Good Strategy Bad Strategy: The Difference and Why it Matters by Richard Rumelt

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Good strategy almost always looks this simple and obvious and does not take a thick deck of PowerPoint slides to explain.

Instead, a talented leader identifies the one or two critical issues in the situation—the pivot points that can multiply the effectiveness of effort—and then focuses and concentrates action and resources on them.

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.

strategy, responsive to innovation and ambition, selects the path, identifying how, why, and where leadership and determination are to be applied.

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.

The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action.

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.

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

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.

And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.

I think you have a lot of ambition, but you don’t have a strategy. I don’t think it would be useful, right now, to work with your managers on strategies for meeting the 20/20 goal. What I would advise is that you first work to discover the very most promising opportunities for the business. Those opportunities may be internal, fixing bottlenecks and constraints in the way people work, or external. To do this, you should probably pull together a small team of people and take a month to do a review of who your buyers are, who you compete with, and what opportunities exist. It’s normally a good idea to look very closely at what is changing in your business, where you might get a jump on the competition. You should open things up so there are as many useful bits of information on the table as possible. If you want, I can help you structure some of this process and, maybe, help you ask some of the right questions. 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. I can’t tell you in advance how large such opportunities are, or where they may be. I can’t tell you in advance how fast revenues will grow. Perhaps you will want to add new services, or cut back on doing certain things that don’t make a profit. Perhaps you will find it more promising to focus on grabbing the graphics work that currently goes in-house, rather than to competitors. But, in the end, you should have a very short list of the most important things for the company to do. Then you will have a basis for moving forward. That is what I would do were I in your shoes. If you continue down the road you are on you will be counting on motivation to move the company forward. I cannot honestly recommend that as a way forward because 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.

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

To help clarify this distinction it is helpful to use the word “goal” to express overall values and desires and to use the word “objective” to denote specific operational targets. Thus, the United States may have “goals” of freedom, justice, peace, security, and happiness. It is strategy which transforms these vague overall goals into a coherent set of actionable objectives—defeat the Taliban and rebuild a decaying infrastructure.

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. 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.

THE UNWILLINGNESS OR INABILITY TO CHOOSE 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.

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.

It leaves out visions, hierarchies of goals and objectives, references to time span or scope, and ideas about adaptation and change. All of these are supporting players.

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.

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.

At Starbucks, one executive might diagnose this challenging situation as “a problem in managing expectations.” Another might diagnose it as “a search for new growth platforms.” A third might diagnose it as “an eroding competitive advantage.” 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.

The guiding policy outlines an overall approach for overcoming the obstacles highlighted by the diagnosis. It is “guiding” because it channels action in certain directions without defining exactly what shall be done.

Good guiding policies are not goals or visions or images of desirable end states. Rather, they define a method of grappling with the situation and ruling out a vast array of possible actions.

Strategy is about action, about doing something. The kernel of a strategy must contain action. It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring concepts down to earth.

A strategy coordinates action to address a specific challenge.

But decentralized decision making cannot do everything. In particular, it may fail when either the costs or benefits of actions are not borne by the decentralized actors. The split between the costs and benefits may occur across organizational units or between the present and the future.

we should seek coordinated policies only when the gains are very large. ^ref-59759

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.

A “threshold effect” exists when there is a critical level of effort necessary to affect the system. Levels of effort below this threshold have little payoff.

Due to similar forces, business strategists will often prefer to dominate a small market segment over having an equal number of customers who represent only a sliver of a larger market.

Many writers on strategy seem to suggest that the more dynamic the situation, the farther ahead a leader must look. This is illogical. The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be. The proximate objective is guided by forecasts of the future, but the more uncertain the future, the more its essential logic is that of “taking a strong position and creating options,” not of looking far ahead.

Premeditation

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.

There is, in fact, a formal theory of decisions that specifies exactly how to make a choice by identifying alternative actions, valuing outcomes, and appraising probabilities of events. The problem with this view, and the reason it barely lightens a leader’s burden, is that you are rarely handed a clear set of alternatives. In the case at hand, Hannibal was certainly not briefed by a staff presenting four options arranged on a PowerPoint slide. 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.

THE PARTS OF A WHOLE

You can make a car out of high-quality off-the-shelf parts, but it won’t be a “driving machine.” In a case like this there is a sharp gain to careful coordination of the parts into a whole.

Many more interactions must be considered to find the sweet spot that gives the largest smile per dollar. You cannot search the entire space of possibilities; it is too complex. But you can probably, with effort, produce a good configuration. ^ref-12165

That difficult exercise was design. But in seeking the best smile per dollar, we took a monopoly view. Yes, we went beyond product to include manufacturing and distribution in the design, but our strategy was tuned to please the customer, not to deal with competition.

To deal with competition, expand your vision again to include other automobile companies. Now you are looking for a competitive sweet spot. You have to adjust the design—the strategy—

put more smile per dollar on a driver’s face than she can get from competing products.

I am describing a strategy as a design rather than as a plan or as a choice because I want to emphasize the issue of mutual adjustment. 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. A good strategy coordinates policies across activities to focus the competitive punch.

A design-type strategy is an adroit configuration of resources and actions that yields an advantage in a challenging situation. Given a set bundle of resources, the greater the competitive challenge, the greater the need for the clever, tight integration of resources and actions. Given a set level of challenge, higher-quality resources lessen the need for the tight integration of resources and actions.

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.

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.

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. Its important lesson is that we should learn design-type strategy from an upstart’s early conquests rather than from the mature company’s posturing.

In general, people will not push further because the analysis of unstructured information is hard, time-consuming work that requires both a rich knowledge of facts and well-developed skills in logic, deduction, and induction.

To begin identifying a company’s strategy, it is usually most helpful to examine the competitive environment. That is, to look at how the major competitors make their livings.

“If we are not going to automatically accept the opinions of others, how can we independently identify a company’s strategy? We do this by looking at each policy of the company and noticing those that are different from the norm in the industry. We then try to figure out the common target of such distinctive policies—what they are coordinated on accomplishing.”

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?”

When faced with a question or problem to which there is no obvious answer, it is human nature to welcome the first seemingly reasonable answer that pops into mind, as if it were a life preserver in a choppy sea. The discipline of analysis is to not stop there, but to test that first insight against the evidence.

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.

growth in a commodity—such as cement or aluminum or PET containers—is an industry phenomenon, driven by an increase in overall demand. The growing demand pulls up profit, which, in turn, induces firms to invest in new capacity. But most of the profits of the growing competitors are an illusion because they are plowed back into new plant and equipment as the business grows. If high profits on these investments can be earned after growth slows, then all is well. But in a commodity industry, as soon as the growth in demand slows down, the profits vanish for firms without competitive advantages. Like some sort of economic black hole, the growing commodity industry absorbs more cash from the ordinary competitor than it ever disgorges.

USING ADVANTAGE

Two equally skillful chess players sit waiting for the game to begin—which one has the advantage? Two identical armies meet on a featureless plain—which one has the advantage? The answers to these questions is “neither,” because advantage is rooted in differences—in the asymmetries among rivals. In real rivalry, there are an uncountable number of asymmetries. It is the leader’s job to identify which asymmetries are critical—which can be turned into important advantages.

No one has an advantage at everything. Teams, organizations, and even nations have advantages in certain kinds of rivalry under particular conditions.

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.

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.

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.

For Stewart Resnick, and now for me, a competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.

VALUE-CREATING CHANGES

That is, wealth increases when competitive advantage increases or when the demand for the resources underlying it increases

increasing value requires a strategy for progress on at least one of four different fronts: • deepening advantages, • broadening the extent of advantages, • creating higher demand for advantaged products or services, or • strengthening the isolating mechanisms that block easy replication and imitation by competitors.

Extending an existing competitive advantage brings it into new fields and new competitions.

Extending a competitive advantage requires looking away from products, buyers, and competitors and looking instead at the special skills and resources that underlie a competitive advantage. In other words, “Build on your strengths.”

The basis for productive extensions often resides within complex pools of knowledge and know-how.

Because so many strategy theorists have mistakenly equated value-creating strategy with “having” a sustainable competitive advantage, they have largely ignored the process of engineering increases in demand. Engineering higher demand for the services of scarce resources is actually the most basic of business stratagems.

An isolating mechanism inhibits competitors from duplicating your product or the resources underlying your competitive advantage.

The most obvious approach to strengthening isolating mechanisms is working on stronger patents, brand-name protections, and copyrights.

Another broad approach to strengthening isolating mechanisms is to have a moving target for imitators. In a static setting, rivals will sooner or later figure out how to duplicate much of your proprietary know-how and other specialized resources. However, if you can continually improve, or simply alter, your methods and products, rivals will have a much harder time with imitation.

For example, a company that innovates by using scientific knowledge will have, in general, weaker isolating mechanisms than one that combines science with information fed back from lead customers or proprietary information gleaned from its own internal operations.

how do you attain such an advantaged position in the first place? The problem is that, as valuable as such positions are, the costs of capturing them are even higher. And an easy-to-capture position will fall just as easily to the next attacker.

One way to find fresh undefended high ground is by creating it yourself through pure innovation. Dramatic technical inventions, such as Gore-Tex, or business model innovations, such as FedEx’s overnight delivery system, create new high ground that may last for years before competitors appear at the ramparts.

The other way to grab the high ground—the way that is my focus here—is to exploit a wave of change. Such waves of change are largely exogenous—they are mostly beyond the control of any one organization. No one person or organization creates these changes.

Therefore, seek to perceive and deal with a wave of change in its early stages of development. The challenge is not forecasting but understanding the past and present.

To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts. As changes begin to occur, the air will be full of comments about what is happening, but you must be able to dig beneath that surface and discover the fundamental forces at work. Leaders who stay “above the details” may do well in stable times, but riding a wave of change requires an intimate feel for its origins and dynamics.

It is hard to show your skill as a sailor when there is no wind. Similarly, it is in moments of industry transition that skills at strategy are most valuable.

an evolution in the direction of efficiency—meeting the needs and demands of buyers as efficiently as possible.

Understanding the inertia of rivals may be just as vital as understanding your own strengths.

McCracken’s “grow by 50 percent” is classic bad strategy. It is the kind of nonsense that passes for strategy in too many companies. First, he was setting a goal, not designing a way to deal with his company’s challenge. Second, growth is the outcome of a successful strategy,

A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment.