Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

when I work with a small start-up company, their problems often revolve around coordinating engineering, marketing, and distribution. Asking the CEO of such a firm to concentrate on opening offices in Europe may be pointless, because the company has not yet mastered the basics of “flying” the business.

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.

quality matching.1 That is, if you are in charge of one link of the chain, there is no point in investing resources in making your link better if other link managers are not.

Stopping two out of three radiological attacks won’t be good enough.

There are little or no payoffs to incremental improvements in chain-link systems, but Marco avoided this problem by shutting down the normal system of local measurement and reward, refocusing on change itself as the objective. One of the tasks of the interviewer is to listen for what is not said. Marco did not say, “We turned it around by increasing the pressure for profit.” He did not say, “We developed new measures of quality and demanded improvements.” He did not say, “I brought in new, more skilled, managers.” Instead, Marco described a turnaround in which he provided the overall definition of what had to be done and in which he anticipated and absorbed the costs of change. In any organization there is always a managed tension between the need for decentralized autonomous action and the need for centralized direction and coordination. To produce a turnaround of a chain-link system, Marco Tinelli tipped the balance, at least for a while, strongly toward central direction and coordination.

Chain-link systems can be changed and made excellent. It takes insight into the key bottlenecks. Plus, it takes leadership and the willingness to absorb short-term losses in the quest for future gains.

IKEA must perform each of its core activities with outstanding efficiency and effectiveness. These core activities must be sufficiently chain-linked that a rival cannot grab business away from IKEA by adopting only one of them and performing it well. That is, a traditional furniture manufacturer that adds a ready-to-assemble line is no real threat to IKEA, nor is a traditional retailer that adds a catalog. The chain-linked activities should form an unusual grouping such that expertise in one does not easily carry over to expertise at the others.

What is especially fascinating is that both excellence and being stuck are reflections of chain-link logic.

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.

Despite all these cautions, I believe that if you are careful about the level of abstraction, you can take certain fundamental lessons from military history and be the wiser for doing so.

There are furious debates over the best balance, in a strategy, between prior guidance and on-the-spot adaptation and improvisation, but there is always some form of prior guidance. By definition, winging it is not a strategy.

Rather, he faced a challenge and he designed a novel response. Today, as then, many effective strategies are more designs than decisions—are more constructed than chosen.

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

Very quickly, you are going to focus on what you, or your company, can do more effectively than others. It will normally turn out that competition makes you focus on a much smaller subset of car models, manufacturing setups, and customers.

In design problems, where various elements must be arranged, adjusted, and coordinated, there can be sharply peaked gains to getting combinations right and sharp costs to getting them wrong.

Most of the work in systems design is figuring out the interactions, or trade-offs, as they were called.

subsystems and their possible interactions, and hold it all in my mind, in order to imagine a configuration that might be effective. This was difficult, to say the least. I didn’t know it at the time, but I was beginning to learn strategy.

JPL was that performance is the joint outcome of capability and clever design.

when the competitive challenge is very high, it may be necessary to accept these costs and design a tightly integrated response. With less challenge, it is normally better to have a bit less specialization and integration so that a broader market can be addressed.

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.

Resources are to coordinated activity as capital is to labor.

The peril of a potent resource position is that success then arrives without careful ongoing strategy work. Own the original patent on the plain-paper photocopier, or own the Hershey’s brand name, or the Windows operating system franchise, or the patent on Lipitor, and there will be many years during which profits will roll in almost regardless of how you arrange your business logic. Yes, there was inventive genius in the creation of these strategic resources, but profits from those resources can be sustained, for a time, without genius.

strategic upstarts extend their success forever—the aging businessperson’s quixotic search for sustained competitive advantage. But the incumbent laxity and inertia that gave these upstarts their openings applies to them as well. In time, most will loosen their tight integration and begin to rely more on accumulated resources and less on clever business design. Relying on the profits accruing to accumulated resources, they will lose the discipline of tight integration, allowing independent fiefdoms to flourish and adding so many products and projects that integration becomes impossible. Faced with the natural slowing of growth over time, they will try to create an appearance of youthful vigor with bolt-on acquisitions. Then, when their resource base eventually becomes obsolete, they, too, will become prey to another generation of upstarts. It is the cycle of life.

Paccar’s design is expressed in actions that are consistent with its positioning and that are consistent over time.

The various elements of Paccar’s strategy are not general purpose—they are designed to fit together to make a specialized whole.

“Melissa pointed out that putting soda in a can is not atomic science. What kind of customer needs technical help to get their product into a can?” My question only evokes blank looks. I have lectured on how to tackle seemingly formless questions like this. The first trick is to replace general nouns with specific examples. I wait a moment, and then I do it for them, a concrete example of replacing the abstract with the concrete. “What about Coors, does it need technical assistance from can companies?” The trick works—hands are up.

It’s smaller companies that need technical assistance—companies without big technical staffs and without internal canning experience of their own.”

The discipline of analysis is to not stop there, but to test that first insight against the evidence. Reza’s explanation that rapid response favors small firms agrees with some of the facts on the table, but not all. I don’t write anything down on the whiteboard.

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 students are surprised that the real world can sometimes have an inner logic that is not secret but that nevertheless remains unremarked.

At the core, strategy is about focus, and most complex organizations don’t focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.”

But in a commodity industry, as soon as the growth in demand slows down, the profits vanish for firms without competitive advantages.

Healthy growth is not engineered. It is the outcome of growing demand for special capabilities or of expanded or extended capabilities. It is the outcome of a firm having superior products and skills. It is the reward for successful innovation, cleverness, efficiency, and creativity. This kind of growth is not just an industry phenomenon. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit.

But both ordinary citizens and the Taliban know that the United States will withdraw. It will withdraw for political reasons and because staying in Afghanistan is stupendously expensive. The U.S. military, carefully designed to inflict crushing high-intensity force, spends $1 million per year to put each soldier in Afghanistan. You don’t want to have been a tool of the United States when these forces are drawn down and the Taliban return to power. In Afghanistan, the United States is “wrestling the gorilla” because it has allowed itself to be drawn into a conflict in support of an almost nonexistent ally and where advantage lies with the side with the most patience and with the least sensitivity to casualties and collateral damage. In this situation, the Taliban has the advantage and is using it.

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. Subtlety arrives when you realize that costs vary with product and application and that buyers differ in their locations, knowledge, tastes, and other characteristics. Thus, most advantages will extend only so far. For instance, Whole Foods has an advantage over Albertsons supermarkets only for certain products and only among grocery shoppers with good incomes who place a high value on organic and natural foods. Defining “sustainability” is trickier. For an advantage to be sustained, your competitors must not be able to duplicate it. Or, more precisely, they must not be able to duplicate the resources underlying it. For that you must possess what I term an “isolating mechanism,” such as a patent giving its holder the legally enforceable right to monopolize the use of a technology for a time.2 More complex forms of isolating mechanisms include reputations, commercial and social relationships, network effects,* dramatic economies of scale, and tacit knowledge and skill gained through experience.

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.

Defining “sustainability” is trickier. For an advantage to be sustained, your competitors must not be able to duplicate it. Or, more precisely, they must not be able to duplicate the resources underlying it. For that you must possess what I term an “isolating mechanism,” such as a patent giving its holder the legally enforceable right to monopolize the use of a technology for a time.2 More complex forms of isolating mechanisms include reputations, commercial and social relationships, network effects,* dramatic economies of scale, and tacit knowledge and skill gained through experience. As an example, Apple’s iPhone business is protected by the Apple and iPhone brand names, by the company’s reputation, by the complementary iTunes service, and by the network effects of its customer group, especially with respect to iPhone applications. Each of these resources has been crafted by Apple executives and put in place as part of a program for building a sustained competitive advantage. These resources are scarce in that competitors find it difficult, if not impossible, to create comparable resources at a reasonable cost.

When another person speaks you hear both less and more than they mean. Less because none of us can express the full extent of our understanding, and more because what another says is constantly mixing and interacting with your own knowledge and puzzlements.