Good Strategy Bad Strategy by Richard Rumelt

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.

A leader’s most important responsibility is identifying the biggest challenges to forward progress and devising a coherent approach to overcoming them.

A good strategy does more than urge us forward toward a goal or vision. A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.

Bad strategy tends to skip over pesky details such as problems. It ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests.

Unlike a stand-alone decision or a goal, a strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge.

A good strategy includes a set of coherent actions. They are not “implementation” details; they are the punch in the strategy. A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.

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.

The guiding policy specifies the approach to dealing with the obstacles called out in the diagnosis. It is like a signpost, marking the direction forward but not defining the details of the trip. Coherent actions are feasible coordinated policies, resource commitments, and actions designed to carry out the guiding policy.

The most basic idea of strategy is the application of strength against weakness.

Or, if you prefer, strength applied to the most promising opportunity.

A good strategy doesn’t just draw on existing strength; it creates strength through the coherence of its design.

An insightful reframing of a competitive situation can create whole new patterns of advantage and weakness.

bad strategy crowds out good strategy.

A good strategy has coherence, coordinating actions, policies, and resources so as to accomplish an important end.

Most complex organizations spread rather than concentrate resources, acting to placate and pay off internal and external interests.

Good strategy requires leaders who are willing and able to say no to a wide variety of actions and interests. Strategy is at least as much about what an organization does not do as it is about what it does.

Looking at things from a different or fresh perspective can reveal new realms of advantage and opportunity as well as weakness and threat.

How someone can see what others have not, or what they have ignored, and thereby discover a pivotal objective and create an advantage, lies at the very edge of our understanding, something glimpsed only out of the corner of our minds.

Looking just at the actions of a winning firm, you see only part of the picture. Whenever an organization succeeds greatly, there is also, at the same time, either blocked or failed competition.

But the oft-forgotten cost of decentralization is lost coordination across units.

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

But the power of that strategy derived from their discovery of a different way of viewing competitive advantage—a shift from thinking about pure military capability to one of looking for ways to impose asymmetric costs on an opponent.

Bad strategy fails to recognize or define the challenge. When you cannot define the challenge, you cannot evaluate a strategy or improve it.

describing a destination is no substitute for developing a comprehensive roadmap

Bad strategy is long on goals and short on policy or action. It assumes that goals are all you need. It puts forward strategic objectives that are incoherent and, sometimes, totally impracticable. It uses high-sounding words and phrases to hide these failings.

Fluff is superficial restatement of the obvious combined with a generous sprinkling of buzzwords. Fluff masquerades as expertise, thought, and analysis.

If you accept that the phrase “information provider” describes a business strategy, then you are a prime customer for this sort of fluff.

A hallmark of true expertise and insight is making a complex subject understandable. A hallmark of mediocrity and bad strategy is unnecessary complexity—a flurry of fluff masking an absence of substance.

A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And if you cannot assess a strategy’s quality, you cannot reject a bad strategy or improve a good one.

If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have either a stretch goal, a budget, or a list of things you wish would happen.

A strategy is like a lever that magnifies force.

business competition is not just a battle of strength and wills; it is also a competition over insights and competencies.

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

The need for true strategy work is episodic, not necessarily annual.

Effective senior leaders don’t chase arbitrary goals. Rather, they decide which general goals should be pursued.

And they design the subgoals that various pieces of the organization work toward.

Indeed, the cutting edge of any strategy is the set of strategic objectives (subgoals) it lays out.

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.

A leader’s most important job is creating and constantly adjusting this strategic bridge between goals and objectives.

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.

Rather than focus on a few important items, the group sweeps the whole day’s collection into the “strategic plan.” Then, in recognition that it is a dog’s dinner, the label “long-term” is added so that none of

A good strategy defines a critical challenge. What is more, it builds a bridge between that challenge and action, between desire and immediate objectives that lie within grasp.

the objectives a good strategy sets should stand a good chance of being accomplished, given existing resources and competence.

The purpose of good strategy is to offer a potentially achievable way of surmounting a key challenge.

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.

Not miscalculation, bad strategy is the active avoidance of the hard work of crafting a good strategy.

A third pathway to bad strategy is New Thought—the belief that all you need to succeed is a positive mental attitude.

There is difficult psychological, political, and organizational work in saying “no” to whole worlds of hopes, dreams, and aspirations.

Any coherent strategy pushes resources toward some ends and away from others.

Strategies focus resources, energy, and attention on some objectives rather than others. Unless collective ruin is imminent, a change in strategy will make some people worse off.

Put differently, universal buy-in usually signals the absence of choice.

Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished.

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.

A great deal of strategy work is trying to figure out what is going on. Not just deciding what to do, but the more fundamental problem of comprehending the situation.

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.

An especially insightful diagnosis can transform one’s view of the situation, bringing a radically different perspective to bear.

An explicit diagnosis permits one to evaluate the rest of the strategy.

Hence, diagnosis is a judgment about the meanings of facts.

Furthermore, a good strategic diagnosis does more than explain a situation—it also defines a domain of action.

A diagnosis is generally denoted by metaphor, analogy, or reference to a diagnosis or framework that has already gained acceptance.

Good strategy is not just “what” you are trying to do. It is also “why” and “how” you are doing it.

A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage. Indeed, the heart of the matter in strategy is usually advantage. Just as a lever uses mechanical advantage to multiply force, strategic advantage multiplies the effectiveness of resources and/or actions.

A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than canceling one another out.

In many situations, the main impediment to action is the forlorn hope that certain painful choices or actions can be avoided—that the whole long list of hoped-for “priorities” can all be achieved.

It is the hard craft of strategy to decide which priority shall take precedence.

A strategy coordinates action to address a specific challenge. It is not defined by the pay grade of the person authorizing the action.

Strategic coordination, or coherence, is not ad hoc mutual adjustment. It is coherence imposed on a system by policy and design.

Strategy is visible as coordinated action imposed on a system. When I say strategy is “imposed,” I mean just that. It is an exercise in centralized power, used to overcome the natural workings of a system. This coordination is unnatural in the sense that it would not occur without the hand of strategy.

Good strategy and good organization lie in specializing on the right activities and imposing only the essential amount of coordination.

In general, strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.

To achieve leverage, the strategist must have insight into a pivot point that will magnify the effects of focused energy and resources.

A pivot point magnifies the effect of effort.

It is a natural or created imbalance in a situation, a place where a relatively small adjustment can unleash much larger pent-up forces.

A “threshold effect” exists when there is a critical level of effort necessary to affect the system.

In either case, the strategist can increase the perceived effectiveness of action by focusing effort on targets that will catch attention and sway opinion.

That is the power of concentration—of choosing an objective that can be decisively affected by the resources at hand.

One of a leader’s most powerful tools is the creation of a good proximate objective—one that is close enough at hand to be feasible. A proximate objective names a target that the organization can reasonably be expected to hit, even overwhelm.

Unfortunately, since Kennedy’s time, there has been an increased penchant for defining goals that no one really knows how to achieve and pretending that they are feasible.

This lunar surface specification absorbed much of the ambiguity in the situation, passing on to the designers a simpler problem. Not a problem easily solved, or to which a solution already existed, but a problem that was solvable.

An important duty of any leader is to absorb a large part of that complexity and ambiguity, passing on to the organization a simpler problem—one that is solvable. Many leaders fail badly at this responsibility, announcing ambitious goals without resolving a good chunk of ambiguity about the specific obstacles to be overcome. To take responsibility is more than a willingness to accept the blame. It is setting proximate objectives and handing the organization a problem it can actually solve.

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.

When there is a weak link, a chain is not made stronger by strengthening the other links.

Quality matters when quantity is an inadequate substitute.

If you have a special skill or insight at removing limiting factors, then you can be very successful.

That is, if you are in charge of one link of the chain, there is no point in investing resources in making your link better if other link managers are not.

The first logical problem in chain-link situations is to identify the bottlenecks,

In any organization there is always a managed tension between the need for decentralized autonomous action and the need for centralized direction and coordination.

Despite all these cautions, I believe that if you are careful about the level of abstraction, you can take certain fundamental lessons from military history and be the wiser for doing so.

However, what we do see in the story of Cannae are three aspects of strategy in bold relief, presented in their purest and most essential forms—premeditation, the anticipation of others’ behavior, and the purposeful design of coordinated actions.

definition, winging it is not a strategy.

A fundamental ingredient in a strategy is a judgment or anticipation concerning the thoughts and/or behavior of others.

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. In these cases, 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.

Business and corporate strategy deal with large-scale design-type problems. The greater the challenge, or the higher the performance sought, the more interactions have to be considered.

A good strategy coordinates policies across activities to focus the competitive punch.

Most of the work in systems design is figuring out the interactions, or trade-offs, as they were called. The moment you tried to optimize any one part, that choice immediately posed problems for other parts.

The lesson I took from systems engineering at JPL was that performance is the joint outcome of capability and clever design.

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.

If the organization has few resources, the challenge can be met only by clever, tight integration. On the other hand, if more resources are available, then less tight integration may be needed.7 Put differently, the greater the challenge, the greater the need for a good, coherent, design-type strategy.

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.

Thus, a strong resource position can obviate the need for sophisticated design-type strategy. If, instead, there is only a moderate resource position—perhaps a new product idea or a customer relationship—the challenge is to build a sensible and coherent strategy around that resource. Finally, the cleverest strategies, the ones we study down through the years, begin with very few strategic resources, obtaining their results through the adroit coordination of actions in time and across functions.

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. Study how Bill Gates outsmarted the giant IBM or how Nucor became a leader in the declining steel industry and you will learn design-type strategy.

Good strategy is design, and design is about fitting various pieces together so they work as a coherent whole.

If you are serious about strategy work, you must always do your own analysis.

The discipline of analysis is to not stop there, but to test that first insight against the evidence.

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.*

But in a commodity industry, as soon as the growth in demand slows down, the profits vanish for firms without competitive advantages.

You must press where you have advantages and side-step situations in which you do not. You must exploit your rivals’ weaknesses and avoid leading with your own.

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.

Despite all the emphasis on “competitive advantage” in the world of business strategy, you cannot expect to make money—to get wealthier—by simply having, owning, buying, or selling a competitive advantage.

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

Gilbreth’s lesson, still fresh today, is that incentives alone are not enough. One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing.

Whatever it is called, the underlying principle is that improvements come from reexamining the details of how work is done, not just from cost controls or incentives.

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.

One way to find fresh undefended high ground is by creating it yourself through pure innovation.

cost, competition, politics, and buyer perceptions. Important waves of change are like an earthquake, creating new high ground and leveling what had been high ground.

A leader’s job is to provide the insight, skill, and inventiveness that can harness that power to a purpose. You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground—become valuable and defensible—as the dynamics play out.

The challenge is not forecasting but understanding the past and present.

When change occurs, most people focus on the main effects—the spurts in growth of new types of products and the falling demand for others. You must dig beneath this surface reality to understand the forces underlying the main effect and develop a point of view about the second-order and derivative changes that have been set into motion.

The part of the Cisco router that is so hard to duplicate was the software. Well … no, it was the skill embodied in the software that was so hard to duplicate.

To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts.

Thus, software’s advantage comes from the rapidity of the software development cycle—the process of moving from concept to prototype and the process of finding and correcting errors.

If you can peer into the fog of change and see 10 percent more clearly than others see, then you may gain an edge.

The first guidepost demarks an industry transition induced by escalating fixed costs. The second calls out a transition created by deregulation. The third highlights predictable biases in forecasting. A fourth marks the need to properly assess incumbent response to change. And the fifth guidepost is the concept of an attractor state.

An industry attractor state describes how the industry “should” work in the light of technological forces and the structure of demand.

In business, inertia is an organization’s unwillingness or inability to adapt to changing circumstances. Even with change programs running at full throttle, it can take many years to alter a large company’s basic functioning.

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

An organization of some size and age rests on layer upon layer of impacted knowledge and experience, encapsulated in routines—the “way things are done.”

An organization’s standard routines and methods act to preserve old ways of categorizing and processing information.

The new competitive spirit was pure aggressiveness, unalloyed by craft.

Inertia due to obsolete or inappropriate routines can be fixed. The barriers are the perceptions of top management.

The problem at AT&T was not the competence of individuals but the culture—the work norms and mindsets.

The hard-won lesson was that a good product-market strategy is useless if important competencies, assumed present, are absent and their development is blocked by long-established culture.

The first step in breaking organizational culture inertia is simplification. This helps to eliminate the complex routines, processes, and hidden bargains among units that mask waste and inefficiency.

Changing a unit’s culture means changing its members’ work norms and work-related values.

In general, to change the group’s norms, the alpha member must be replaced by someone who expresses different norms and values.

Planning and planting a garden is always more interesting and stimulating than weeding it, but without constant weeding and maintenance the pattern that defines a garden—the imposition of a special order on nature—fades away and disappears.

Indeed, you cannot fully understand the value of the daily work of managers unless one accepts the general tendency of unmanaged human structures to become less ordered, less focused, and more blurred around the edges.

Without constant attention, the design decays.

Like a parent who must resist fourteen-year-olds’ pushing for beer at the party, corporate management’s job is to resist these imprecations and preserve the design. If the design becomes obsolete, management’s job is to create a new way of coordinating efforts so that the competitive energy is directed outward instead of inward.

This is the point where a bad strategist would have wrapped the concept of a faster development cycle in slogans about speed, power, and growth, and then sought to cash in by taking the company public. Instead, the Nvidia team designed a set of cohesive policies and actions to turn their guiding policy into reality.

With overlapping schedules, the three teams would deliver a new product every six months.

The benefit of a faster cycle is that the product will be best in class more often.

A surface reading of history makes it look like 3dfx did itself in with too many changes of direction. The deeper reality was that Nvidia’s carefully crafted fast-release cycle induced 3dfx’s less coordinated responses.

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, and attempts to engineer growth are exercises in magical thinking.

The most precious functional knowledge is proprietary, available only to your organization.

A new strategy is, in the language of science, a hypothesis, and its implementation is an experiment. As results appear, good leaders learn more about what does and doesn’t work and adjust their strategies accordingly.

In a changing world, a good strategy must have an entrepreneurial component. That is, it must embody some ideas or insights into new combinations of resources for dealing with new risks and opportunities.

The presumption that all important knowledge is already known, or available through consultation with authorities, deadens innovation.

A strategy is, like a scientific hypothesis, an educated prediction of how the world works.

The ultimate worth of a strategy is determined by its success, not its acceptability to a council of philosophers or a board of editors.

One of the most important resources a business can have is valuable privileged information—that is, knowing something that others do not.

This process of learning—hypothesis, data, anomaly, new hypothesis, data, and so on—is called scientific induction and is a critical element of every successful business.

Carnegie’s benefit was not from the list itself. It came from actually constructing the list.

Taylor’s assignment was to think through the intersection between what was important and what was actionable.

Making a list is a basic tool for overcoming our own cognitive limitations. The list itself counters forgetfulness. The act of making a list forces us to reflect on the relative urgency and importance of issues. And making a list of “things to do, now” rather than “things to worry about” forces us to resolve concerns into actions.

Our own myopia is the obstacle common to all strategic situations.

Being strategic is being less myopic—less shortsighted—than others. You must perceive and take into account what others do not, be they colleagues or rivals. Being less myopic is not the same as pretending you can see the future. You must work with the facts on the ground, not the vague outlines of the distant future. Whether it is insight into industry structures and trends, anticipating the actions and reactions of competitors, insight into your own competencies and resources, or stretching your own thinking to cover more of the bases and resist your own biases, being “strategic” largely means being less myopic than your undeliberative self.

Our instincts can often produce amazingly good judgments. But our instincts also tell us, incorrectly, that our instincts are always right.

It is the ability to think about your own thinking, to make judgments about your own judgments.

In strategy work, knowledge is necessary but not sufficient. There are many people with deep knowledge or experience who are poor at strategy.

To guide your own thinking in strategy work, you must cultivate three essential skills or habits. First, you must have a variety of tools for fighting your own myopia and for guiding your own attention. Second, you must develop the ability to question your own judgment. If your reasoning cannot withstand a vigorous attack, your strategy cannot be expected to stand in the face of real competition. Third, you must cultivate the habit of making and recording judgments so that you can improve.

The kernel is a list reminding us that a good strategy has, at a minimum, three essential components: a diagnosis of the situation, the choice of an overall guiding policy, and the design of coherent action.

When one has an initial insight into what to do about a challenging situation, it never occurs in the form of a full-blown strategy. Rather, the lightning of insight strikes in one of the three elements of the kernel.

There is nothing wrong with a localized insight. We have no real control over the process of insight and should be glad when it works at all.

The kernel reminds us to expand the scope of our thinking to include all three elements.

There is nothing deep about this process other than realizing that it can and should be done.

To gain this change in perspective, shift your attention from what is being done to why it is being done, from the directions chosen to the problems that these choices address.

Thinking through how a particular well-remembered expert might respond to a problem can be a richer source of criticism and advice than abstract theories or frameworks.

Listening to Teece’s and Jobs’s imaginary counsel, I am reminded that good strategies are usually “corner solutions.” That is, they emphasize focus over compromise. They focus on one aspect of the situation, not trying to be all things to all people.

In business and politics, and in many aspects of military strategy, most of the important judgments are about people, especially anticipating their actions and reactions.

Good judgment is hard to define and harder still to acquire. Certainly some part of good judgment seems to be innate, connected with having a balanced character and an understanding of other people. Still, I am convinced that judgment can be improved with practice. For that practice to be effective, you should first commit your judgments to writing.

The same principle applies to any meeting you attend. What issues do you expect to arise in the meeting? Who will take which position? Privately commit yourself in advance to some judgments about these issues, and you will have daily opportunities to learn, improve, and recalibrate your judgment.

Good strategy grows out of an independent and careful assessment of the situation, harnessing individual insight to carefully crafted purpose. Bad strategy follows the crowd, substituting popular slogans for insights.

People talk as if products have costs, but that is shorthand easily leading to confusion. Choices, not products, have costs.

An important virtue of a good leader is putting the situation in perspective and having cool-minded judgment.