Good Strategy/Bad Strategy: The Difference and Why It Matters

Citation

Rumelt, R.P. (2012), "Good Strategy/Bad Strategy: The Difference and Why It Matters", Strategic Direction, Vol. 28 No. 8. https://doi.org/10.1108/sd.2012.05628haa.002

Good Strategy/Bad Strategy: The Difference and Why It Matters

Article Type: Suggested reading From: Strategic Direction, Volume 28, Issue 8

Richard P. Rumelt,Crown Business, New York, NY, 2011, 336 pp.

In Good Strategy/Bad Strategy, Richard Rumelt makes a two-fold contribution to the strategy literature – first he clearly distinguishes bad strategy from good and, secondly, he makes the case that crafting good strategy is intensely complex and difficult and involves informed, critical thinking. Rumelt’s clarion call to executives “is to wake you up to the dramatic differences between good strategy and bad strategy and to give you a leg up toward crafting good strategies.” It is written in a readable style, well illustrated throughout with examples from well-known companies, many from Rumelt’s own consulting experience. I found it an engaging read.

The book is divided into three parts: Part I clarifies the difference between good and bad strategy; Part II, which occupies most of the book, delves into sources of potential strategic advantage that aid in good strategy-making; and Part III explains how to think like a strategist.

Good strategy/bad strategy

According to Rumelt, good strategy “is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge”[1]. Good strategy is a plan for action backed up by a cogent argument – an effective mixture of thought and implementation with a basic underlying structure Rumelt calls the “kernel,” the bare bones center of a strategy – the “hard nut at the core of the concept.” This core strategy contains three elements[2]:

1. 1.

   A “diagnosis” that explains the nature of the challenge, identifying which aspects of the situation are critical and the obstacles to be overcome – a critical version of “What’s going on here?” Rumelt claims that most deep strategic changes are brought about by a change in diagnosis – a change in how the company perceives its situation.

2. 2.

   A “guiding policy” for dealing with the challenge – an overall approach to cope with or overcome the obstacles identified in the diagnosis. Good guiding policies define a method of grappling with the situation and ruling out a vast array of possible actions. Without a good guiding policy, an organization would have no principle to coordinate or focus its actions.

3. 3.

   A set of “coherent actions” are required to carry out the guiding policy. This means that actions adopted – the resources allocated, policies, and maneuvers undertaken – should be consistent and coordinated.

In contrast, bad strategy is more than the absence of good strategy. Bad strategy is long on goals and short on policy or action. Rumelt lists four manifestations of bad strategy:

• •

  Fluff – “a form of gibberish masquerading as strategic concepts or arguments […] to create the illusion of high-level thinking”[3]. Fluff is couched in impressive sounding terminology because plain-spoken language might reveal its deficiencies. Fluff also contains slogans and grandiose statements that fail to hold up under scrutiny.

• •

  Failure to face the challenge or come to grips with the fundamental obstacles and problems standing in the organization’s way. Often, companies use a fill-in-the-blanks template – with boxes for vision statement, mission statement, core values, strategic goals, strategies for each goal, and initiatives – in an annual ritual that produces no real effect because the challenge or purpose for the strategies is missing.

• •

  Mistaking goals for strategy – Many companies in fact have grandiose visions bordering on the unattainable that they promulgate as strategies, such as, “Think big, think bigger!” In the compelling example Rumelt uses, the “strategies” the company uses to help it get there are goals and objectives – 20 percent increase in revenues and profits, develop the will to win, foster an open work environment, delight our customers, etc.

Bad strategic objectives[4] take two principal forms:

1. 1.

   “dog’s dinner objectives” that contain every suggestion made at planning meetings, involving tens of strategies and hundreds of (uncoordinated) actions and objectives (far too many and inserted into the plan with no aforethought); and

2. 2.

   “blue sky objectives” that are either unachievable or that restate the desired state of affairs, leaving the organization no better off.

As Rumelt says, “it skips over the annoying fact that no one has a clue as to how to get there”[5]. As a case in point, Rumelt dissects the Los Angeles Unified School District’s plans for improving test-performance scores of the 34 weakest schools in the system and shreds every aspect of it as “blue sky objectives” with no diagnosis and no hope of ever achieving them.

Again, Rumelt preaches truth to power when he says that the most common reasons for so much bad strategy include executives actively avoiding both the hard work of crafting a good strategy and the pain that accompanies making hard choices. He excoriates the “template-style” strategy of filling in the blanks as being a one-size-fits-all substitute for the hard work of analysis. And he derides the misguided belief that executives need only a positive mental attitude to succeed. His other targets include charismatic leaders that get visions and motivation confused with strategy, and a proliferation of websites and consultants offering guidance on vision, mission, values, and strategy without identifying both the true challenges being faced and the obstacles to be overcome.

Good strategy is hard work and many executives either avoid it or don’t really know what it entails. To have a strategy – rather than merely aspirations – is to choose one path and eschew others. Rumelt acknowledges that saying “no” to a host of hopes, dreams, and aspirations is difficult psychologically, politically, and organizationally. In my opinion, Rumelt has done the business community a service by shining a bright light on the flimsy efforts that often masquerade as good strategy. We can hope that executives that have promulgated or condoned bad strategy in the past will be motivated to change.

Sources of power

In his introduction to Part II, Rumelt says, “good strategy works by harnessing power and applying it where it will have the greatest effect,” and “good strategy is an approach that magnifies the effectiveness of actions by finding and using sources of power.” Each chapter in Part II is devoted to a different source of potential strategic advantage: including leverage, “chain-link systems,” design, focus, growth, advantage, and dynamics. As Rumelt explains:

Strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and applying concentrated effort.

Chain-link logic

A system’s performance is limited by its weakest subunit or “link.” A chain with a weak link cannot be made stronger by strengthening the other links. So every part of the system must be made strong and complementary. As Rumelt says, “the excellence achieved by a well-managed chain-link system is difficult to replicate.”

Design

A successful strategy requires premeditation, the anticipation of other players’ behavior, and the purposeful design of coordinated actions. Design involves tradeoffs between how best to achieve the challenge and available resources. Having a strategic resource eases the task[6]. Master strategists, Rumelt says, are not decision-makers but designers.

Focus

According to Rumelt, companies that don’t focus their resources, instead pursuing multiple goals at once, are not likely to achieve a breakthrough in any of them. He urges that companies focus on a target market to gain the bargaining power that has eluded its competitors and increase its margins.

Growth

Many companies wrongly believe that just by growing they create value, says Rumelt. Real growth, he says, is a result of what companies do better – satisfy more demand, find new customers, produce a better product, find new needs to service.

Advantage

The secret to using advantage is to press where you know you have the upper hand and avoid situations where you don’t. He expands on ways of increasing value through deepening advantages, broadening their extent, increasing demand for advantaged products and services, and blocking easy replication or imitation by competitors, usually by patents, brand-name protections, and copyrights.

Dynamics

Rumelt calls forces of external change and a company’s ability to exploit them its dynamics. He advocates recognizing and dealing with a wave of change early in its development rather than waiting until it is too late to exploit it. To help with “peering into the fog of change,” Rumelt offers some guideposts: watch for escalating fixed costs in the industry, transitions created by deregulation, predictable biases in forecasting, signals of an incumbent’s response to change, and evidence of emerging “attractor states” – ways in which industries change to become more efficient.

Thinking like a strategist

Rumelt offers executives a number of ways of thinking that can help them create better strategies – subjecting a strategy to logical and empirical tests before ascertaining its validity, expanding the scope of thinking about strategy and subjecting it to deeper criticism, and forming an independent judgment about important issues.

Strategy as experiment

A new strategy is a hypothesis – an educated prediction of how the world works – and its implementation an experiment. As results appear, good leaders learn more about what does and doesn’t work and adjust their strategies accordingly[7]. Good strategy work is necessarily empirical and pragmatic, requiring attention to data. To illustrate the steps involved in hypothesizing a result, carrying it out on a small scale to test it, and then scaling it up quickly, Rumelt tells the story of how Howard Schultz persuaded Starbucks Coffee Company to launch coffeehouses in the USA after he experienced their seductive delights during a trip to Italy.

Critical thinking

Rumelt warns that rushing to judgment about a strategic course is risky. Choosing how to approach a problem and analyzing how to think about it – thinking about one’s own thinking – is a personal skill that is more important, Rumelt believes, than any strategy concept or analytical framework. He also says that the best way to practice and enhance such judgment is to take a position on an issue, a strategy, or a diagnosis.

Developing independent judgment. Rumelt warns against following the crowd – for example, believing Wall Street’s projections – rather than basing decisions on independent judgment. He cautions against social herding, that is, believing something because everyone else believes it, or giving in to a bias and ignoring pertinent data. These traps can be avoided by paying close attention to authentic data, learning from history, and heeding other people’s experience.

Some caveats

The book’s Part II – Sources of Power – is mistitled in my opinion. Rumelt is actually offering a collection of chapters or essays on the excitement, difficulty, and uncertainty involved in crafting good strategy. A worthy effort.

My other complaint is that Rumelt’s initial definition of good strategy in Part I is incomplete. Only after finishing Part II could I piece together a full list of the qualities of a good strategy: a sustainable competitive advantage, knowledge of competitors and their likely strategies and reactions, an understanding how an industry is changing and what implications that has for the company, and an acknowledgement that every strategy is an hypothesis and an educated prediction as to what might work and that it will likely need adjusting based on what is learned. These minor criticisms aside, Rumelt is a wonderful teacher with a keen understanding of strategy, which enables him to separate true insights from platitudes. I, for one, am a grateful learner. Even those that already know a lot about strategy will profit from reading this book and its many penetrating examples that bring his wisdom and advice to life. And for me it was a page turner.

Reviewed by Stan Abraham, Professor Emeritus of Strategy and Entrepreneurship at Cal Poly Pomona, a contributing editor of Strategy & Leadership and the author of Strategic Planning: A Practical Guide for Competitive Success, 2nd edition (2012).

This review was originally published in Strategy and Leadership, Vol. 40 No. 1.

Notes

1. Page 9.

2. Pages 77-94.

3. Page 32.

4. Rumelt distinguishes goals (overall values and desires) from objectives (specific operational targets), page 52.

5. Page 54.

6. Rumelt’s definition: “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” (p. 135).

7. Page 241.