Good Strategy/Bad Strategy: The difference and why it matters

by Richard P. Rumelt

The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating

A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them. And the greater the challenge, the more a good strategy focuses and coordinates efforts to achieve a powerful competitive punch or problem-solving effect.

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

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.

Most organizations of any size don’t do this. Rather, they pursue multiple objectives that are unconnected with one another or, worse, that conflict with one another.

The creation of new strengths through subtle shifts in viewpoint. An insightful reframing of a competitive situation can create whole new patterns of advantage and weakness. The most powerfu...

My interview plan was simple: I asked each executive to identify the leading competitor in their business. I asked how that company had become the leader—evoking their private theories about what works. And then I asked them what their own company’s current strategy was.

Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable. It uses high-sounding words and phrases to hide these failings.

I have had the opportunity to discuss the bad strategy concept with a number of senior executives. In the process, I have condensed my list of its key hallmarks to the four listed in the beginning of this chapter: fluff, the failure to face the challenge, mistaking goals for strategy, and bad strategic objectives.

challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.

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.

For example, it retains program managers for only four to six years to limit empire building and to bring in fresh talent. The

“We are going to grow, and grow profitably. My problem is getting everyone aligned for this push. What I need is some coaching for my top people. I want them to be totally up to speed on strategic thinking. I want skills they can use tomorrow in a meeting with a client.”

strategy is like a lever that magnifies force.

build levers and wheels and then move the rock. I tried again: “Chad, when a company makes the kind of jump in performance your plan envisions, there is usually a key strength you are building on or a change in the industry that opens up new opportunities. Can you clarify what the point of leverage might be here, in your company?”

The end result will be a strategy that is aimed at channeling energy into what seem to be one or two of the most attractive opportunities, where it looks like you can make major inroads or breakthroughs.

The reason for this dissatisfaction is that most corporate strategic plans are simply three-year or five-year rolling budgets combined with market share projections. Calling a rolling budget of this type a “strategic plan” gives people false expectations that the exercise will somehow result in a coherent strategy.

Good strategy works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.

If the leader’s strategic objectives are just as difficult to accomplish as the original challenge, there has been little value added by the strategy.

First, if one has a policy of resolving conflict by adopting all the options on the table, there will be no incentive for anyone to develop and sharpen their arguments in the first place.

Second, both Chips and Solutions represented dramatic transformations of the firm, and each would require developing wholly new skills and work practices. One wouldn’t choose either risky alternative unless the status quo Boxes strategy was failing.

The key innovation in this growing stream has been the reduction of charismatic leadership to a formula. The general outline goes like this: the transformational leader (1) develops or has a vision, (2) inspires people to sacrifice (change) for the good

of the organization, and (3) empowers people to accomplish the vision. Some experts place more emphasis on the moral qualities of the leader, others on commitment, and others on the leader being intellectually stimulating.

“If you don’t have a competitive advantage, don’t compete.”

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.

guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.

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.

The first step toward effective strategy is diagnosing the specific structure of the challenge rather than simply naming performance goals.

second step is choosing an overall guiding policy for dealing with the situation that builds on or creates some type of leverage or advantage.

third step is the design of a configuration of actions and resource allocations that implemen...

combination of three elements the kernel to emphasize that it is the bare-bones center of a strategy—

The core content of a strategy is a diagnosis of the situation at hand, the creation or identification of a guiding policy for dealing with the critical difficulties, and a set of coherent actions. I will explore the three elements of the kernel one by one.

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.

Importantly, none of these diagnoses can be proven to be correct—each is a judgment about which issue is preeminent. Hence, diagnosis is a judgment about the meanings of facts.

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.

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

A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage. Indeed, the heart of the matter in strategy is usually advantage. Just as a lever uses mechanical advantage to multiply force, strategic advantage multiplies the effectiveness of resources and/or actions. Importantly, not all advantage is competitive.

Pushing further along, Stephanie began to explore the guiding policy of “serve the busy professional.” After some more tinkering, Stephanie sharpened the guiding policy a bit more, deciding to target “the busy professional who has little time to cook.”

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.

The actions within the kernel of strategy should be coherent. That is, the resource deployments, policies, and maneuvers that are undertaken should be consistent and coordinated. The coordination of action provides the most basic source of leverage or advantage available in strategy.

In 2003, I worked with a company whose initial “strategy” was to (1) close a plant in Akron and open a new plant in Mexico, (2) spend more on advertising, and (3) initiate a 360-degree feedback program. Now these actions may all have been good ideas, but they did not complement one another. They are “strategic” only in the sense that each probably requires the approval of top management.

The idea that coordination, by itself, can be a source of advantage is a very deep principle. It is often underappreciated because people tend to think of coordination in terms of continuing mutual adjustments among agents. Strategic coordination, or coherence, is not ad hoc mutual adjustment. It is coherence imposed on a system by policy and design. More specifically, design is the engineering of fit among parts, specifying how actions and resources will be combined. (This

By “proximate,” I mean a state of affairs close enough at hand to be feasible. If an objective is clear and feasible, it can help coordinate both problem solving and direct action.

Thus, we should seek coordinated policies only when the gains are very large. There will be costs to demanding coordination, because it will ride roughshod over economies of specialization and more nuanced local responses. The brilliance of good organization is not in making sure that everything is connected to everything else.

In very general terms, a good strategy works by harnessing power and applying it where it will have the greatest effect. In the short term, this may mean attacking a problem or rival with adroit combinations of policy, actions, and resources. In the longer term, it may involve cleverly using policies and resource commitments to develop capabilities that will be of value in future contests. In either case, a “good strategy” is an approach that magnifies the effectiveness of actions by finding and using sources of power.

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.

To create leverage around this pattern, 7-Eleven Japan has developed a method of collecting information from store managers and employees about local tastes and forming quick-response merchandising teams to develop new product offerings. To further leverage this information and team skills, the company has developed relationships with a number of second- and third-tier food manufacturers and found ways to quickly bring new offerings to market under its own private-label brand, at low prices, using the food manufacturers’ excess capacity. At the same time, 7-Eleven was expanding its operations in China. There, Murata explained, their outstanding advantage was cleanliness and service. The Chinese consumers were used to being supplicants at a retail outlet, and 7-Eleven Japan’s tradition of spotless interiors and white-gloved service personnel who greeted customers with bows and smiles, as well as its good-tasting lunches, were producing twice as many sales per square foot than any competitor obtained. Murata’s strategy focused organizational energy on decisive aspects of the situation. It was not a profit plan or a set of financial goals. It was an entrepreneurial insight into the situation that had the potential to actually create and extend advantage.