Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

There was what I call the smooth-sailing fallacy, where people assume that a lack of recent tremors and storms means that there is no risk. This fallacy was institutionalized by the financial industry’s doctrine of measuring risk by analyzing past vibrations in prices. A system with a critical design flaw—such as the Hindenburg, the New Orleans levees, or the building of a mountain of securities on the premise that home prices never decline—does not necessarily display the flaw until it collapses. The collapse is virtually certain, but it is not signaled by a history of shakiness or vibration. Importantly, the collapse is not due to totally unforeseeable or almost impossible events—things the financial community tends to call “black swans”6 or “tail-risks.” Given the design flaws in the system, a collapse was inevitable.