Good Strategy, Bad Strategy
Cover & Diagrams
Why do so many organizations get strategy wrong? Even some of the world's biggest organizations do strategy poorly, and incorrectly credit their success to their personal decision-making skill. Leaders often do what makes them feel good, whether it helps their company or not.
We read the book Good Strategy, Bad Strategy by Richard Rumelt and will break down the key insights between good and bad strategy. The "kernel" of good strategy contains three main components: diagnosis of a problem; an appropriate guiding policy; and a set of coherent actions. If each stage isn't treated carefully, bad strategy is inevitable.
Top 20 insights
- In its simplest form, good strategy answers three very simple questions: 'why' (diagnosis of the problem), 'what' (guiding policy for action), and 'how' (the actionable objectives themselves). Rumelt calls this the kernel of good strategy.
- A good guiding policy tackles the obstacles identified in the diagnosis of a problem through the creation of advantage or the collection from sources of advantage. Importantly, not all advantage is competitive (in the case of nonprofits or public-policy strategy).
- Action points are vital to any good strategy. Companies often lack action points. With Bush in Iraq, the goal was to invade and conquer. The goals were freedom, democracy, and reconstruction; but the strategy was not implemented until General David Petraeus laid out what must be done to counter an insurgence (something that had not been considered before). General Petraeus' impact was great. This example demonstrates why coherent action must be central to any strategy. "A good strategy does more than urge us forward toward a goal or vision," Rumelt writes. "A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them."
- There are two main types of bad strategic objectives: 1) dog's-dinner objectives, which often constitute a "scrambled mess of things to accomplish" and tend to come from large meetings; and 2) blue-sky objectives. "A blue-sky objective is usually a simple restatement of the desired state of affairs or of the challenge," Rumelt writes. "It skips over the annoying fact that no one has a clue as to how to get there."
- The example of when a doctor treats a patient can be used to guide good strategy. It consists of three stages: diagnosis of the problem, e.g. name the disease or pathology; the therapeutic approach taken then becomes the doctor's guiding policy; and finally, the doctor's prescriptions for diet, therapy and medication are the coherent actions to be taken.
- "The simplest business strategy is to use knowledge gleaned by sales and marketing specialists to affect capacity expansion or product design decisions—coordination across functions and knowledge bases" – Richard Rumelt
- Operation Desert Storm in 1991 was the US's counter-attack to Iraq's invasion of Kuwait. General Schwarzkopf received adulation for his strategy to misdirect Saddam Hussein's attention while he flanked his forces with a so-called 'left hook'. However, Rumelt points out that the strategy is foreshadowed in the US Army's own field manual titled 'Operations'. What was seen as a brilliant strategy by many in the US media and general population was sound, simple action based on the US's own field manuals. Often this is the essence of good strategy: simple in concept, focused on execution.
- There are two essential, frequently overlooked sources of advantage for organizations: 1) A coherent strategy—objectives that don't conflict with and do relate closely to one another. "A good strategy doesn't just draw on existing strength; it creates strength through the coherence of its design," which creates advantage; and 2) The creation of new strengths through subtle shifts in viewpoint: "An insightful reframing of a competitive situation can create whole new patterns of advantage and weakness."
- The tale of David versus Goliath can reveal that what often appears a weakness at first may in fact be a strength in certain situations. Through the list of David's strengths and weaknesses, one might presume his diminutive size is a weakness against the much stronger, much bigger Goliath, yet it was David's quick movement and skill with a slingshot, aimed at an uncovered part of Goliath's body, that secured his victory. Good strategy often lies in a leader's ability to see what others cannot. When such insight is realized, a reframe of a situation can enable fresh ways to think that can lead to unique approaches.
- Proximate objectives are central to any strategy. John F. Kennedy's goal to put a man on the moon by the end of the 1960s, while often touted as a lofty, audacious goal, was in fact a carefully chosen proximate objective—that is, one that the administration felt was within reach. The more dynamic and complex a situation, the more proximate objectives should be, because despite what many strategy writers espouse, your foresight grows worse as the complexity of a situation increases.
- There are four major hallmarks of bad strategy: 1) fluff, aka "a form of gibberish masquerading as strategic concepts or arguments"; 2) a failure to face the challenge; 3) mistaking goals for strategy, and 4) bad strategic objectives.
- Chain-link systems, beware: performance is limited by its weakest chain link. When there is a weak link, a chain is not made stronger by strengthening the other links. General Motors suffered from chain-link problems between 1980-2008. If knobs still fall off automobile dashboards and door panels continue to rattle, improving transmission will do little good. Improving fit and finish will do little good as long as the designers make sub-par designs. These are examples of chain-link systems: in many business situations, the whole is only as good as its weakest link. It is important for leaders to identify and address the worst problems afflicting a company.
- Chain-link systems, rejoice: Conversely, "the excellence achieved by a well-managed chain-link system is difficult to replicate," as can be seen with IKEA. The source of IKEA's dominance is in the integrated coordination of its policies, including giant retail stores in suburban neighborhoods (with free parking), catalogs that effectively replace a sales force, flat-pack furniture designs that reduce shipping and storage costs, and so on. To compete with IKEA, a company must implement each stage of the process, because each link complements the next.
- "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." Rumelt emphasizes the importance of creative design when putting together a strategy.
- Focused strategy: Crown Cork & Seal was a metal-can maker that despite its smaller size and higher costs compared to competitors, made far more money than any of them. This was because all of Crown's policies were coherent, focused on the goal of retaining the company's bargaining power. While its competitors supplied all customers (thus intensifying competition between said suppliers), Crown's policies were focused on short runs and remained adaptable to the sporadic customer. Because to shift production is expensive, most suppliers don't do it. But this is how Crown managed to succeed: it retained its leverage where others did not.
- The fetishization of growth: When Crown Cork & Seal's new CEO took over, he had ambitious plans to grow the business. During the ten years before Avery became CEO (1980-1989), revenues only grew at 3.1% each year. Crucially, however, it yielded an average return for shareholders of 18.5%. After Avery took over, Crown's rise in sales revenue was accompanied by a dramatic fall in return on capital (the ratio of profit to investments)—below 5%. Before he took over that figure was 15.3%. Performance had deteriorated because the new CEO chased growth for its own sake.
- Inertia and entropy: The inertia of Blockbuster's failure to give up on its retail stores meant that Netflix surpassed it and is now an industry leader. "Understanding the inertia of rivals may be just as vital as understanding your own strengths. … An organization's greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia." Organizational inertia usually falls into one of three categories: 1) the inertia of routine; 2) cultural inertia, and 3) inertia by proxy.
- Don't accept the first convenient solution to a problem: 1) consider the kernel of good strategy, as discussed above: diagnosis, guiding policy, and coherent action; 2) approach a problem with a 'problem-solution' view, simplify the process with the identification of a problem the organization hopes to solve; and 3) use the 'create-destroy' approach, which includes the attempt to destroy one's own ideas and solutions to test their robustness. (Rumelt recommends execs to imagine a panel of experts that scrutinizes your proposed solution.)
- Since Jen-Hsun Huang became the CEO of Nvidia in 1999, the company's shares increased 21-fold, which outperformed Apple over the next decade-plus. Nvidia's explosion is an example of great strategy, based on Rumelt's 'kernel' approach: the company diagnosed the problem, namely that 3D-graphics cards were the future; its guiding policy was the shift from a multi-media approach to a focus on improved graphics for PCs by the development of superior GPUs, and its action points were coherent and focused. More detail on this example can be found below.
- Execs should utilize leverage. Rumelt says leverage is the focus of attention and resources at the right moment towards a pivotal objective. There are three main considerations in the process of strategic leverage: 1) anticipation of challenges and opportunities, which often comes from the analysis of competitor behavior and market forces; 2) pivot points from which to base strategic focus, as in sources of strength for an organization relative to alternative approaches; and 3) the concentration of resources toward said points.
Useless 'strategy' has pervaded the psyche of organizations worldwide. Why? Because good strategy is hard work. From redundant vision-building to lazy law-of-attraction thinking, people do what makes them feel good, whether it helps their company or not. It's easy to declare wishfully; it's much harder to put together a plan to ensure execs' wishes are granted.
Good strategy cannot be stumbled upon by chance. Even some of the world's biggest organizations do strategy poorly, and incorrectly owe their success to their decision-making skill. Conversely, many organizations do strategy expertly, from which much can be learned. The 'kernel' of good strategy contains three main components: diagnosis of a problem; an appropriate guiding policy; and a set of coherent actions. If each stage isn't treated carefully, bad strategy is inevitable.
A paragon of organizational strategy, Richard Rumelt walks readers around the many landmines lying in wait should leaders misstep in their strategy. At its core, strategy is the identification of critical factors in a situation, then the skillful design of coordinated actions to deal with said factors. It requires awareness of one's resources and capabilities and a sharp understanding of one's industry and its surrounding space. Though there is much to learn, fundamentally strategy is very difficult leg work, not easily replaced with template-style vision building or any other form of pseudo-strategy.
Some ground rules
Rumelt first dispels what some believe constitutes strategy. It has little to do with ambition, leadership, vision or the economic logic of competition. The core of strategy work is "discovering the critical factors of a situation and designing a way of coordinating and focusing actions to deal with those factors."
Bad strategy is not only the absence of good strategy; bad strategy is itself a hodgepodge of misunderstood or misapplied concepts. Leaders often "mistakenly [treat] strategy work as an exercise into set goals rather than solve problems."
Steve Jobs and Apple
When Steve Jobs first returned to Apple, he didn't do much that was remarkable. Given Apple's shrinking market share (about 4% of the PC market when he rejoined), he did what any right-thinking strategist would do, according to Rumelt: he made a series of shrewd, necessary business choices that made sense.
Jobs made (necessary) cuts across the board, simplifying and focusing the company's processes. Jobs took 'focused action'—something that is all too rare in business, writes Rumelt. He first steadied the ship and then stood poised and waited for the perfect opportunity to explode the company into life again.
There were many technologies on the brink of launch, and Jobs knew that. Despite Windows-Intel's seemingly insurmountable market lead, Jobs knew that if he made the right decision at the right time, he had a chance to skyrocket Apple to the top. So he steadied the ship, simplified product selection, made tough but necessary decisions, and waited.
Jobs' strategy was focused, self-aware, and action-oriented throughout. "Good strategy itself is unexpected," Rumelt writes.
The Jobs formula
Jobs has an amusing, and incredibly simple, approach to business, which Rumelt, a foremost academic of organizational strategy, loves. It has four stages:
- imagine a product that is "insanely great"
- assemble a small team of the very best engineers and designers in the world
- make the product visually stunning and easy to use, pouring innovation into the user interface
- tell the world how cool and trendy the product is with innovative advertising.
Often the greatest business leaders, like Jobs, or Elon Musk, have simple approaches to strategy, even if technically they are complex. "Good strategies are usually 'corner solutions,'" Rumelt writes. "That is, they emphasize focus over compromise."
The curious case of Walmart
"Half of what alert [MBA students] learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance," Rumelt writes as he details the case of Wal-Mart in 1986. Rumelt's students would theorize why Wal-Mart did so well (computerised warehousing and trucking system, non-union, low admin expenses and so on), but no one considered why, if this was so simple, competitors didn't copy the formula. "Looking just at the actions of a winning firm, you see only part of the picture."
Kmart was the most notable failure. Eventually filing for bankruptcy in 2002, they focused on international expansion throughout the '70s and '80s, "ignoring Wal-Mart's innovations in logistics and its growing dominance of small-town discounting."
Overall, it is the coherence of structure, policy, and actions that made Wal-Mart so difficult to compete with. Isolated examples, such as the introduction of barcode scanners at checkout, are not enough; Kmart also had barcode scanners in the early '80s. The difference between it and Wal-Mart is coherence, a total strategy as opposed to "some imagined 'best practice' form. … The network, not the store, became Wal-Mart's basic unit of management."
Competitors must integrate the entire design of Wal-Mart's strategy to emulate its success. It is the coherence of its strategy that buttresses its advantage.
There is a difference between what Rumelt in 2007 coined 'bad strategy' and no strategy at all. There are four major hallmarks of bad strategy:
Fluff is "a form of gibberish masquerading as strategic concepts or arguments. It uses … words that are inflated and unnecessarily abstruse and apparently esoteric concepts to create the illusion of high-level thinking."
A humorous example of fluff in business, the likes of which are to be avoided at all costs: "Our fundamental strategy is one of customer-centric intermediation" – a major retail bank that Rumelt worked with as a consultant. In other words, its fundamental strategy was to be a bank.
Failure to face the challenge
Bad strategy fails to recognize or define the challenge, which makes overcoming it near impossible. DARPA, a US military research organization, explicitly outlines what governs its actions (a good example):
- "DARPA focuses its investments on this 'DARPA-hard' niche—a set of technical challenges that, if solved, will be of enormous benefit to US national security even if the risk of technical failure is high"
- DARPA changes its program managers every four to six years to limit 'empire building' and so that workers challenge previously held modes of operation
On this, Rumelt writes: "DARPA's strategy is more than a general direction. It includes specific policies that guide its everyday actions." DARPA has led to advancements in various fields, including stealth technology, GPS, nanotechnology, and much more.
Don't mistake goals for strategy
Statement of goals is not a strategy; a bad strategy often contains no action points.
Cookie-cutter annual 'strategic planning' accounts for most of corporate 'strategy': "Importantly, opportunities, challenges, and changes don't come along in nice annual packages. The need for true strategy work is episodic, not necessarily annual."
Bad strategic objectives: Strategic objectives must help an organization reach its desired end. Bad strategic objectives often fail to address critical issues or are impracticable. Rumelt suggests using the following definitions:
Goal: a word used to express overall values and desire. For example: The United States' foreign-policy goals of freedom, justice, and democracy
Objective: used to denote specific operational targets. For example: defeat the Taliban, rebuild infrastructure
Chen brothers: good goals plus good objectives
Chen Brothers, a distributor of specialty foods, was under threat by the growth of Whole Foods. Whole Foods was applying pressure on the smaller stores that Chen Brothers supplied.
Chen Brothers' stated goals were to 1) Grow profit; 2) be a good place to work; 3) be seen as the go-to distributor of organic foods.
Chen Brothers' stated objectives were to first categorize customers into three tiers; then, the most important objectives for each tier were as follows: the Top tier was to achieve shelf-space dominance, the middle tier was promotional parity or better, and the lowest tier was to grow market penetration.
But Chen Brothers spotted the threat of Whole Foods and adapted. The company kept its goals the same but adjusted its strategic objectives. Its strategy became the linking together of the various smaller stores that Chen Brothers supplied to, formulating a common brand that would be sold through Whole Foods. It formulated a dedicated Whole Foods team, combining production, marketing, advertising, financial expertise, and distribution under one roof.
Chen Brothers were successful in their attempts and were right about Whole Foods eventually dominating the specialty food market.
Two key takeaways from this example:
- Sharp focus on one or two crucial objectives is vital. In this case, the objective was adapted; the original strategy of distributing directly to merchants was no longer tenable given Whole Foods' ascendance. "Management had skilfully designed a 'way forward' that concentrated corporate attention on one or two important objectives," Rumelt writes.
- Industry-level awareness is essential. Chen Brothers identified Whole Foods as a force worthy of altering its own course. Whole Foods has stayed; Chen Brothers was right to adapt. Knowledge of your industry is a must for identifying opportunities and threats and adapting your strategy accordingly.
Common pathways to bad strategy
The three most common pathways to bad strategy begin with the unwillingness or inability to choose. In short, strategy decisions are difficult to make. Having the conviction and the foresight to make big, tough decisions is a necessary step when putting together a strategy.
Second, a template style strategy that includes fill-in-the-blanks template ideas like "The Vision", "The Mission", "The Values" and "The Strategies." This alone is not an actual "strategy."
Third, there is now a fetishization of quasi-religious, law-of-attraction thought in the US that has its roots in 19th-century Protestant Christian individualism. This "new thought" has had a knock-on impact on business strategy, which often leads to a shallow motivational mantra rather than a strategy for success.
The kernel of good strategy
Rumelt defines the 'kernel' of good strategy as "an effective mixture of thought and action with a basic underlying structure." It contains three elements: 1) A diagnosis, 2) a guiding policy, and 3) coherent actions.
A good "guiding policy" sets the stage for focused action. For example, George Kennan was the American diplomat in the USSR for more than a decade. He witnessed first-hand much of the terror for which the USSR was responsible. In 1946, he wrote the so-called 'long telegram', which explored the nature of Soviet ideology and power. He surmised that the Soviets positioned themselves explicitly against capitalism, and as such, Kennan's proposal was to treat the Soviet ideology as a virus that must be contained until it dies out.
This was a sliding-doors moment in foreign policy. If the challenge was diagnosed another way —for example, if the Soviet Union were enticed into the world community through a policy of engagement as opposed to containment— the Vietnam War, Berlin Airlift, Korean War, and many other horrific events might not have happened. Kennan's framing of the problem was absent of actionable objectives, and because of that, future American leaders struggled to turn the guiding policy into action.
A guiding policy can be an advantage in and of itself if it anticipates actions and reactions of others, reduces the complexity and ambiguity of a situation, by exploiting leverage, and by creating policies and actions that are coherent.
Nvidia: A+ strategy
Nvidia, a designer of 3D-graphics chips, had a rapid rise to the top, passing apparently stronger firms, including Intel, along the way in the 3D-graphics market. Since Jen-Hsun Huang became CEO in 1999 the company's shares increased 21-fold, even beating Apple during that same period.
Diagnosis: recognizing that 3D-graphics chips were the future of computing (given the almost infinite demand for graphics improvement that came from PC gaming).
Guiding policy: the shift from a holistic multi-media approach to a sharp focus on improved graphics for PCs through the development of superior graphics processing units (GPUs).
Action points: 1) The establishment of three separate development teams; 2) reducing the chance of delays in production/design by investing heavily in specific design simulation processes; 3) reducing process delays involving the lack of control over driver production, by developing a unified driver architecture (UDA). All Nvidia chips would use the same downloadable driver software, making everything run more smoothly at all stages (for both Nvidia and its customers).
Nvidia grew at a rate of about 67% per year from 2001 to 2007 and circumnavigated the design and production bottlenecks faced by companies like Intel. Despite similar growth to Nvidia during that period, Intel had the effects of its performance increases dulled by process issues. Nvidia, meanwhile, won consumers over with more frequent top-tier GPUs.
Where competitors like Silicon Graphics spread themselves too thin, Nvidia's strategy during that time was intuitive, focused, and executed well.
The Kennedy administration was careful not to claim the US would beat the Soviet Union to put up a manned orbiting lab, or an unmanned vehicle on the moon; these feats, the US concluded, would not be achieved before the Soviets did so because of the latter's superiority in heavy-lift rockets. Kennedy chose his goal of putting a crew on the moon very carefully, because he knew that it was not only possible but probable that they would beat the Soviet Union: "…the moon landing would require much larger rockets than either nation possessed, giving the United States an advantage because of its larger base of resources."
It is vital for execs to choose proximate objectives.
Design novel strategy
When you design a strategy, business leaders should consider three key stages:
- The anticipation of others' behavior
- The purposeful design of coordinated actions.
Many great strategies are more like bespoke designs than decisions. Seeing strategy as a 'choice' or a 'decision' may in fact be a poor reflection of its true nature; often leaders are faced with unique challenges, to which they are forced to formulate a novel response.
Sometimes an early advantage, such as Xerox's plain-paper-copying patent, can lead to inertia. Such a big market lead can lead to complacency when management doesn't believe it needs to stay abreast of new developments.
Applied to strategy, 'focus' has two meanings: first, it denotes the coordination of policies that produces extra power through interactions and overlapping effects. Second, as introduced by Michael Porter in Competitive Strategy, it denotes the application of that power to the right target.
The dynamics of change are important to consider when formulating strategy. Sensing waves of change in society, or in a given industry, is crucial.
As computer technology progressed in the 20th century, the focus shifted from interconnected individual computer systems—that were made and maintained by companies like IBM and DEC who specialized in integrated systems—to a series of component parts driven by the microprocessor. Now each part was 'smarter', and didn't require expertise of holistic integration. The industry had shifted, and IBM had to readjust.
Here are five 'guideposts' to read the shifting dynamics of an industry:
- Raise fixed costs: the simplest form of transition is triggered by a substantial increase in fixed costs, such as when traditional pistons were replaced by more advanced jet engines, which leaves but a few competitors left able to pay for the added cost
- Deregulation: this can enable previously stretched competitors to become more involved with profit-making
- Predictable biases: biases include an inability to predict a dip in sales after continuously rising all-time highs; an overprediction of current companies and business models; and the advice from consultants and analysts that businesses should copy whatever the current largest player does
- Incumbent responses: expect resistance from incumbent companies when dynamics start to shift
- Attractor states: this provides a sense of direction for the future evolution of an industry, but such attractor states might not come to be.
Inertia and entropy
Inertia and entropy, defined by Rumelt as resistance to change, are responsible for much bad strategy. The inertia of Blockbuster as it failed to abandon its retail stores meant that Netflix surpassed it and is now an industry leader. Understand the inertia of rivals, as it is vital as understanding your own strengths. As Rumelt wrote, "An organization's greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia."
Organizational inertia usually falls into one of three categories: 1) the inertia of routine; 2) cultural inertia, and 3) inertia by proxy.
Keep your head
If you can maintain composure and 'keep your head', even while those around you lose theirs, you are at a great advantage, Rumelt writes, who warns not to put blind faith in the stock market. He uses the example of the telecommunications industry and details a time around the beginning of the 21st century when everybody else had blind faith in the company Global Crossing, whose stock was grossly overvalued given the dynamics of its industry. This included the ease of entry for competitors, as it was not as hard as it seemed for others to do what Global Crossing was doing. In 2001, the company filed for bankruptcy amid an inability to keep up with bandwidth capacity — something that was clear to anyone that had looked close enough. Despite what everyone else thinks, conduct your own analyses, and do not be swayed by social herding. Keep your head.