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.

The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.

A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.

Strategy cannot be a useful concept if it is a synonym for success. Nor can it be a useful tool if it is confused with ambition, determination, inspirational leadership, and innovation. Ambition is drive and zeal to excel. Determination is commitment and grit. Innovation is the discovery and engineering of new ways to do things. Inspirational leadership motivates people to sacrifice for their own and the common good.1 And strategy, responsive to innovation and ambition, selects the path, identifying how, why, and where leadership and determination are to be applied.

Rather, the term “strategy” should mean a cohesive response to an important challenge. Unlike a stand-alone decision or a goal, a strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.

A good strategy has an essential logical structure that I call the kernel. The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action. The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a signpost, marking the direction forward but not defining the details of the trip. Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy.

Having a coherent strategy—one that coordinates policies and actions. A good strategy doesn’t just draw on existing strength; it creates strength through the coherence of its design.

The creation of new strengths through subtle shifts in viewpoint

Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.

The second natural advantage of many good strategies comes from insight into new sources of strength and weakness. Looking at things from a different or fresh perspective can reveal new realms of advantage and opportunity as well as weakness and threat.

But, I tell them, there is one more thing. Something I barely understand but that seems important. It has to do with the “conventional wisdom”—the phrase from the case I put on the whiteboard at the beginning of the class: “A full-line discount store needs a population base of at least 100,000.” I turn to Bill and say: “You started us out by arguing that Walton broke the conventional wisdom. But the conventional wisdom was based on the straightforward logic of fixed and variable cost. It takes a lot of customers to spread the overhead and keep costs and prices low. Exactly how did Walton break the iron logic of cost?” I push ahead, putting Bill into a role: “I want you to imagine that you are a Wal-Mart store manager. It’s 1985 and you are unhappy with the whole company. You feel that they don’t understand your town. You complain to your dad, and he says, ‘Why don’t we just buy them out? We can run the store ourselves.’ Assuming Dad has the resources, what do you think of his proposal?” Bill blinks, surprised at being put on the spot for a second time. He thinks a bit, then says, “No, it’s not a good idea. We couldn’t make a go of it alone. The Wal-Mart store needs to be part of the network.” I turn back the whiteboard and stand right next to the boxed principle: “A full-line discount store needs a population base of at least 100,000.” I repeat his phrase, “The Wal-Mart store needs to be part of the network,” while drawing a circle around the word “store.” Then I wait. Wit...

use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.

Fluff. Fluff is a form of gibberish masquerading as strategic concepts or arguments. It uses “Sunday” words (words that are inflated and unnecessarily abstruse) and apparently esoteric concepts to create the illusion of high-level thinking.

Failure to face the challenge. Bad strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it.

Mistaking goals for strategy. Many bad strategies are just statements of desire rather than pla...

Bad strategic objectives. A strategic objective is set by a leader as a means to an end. Strategic objectives are “bad” when they fail to address criti...

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.

A strategy is like a lever that magnifies force. Yes, you might be able to drag a giant block of rock across the ground with muscles, ropes, and motivation. But it is wiser to build levers and wheels and then move the rock.

For example, Chen Brothers was a rapidly growing regional distributor of specialty foods. Its overall goals included growing profit, being a good place to work, and being seen as the go- to distributor for organic foods. These were all worthy goals. None of them, however, implied a particular strategy or action, although they can be seen as constraints (that is, these sorts of broad “goals” work like the rules of football in that they rule out a great many actions without specifying what the team should actually do).

When a leader characterizes the challenge as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reasons for the underperformance. Unless leadership offers a theory of why things haven’t worked in the past, or why the challenge is difficult, it is hard to generate good strategy.

An interesting aspect of this language is the idea that leadership teams must share common beliefs and values. This is now a frequent demand in education circles. One would hope that the experience of North Korea would have cured people of the idea that forcing everyone to believe in and value the same things is the road to high performance. Yet, within politically correct edu-speak, this impossible state of affairs is continually sought as the path to “transformational change.”

bad strategy is vacuous and superficial, has internal contradictions, and doesn’t define or address the problem. Bad strategy generates a feeling of dull annoyance when you have to listen to it or read it.

But the essential difficulty in creating strategy is not logical; it is choice itself.

Unless collective ruin is imminent, a change in strategy will make some people worse off. Hence, there will be powerful forces opposed to almost any change in strategy.

But if that is the case, why publish this fluff?

This statement is informative of the authors weird pedantry. Organizations published mission statements as "strategy" but that doesnt mean they mean strategy in the same way he does

The kernel of a strategy contains three elements: A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical. A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

Slowing growth is a problem for Wall Street but is a natural stage in the development of any noncancerous entity.

Furthermore, a good strategic diagnosis does more than explain a situation—it also defines a domain of action.

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

This section of the book explores a number of fundamental sources of power used in good strategies: leverage, proximate objectives, chain-link systems, design, focus, growth, advantage, dynamics, inertia, and entropy. Obviously, this set is not exhaustive.

In general, strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.

A “threshold effect” exists when there is a critical level of effort necessary to affect the system. Levels of effort below this threshold have little payoff. When there are threshold effects, it is prudent to limit objectives to those that can be affected by the resources at the strategist’s disposal.

Another example is the continuing call for energy independence, an objective that remains infeasible absent the political courage to raise gasoline prices and commit to the development of nuclear power.

Or the discovery of new reserves. This is the first prediction that jumps out at me as inaccurate

Many writers on strategy seem to suggest that the more dynamic the situation, the farther ahead a leader must look. This is illogical. The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be.

To concentrate on an objective—to make it a priority—necessarily assumes that many other important things will be taken care of.

Talking with real estate experts and contractors about home remodeling, I learned that in assessing a property’s potential, one should identify the limiting factors. If a house is near a noisy highway, that is a limiting factor. No matter how much marble is put in the bathrooms or how fine the cabinetry is in the kitchen, the noise will limit the house’s value. Similarly, if a room has wonderful hardwood floors and classic architecture, a less-than-excellent paint job will limit its attractiveness. 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.

To make matters even more difficult, striving for higher quality in just one of the linked units may make matters worse! Higher quality in a unit requires investments in better resources and more expensive inputs, including people. Since these efforts to improve just one linked unit will not improve the overall performance of the chain-linked system, the system’s overall profit actually declines. Thus, the incentive to improve each unit is dulled.

Giant retail stores located in the suburbs allow huge selections and ample parking for customers.

I wonder if ikea dies if we kill big retail complexes. Interesting to think what businesses rely on non-walkable comunities

In the case of excellence, like IKEA, a series of chain-linked activities are all maintained at a high level of quality, each benefiting from the quality of the other and the whole being resistant to easy imitation. On the other hand, when a series of chain-linked activities are of low quality, as in General Motors circa 2007, the system can be stuck, because there is little gain to improving only a fraction of the activities. Marco Tinelli’s success demonstrates that to unstick a stuck chain-linked system, a strong leader must possess the insight and fortitude to make the necessary investments in each link of the chain.

Combining this with the last book i listened to (peoples republic of walmart) "chain link" really is just "centrally planned in a good way"

The word “strategy” comes to us from military affairs. Unfortunately, humans have put more effort, over more time, into thinking about war than any other subject.

By definition, winging it is not a strategy.

Today, as then, many effective strategies are more designs than decisions—are more constructed than chosen. In these cases, doing strategy is more like designing a high-performance aircraft than deciding which forklift truck to buy or how large to build a new factory. When someone says “Managers are decision makers,” they are not talking about master strategists, for a master strategist is a designer.

A 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 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.

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.

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.

the faster the uptake of a durable product, the sooner the market will be saturated.

Follow the story of Nvidia and you will clearly see the kernel of a good strategy at work: diagnosis, guiding policy, and coherent action. 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 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. Plus, there is the constant buzz surrounding new product introductions, a substitute for expensive advertising. As a further plus, the faster company’s engineers will get more experience and, perhaps, learn more about the tricks of turning the technology into product.

Note that, in general, if you have a “me-too” product, you prefer fragmented retail buyers. On the other hand, if you have a better product, a powerful buyer such as Dell can help it see the light of day.