Good Strategy / Bad Strategy: Learnings from a Strategy Guru

How to craft an effective strategy? The best answer is provided in Richard Rumelt's book 'Good Strategy / Bad Strategy'. This article explores Rumelt's core concepts and offers a few thoughts on his ideas and the book as a whole.

While many people frequently mention strategy, they often don't fully understand what the term means. This lack of understanding may be why 40% companies have no strategy at all and are adrift, and why only 35% of executives worldwide believe they have good strategies [according to a PwC survey].

Here are a few common questions that can help gauge an understanding of strategy:

• What exactly is strategy? And what is the difference between strategy, goals, and objectives?
• What defines a bad strategy?
• How to develop a good strategy?
• Why are some companies more successful than others in terms of strategy development?

The book Good Strategy / Bad Strategy by Richard Rumelt, a UCLA Anderson School of Management professor and one of the world’s most influential thinkers on strategy and management, provides clear answers to all these questions.

In this article, I will delve into Richard Rumelt's core concepts and offer a few thoughts on his ideas and the book as a whole:

• What exactly is a strategy
• What is a bad strategy
• What is a good strategy
  • Developing a good strategy
  • Sources of power used in a good strategy
• Practical advice for strategists by Richard Rumelt
• Book review & closing thoughts

What Exactly is a Strategy

Originating from the Greek word strategos, an elected general in ancient Athens, the term ‘strategy’ is now used not only in military context but also in many other domains. For example, currently Cambridge Dictionary defines strategy as:

“…a detailed plan for achieving success in situations such as war, politics, business, industry, or sport, or the skill of planning for such situations.”

Michael Porter, widely recognised as a founder of the modern strategy field, defines strategy mainly from marketing positioning perspective:

“Strategy is the creation of a unique and valuable position, involving a different set of activities.“

However, despite these definitions from dictionaries and influential management thinkers, in my opinion, none provide such as coherent and precise a definition as that of Richard Rumelt:

“Strategy is the application of strength against weakness. Or, strength applied to the most promising opportunity… A strategy, responsive to innovation and ambition, selects the path, identifying how, why, and where leadership and determination are to be applied... Strategy is how you overcome the obstacles that stand between where you are and what you want to achieve."

Rumelt further elaborates on his point, distinguishing strategy from mere goals. His explanation of strategy is a cornerstone that every leader and strategist should keep in mind when developing their strategies:

Executives who complain about “execution” problems have usually confused strategy with goal setting. When the “strategy” process is basically a game of setting performance goals - so market share and so much profit, so many students graduating high school, so many visitors to the museum - then there are remains a yawning gap between these ambitions and actions. Strategy is about how an organisation will move forward. Doing strategy is figuring out how to advance the organisation’s interests. Of course, a leader can set goals and delegate to others the job of figuring out what to do. But that is not strategy. If that is how the organisation runs, let’s skip the spin and be honest - call it goal setting.

Thus, it's useful to think of “goals” as big-picture values and desires, and "objectives" as specific tasks and targets. A leader’s key job is to build and adjust the strategic bridge between goals and objectives.

Bad Strategy

In 2007, Richard Rumelt coined the term ‘bad strategy’ during a seminar on national-security strategy in Washington, DC. By that time, Rumelt had accumulated extensive experience in the corporate world, where he observed a abundance of bad strategies. A few years after this seminar, he had the opportunity to discuss his concept of bad strategy with senior executives. As a result, Rumelt introduced four key hallmarks of bad strategy:

1. Fluff: restatement of the obvious combined with a generous sprinkling of buzzwords and apparently esoteric concepts which create the illusion of high level thinking and expertise. E.g. “The phrase ‘customer-centric intermediation’ is pure fluff. Pull off the fluffy covering and you have the superficial statement ‘Or bank’s fundamental strategy is being a bank’.”

2. Failure to face the challenge: when you cannot define the challenge, you cannot evaluate a strategy to improve it. If you fail to identify and analyse the obstacles, you don’t have a strategy. Instead, you have a stretch goal, a budget, or a list of things you wish would happen. E.g. Ritualised formalism for producing ‘strategic plans’ with the current fill-in-the-blanks template.

3. Mistaking goals for strategy: just statements of desire rather than plans for overcoming obstacles. E.g. “20/20 plan: Revenues are to grow at 20 percent a year, and the profit margin is to be 20 percent or higher … and pushing until we get there.”

4. Bad strategic objectives: when they fail to address critical issues or when they are impracticable. There are two forms of this problem:

• Dog’s dinner objectives: when there is a scrambled mess of things to accomplish, a long list of things to do, often mislabeled as strategies or objectives.
• Blue-sky objectives: a simple restatement of the desired state of affairs or of the challenge. It skips over the annoying fact that no one has a clue as how to get there.

In general, a bad strategy tends to be superficial, has internal inconsistencies, and fails to define or address the problem. Along with this, Rumelt mentions that bad strategy “generates a feeling of dull annoyance when you have to listen to it or read it”.

Why so much bad strategy?

To address the appearance of bad strategies, it is important to understand the root causes of their occurrence. In this connection, Richard Rumelt offers three most common reasons for bad strategy:

• Active avoidance of the hard work of crafting a good strategy and the inability to choose among competing values and parties.
• Template-style strategy: filling in the blanks with vision, mission, values, and strategies. This path offers a one-size-fits-all substitute for the hard work of analysis and coordinated action.
• "New Thought": the belief that all you need to succeed is just a positive mental attitude.

Good Strategy

Richard Rumelt characterises a good strategy as one that:

• ensures coherence, coordinating actions, policies, and resources so as to accomplish an important end,
• utilizes the scientific method,
• acknowledges the nature of challenge and presents a way to overcome it,
• concentrates energy and resources on one, or very few, pivotal objectives, the achievement of which will trigger a series of beneficial results.

However, the greatest value of this book is the knowledge of how to craft a good strategy, provided by an acknowledged expert in this field.

Developing a Good Strategy

The main concept, introduced in the book, is “The Kernel of Good Strategy” which consists of three elements: diagnosis, guiding policy and coherent actions. These elements determine the steps so as to develop a good strategy. In business, which usually dealing with change and competition, these steps are:

1. Diagnosis. Define and explain the specific structure of the challenge rather than simply naming performance goals.

2. Guiding policy. Choose an overall approach for dealing with the situation that builds on or creates some type of leverage or advantage. "Having lower costs, a better brand, a faster product-development cycle, more experience, more information about customers, and so on, can all be sources of advantage. This is all true but it is important to take a broader perspective. A good guiding policy itself can be a source of advantage."

3. Coherent actions. Configuration of actions and resource allocations that implement the chosen guiding policy. "Many people call the guiding policy “the strategy” and stop there. This is a mistake. Strategy is about action, about doing something. The kernel of a strategy must contain action. It does not need to point to all the actions that will be taken as events unfold, but there must be enough clarity about action to bring concepts down to earth. To have punch, actions should coordinate and build upon one another, focusing organisational energy."

In discussing the frequency of strategy development, Richard Rumelt points out that the need for true strategy work is episodic, and not necessarily annual.

Sources of Power Used in a Good Strategy

In very general terms, a good strategy works by harnessing power and applying it where it will have the greatest effect… A ‘good strategy’ is an approach that magnifies the effectiveness of actions by finding and using sources of power.

Richard Rumelt highlighted several fundamental sources of power (and trouble), selecting nine for their generality and freshness. This set includes:

1. Leverage: "Arises from a mixture of anticipation, insight into what is most pivotal in a situation, and making a concentrated application of effort”.

2. Proximate objectives: “A proximate objective names a target that the organisation can reasonably be expected to hit, even overwhelm.”

3. Chain-link systems: “A system has a chain-link logic when its performance is limited by its weakest subunit or “link”. When there is a weak link, a chain is not made stronger by strengthening the other links.” A notable example of using this power is IKEA.

4. Design: A design-type strategy is a smart way of arranging resources and actions to get ahead in difficult situations. When you have a fixed amount of resources, the tougher the competition, the more you need to cleverly and closely combine your resources and actions.

5. Focus: “At the core, strategy is about focus, and most complex organisations don’t focus their resources. Instead, they pursue multiple goals at once, not concentrating enough resources to achieve a breakthrough in any of them.”

6. Growth: Healthy growth results from having superior products and skills, which are the reward for successful innovation, cleverness, efficiency, and creativity.

7. Advantage: Advantage stems from the asymmetries among competitors, with each entity having strengths under particular conditions. To leverage this advantage, you must capitalise on your own strengths, exploit rivals' weaknesses and avoid leading with your own weaknesses. Increasing value requires a strategy to progress on at least 1 of 4 fronts:

• Deepening advantages: refers to widening the gap between buyer value and cost by either increasing value to buyers, reducing costs, or both. There are 2 reasons, why companies may fail to achieve such improvements:
  • management believes that improvements come from pressure, controls and incentives alone, while in reality, they mainly result from reexamining the details of how work is done (’reengineering’, or ‘business-process transformation’),
  • weak isolating mechanisms surround important methods.
• Broadening the extent of advantages: extension brings competitive advantage into new fields and new competitions. Some corporate resources can be put to good use in other products or markets. ‘Build on your strength’ is the most basic idea in corporate strategy.
• Creating higher demand for advantaged products or services: it is the scarce resources underlying the advantage that increase in value. Engineering higher demand for the services of scarce resources is another most basic business strategy.
• Strengthening isolating mechanisms: stronger patents, brand-name protections, and copyrights block easy replication and imitation by competitors. More complex forms of isolating mechanisms include reputations, commercial and social relationships, network effects, dramatic economies of scale, and tacit knowledge and skill gained through experience.

8. Dynamics (riding a dynamic wave of change): “…wind of change waves are largely exogenous and mostly beyond of control of any one organisation. … 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.”

• To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts.
• Richard Rumelt uses a few mental guideposts, each an important observation or thought approach, to help navigate the uncertainties of change:
  • Rising fixed costs: this forces the industry to consolidate because only the largest competitors can cover their fixed costs.
  • Deregulation: dramatically shifts competitive landscape due to major changes in government policy.
  • Predictable biases in forecasting:
    • people rarely predict that a business or economic trend will peak and then decline;
    • in all most all situations people anticipate a ‘battle of titans’: when faced with the wind of change market leaders will compete for supremacy, undercutting the middle-sized and smaller firms. However, this prediction is only sometimes correct;
    • prediction that future winners will be like current market leaders.
  • Incumbent response to change: “incumbent firms often resist changes that threatens to undermine the complex skills and valuable positions they have accumulated over time.”
  • Attractor state: this concept involves envisioning how the industry ‘should’ work in the wind of change.

9. Inertia & Entropy

Successful strategies often owe a great deal to the inertia and inefficiency of rivals.

An organisation’s greatest challenge may not be external threats and opportunities, but instead the effects of entropy and inertia.

Inertia: an organisation’s unwillingness or inability to adapt to changes. There are 3 types of organisational inertia:

• Inertia of routine: the way things are done (process, procedures and methods) continue to prevail even when the situation has changed.
• Cultural inertia: aspects of social behaviour that are stable and resistant to change.
• Inertia by proxy: company chooses not to respond to changes in order not to loose still-valuable streams of profit due to customers’ inertia.

Entropy: the degree of disorder increases in isolated systems. Entropy makes it necessary for leaders to constantly work on maintaining an organisation’s purpose, form, and methods even if there are no changes in strategy or competition.

Practical Advice for Strategists

In the concluding part of his book “Think Like a Strategist”, Richard Rumelt introduces various thought methods and techniques that can help in creating better strategies. I have highlighted the ones that I find most interesting.

Strategy is a hypothesis

• A good strategy is, in the end, a hypothesis about what will work. Not a wild theory, but an educated judgement.
• Asking for a strategy that is guaranteed to work is like asking a scientist for a hypothesis that is guaranteed to be true - it is a dumb request.
• To generate a strategy, one must put aside the comfort and security of pure deduction and launch into the murkier waters of induction, analogy, judgment, and isight.

Using your head

• Cultivate three essential skills or habits:
  • have a variety of tools for fighting your own myopia,
  • ability to question your own judgement,
  • habit of making and recording judgements.
• Create-destroy discipline: Invoke a “virtual panel of experts”, whose judgements you value and have an internal mental dialogue with them to both critique my own ideas and stimulate new ones.
• Practicing judgement: “A ski racer must judge the texture of the snow. In business and politics, most of the important judgements are about people, especially anticipating their actions and reactions”.

Keeping your head

Being independent, doubting, and paying attention to real-world data are crucial in pushing back against these biases:

• “Social herding presses us to think that everything is Ok (or not Ok) because everyone else is saying so”.
• “The inside view presses us to ignore the lessons of other times and other places, believing that our company, our nation, our new venture, or our era is different”.

Book Review & Closing Thoughts

Nowadays, beginning reading a business book often comes with the fear of wasting time on another book filled with lots of buzzwords and little substantial content. ‘Good Strategy / Bad Strategy’ by Richard Rumelt is certainly not one of those books.

Why I Liked This Book

• This book is an affordable way to gain valuable knowledge about strategy. As I mentioned in the introduction, the author answered all the essential questions about effective strategy and provides a clear framework.
• Richard Rumelt illustrates each concept with 70+ real-world examples from business, military history, politics, enhancing the understanding of his theories.
• Reading this book reinforces both strategic and critical thinking skills.
• The author uses clear and straightforward language, making it easy to grasp his points.

A Few Concerns

Critics of this book might ague that:

• One could say that each case study in the book is selectively used to confirm the author's point of view. Therefore, this approach is more like an educated guess than a research work, with results that are not guaranteed to be 100% valid.
• There is still the question of practically “How do I do this?” However, nobody will provide a magical recipe with a detailed step-by-step guide that works for everyone. Each case and situation is unique. In my opinion, understanding the core principles of a good strategy provided by Richard Rumelt, is sufficient to start creating or evaluating a strategy.

Closing Thoughts

If I were to describe this book in three words, they would be: ‘Straightforward. Honest. Real world.’

Based on my personal book rating system, where 1 is ‘Waste of time’ and 5 is ‘Must-read’, I would give this book a rating of 5 out of 5.

This article captures key learnings and ideas from Richard Rumelt about building an effective strategic framework. However, the full picture and inspiration can only be gained by reading the entire book from beginning to end. Highly recommended.

REFERENCES

1. "Our Leading Research on Strategy." Strategy&, PwC, www.strategyand.pwc.com/gx/en/unique-solutions/capabilities-driven-strategy/approach/research-on-strategy.html. Accessed 20 Jan. 2024.
2. Rumelt, Richard P. Good Strategy / Bad Strategy: The Difference and Why It Matters. CPI Group (UK) Ltd., 2017.
3. "Strategy." Encyclopaedia Britannica, www.britannica.com/topic/strategy-military. Accessed 20 Jan. 2024.
4. "Strategy." Cambridge Dictionary, www.dictionary.cambridge.org/dictionary/english/strategy. Accessed 20 Jan. 2024.
5. Porter, Michael E. "What Is Strategy? For Starters, It’s Not the Same as Operational Effectiveness." Harvard Business Review, Nov.-Dec. 1996, www.hbr.org/1996/11/what-is-strategy.