Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

factors. A leader’s most important responsibility is identifying the biggest challenges to forward progress and devising a coherent approach to overcoming them.

A good strategy recognizes the nature of the challenge and offers a way of surmounting it.

A word that can mean anything has lost its bite. To give content to a concept one has to draw lines, marking off what it denotes and what it does not. To begin the journey toward clarity, it is helpful to recognize that the words “strategy” and “strategic” are often sloppily used to mark decisions made by the highest-level officials.

Many people assume that a strategy is a big-picture overall direction, divorced from any specific action. But defining strategy as broad concepts, thereby leaving out action, creates a wide chasm between “strategy” and “implementation.”

Executives who complain about “execution” problems have usually confused strategy with goal setting.

Most complex organizations spread rather than concentrate resources, acting to placate and pay off internal and external interests.

Strategy is at least as much about what an organization does not do as it is about what it does.

Silence. This question breaks the pleasant give-and-take of reciting case facts. The case actually says almost nothing about competition, referring broadly to the discounting industry. But surely executives and MBA students would have thought about this in preparing for this discussion. Yet it is totally predictable that they will not. Because the case does not focus on competition, neither do they. I know it will turn out this way—it always does. Half of what alert participants learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance.

Looking just at the actions of a winning firm, you see only part of the picture. Whenever an organization succeeds greatly, there is also, at the same time, either blocked or failed competition. Sometimes competition is blocked because an innovator holds a patent or some other legal claim to a temporary monopoly. But there may also be a natural reason imitation is difficult or very costly. Wal-Mart’s

With luck, someone will get it. As one student tries to articulate the discovery, others get it, and I sense a small avalanche of “ahas,” like a pot of corn kernels suddenly popping. It isn’t the store; it is the network of 150 stores. And the data flows and the management flows and a distribution hub. The network replaced the store. A regional network of 150 stores serves a population of millions! Walton didn’t break the conventional wisdom; he broke the old definition of a store.

When you understand that Walton redefined the notion of “store,” your view of how Wal-Mart’s policies fit together undergoes a subtle shift. You begin to see the interdependencies among location decisions. Store locations express the economics of the network, not just the pull of demand. You also see the balance of power at Wal-Mart. The individual store has little negotiating power—its options are limited. Most crucially, the network, not the store, became Wal-Mart’s basic unit of management.

A large organization may balk at adopting a new technique, but such change is manageable. But breaking with doctrine—with one’s basic philosophy—is rare absent a near-death experience.

Kmart saw Wal-Mart like Goliath saw David—smaller and less experienced in the big leagues. But Wal-Mart’s advantages were not inherent in its history or size. They grew out of a subtle shift in how to think about discount retailing. Tradition saw discounting as tied to urban densities, whereas Sam Walton saw a way to build efficiency by embedding each store in a network of computing and logistics. Today we call this supply-chain management, but in 1984 it was as an unexpected shift in viewpoint. And it had the impact of David’s slung stone.

In 1981, KMart had 2000 stores and WalMart had 276

Soft-spoken, Marshall watched my eyes, checking that I understood the implications of his statements. He took out a document, a thin sheaf of paper, and began to explain its meaning: “This document reflects thoughts about how to actually use U.S. strengths to exploit Soviet weaknesses, a very different approach.”

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

Bad strategy is not simply the absence of good strategy. It grows out of specific misconceptions and leadership dysfunctions. Once you develop the ability to detect bad strategy, you will dramatically improve your effectiveness at judging, influencing, and creating strategy. To detect a bad strategy, look for one or more of its four major hallmarks: 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 plans for overcoming obstacles. 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 critical issues or when they are impracticable.

A hallmark of true expertise and insight is making a complex subject understandable. A hallmark of mediocrity and bad strategy is unnecessary complexity—a flurry of fluff masking an absence of substance.

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.

The current fill-in-the-blanks template starts with a statement of “vision,” then a “mission statement” or a list of “core values,” then a list of “strategic goals,” then for each goal a list of “strategies,”

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.

Strategic objectives should address a specific process or accomplishment, such as halving the time it takes to respond to a customer, or getting work from several Fortune 500 corporations.

In 1917, around the village of Passchendaele in Flanders, British general Douglas Haig planned an assault. He wanted to break through the Germans’ fortified lines and open up a path to the sea, dividing the German army. He had been advised that shelling the German fortified positions would destroy the dikes and flood the below-sea-level fields. He shelled the German fortifications anyway. The shelling broke the dikes and churned the rich soil to sticky yellow clay, a quagmire that men sank into up to their knees and bellies. It drowned tanks, horses, and the wounded. Haig, stung by the death of 100,000 British troops at the Somme a year earlier, had promised to call off the advance if it did not go well. It didn’t, yet the doctrine of motivation and “one last push” continued for three months, despite appalling losses. In a final ten-day assault, Canadian troops pressed directly into the machine-gun fire, floundering in the mud and body parts of comrades; they suffered 16,000 casualties to take a small hill. Over the three months of battle, five miles of ground were gained and more than 70,000 Allied soldiers died in the muck. Another 250,000 were wounded. Winston Churchill described Passchendaele as “a forlorn expenditure of valour and life without equal in futility.”

Motivation is an essential part of life and success, and a leader may justly ask for “one last push,” but the leader’s job is more than that. The job of the leader is also to create the conditions that will make that push effective, to have a strategy worthy of the effort called upon.

To obtain higher performance, leaders must identify the critical obstacles to forward progress and then develop a coherent approach to overcoming them.

This is covered effectively in Heidi Grant Halvorson's book, Succeed where she suggests attaching if-then plans to obstacles

Importantly, opportunities, challenges, and changes don’t come along in nice annual packages. The need for true strategy work is episodic, not necessarily annual.

Effective senior leaders don’t chase arbitrary goals. Rather, they decide which general goals should be pursued. And they design the subgoals that various pieces of the organization work toward.

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.

bad strategy is the active avoidance of the hard work of crafting a good strategy.

One common reason for choosing avoidance is the pain or difficulty of choice. When leaders are unwilling or unable to make choices among competing values and parties, bad strategy is the consequence. A second pathway to bad strategy is the siren song of template-style strategy—filling in the blanks with vision, mission, values, and strategies. This path offers a one-size-fits-all substitute for the hard work of analysis and coordinated action. A third pathway to bad strategy is New Thought—the belief that all you need to succeed is a positive mental attitude.

Condorcet’s paradox.1

Economist Kenneth Arrow received a Nobel Prize in 1972 for proving that such attempts are fruitless.2 This sort of group irrationality is a central property of democratic voting, a fact not covered in high school civics.

Serious strategy work in an already successful organization may not take place until the wolf is at the door—or even until the wolf’s claws actually scratch on the floor—because good strategy is very hard work.

There has been a lot of ink spilled on the inner logic of competitive strategy and on the mechanics of advantage. But the essential difficulty in creating strategy is not logical; it is choice itself. Strategy does not eliminate scarcity and its consequence—the necessity of choice. Strategy is scarcity’s child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others. There is difficult psychological, political, and organizational work in saying “no” to whole worlds of hopes, dreams, and aspirations.

Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished.

The Jack Welch quote about “reaching for what appears to be the impossible” is fairly standard motivational fare, available from literally hundreds of motivational speakers, books, calendars, memo pads, and websites. This fascination with positive thinking, and its deep connections to inspirational and spiritual thought, was invented about 150 years ago in New England as a mutation of Protestant Christian individualism. The Protestant Reformation was founded on the principle that people did not need the Catholic Church to stand between them and the deity. In the 1800s, starting with Ralph Waldo Emerson’s “transcendentalism,” American theology began to develop the idea that each person’s individual communication with God was possible because everyone has a spark of the divine within themselves, experienced as certain states of mind. The next stage in the development of this idea was Mary Baker Eddy’s Christian Science, which held that a mind holding the correct thoughts and beliefs could draw on divine power to eliminate disease. By 1890, this stream of religious philosophy had morphed into a set of mystical beliefs in the power of thought to affect the material world beyond the self. Called the New Thought movement, it combined religious sentiment with recommendations for worldly success.

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.

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.

At a minimum, a diagnosis names or classifies the situation, linking facts into patterns and suggesting that more attention be paid to some issues and less to others. An especially insightful diagnosis can transform one’s view of the situation, bringing a radically different perspective to bear. When a diagnosis classifies the situation as a certain type, it opens access to knowledge about how analogous situations were handled in the past. An explicit diagnosis permits one to evaluate the rest of the strategy. Additionally, making the diagnosis an explicit element of the strategy allows the rest of the strategy to be revisited and changed as circumstances change.

The challenge facing Starbucks was ill-structured. By that I mean that no one could be sure how to define the problem, there was no obvious list of good approaches or actions, and the connections between most actions and outcomes were unclear. Because the challenge was ill-structured, a real-world strategy could not be logically deduced from the observed facts. Rather, a diagnosis had to be an educated guess as to what was going on in the situation, especially about what was critically important.

Furthermore, a good strategic diagnosis does more than explain a situation—it also defines a domain of action. Whereas a social scientist seeks a diagnosis that best predicts outcomes, good strategy tends to be based on the diagnosis promising leverage over outcomes.

A diagnosis is generally denoted by metaphor, analogy, or reference to a diagnosis or framework that has already gained acceptance.

In business, most deep strategic changes are brought about by a change in diagnosis—a change in the definition of the company’s situation.

After studying the situation, Gerstner changed the diagnosis. He believed that in an increasingly fragmented industry, IBM was the one company that had expertise in all areas. Its problem was not that it was integrated but that it was failing to use the integrated skills it possessed. IBM, he declared, needed to become more integrated—but this time around customer solutions rather than hardware platforms. The primary obstacle was the lack of internal coordination and agility. Given this new diagnosis, the guiding policy became to exploit the fact that IBM was different, in fact, unique. IBM would offer customers tailored solutions to their information-processing problems, leveraging its brand name and broad expertise, but willing to use outside hardware and software as required. Put simply, its primary value-added activity would shift from systems engineering to IT consulting, from hardware to software. Neither the “integration is obsolete” nor the “knowing all aspects of IT is our unique ability” viewpoints are, by themselves, strategies. But these diagnoses take the leader, and all who follow, in very different directions.

The guiding policy outlines an overall approach for overcoming the obstacles highlighted by the diagnosis.

This is similar to what the military calls "doctrine."

Like the guardrails on a highway, the guiding policy directs and constrains action without fully defining its content.

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

advantage. Indeed, the heart of the matter in strategy is usually advantage.

A good guiding policy itself can be a source of advantage.

In the real world, however, “maximize profit” is not a helpful prescription, because the challenge of making, or maximizing, profit is an ill-structured problem.

The INSEAD library holds a bronze statue of Doriot inscribed with his observation “Without action, the world would still be an idea.”