitious is not a strategy.

The CEO of a Web-services company was sitting directly across from me. He put down his fork and said, “Strategy is never quitting until you win.” I could not have disagreed more, but I was not there to argue or lecture. “Winning is better than losing,” I said, and the conversation turned to other matters.

A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them. And the greater the challenge, the more a good strategy focuses and coordinates efforts to achieve a powerful competitive punch or problem-solving effect.

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.

“We have a sophisticated strategy process, but there is a huge problem of execution. We almost always fall short of the goals we set for ourselves.” If you have followed my line of argument, you can see the reason for this complaint. A 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.

Bad strategy has a life and logic of its own, a false edifice built on mistaken foundations. Bad strategy may actively avoid analyzing obstacles because a leader believes that negative thoughts get in the way. Leaders may create bad strategy by mistakenly treating strategy work as an exercise in goal setting rather than problem solving. Or they may avoid hard choices because they do not wish to offend anyone—generating a bad strategy that tries to cover all the bases rather than focus resources and actions.

The power of Jobs’s strategy came from directly tackling the fundamental problem with a focused and coordinated set of actions. He did not announce ambitious revenue or profit goals; he did not indulge in messianic visions of the future. And he did not just cut in a blind ax-wielding frenzy—he redesigned the whole business logic around a simplified product line sold through a limited set of outlets.

We are dropping five of six national retailers—meeting their demand has meant too many models at too many price points and too much markup.

Steve Jobs’s answer that day—“to wait for the next big thing”—is not a general formula for success. But it was a wise approach to Apple’s situation at that moment, in that industry, with so many new technologies seemingly just around the corner.

Schwarzkopf revealed the ground-war strategy to the public in a widely viewed press briefing. Most people who saw this briefing and the map of the left hook were surprised and impressed. News commentators described the plan as “brilliant” and “secret.” Few had anticipated this envelopment maneuver. But why hadn’t they? The Department of the Army publishes field manuals fully describing its basic doctrines and methods. FM 100-5, published in 1986, was titled Operations and was described as “the Army’s keystone warfighting manual.” Part 2 of FM 100-5 was dedicated to “Offensive Operations,” and on page 101 it described “envelopment” as the most important form of offensive maneuver—the U.S. Army’s “Plan A.” The manual said:

Envelopment avoids the enemy’s front, where its forces are most protected and his fires most easily concentrated. Instead, while fixing the defender’s attention forward by supporting or diversionary attacks, the attacker maneuvers his main effort around or over the enemy’s defenses to strike at his flanks and rear.

Given this vivid picture of a feint up the middle combined with a powerful “left hook,” one must ask: “How could Schwarzkopf’s use of the primary offensive doctrine of the U.S. Army have been a surprise to anyone?”

The best answer to this puzzle is that the real surprise was that such a pure and focused strategy was actually implemented. Most complex organizations spread rather than concentrate resources, acting to placate and pay off internal and external interests. Thus, we are surprised when a complex organization, such as Apple or the U.S. Army, actually focuses its actions. Not because of secrecy, but because good strategy itself is unexpected.

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. Despite this, most organizations will not create focused strategies. Instead, they will generate laundry lists of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources. 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.

As the responses flood in, three diagrams take shape on the whiteboard. A circle appears, representing a small town of ten thousand persons. A large box drawn in the circle represents a forty-five-thousand-square-foot Wal-Mart store. A second diagram of the logistical system emerges. A square box represents a regional distribution center. From the box, a line marks the path of a truck, swooping out to pass by some of the 150 stores served by the distribution center. On the return path, the line passes vendors, picking up pallets of goods. The line plunges back to the square, where an “X” denotes cross-docking to an outgoing truck. Lines of a different color depict the data flows, from the store to a central computer, and then out to vendors and the distribution center. Finally, as we discuss the management system, I draw the paths of the regional managers as they follow a weekly circuit: Fly out from Bentonville, Arkansas, on Monday, visit stores, pick up and distribute information, and return to Bentonville on Thursday for group meetings on Friday and Saturday. The last two diagrams are eerily similar—both revealing the hub structure of efficient distribution.

Susan, a human resources executive, suddenly perks up. Isolating one small policy has triggered a thought. I gave a talk the day before on “complementary” policies and she sees the connection. “By itself,” she says, “it doesn’t help that much. Kmart would have to move the data to distribution centers and suppliers. It would have to operate an integrated inbound logistics system.” “Good,” I say, and point out to everyone that Wal-Mart’s policies fit together—the bar codes, the integrated logistics, the frequent just-in-time deliveries, the large stores with low inventory—they are complements to one another, forming an integrated design. This whole design—structure, policies, and actions—is coherent. Each part of the design is shaped and specialized to the others. The pieces are not interchangeable parts. Many competitors do not have much of a design, shaping each of their elements around some imagined “best practice” form. Others will have more coherence but will have aimed their designs at different purposes. In either case, such competitors will have difficulty in dealing with Wal-Mart. Copying elements of its strategy piecemeal, there will be little benefit. A competitor would have to adopt the whole design, not just a part of it.

I turn back the whiteboard and stand right next to the boxed principle: “A full-line discount store needs a population base of at least 100,000.” I repeat his phrase, “The Wal-Mart store needs to be part of the network,” while drawing a circle around the word “store.” Then I wait. With luck, someone will get it. As one student tries to articulate the discovery, others get it, and I sense a small avalanche of “ahas,” like a pot of corn kernels suddenly popping. It isn’t the store; it is the network of 150 stores. And the data flows and the management flows and a distribution hub. The network replaced the store. A regional network of 150 stores serves a population of millions! Walton didn’t break the conventional wisdom; he broke the old definition of a store. If no one gets it right away, I drop hints until they do.

Store locations express the economics of the network, not just the pull of demand. You also see the balance of power at Wal-Mart. The individual store has little negotiating power—its options are limited. Most crucially, the network, not the store, became Wal-Mart’s basic unit of management.

If your competitors also operate this kind of decentralized system, little may be lost. But once Walton’s insights made the decentralized structure a disadvantage, Kmart had a severe problem. A large organization may balk at adopting a new technique, but such change is manageable. But breaking with doctrine—with one’s basic philosophy—is rare absent a near-death experience.

The hidden power of Wal-Mart’s strategy came from a shift in perspective. Lacking that perspective, Kmart saw Wal-Mart like Goliath saw David—smaller and less experienced in the big leagues. But Wal-Mart’s advantages were not inherent in its history or size. They grew out of a subtle shift in how to think about discount retailing. Tradition saw discounting as tied to urban densities, whereas Sam Walton saw a way to build efficiency by embedding each store in a network of computing and logistics. Today we call this supply-chain management, but in 1984 it was as an unexpected shift in viewpoint.

Despite the fact that they are adorned with modern phrases and slogans, most of these strategic plans are as bad as International Harvester’s. Like Harvester’s, they do not identify and come to grips with the fundamental obstacles and problems that stand in the organization’s way. Looking at most of this product, or listening to the managers who have produced it, you will find an almost total lack of strategic thinking. Instead, you will find high-sounding sentiments together with plans to spend more and somehow “get better.”

DARPA’s strategy is more than a general direction. It includes specific policies that guide its everyday actions. For example, it retains program managers for only four to six years to limit empire building and to bring in fresh talent.

In addition, DARPA has a very limited investment in overhead and physical facilities in order to prevent entrenched interests from thwarting progress in new directions. These policies are based on a realistic appraisal of the obstacles to innovation. They are a far cry from vague aspirations such as “retain the best talent” and “maintain a culture of innovation.”

It creates policies that concentrate resources and actions on surmounting those difficulties.

If you are a midlevel manager, your boss sets your goals. Or, if you work in an enlightened company, you and your boss negotiate over your goals. In either setting, it is natural to think of strategies as actions designed to accomplish specific goals. However, taking this way of thinking into a top-level position is a mistake.

And they design the subgoals that various pieces of the organization work toward. Indeed, the cutting edge of any strategy is the set of strategic objectives (subgoals) it lays out. One of the challenges of being a leader is mastering this shift from having others define your goals to being the architect of the organization’s purposes and objectives.

Chen Brothers did not fall into the trap of believing that strategy is a grand vision or a set of financial goals. Instead, management had skillfully designed a “way forward” that concentrated corporate attention on one or two important objectives. Once accomplished, new opportunities would open up and more ambitious objectives could be set.

As a vivid example, I recently had the chance to discuss strategy with the mayor of a small city in the Pacific Northwest. His planning committee’s strategic plan contained 47 “strategies” and 178 action items. Action item number 122 was to “create a strategic plan.” As another example, the Los Angeles Unified School District’s strategic plan for “high-priority schools” (discussed on the next page) contained 7 “strategies,” 26 “tactics,” and 234 “action steps,” a true dog’s dinner of things to do. This pattern is all too common in city, school district, and nonprofit strategy work, as well as in some business firms.

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. If the leader’s strategic objectives are just as difficult to accomplish as the original challenge, there has been little value added by the strategy.

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. For example, one of Brewer’s seven key strategies was to “build school and District leadership teams that share common beliefs, values, and high expectations for all adults and students and that support a cycle of continuous improvement to ensure high-quality instruction in their schools.” This would be accomplished by building the “capacity of administrative and other school leaders.… Transformational leaders need a strongly focused program to define, sharpen and apply critical skill sets in their everyday work.”

An interesting aspect of this language is the idea that leadership teams must share common beliefs and values. This is now a frequent demand in education circles. One would hope that the experience of North Korea would have cured people of the idea that forcing everyone to believe in and value the same things is the road to high performance. Yet, within politically correct edu-speak, this impossible state of affairs is continually sought as the path to “transformational change.”

Bad strategy flourishes because it floats above analysis, logic, and choice, held aloft by the hot hope that one can avoid dealing with these tricky fundamentals and the difficulties of mastering them.

You might imagine resolving this problem with a cleverer voting scheme. Perhaps the three could weight their preferences and one could somehow combine these weights. Economist Kenneth Arrow received a Nobel Prize in 1972 for proving that such attempts are fruitless.2 This sort of group irrationality is a central property of democratic voting, a fact not covered in high school civics.

DEC’s chief executive, Ken Olsen, had made the mistake of asking the group to reach a consensus. The group was unable to do that because there was no basis in logic or hierarchy to reject a subgroup’s passionately held positions. Instead, the group compromised on a statement like this: “DEC is committed to providing high-quality products and services and being a leader in data processing.”

This fluffy, amorphous statement was, of course, not a strategy. It was a political outcome reached by individuals who, forced to reach a consensus, could not agree on which interests and concepts to forgo. So they avoided the hard work of choice, set nothing aside, hurt no interest groups or individual egos, but crippled the whole.

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.

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. Intel CEO Andy Grove vividly relates the intellectual, emotional, and political difficulties in moving the company from producing dynamic random access memory (DRAM) to one focused on microprocessors.

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. When organizations are unable to make new strategies—when people evade the work of choosing among different paths into the future—then you get vague mom-and-apple-pie goals that everyone can agree on. Such goals are direct evidence of leadership’s insufficient will or political power to make or enforce hard choices. Put differently, universal buy-in usually signals the absence of choice.

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.

In business, the challenge is usually dealing with change and competition. The first step toward effective strategy is diagnosing the specific structure of the challenge rather than simply naming performance goals. The second step is choosing an overall guiding policy for dealing with the situation that builds on or creates some type of leverage or advantage. The third step is the design of a configuration of actions and resource allocations that implement the chosen guiding policy. In many large organizations, the challenge is often diagnosed as internal. That is, the organization’s competitive problems may be much lighter than the obstacles imposed by its own outdated routines, bureaucracy, pools of entrenched interests, lack of cooperation across units, and plain-old bad management. Thus, the guiding policy lies in the realm of reorganization and renewal. And the set of coherent actions are changes in people, power, and procedures. In other cases the challenge may be building or deepening competitive advantage by pushing the frontiers of organizational capability.

Importantly, none of these diagnoses can be proven to be correct—each is a judgment about which issue is preeminent. Hence, diagnosis is a judgment about the meanings of facts.

He believed that in an increasingly fragmented industry, IBM was the one company that had expertise in all areas. Its problem was not that it was integrated but that it was failing to use the integrated skills it possessed. IBM, he declared, needed to become more integrated—but this time around customer solutions rather than hardware platforms. The primary obstacle was the lack of internal coordination and agility. Given this new diagnosis, the guiding policy became to exploit the fact that IBM was different, in fact, unique. IBM would offer customers tailored solutions to their information-processing problems, leveraging its brand name and broad expertise, but willing to use outside hardware and software as required. Put simply, its primary value-added activity would shift from systems engineering to IT consulting, from hardware to software. Neither the “integration is obsolete” nor the “knowing all aspects of IT is our unique ability” viewpoints are, by themselves, strategies. But these diagnoses take the leader, and all who follow, in very different directions.

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 itself can be a source of advantage.

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.

Thinking about her store, Stephanie diagnosed her challenge to be competition with the local supermarket. She needed to draw customers away from a store that was open 24/7 and had lower prices. Seeking a way forward, she believed that most of her customers were people who walked by the store almost every day. They worked or lived nearby. Scanning her list of questions and alternatives, she determined that there was a choice between serving the more price-conscious students or the more time-sensitive professionals. Transcending thousands of individual choices and instead framing the problem in terms of choosing among a few customer groups provided a dramatic reduction in complexity. Of course, if both of these customer segments could be served with the same policies and actions, then the dichotomy would have been useless and should be cast aside. In Stephanie’s case, the difference seemed significant. More of her customers were students, but the professionals who stopped in made much larger purchases. Pushing further along, Stephanie began to explore the guiding policy of “serve the busy professional.” After some more tinkering, Stephanie sharpened the guiding policy a bit more, deciding to target “the busy professional who has little time to cook.”

It is the hard craft of strategy to decide which priority shall take precedence. Only then can action be taken. And, interestingly, there is no greater tool for sharpening strategic ideas than the necessity to act.

“Well, each country manager has spent years understanding the special conditions in a country, tailoring products and marketing programs to that country’s local conditions. They don’t trust the Pan-European idea. The French don’t want to waste marketing efforts on products they see as ‘too British’ or ‘too German.’ And there really has not yet been a compelling Pan-European product that all could get behind. If it were already a success in three or four countries, the rest would get behind it. But everyone has their current portfolio of products to worry about.”

“Of course,” he said. “We could have a single group develop, roll out, and market Pan-European products and take full profit responsibility.” “At the same time,” I added, “you would have to intervene in the country-based system with special budget overrides for this initiative, promotions for people who help it along, and career problems for people who don’t.”