Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

Good strategy almost always looks this simple and obvious and does not take a thick deck of PowerPoint slides to explain.

Strategy is about how an organization will move forward.

More than charisma and vision, we must demand good strategy.

As it went bankrupt in December 2001, evidence accumulated about fraudulent accounting practices. The scandal took its auditor, Arthur Andersen, down as well. (The accountant’s consulting arm, Andersen Consulting, was renamed Accenture.)

A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy.

If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen

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.

Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others. When this hard work is not done, weak amorphous strategy is the result.

A great deal of strategy work is trying to figure out what is going on. Not just deciding what to do, but the more fundamental problem of comprehending the situation.

Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.

In very general terms, a good strategy works by harnessing power and applying it where it will have the greatest effect.

Quality matters when quantity is an inadequate substitute. If a building contractor finds that her two-ton truck is on another job, she may easily substitute two one-ton trucks to carry landfill. On the other hand, if a three-star chef is ill, no number of short-order cooks is an adequate replacement. One hundred mediocre singers are not the equal of one top-notch singer.

As an investor, one wants to find limiting factors that can be fixed, such as paint, rather than factors that cannot be fixed, such as highway noise. If you have a special skill or insight at removing limiting factors, then you can be very successful.

It is of little use to supply advanced machinery to unskilled workers, but it is also useless to educate people for jobs that do not exist.

Expertise is not evenly distributed in the world.

Properly organized and led, ordinary men could defeat skilled warriors who fought as individuals or as small bands.

Biographer Theodore Dodge named Hannibal the “father of strategy,” because, over this long conflict, Rome learned and, gradually, came to master strategy through Hannibal’s painful teachings.3 Roman society was hardened and militarized by this prolonged struggle, and Rome went on to conquer and dominate the known world for five hundred years. In turn, the rest of the Western world learned strategy from Rome.

Designers learn from other designers over time, and the company accumulates these nuggets of wisdom by providing a good, stable place to work for talented engineers.

Paccar’s strategy is based on doing something well and consistently over a long period of time. That has created difficult-to-replicate resources: its image, its network of experienced dealers, its loyal customers, and the knowledge embedded in its staff of designers and engineers.

Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.

The basic definition of competitive advantage is straightforward. If your business can produce at a lower cost than can competitors, or if it can deliver more perceived value than can competitors, or a mix of the two, then you have a competitive advantage.

Gilbreth’s lesson, still fresh today, is that incentives alone are not enough. One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing.

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.

It is hard to show your skill as a sailor when there is no wind.

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

Drive down a suburban street and it is easy to spot the untended home. Weeds grow in the garden, paint peels from a door. Similarly, one can sense a business firm that has not been carefully managed. Its product line grows less focused; prices are set low to please the sales department, and shipping schedules are too long, pleasing only the factory.

The benefit of a faster cycle is that the product will be best in class more often. Compared to a competitor working on an eighteen-month cycle, Nvidia’s six-month cycle would mean that its chip would be the better product about 83 percent of the time.

Good strategy is built on functional knowledge about what works, what doesn’t, and why. Generally available functional knowledge is essential, but because it is available to all, it can rarely be decisive. The most precious functional knowledge is proprietary, available only to your organization.

A sailor has to judge the wind and a ski racer must judge the texture of the snow. In business and politics, and in many aspects of military strategy, most of the important judgments are about people, especially anticipating their actions and reactions.