Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

The first logical problem in chain-link situations is to identify the bottlenecks, and

The second, and greatest, problem is that incremental change may not pay off and may even make things worse.

IKEA teaches us that in building sustained strategic advantage, talented leaders seek to create constellations of activities that are chain-linked. This adds extra effectiveness to the strategy and makes competitive imitation difficult. What is especially fascinating is that both excellence and being stuck are reflections of chain-link logic.

The ruthless genius of Hannibal’s strategy was then revealed. Not only was the Roman army surrounded, but as their superior numbers pressed into the arc of Hannibal’s bowed-in center, the Roman ranks were squeezed together. They became so tightly massed that many Roman soldiers could not move to raise their weapons. The Romans had lost coherence and mobility. Encircled and compressed together, their numerical superiority had been nullified.

However, what we do see in the story of Cannae are three aspects of strategy in bold relief, presented in their purest and most essential forms—premeditation, the anticipation of others’ behavior, and the purposeful design of coordinated actions.

a critical issue becomes the identification of the particular set of buyers—our target market—where we have a differential advantage.

design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.

A more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change.

strategic resource is a kind of property that is fairly long lasting that has been constructed, developed over time, designed, or discovered by a company and that competitors cannot duplicate without suffering a net economic loss.

The peril of a potent resource position is that success then arrives without careful ongoing strategy work.

This particular pattern—attacking a segment of the market with a business system supplying more value to that segment than the other players can—is called focus. Here, the word “focus” has two meanings. First, it denotes the coordination of policies that produces extra power through their interacting and overlapping effects. Second, it denotes the application of that power to the right target.

Growth based upon substitution has a clear ceiling and, once the conversion to the substitute has taken place, the growth grinds to a sudden halt.

When Avery took over leadership of Crown, he found that the new PET bottles were making big inroads into the market for soft drink containers. Product changeover costs in plastics were much lower than in metal containers, so the basis of Crown’s traditional advantage was eroding.

The problem with diving into the growing PET industry was that growth in a commodity—such as cement or aluminum or PET containers—is an industry phenomenon, driven by an increase in overall demand.

The problem with engineering growth by acquisition is that when you buy a company, especially a public company, you usually pay too much. You pay a premium over its ordinary market value—usually about 25 percent—plus fees.

“By providing more value you avoid being a commodity.

“It is one of the big benefits of being a private company. When I first bought these lands from major oil companies, they were looking ahead one quarter or one year. They wanted to get the assets ‘off their books’ to make their financial ratios look better. We can do more with these businesses because we don’t suffer the crazy pressures that are put on a public company.”

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.

For Stewart Resnick, and now for me, a competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.

how do you attain such an advantaged position in the first place? The problem is that, as valuable as such positions are, the costs of capturing them are even higher. And an easy-to-capture position will fall just as easily to the next attacker.

One way to find fresh undefended high ground is by creating it yourself through pure innovation.

The other way to grab the high ground—the way that is my focus here—is to exploit a wave of change. Such waves of change are largely exogenous—they are mostly beyond the control of any one organization.

An exogenous wave of change is like the wind in a racing boat’s sails. It provides raw, sometimes turbulent, power. A leader’s job is to provide the insight, skill, and inventiveness that can harness that power to a purpose. You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground—become valuable and defensible—as the dynamics play out.

Good hardware and software engineers are both expensive. The big difference lies in the cost of prototyping, upgrading, and, especially, the cost of fixing a mistake. Design always involves a certain amount of trial and error, and hardware trials and errors are much more costly.

Working with industry-wide or economy-wide change is even more advanced than particle physics—understanding and predicting patterns of these dynamics is difficult and chancy.

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.

Continental’s system for projecting airfares for the new era of competition was the same one it had used all during the regulation era to suggest and justify fares in negotiations with the CAB. This projection had nothing to do with competition, supply, demand, capacity, or market forces. It took costs and added a markup. It “predicted” what the CAB would do in setting fares.

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.

This effect may be magnified because the customers who switched away from the inert incumbent are, by self-selection, the most sensitive to a better offer.

Sloan’s product policy is an example of design, of order imposed on chaos. Making such a policy work takes more than a plan on a piece of paper. Each quarter, each year, each decade, corporate leadership must work to maintain the coherence of the design. Without constant attention, the design decays. Without active maintenance, the lines demarking products become blurred, and coherence is lost.

In 2007, Forbes named Nvidia the “Company of the Year,” explaining that “Since Huang [CEO and founder] took the company public in 1999, Nvidia’s shares have risen 21-fold, edging out even the mighty Apple over the same time period.”1

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.

The program produced an astounding number of computer graphics superstars, including John Warnock, founder of Adobe Systems; Nolan Bushnell, founder of Atari; Edwin Catmull, cofounder of Pixar; and Jim Clark, founder of both Silicon Graphics and Netscape.

When a product gives a buyer an advantage in competition with others, there will be an especially rapid uptake of the product. When, for example, the first spreadsheet, VisiCalc, appeared in 1979, it provided an edge to MBA students, financial analysts, and other professionals who used it.

The GPU [graphics processing unit] is going to be the center of technology and value added in consumer computing.”

Finally, CEO Jen-Hsun Huang believed that Nvidia could construct an advantage by breaking out of the industry’s eighteen-month cycle. He reasoned that since it looked possible to advance graphics power three times faster than CPU power, Nvidia could deliver a substantial upgrade in graphics power every six months instead of every eighteen months.

Spreading its resources too thin, it attempted to compensate by stretching the goals for its next high-performance chip beyond the competencies of its development process.

The deeper reality was that Nvidia’s carefully crafted fast-release cycle induced 3dfx’s less coordinated responses. As Hannibal did to Rome at Cannae, Nvidia enticed its rival into overreaching.

An organization creates pools of proprietary functional knowledge by actively exploring its chosen arena in a process called scientific empiricism. Good strategy rests on a hard-won base of such knowledge, and any new strategy presents the opportunity to generate it.

In the same way, a good business strategy deals with the edge between the known and the unknown. Again, it is competition with others that pushes us to edges of knowledge. Only there are found the opportunities to keep ahead of rivals. There is no avoiding it. That uneasy sense of ambiguity you feel is real. It is the scent of opportunity.

To generate a strategy, one must put aside the comfort and security of pure deduction and launch into the murkier waters of induction, analogy, judgment, and insight.

An anomaly like this appears through comparison.

The anomalies are not in nature but in the mind of the acute observer, revealed by a comparison between the facts and refined expectations.

Howard Schultz envisioned an Italian espresso bar in Seattle. He tested this hypothesis and found it wanting. But the test produced additional information, so he modified his hypothesis and retested. After hundreds of iterations, the original hypothesis has long since vanished, replaced by a myriad of new hypotheses, each covering some aspect of the growing, evolving business. 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.

Integration is not always a good idea. When a company can buy perfectly good products and services from outside suppliers, it is usually wasteful to go through the expense and trouble of mastering a new set of business operations. However, when the core of a business strategy requires the mutual adjustment of multiple elements, and especially when there is important learning to be captured about interactions across business elements, then it may be vital to own and control these elements of the business mix.

people can forget their larger purposes, distracted by the pull of immediate events.

Taylor’s assignment was to think through the intersection between what was important and what was actionable.

Making a list is a basic tool for overcoming our own cognitive limitations. The list itself counters forgetfulness. The act of making a list forces us to reflect on the relative urgency and importance of issues. And making a list of “things to do, now” rather than “things to worry about” forces us to resolve concerns into actions.

Under pressure to develop a way out of the difficulty, that first idea is a welcome relief. Thank goodness, here is something to hang on to! It feels much better to get oriented. The problem is that there might be better ideas out there, just beyond the edge of our vision. But we accept early closure because letting go of a judgment is painful and disconcerting. To search for a new insight, one would have to put aside the comfort of being oriented and once again cast around in choppy waters for a new source of stability. There is the fear of coming up empty-handed. Plus, it is unnatural, even painful, to question our own ideas.