Good Strategy/Bad Strategy: The difference and why it matters

You have most probably faced the following situation at work: At a time when business is faltering, management delivers a message, either through a company-wide email or at an all-hands meeting, that times are tough, competition has intensified, customers are waiting, and now is the time to meet the challenge by buckling up, working harder and delivering. If the situation is really dire, there will also be more or less hidden threats woven in, as to what will happen to those who don’t “go the distance” (or whatever crappy euphemism they come up with for “doesn’t stay around until 9 pm”). You know that this is all bullshit, that management is doing something wrong and trying to put the onus on you, but you can’t name it. Well, you were right: You were facing a case of management not doing its job. This book will explain to you, in excruciating detail, with copious examples, what they were doing wrong and what they should have been doing instead. Will this help with your stress level at work, with whether you get promoted, or find a better job? It probably won’t, but you never know. The reason management was compelled to engage in such an embarassing display was that they didn’t do the hard work of coming up with a decent strategy, making them necessarily go for a bogus version. Weirdly enough, the worst thing about Rumelt’s writing is the names he picks for these two appearances of strategy, decent and bogus: The names Good Strategy for actually thought out, deliberate strategy, and Bad Strategy for the fake version that derives from cliché and motivational writing, sound rather lazy. This choice of words also makes it way too easy to confuse strategy the concept with a correct formulation of one. At least the latter has the fitting acronym BS, so let’s go with GS and BS for the rest of this review.

We have heard the word strategy (together with others of the same ilk such as KPI, tactics, company culture, goals etc) get thrown around in an effort to sound businessy and managementy so often that we have become desensitized to it. The problem is, strategy is actually the central component of modern management, since it should be the one thing around which the actions of a company facing a challenge should be organized. According to Rumelt, in order for a piece of business thinking to count as Good Strategy, it has to have the following components, which together consitute the kernel of a strategy (p. 77):

• A diagnosis that defines or explains the nature of the challenge

• A guiding policy for dealing with the challenge

• A set of coherent actions that are designed to carry out the guiding policy

The diagnosis gives shape to the challenge faced by an organization. It should, like all successful acts of perspective-taking, reduce the complexity of the situation; it should offer the organization a framework within which the challenge, and the various moving parts in the environment in which it is operating, can be conceptualized and acted upon: “A diagnosis is a judgement about the meaning of facts” (p.81). The challenge is essentially an ill-structured problem; if there were a fool-proof way of analyzing the business environment in order to “make money”, everyone would be doing that. The act of giving it a name, and creating analogies with a known situation, galvanizes people and gives them a chance to shape their response. The source of the analogy depends on the domain. In international politics, for example, it is frequently a well-known historic occasion, but in business it’s simply a conceptual framing of the challenge. The idea that taking the right perspective can give you an advantage is well-known from pithy sayings like “a new point of view is worth 20 IQ points”, but Rumelt goes into much more detail to differentiate a good strategic diagnosis from other kinds. Just to give an example, a strategic diagnosis should “promise leverage over outcomes” (p. 81). This notion, that you can shape your thinking to prioritise for action, is an undercurrent that pops up in different guises in different points in the book; I will also come back to it later with a concrete example.

If the diagnosis is the what of the challenges faced by a company, the guiding policy is the how of tackling those challenges. Obviously, it cannot be something braindead like “Just do it”, or “outperform the competition”; there needs to be an aspect to it that uses the resources of the organization, competitive landscape and market dynamics to create advantage. As with the diagnosis, how to create such a policy is an ill-defined problem, requiring intellectual capacity and curiosity to solve. It’s worth quoting a long paragraph here, to highlight a topic I will come back to later, namely how difficult it is to create GS:

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.

Out of the diagnosis and the guiding policy, a set of coherent actions must be derived and executed with expediency, forcefullness, and most importantly, coordination. The point of the adjective coherent here is that the actions must be designed to achieve advantage as specified by the guiding policy, with their coordination over time and space serving to meet the challenge. The design and execution of coherent action is where the essential organizational challenge of strategy work becomes apparent. Coherent action necessitates choice, because it is impossible to carry out without focusing the organization’s resources, forcing the organization to change course, which in turn means exercising authority over it: “Strategy is visible as coordinated action imposed on a system…It is an exercise in centralized power, used to overcome the natural workings of a system” (p. 92). It is thus impossible, in most cases, to reorganize a company strategically while also keeping everyone content; toes have to be stepped on, people demoted or even fired, careers stalled, departments disbanded. Intel, which closed down its memory business, survived the onslaught of Japanese chip producers, becoming the foremost supplier of computer chips and one of the most successful tech companies. DEC, on the other hand, could not decide between abandoning its computer hardware or software business, ending up overtaken in both, and then sold for parts. This “violent” method of change management is obviously in stark contrast to “new age” management thinking, where inculcating people (and first of all yourself) with visions and then setting them free is supposed to lead to success. It is therefore impossible for Rumelt to avoid hard criticisms of management thinking gurus of this vein, such as Peter Singer: “Ascribing the success of Ford and Apple to a vision, shared at all levels, rather than pockets of outstanding competence, mixed with luck, is a radical distortion of history” (p. 74).

The bulk of Good Strategy, Bad Strategy is about methods and tools to create and execute a strategy with a higher chance of being successful. The reader should not come to this book expecting a general, theoretical strategy framework (which is done in Michael Porter’s Competitive Strategy, the standard textbook on business strategy). Rumelt instead illuminates the nature and workings of strategy in the real world by holding light to different aspects in the context of real-life examples. Obviously, some of these examples require management knowledge (such as the one on how Walmart succeeded), but most should be accessible to the average reader, and where specialized vocabulary or managerial lore is mentioned, Rumelt makes the effort to shortly explain it in the footnotes. Due to this “distributed” style of writing, important insights are spread all over the book. This however makes all sections eminently readable, and you never get the feeling you have to slog through the boring parts to get to the juicy ones. Through the various points and examples, the reader is offered a good glimpse of how action-focused strategy work has to be if it’s supposed to have any force. The aim of strategic thinking is not to write down a treatise on how success is unavoidable if this and that action is taken or choices are made; what you are trying to do is “take a strong position and create options”, as in a chess game. The example I found the most mind-opening in this respect was how the first specification of the lunar surface, required by the engineers for designing the lander, was created. The director responsible for this task, Phyliss Buwalda, had very limited knowledge of the surface, as no one was there yet, but had to give the engineers a starting position on which they could base their decisions: “It wasn’t that you couldn’t design a vehicle; it was that you couldn’t defend any one design against someone else’s story about the possible horrors of the lunar surface” (p. 109). Her team ended up providing a quite precise specification, looking a lot like a Southwestern desert. Her defence of this description, in the absence of strong reasons to pick this or that version, was that “if the lunar surface wouldn’t support a straightforward lander… the whole US program of landing a man there would be in deep trouble” (p.109). In the absence of precise information, she chose to reduce ambiguity, and present the engineers with a simpler, solvable problem, essentially prioritizing for action instead of correctness.

When Rumelt leaves the business domain and uses recent political history for demonstrations of strategy principles, the examples become a bit bitter for someone who was also involved with this history but from the other side of republican international politics, like myself. Strategy is of course a big topic in war, and Rumelt cannot but give examples from there, but when he talks about the Iraq war (starting p. 18) it’s go yankees all the way. He doesn’t consider the whole affair an ideological failure, where a cadre of ideologically driven warmongers lied and manipulated their way to an invasion, but a series of blunders where invalid technical strategical steps were applied, for example when an insurgency wasn’t “anticipated” (p. 99). Many people “anticipated” a deadly insurgency, of course, since Iran would suddenly have free hand to manipulate the Shiite population, controlling it like the “graphite rods in a nuclear plant”, as one commentator put it at the time. But of course all of those voices were drowned in the jingoistic cries of mainstream media and government sources. To his credit though, I have to mention that he does take a dig at George W. Bush for running his oil business aground.

There are, very generally stated, two central things about strategy that Rumelt is getting at from different perspectives. One is why it’s so difficult to create and execute Good Strategy, and the other is what happens when managers dodge the hard work and take short-cuts. Let’s start with the former, the hard things about strategy. Coming up with strategy, and executing it with decisiveness and momentum, requires giving things form, making decisions, changing organizations to adhere to this form, and keeping focus. These all require inventiveness and curiosity, because strategy is not a decision problem but a design problem. That is, the choices are not presented as a set of distinct and freely available options, but as an ill-structured situation that requires creative interpretation to be acted on: “To generate a strategy, one must put aside the comfort and security of pure deduction and luanch into the murkier waters of induction, analogy, judgement, and insight” (p. 245).

Not only creating a strategy, but also the analysis of a successful strategy is hard work that requires focus and diligence, as demonstrated by Rumelt in his discussions of MBA case study sessions. The problem here is twofold. On the one hand, it is not straightforward to figure out what the goals of parts of a strategy are, and how they integrate with each other to form a whole, since they are co-dependent with an interpretation of the state of affairs. The other is of psychological nature; we humans tend to stick to the first solution we find, especially when facing an ill-structured problem. It takes conscious effort to pry yourself away from this secure choice and keep on looking for other, more complex solutions. Thanks to his experiences in consulting and tutoring, Rumelt can touch upon such psychological aspects of creating and executing strategy. His points range from occasional notes on (organizational) psychology, such as his observation on impediments to taking action (“Indeed, we always hope that a brilliant insight or very clever design will allow us to accomplish several apparently conflicting objectives with a single stroke”, p. 90), to a whole chapter on “thinking about thinking”. This serious occupation with the psychology of the topic at hand reminded me of how Test-Driven Development is as much a book on developer psychology as it is about writing code.

The other core insight concerns what happens in the absence of Good Strategy, leading to, you guessed it, Bad Strategy (as mentioned, the naming is not optimal). When they are unable to put in the work of diving into the details of the industry and their business, due to lack of skills or laziness, managers tend to revert to clichées. The most famous of these is the “buckling up” approach, something I tried to dramatize in the opening paragraph. Rumelt rightly connects this attitude to the “one last push” thinking of the First World War, in which hundreds of thousands of men died because their leaders didn’t have a strategy to use their resources effectively, instead getting them slaughtered by throwing them at machine gun fire. As Rumelt puts it, “Motivation is an essential part of life and success, and a leader may justly ask for ‘one last push’, but the leader’s job is more than that. The job of the leader is also to create the conditions that will make that push effective, to have a strategy worthy of the effort called upon” (p. 49). The other type of clichée, already touched upon above, is “New Age” thinking, wherein wishful thinking and preaching of visions takes the place of the kernel of a strategy. In my experience, the “buckling up” approach follows New Age nonsense, since the latter is bound to be unsuccessful, and at some point the business is going down the drain, but there is still no strategy, and the only thing left is to implore the workforce to go at it harder. What both have in common, though is sloppy communication (what Rumelt calls “fluff”), goals that mascarade as a strategy, and absence of concrete, coordinated actions. Another reason for BS, either in concept or in execution, is the absence of choice. Choice, as alluded to above, is essential for creating a good kernel, serving to focus the resources of an organization. In its absence, leaders refrain from concrete policies and actions, instead having to resort to general statements that cover too many bases, and try to keep everyone happy. This again leads to fluff and unattainable goals.

I fear that I haven’t been able to do Rumelt’s book justice in this review. If you are interested in business strategy and management, this is one of those books you cannot avoid. Like the effort of coming up with a good strategy, this book deserves rereading, studying, and extracting new ideas and strategies from.

Related books

• Dealers of Lightning tells the story of Xerox’s search for a new competitive advantage. Xerox is well-known for its strategic blunders, and is mentioned in this book, too. Dealers of Lightning has extensive discussion of whether Xerox borked the technological advantage they built through Xerox Parc by messing up the strategy.

• Crossing the Chasm, the classic on high tech marketing, covers a lot of similar ground, with a focus on marketing early stage tech products.

• The Everything Store is a lot of the thinking discussed here applied by Jeff Bezos, a bit too successfully and aggresively one could even say.

Choice quotes

“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” (p. 55).

“Bad strategy is the active avoidance of the hard work of crafting a good strategy…pain or difficulty of choice” (p. 58)

“Strategy is scarcity’s child, and to have a strategy, rather than vague aspirations, is to choose one path and eschew others…When a strategy works, we tend to remember what was accomplished, not the possibilities that were painfully set aside” (p. 62)

“Any coherent strategy pushes resources toward some ends and away from others. These are the inevitable consequence of scarcity and change” (p. 63)

“A great deal of strategy work is trying ot figure out what is going on” (p.79).

“Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be. The proximate objective is guided by the 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” (p. 111).

“In design problems, where various elements must be arranged, adjusted and coordinated, there can be sharply peaked gains to getting combinations right and sharp costs to getting them wrong. A good strategy coordinates policies across activities to focus the competitive punch” (p. 131).

“You can choose how you will approach a problem; you can guide your own thinking about it… This personal skill is more important than any one so-called strategy concept, tool, matrix, or analytical framework. It is the ability to think about your own thinking, to make judgements about your judgements” (p. 267).