Good Strategy Bad Strategy: The Difference and Why It Matters

Good Strategy Bad Strategy: The Difference and Why It Matters
Publisher:
Published: 7/19/2011
Clears out the mumbo jumbo and muddled thinking underlying too many strategies and provides a clear way to create and implement a powerful action-oriented strategy for the real world

Book Summary - Good Strategy/ Bad Strategy: The Difference and Why It Matters by Richard Rumelt

What You’ll Learn

  • The definition of strategy
  • What are the building blocks of strategy?
  • Which corporations set good examples of strategic approaches to business
  • The importance of being focused
  • How strategy is like science

Who This is For

  • Business executives and entrepreneurs
  • Business management students
  • Anyone curious about how successful companies beat out the competition

Key Insights

With a focus on what makes Good Strategy, Richard Rumelt teaches the basic elements for business success, beginning with understanding the difference between strategy and goals. The kernel of strategy is made up of three parts: diagnosis, guiding policy, and coherent actions. With these basic building blocks, the science of strategy can be employed, paying attention to balance, leverage, and keeping the high ground above the competitors.

Key Points

What Strategy is and What it Isn’t

Let’s begin with what strategy isn’t… it’s not goal setting. A graphic arts company cited their 2005 Key Strategy to be, “20 percent revenue increase and a 20 percent profit margin.” But a goal (or vision) is an idea that stands alone. Without an action plan, it is not a strategy.

Strategy is a set of ideas that include an action plan to achieve those goals. The place to start is setting goals, but to qualify for the term “strategy” there must be detailed information on how the goals will be achieved.

While goals can often be mistaken for strategies, motivational slogans and buzzwords also get misinterpreted to be strategies. This is especially true in the absence of clear, simple verbiage. Considered “fluff,” superficially restating the obvious with buzzwords comes across as high-level planning, but is really just a façade. One example of this is the “strategy” employed by a bank that offers “customer-centric intermediation.” This sounds highfalutin, but since “intermediation” just means taking and lending money, and “customer-centric” means they serve their customers, all their strategy is really saying is that they are a bank! And since there are no actionable plans, this is actually not a strategy.

Failure to face the challenge is another weak spot in strategic planning, meaning not properly identifying your company’s main problem. Bad strategic objectives are only seeing serious problems as irritants and not addressing them directly or at all. Sometimes leaders believe that focusing on difficult issues is just negative thinking, but problems can’t be solved if they aren’t identified.

The Building Blocks of Good Strategy

All strategies will appear different as they are tailored to meet unique needs. But there is a common component to any successful strategy. It’s something called “the kernel” and is made of three different parts. The first two are labeled the diagnosis and guiding policy.

Diagnosis is really just analyzing the complexity of a company’s circumstances while the guiding policy lays out the plan to address the diagnosis. For example, in 1993, IBM was in decline. The marketing strategy of offering complete computers was antiquated as the industry was moving towards a more fragmented approach of selling individual computer parts.

Rather than altering to this fragmentation, the CEO created another diagnosis. He chose not to fragment the departments, but instead to centralize and become the leader in IT consulting. This required a guiding policy of focusing on customer solutions.

The third element of “the kernel” is coherent actions that support the guiding policy. “Coherent” meaning that the chosen actions should not contradict each other. Ford Motor is an example of incoherent actions. They took over Volvo, Jaguar, Land Rover, and Aston Martin. With these acquisitions, the new guiding policy they employed was to exploit these brands while also utilizing the economy of scale, which meant they consolidated the design and manufacturing between all the brands. Coherence was lacking because what set these brands apart was their uniqueness, and consolidating their manufacturing robbed them of the very quality that made them desirable.

Good Strategy Means One Strategy

Focusing resources on just one action is the hallmark of “good strategy.” It can be tempting to pursue multiple opportunities, but it's imperative to focus on just one priority. Doing the opposite can water down all efforts and produce lackluster results.

In 1988, Digital Equipment Corporation was struggling to compete with the latest PC designs. The executives couldn’t commit to one direction. They wanted to build ready-to-use systems, focus on customer solutions, and explore microchip technology. The corporate leaders were unable to choose a single direction until 1992 when they finally settled on microchips. But by this time, they were too late as competitors had the lead. The company ended by selling out to a rival corporation.

The biggest deterrent to having the needed laser focus strategy is that it can often hurt other areas of the business, which results in opposition from those working in the departments being harmed. Strategic leadership requires pushing through, by understanding how essential it is to have focus.

Good Strategy has Leverage

Another evaluation of Good Strategy is, does it give you leverage over your competition? To do this, you need to anticipate opportunities ahead of time. This doesn’t mean fortune-telling/seeing into the future, but rather having the knack for recognizing emerging possibilities in the present and making actionable plans to pursue them.

Toyota recognized early on the dwindling supply of fossil fuels would lead to a hybrid car demand, so they were the first to invest in this new technology… to the tune of $1 Billion! This led to other manufacturers licensing their technology rather than investing in their own.

Another important implementation of leverage is to avoid competing with companies where you don’t have an advantage. Called “wrestling the gorilla” it is counterproductive to put energy and resources into a pursuit where another company already has the upper hand

Good Strategy is Balanced

Actions of Good Strategy need to be based on your current situation and fit together. There is always a tradeoff between resources, possible actions, and ways to optimize them. A good strategy utilizes resources in the most efficient ways possible. When Hannibal invaded the Roman Empire, he ran into trouble. The Roman Army outnumbered him by 85,000 to 55,000. Since his resources were more limited, Hannibal created a strategy that maximized what he did have.

He had his army form an arc with the middle intentionally appearing to be in retreat. The Roman Army fell for it and went after the “retreating soldiers”, going into the gap Hannibal had intentionally created. The space they were filling became too tight for all of the army to fit in and they struggled to swing their swords. Then the sides of the arc closed in and the Romans were surrounded. In this out-strategized state, they were slaughtered. The Romans lost 50,000 compared to Hannibal’s 5,000.

Good Strategy Takes the High Ground

Shifts in the business market are constantly happening. A good strategy needs to take advantage of such changes. When television became more widely available, it created competition for movie theaters. Previously, Hollywood had a captive audience, but with the advent of free television, they needed to shift their strategies. One such strategy was for the big production studios to fund indie film companies with specialized interests that attracted a different audience, one which followed independent films. The winners here were the independent filmmakers who benefitted from the competition that television placed on the cinema industry by receiving big studio funding!

Good Strategy uses the Scientific Approach

Begin your good strategy utilizing the scientific approach of hypotheses. In this application, it means using educated reasoning to anticipate how situations could work to your advantage.

Howard Schultz visited Italy in 1983 and hypothesized that the Italian expresso experience could be successful in America. He relished the Italian coffee bars where pricey coffee served in comfortable social settings were in contrast to the cheap, bland American coffee experience. Schultz tested his hypothesis by convincing his employers of a Seattle-based coffee roasting company to let him set up a small expresso bar. The company was Starbucks.

Schultz gathered information by studying the Italian coffee market and then tested it by setting up a small “study” in the form of the expresso bar. Then he modified his study as he discovered that Americans preferred comfortable chairs to bar stools and wanted to take their coffee to go, which led him to introduce paper cups.

His hypothesis was tested, produced results, and then was modified through further research. Howard Schultz bought Starbucks in 1987, by 2001, it brought in $2.6 billion in revenue!

The Main Takeaway

In Good Strategy/Bad Strategy, Richard Rumelt explains the basic elements of strategy and how they are employed. Through examples of well-known companies who successfully implemented Good Strategies (and a few who fell for bad ones), the basic building blocks and science of strategy is illustrated.

About the Author

Richard Rumelt is the Harry and Elsa Kunin Emeritus Professor of Business & Society at the University of California, Los Angeles Anderson School of Management. He joined the school in 1976 from Harvard Business School. The Economist named him as one of the 25 most influential people in management and corporate practices, and McKinsey Quarterly called Rumelt the “strategy’s strategist.”

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