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Article citation: Richard P. Rumelt, (2012) "Good Strategy/Bad Strategy: The Difference and Why It Matters", Strategic Direction, Vol. 28 Iss: 8, 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.
According to Rumelt, good strategy “is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a high-stakes challenge”. 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:
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.
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.
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.”
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. Master strategists, Rumelt says, are not decision-makers but designers.
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.
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.
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.
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.
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.
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. 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.
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.
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.
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.