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

by Richard P. Rumelt

Like a quarterback whose only advice to teammates is “Let’s win,” bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values. Each of these elements is, of course, an important part of human life. But, by themselves, they are not substitutes for the hard work of strategy.

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.

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.

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.

Once you gain a facility with the structure and fundamentals of a good strategy, you will develop the parallel ability to detect the presence of bad strategy. Just as you do not need to be a director to detect a bad movie, you do not need economics, finance, or any other abstruse special knowledge to distinguish between good and bad strategy.

Despite this, most organizations will not create focused strategies. Instead, they will generate laundry lists of desirable outcomes and, at the same time, ignore the need for genuine competence in coordinating and focusing their resources.

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.

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.

The articulation of a national vision that describes America’s purpose in the post–September 11th world is useful—indeed, it is vital—but describing a destination is no substitute for developing a comprehensive roadmap for how the country will achieve its stated goals.”

“All too much of what is put forward as strategy is not. The basic problem is confusion between strategy and strategic goals.”

Fluff has its origins in the academic world and, more recently, in the information technology industry. There, for example, a recent EU report defines “cloud computing” as “an elastic execution environment of resources involving multiple stakeholders and providing a metered service at multiple granularities for a specified level of quality-of-service.”5 A less fluffy explanation is that when you do a Google search, or send data to an Internet backup service, you do not know or care which physical computer, data server, or software system is being used—there is a “cloud” of machines and networks, and it is up to the external service provider to work out how the job is performed and how you will be charged.

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.

Instead of long tables of numbers and bubble charts, we have a different type of ritualized formalism for producing “strategic plans.” 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,” and then, finally, a list of “initiatives.

Looking at most of this product, or listening to the managers who have produced it, you will find an almost total lack of strategic thinking. Instead, you will find high-sounding sentiments together with plans to spend more and somehow “get better.”

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.

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

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.

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.

Bad strategy generates a feeling of dull annoyance when you have to listen to it or read it.

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.

Strategy involves focus and, therefore, choice. And choice means setting aside some goals in favor of others. When this hard work is not done, weak amorphous strategy is the result.

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

There is a large industry of consultants and book writers who are willing to provide instruction on the delicate differences between missions, visions, strategies, initiatives, and priorities. From small boutiques to the large IT-based firms trying to break into strategy work, consultants have found that template-style strategy frees them from the onerous work of analyzing the true challenges and opportunities faced by the client. Plus, by couching strategy in terms of positives—vision, mission, and values—no feelings are hurt.

Interestingly, Senge urges leaders to “personal mastery,” which is a spiritual inward journey. In this regard, he quotes Ford’s mystical belief that “the smallest indivisible reality is, to my mind, intelligent and is waiting there to be used by human spirits if we reach out and call them in.”

The kernel of a strategy contains three elements: 1. 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. 2. 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. 3. 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.

In many large organizations, the challenge is often diagnosed as internal. That is, the organization’s competitive problems may be much lighter than the obstacles imposed by its own outdated routines, bureaucracy, pools of entrenched interests, lack of cooperation across units, and plain-old bad management. Thus, the guiding policy lies in the realm of reorganization and renewal. And the set of coherent actions are changes in people, power, and procedures. In other cases the challenge may be building or deepening competitive advantage by pushing the frontiers of organizational capability.

“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.

None of these viewpoints is, by itself, an action, but each suggests a range of things that might be done and sets aside other classes of action as less relevant to the challenge. 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.

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

Indeed, we always hope that a brilliant insight or very clever design will allow us to accomplish several apparently conflicting objectives with a single stroke, and occasionally we are vouchsafed this kind of deliverance. 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. This coordination is unnatural in the sense that it would not occur without the hand of strategy.

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. Down that road lies a frozen maladaptive stasis. Good strategy and good organization lie in specializing on the right activities and imposing only the essential amount of coordination.

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.

A good strategy draws power from focusing minds, energy, and action. That focus, channeled at the right moment onto a pivotal objective, can produce a cascade of favorable outcomes. I call this source of power leverage.*

For example, there seems to be a threshold effect in advertising. That is, a very small amount of advertising will produce no result at all. One has to get over this hump, or threshold, to start getting a response to advertising efforts.5 This means it may pay companies to pulse their advertising, concentrating it into relatively short periods of time, rather than spreading it evenly.

I came to see skills at coordination as if they were rungs on a ladder, with higher rungs in reach only when the lower rungs had been attained. Indeed, PJ’s concept of a layering of skills explains why some organizations can concentrate on issues that others cannot. This understanding has helped shape the advice I offer clients. For example, 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.

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.

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 more tightly integrated design is harder to create, narrower in focus, more fragile in use, and less flexible in responding to change. A Formula 1 racing car, for example, is a tightly integrated design and is faster around the track than a Subaru Forester, but the less tightly integrated Forester is useful for a much wider range of purposes.

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.

When the profits roll in, leaders will point to their every action with pride. Books will be written recommending that others immediately adopt the successful firm’s dress code, its vacation policy, its suggestion-box policies, and its method of allocating parking spaces. Of course, these connections are specious. Were there such simple, direct connections between current actions and current results, strategy would be a lot easier. It would also be a lot less interesting, for it is the disconnect between current results and current action that makes the analysis of the sources of success so hard and, ultimately, so rewarding.

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.

For example, compare the changes during your life to those that occurred during the fifty years between 1875 and 1925. During those fifty years, electricity first lit the night and revolutionized factories and homes. In 1880, the trip from Boston to Cambridge and back was a full day’s journey on horseback. Only five years later, the same trip was a twenty-minute ride on an electric streetcar; with the streetcar came commuting and commuter suburbs. Instead of relying on a single giant steam engine or water wheel to power a factory, producers switched to electric motors to bring power into every nook and cranny.

Now, look at another, more modern, period of fifty years. Since I was born in 1942, television has reshaped American culture, jet air travel has opened the world to ordinary people, the falling costs of long-distance transport have generated a rising tide of global trade, retail stores the size of football fields now dot the landscape, computers and cell phones are ubiquitous, and the Internet has made it possible to work, seek out entertainment, and shop without leaving home. Millions can instantly tweet about their evanescent likes and dislikes. Yet, all in all, the last fifty years’ changes have had a smaller impact on everyday life and the conduct of business than did the momentous changes that occurred from 1875 to 1925.

It took years for Intel’s management, and the rest of the industry, to fully appreciate the implications of a general-purpose chip that could be specialized with software. Instead of each customer paying to develop a specialized proprietary chip, many could use the same general-purpose microprocessor, creating proprietary behavior with software. Thus, the microprocessor could be produced in high volume.

Thus, software’s advantage comes from the rapidity of the software development cycle—the process of moving from concept to prototype and the process of finding and correcting errors. If engineers never made mistakes, the costs of achieving a complex design in hardware and software might be comparable.

In fact, highly regulated companies do not know their own costs—they will have developed complex systems to justify their costs and prices, systems that hide their real costs even from themselves.

In the meantime, these mental and accounting biases mean that such companies can be expected to wind down some product lines that are actually profitable and continue to invest in some products and activities that offer no real returns.

In seeing what is happening during a change it is helpful to understand that you will be surrounded by predictable biases in forecasting. For instance, people rarely predict that a business or economic trend will peak and then decline. If sales of a product are growing rapidly, the forecast will be for continued growth, with the rate of growth gradually declining to “normal” levels. Such a prediction may be valid for a frequently purchased product, but it can be far off for a durable good. For durable products—such as flat-screen televisions, fax machines, and power mowers—there is an initial rapid expansion of sales when the product is first offered, but after a period of time everyone who is interested has acquired one, and sales can suffer a sharp drop. After that, sales track population growth and replacement demand.