Good Strategy Bad Strategy: The Difference and Why It Matters

Good Strategy Bad Strategy: The Difference and Why It Matters

by Richard P. Rumelt

Good Strategy Bad Strategy explores the complexities of strategic thinking and provides a compelling framework for implementing impactful strategies in practical situations. By placing a strong emphasis on the primary responsibility of leaders, this book will guide you in recognizing crucial challenges and coordinating actions to address them. Most importantly, you will gain an understanding of the key distinctions between good and bad strategies, enabling you to develop a successful strategy of your own.

Summary Notes

Good Strategy

Having a good strategy is crucial for any organization to achieve its goals. A successful strategy involves aligning all actions, policies, and resources toward a specific and important objective. Unfortunately, many organizations struggle to maintain this coherence. They often attempt to do too many things at once, mistakenly believing that more effort or money will guarantee success.

Let's look at the example of Apple Inc. in 1996. At that time, Apple was facing tough competition from Windows-Intel-based PCs, and the company was in decline. Apple's CEO, Gil Amelio, tried to restructure the company's product divisions into four groups, even creating a new Internet Services Group. However, his efforts were not enough to turn the company around.

It was only when Steve Jobs returned to Apple as interim CEO that the company was able to recover. Jobs implemented a completely different strategy that was focused and coherent. He took a comprehensive approach, which included reducing staff, simplifying the product line, moving manufacturing to Taiwan, and significantly reducing inventory. Additionally, he even convinced Microsoft to invest $150 million in Apple!

The success of Jobs' strategy can be attributed to its focus and coordination. He identified the core problem Apple was facing and coordinated a set of actions to address it. This involved streamlining the product line, controlling sales through limited outlets, and stopping the development of new operating systems.

One common issue that hampers organizations is the dispersal of resources. This occurs when organizations try to cater to various internal and external interests, which ultimately dilutes their focus. While accommodating conflicting goals and allocating resources to disconnected objectives may seem possible for powerful and wealthy organizations, it actually leads to an ineffective strategy.

Despite this, many organizations continue to overlook the importance of a concentrated strategy. Instead, they create long lists of desired outcomes without prioritizing the need to coordinate and focus their resources effectively.

A good strategy requires leaders who can confidently say 'no' to numerous actions and interests. Strategy isn't just about what an organization chooses to do; it's equally about what it decides not to do.

Actions to take

Bad Strategy

Bad strategy isn't just the absence of good strategy. It actually stems from specific misconceptions and problems within leadership. Basically, a bad strategy focuses too much on goals and doesn't provide a clear plan of action. It wrongly assumes that goals alone are enough to succeed. To cover up these flaws, bad strategies often use fancy words and phrases.

But once you learn how to spot a bad strategy, you can greatly improve your ability to assess, influence, and create effective strategies. There are four main signs that indicate a bad strategy: fluff, failure to address the real challenges, confusing goals with strategy, and setting bad objectives.

Actions to take

The Elements of a Good Strategy

A good strategy is a well-organized and logical course of action supported by reasoning. It involves a harmonious blend of thinking and doing, with a fundamental framework known as the "kernel."

The kernel serves as the core of a strategy and is essential for its success. Without a properly defined or flawed kernel, the strategy is likely to encounter significant issues. Understanding this kernel is crucial as it simplifies the process of creating, explaining, and evaluating a strategy. Unlike complicated discussions about terms like visions, missions, goals, strategies, objectives, and tactics, the kernel is straightforward and practical.

The kernel consists of three main elements: a diagnosis, a guiding policy, and a set of coherent actions. The diagnosis helps us understand and explain the nature of the challenge we're facing. In a business context, this challenge often involves dealing with changes and competition. Instead of just setting goals for performance, a successful strategy starts by understanding the underlying structure of the challenge.

The next step entails selecting an overarching guiding policy that leverages or creates some form of advantage to address the situation.

Finally, the strategy is implemented through a well-designed configuration of actions and resource allocations that align with the chosen guiding policy.

In many large organizations, the challenges they face are often internal. This means that the problems they encounter within the organization, like outdated processes, bureaucracy, resistance to change, lack of cooperation between departments, and poor management, overshadow the external competition. In such cases, the guiding policy revolves around reorganizing and renewing the organization. The set of coherent actions then involves making changes to personnel, power dynamics, and procedures within the organization.

Actions to take

The Sources of Power

A great strategy uses different sources of power to overcome obstacles. These sources include the following:

  1. Leverage: This means making the most out of what you have. It's about using your resources effectively to get the biggest result. This could be predicting your competitor's moves, understanding where you can apply your strengths best, or focusing your efforts only on the most critical objectives.
  2. Proximate Objectives: This is about setting realistic goals. Your goal should be ambitious but within reach. They require understanding the nature of the challenge and allocating resources properly to solve solvable sub-problems. Think about how President Kennedy set the goal of landing a man on the moon by 1969 - it was ambitious, but he knew it was possible because the technology was within reach.
  3. Chain-link Systems: Imagine a chain; if one link is weak, the entire chain is weak. The same applies to a business; if one department underperforms, the whole business suffers. It's important to ensure every department performs well. A good example of a business with a chain-link system is IKEA: they manage everything from designing its furniture to managing its supply chain.
  4. Using Design: Good strategy is like design, where various elements fit together coherently. It involves creating a guiding policy and coherent actions, which is a powerful approach that few companies implement well. A well-designed strategy can be advantageous in resource-constrained or highly competitive situations.
  5. Focus: This strategy involves targeting a specific part of the market with a product or service that delivers more value to that segment than other players do for the entire market. Think of creating a product that appeals strongly to a small, loyal part of the market rather than trying to appeal to everyone.
  6. Growth: Growth is the result of success, not the strategy itself. A common misconception is that growth is always good, but that's not true. Rapid, unsustainable growth can lead to business failure. Instead, growth should be driven by creativity, innovation, and efficiency.
  7. Using Advantage: This strategy involves using your strengths to your advantage and avoiding areas where you're weak. This can involve offering your product at a lower cost than competitors or offering more value. To maintain this advantage, you need to protect it from being copied by competitors, for example, through patents or superior knowledge and skills.
  8. Using Dynamics: This strategy involves understanding and anticipating changes in the industry. This could be changes in technology, politics, or customer preferences. As a strategist, you should do your own analysis of where your industry is headed and adapt accordingly.
  9. Inertia and Entropy: Inertia is when a company is resistant to change, while entropy is when a company becomes less organized over time. As a strategist, you can exploit these weaknesses in your competitors and avoid them in your own organization. For example, Netflix outperformed Blockbuster because Blockbuster was resistant to moving away from retail stores.

Actions to take

Thinking Like a Strategist

Creating effective strategy often encourages us to look at situations from the perspectives of rivals or customers, but it's equally important to consider our own thought processes. Our intentions do not always dictate our thoughts, and much of our thinking happens spontaneously. This can lead to leaders forming strategies without considering their own internal processes of ideation and evaluation.

The process of crafting a business strategy is much like a scientific exploration. You're venturing into the unknown, formulating an educated guess (hypothesis), and putting it to the test (experimentation). As the results come in, you learn more about what works and what doesn't, and then you adjust your strategy accordingly.

However, this process requires not only knowledge and experience in your field but also the ability to confront biases, question judgments, and refine decision-making.

The backbone of a good strategy includes diagnosing the situation, choosing an overall guiding policy, and designing coherent actions. This basic structure, or "kernel," helps us remember that a strategy isn't just a flash of insight but a coherent argument that starts with understanding the situation, choosing a direction, and then laying out actions to get there.

Finally, it's important to resist the temptation to follow the crowd. Good strategy requires independent thinking. Despite the pressures to conform, it's crucial to focus on real-world data and learn from history and experiences elsewhere. This calls for a balance between independence and conformity, skepticism and cynicism, an important facet of strategic success.

Actions to take

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