Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

Nelson’s challenge was that he was outnumbered. His strategy was to risk his lead ships in order to break the coherence of his enemy’s fleet. With coherence lost, he judged, the more experienced English captains would come out on top in the ensuing melee.

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 includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.

Strategy is about how an organization will move forward. Doing strategy is figuring out how to advance the organization’s interests. Of course, a leader can set goals and delegate to others the job of figuring out what to do. But that is not strategy. If that is how the organization runs, let’s skip the spin and be honest—call it goal setting.

Many organizations, most of the time, don’t have this. Instead, they have multiple goals and initiatives that symbolize progress, but no coherent approach to accomplishing that progress other than “spend more and try harder.”

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

Wal-Mart’s advantage must stem from something that competitors cannot easily copy, or do not copy because of inertia and incompetence. In the case of Wal-Mart, the principal competitive failure was Kmart.

This fascinating analysis of the situation worked to redefine “defense” in new terms—a subtle shift in point of view. It argued that “in dealing effectively with the other side, a nation seeks opportunities to use one or more distinctive competences in such a way as to develop competitive advantage—both in specific areas and overall.” It then went on to explain that the crucial area of competition was technology because the United States had more resources and better capabilities in that area. And, most important, it argued that having a true competitive strategy meant engaging in actions that imposed exorbitant costs on the other side. In particular, it recommended investing in technologies that were expensive to counter and where the counters did not add to Soviet offensive capabilities. For instance, increasing the accuracy of missiles or the quietness of submarines forced the Soviet Union to spend scarce resources on counters without increasing the threat to the United States. Investments in systems that made Soviet systems obsolete would also force them to spend, as would selectively advertising dramatic new technologies.

Behind almost all of these forces and events lay the indirect competitive logic that Marshall and Roche expressed in 1976: use your relative advantages to impose out-of-proportion costs on the opposition and complicate his problem of competing with you.

business competition is not just a battle of strength and wills; it is also a competition over insights and competencies. My judgment is that motivation, by itself, will not give this company enough of an edge to achieve your goals.

The leader’s responsibility is to decide which of these pathways will be the most fruitful and design a way to marshal the organization’s knowledge, resources, and energy to that end. Importantly, opportunities, challenges, and changes don’t come along in nice annual packages. The need for true strategy work is episodic, not necessarily annual.

Rather, they decide which general goals should be pursued. And they design the subgoals that various pieces of the organization work toward. Indeed, the cutting edge of any strategy is the set of strategic objectives (subgoals) it lays out. 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.

A high rate of community involvement might be a very desirable state of affairs. But it is hardly a strategy. It is a blue-sky objective.

Bad strategy flourishes because it floats above analysis, logic, and choice, held aloft by the hot hope that one can avoid dealing with these tricky fundamentals and the difficulties of mastering them.

I call this combination of three elements the kernel to emphasize that it is the bare-bones center of a strategy—the hard nut at the core of the concept.

“It looks to me as if there is really only one question you are asking in each case. That question is ‘What’s going on here?’ ” John’s comment was something I had never heard said explicitly, but it was instantly and obviously correct. 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.

A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than canceling one another out.

Nevertheless, strategy is primarily about deciding what is truly important and focusing resources and action on that objective. It is a hard discipline because focusing on one thing slights another.

Strategy is visible as coordinated action imposed on a system. When I say strategy is “imposed,” I mean just that. It is an exercise in centralized power, used to overcome the natural workings of a system.

For the most part, the aim of a move is to find positions for one’s pieces that (a) increase their mobility, that is, increase the options open to them and decrease the freedom of operation of the opponent’s pieces; and (b) impose certain relatively stable patterns on the board that induce enduring strength for oneself and enduring weakness for the opponent. If and when sufficient positional advantages have been accumulated, they generally can be cashed in with greater or less ease by tactical maneuvers (combinations) against specific targets that are no longer defensible or only at terrible cost.5

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.

When someone says “Managers are decision makers,” they are not talking about master strategists, for a master strategist is a designer.

Study how Bill Gates outsmarted the giant IBM or how Nucor became a leader in the declining steel industry and you will learn design-type strategy. Study Microsoft today and you will see a mature giant, reaping the benefits of past victories but just as tied to its installed base and a rich mix of conflicting initiatives and standards as was IBM in 1985.

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. This position and these kinds of slow-build resources are simply not available to companies, mesmerized by the stock market, who want big results in twelve months.

There is nothing magical about Paccar’s strategy. It is classic “hold the high ground” positioning. This defensive structure can probably be maintained as long as there are no significant structural changes in the industry’s economics or buyer behavior.

All of these obstacles can be overcome with time and resources. 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.

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. Today, this approach to information flows and business processes is sometimes called “reengineering” or “business-process transformation.” Whatever it is called, the underlying principle is that improvements come from reexamining the details of how work is done, not just from cost controls or incentives.

An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia.

Organizational inertia generally falls into one of three categories: the inertia of routine, cultural inertia, and inertia by proxy.

Entropy is a great boon to management and strategy consultants. Despite all the high-level concepts consultants advertise, the bread and butter of every consultant’s business is undoing entropy—cleaning up the debris and weeds that grow in every organizational garden.

None of this improvement came from a deep entrepreneurial insight or from innovation. It was all just management—just undoing the accumulated clutter and waste from years of entropy at work.

But if you invest to take business away from a sister brand or division, that may make the whole corporate pie smaller. Not only are the investments in advertising and development partially wasted, but you have probably pushed down the prices of both brands.

being a niche business frequented by bohemians, beatniks, hippies, and Gen X nocturnals, depending on the era.

And almost all of the drinks are milk based. In fact, viewed from Europe, Starbucks is more of a milk company than a coffee company and most of its drinks are simply coffee-flavored milk.

What the kernel does, however, is remind us that a strategy is more than a localized insight. It is an internally consistent argument that leads from facts on the ground to diagnosis, thence to an overall directive, thence to action. The kernel reminds us to expand the scope of our thinking to include all three elements.

Learning from others can be more than simply listening to them, watching them, or reading what they write. When you build your own panel of experts you go one step farther, trying to shape your understanding of their teachings into a virtual personality. When it works, it does so because we humans have built-in software for understanding other humans, software that is more expert at recognizing and recalling personalities than at almost anything else.

If you can keep your head when all about you Are losing theirs … —“IF,” RUDYARD KIPLING

Finally, there is the inside view, a label given by Nobel laureate Daniel Kahneman and coauthor Dan Lovallo to the tendency to ignore related pertinent data—to believe that “this case is different.”7