Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

The discipline of analysis is to not stop there, but to test that first insight against the evidence.

He did not choose to understand the deeper meaning of focus—a concentration and coordination of action and resources that creates an advantage.

But unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by such expansion.

The silver machine’s advantage gives it value, but the advantage isn’t interesting because there is no way for an owner to engineer an increase in its value. The machine cannot be made more efficient. Pure silver cannot be differentiated.

In particular, increasing value requires a strategy for progress on at least one of four different fronts: deepening advantages, broadening the extent of advantages, creating higher demand for advantaged products or services, or strengthening the isolating mechanisms that block easy replication and imitation by competitors.

Start by defining advantage in terms of 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.

Whatever it is called, the underlying principle is that 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.

The most obvious approach to strengthening isolating mechanisms is working on stronger patents, brand-name protections, and copyrights.

But oil, the courts decided, moved and flowed like a wild beast—no one could really tell where a particular drop of oil had come from. Applying the age-old Anglo-Saxon “rule of capture,” oil legally belonged to whoever pumped it out of the ground.

Out of the myriad shifts and adjustments that occur each year, some are clues to the presence of a substantial wave of change and, once assembled into a pattern, point to the fundamental forces at work. The evidence lies in plain sight, waiting for you to read its deeper meanings.

It is hard to show your skill as a sailor when there is no wind. Similarly, it is in moments of industry transition that skills at strategy are most valuable.

The simplest form of transition is triggered by substantial increases in fixed costs, especially product development costs. This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges.

A similar dynamic was IBM’s rise to dominance in computing in the late 1960s, driven by the surging costs of developing computers and operating systems.

The logic of the situation is counterintuitive to many people—the faster the uptake of a durable product, the sooner the market will be saturated.

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.

Two complements to attractor-state analysis are the identification of accelerants and impediments to movements toward an attractor state.

The strategic challenge for the New York Times and the Chicago Tribune is not “moving online” or “more advertising,” but unbundling their activities.

Despite having a large early lead in mobile phone operating systems, Microsoft’s slowness in improving this software provided a huge opening for competitors, an opening through which Apple and Google quickly moved. Understanding the inertia of rivals may be just as vital as understanding your own strengths.

An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia.

Leaders must diagnose the causes and effects of entropy and inertia, create a sensible guiding policy for effecting change, and design a set of coherent actions designed to alter routines, culture, and the structure of power and influence.

Organizational inertia generally falls into one of three categories: the inertia of routine, cultural inertia, and inertia by proxy.

The standard unit of production in the airline industry is the available-seat-mile (ASM). Take a seat, lift it to thirty-two thousand feet, and move it one mile and you have produced one ASM.

Inertia due to obsolete or inappropriate routines can be fixed. The barriers are the perceptions of top management. If senior leaders become convinced that new routines are essential, change can be quick.

The standard instruments are hiring managers from firms using better methods, acquiring a firm with superior methods, using consultants, or simply redesigning the firm’s routines. In any of these cases, it will probably be necessary to replace people who have invested many years developing and using the obsolete methods as well as to reorganize business units around new patterns of information flow.

AT&T wasn’t competent at product development. Yes, the company was the proud owner of Bell Labs; the inventor of the transistor, the C programming language, and Unix; and was a marvelous place that probed deeply into the fundamentals of nature.

Bell Labs did fundamental research, not product development. The reaction to a request for demonstration code was as if Boeing engineers had been asked to design toy airplanes.

The first step in breaking organizational culture inertia is simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency. Strip out excess layers of administration and halt nonessential operations—sell them off, close them down, spin them off, or outsource the services. Coordinating committees and a myriad of complex initiatives need to be disbanded. The simpler structure will begin to illuminate obsolete units, inefficiency, and simple bad behavior that was hidden from sight by complex overlays of administration and self-interest.

In general, to change the group’s norms, the alpha member must be replaced by someone who expresses different norms and values.

All this is speeded along if a challenging goal is set. The purpose of the challenge is not performance per se, but building new work habits and routines within the unit.

Once the bulk of operating units are working well, it may then be time to install a new overlay of coordinating mechanisms, reversing some of the fra...

Again, the apparent inertia of the telephone companies was actually inertia by proxy, induced because their customers were so slow to switch suppliers, even in the face of dramatic price differences.

Inertia by proxy disappears when the organization decides that adapting to changed circumstances is more important than hanging on to old profit streams.

None of this improvement came from a deep entrepreneurial insight or from innovation. It was all just management—just undoing the accumulated clutter and waste from years of entropy at work.

Planning and planting a garden is always more interesting and stimulating than weeding it, but without constant weeding and maintenance the pattern that defines a garden—the imposition of a special order on nature—fades away and disappears.

Indeed, you cannot fully understand the value of the daily work of managers unless one accepts the general tendency of unmanaged human structures to become less ordered, less focused, and more blurred around the edges.

Follow the story of Nvidia and you will clearly see the kernel of a good strategy at work: diagnosis, guiding policy, and coherent action.

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.

When a product gives a buyer an advantage in competition with others, there will be an especially rapid uptake of the product.

This rate of progress was called Moore’s law. No one could jump much ahead of this pace because all the technologies, from photolithography to optical design to metal deposition to testing, had to advance in lockstep. The industry called this pattern of collective advance the “road map.”

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.

A great deal of human thought is not intentional—it just happens.

An engineer starts with complexity and crafts certainty.

Again, it is competition with others that pushes us to edges of knowledge.

The problem of coming up with a good strategy has the same logical structure as the problem of coming up with a good scientific hypothesis. The key differences are that most scientific knowledge is broadly shared, whereas you are working with accumulated wisdom about your business and your industry that is unlike anyone else’s.

A strategy is, like a scientific hypothesis, an educated prediction of how the world works. The ultimate worth of a strategy is determined by its success, not its acceptability to a council of philosophers or a board of editors. Good strategy work is necessarily empirical and pragmatic. Especially in business, whatever grand notions a person may have about the products or services the world might need, or about human behavior, or about how organizations should be managed, what does not actually “work” cannot long survive.

The human mind is finite, its cognitive resources limited. Attention, like a flashlight beam, illuminates one subject only to darken another.

My MBA students will each predict that they will get a grade putting them in the top half of the class, even after this information is fed back to them.3 In reasoning about natural data, people tend to see patterns where there is only randomness, tend to see causes rather than associations, and tend to ignore information that conflicts with a maintained theory.

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.