Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

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.

When you build your own panel of experts you go one step farther, trying to shape your understanding of their teachings into a virtual personality.

When it works, it does so because we humans have built-in software for understanding other humans, software that is more expert at recognizing and recalling personalities than at almost anything else.

By committing to a judgment—especially a diagnosis—you increase the probability that you will disagree with some of the assessments of others, and thereby increase the chance of learning something.

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.

America’s first depression, in 1819, was a direct result of the government selling large tracts of public land on easy credit. These sales were especially concentrated in Tennessee, Mississippi, and Alabama. Attracted by high prices for crops, especially cotton, settlers borrowed heavily from highly leveraged state banks to purchase land and supplies. The consequent massive increase in production, coupled with the gradual recovery of European agriculture from the devastation of the Napoleonic wars, triggered a collapse in prices in 1819.

In praising America’s “deep and liquid” financial markets, the herd conveniently skipped over the giant bag of flammable gas keeping those markets buzzing—easy credit, overleveraging, a vast expanse of unpriceable derivative securities, long-term assets financed with overnight borrowing from trigger-happy counterparties, and huge top management bonuses for taking on hidden risks.

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.