Below, I summarize the book titled “Good Strategy, Bad Strategy: The Difference and Why It Matters.”
The purpose of the book is to show the differences between good strategy and bad strategy and demonstrate how to create a good strategy. In general, people think strategy what an organization does, and change your attention from what is being done to why it is being done, from the directions chosen to the problems that these choices address. Good strategy is both what you are trying to do and why and how you are doing it.
Good strategy looks simple and obvious and does not need a bunch of PowerPoint slides to define it. Strategy is not created via “strategic management” tool matrix, chart, triangle, or fill-in-the-blanks scheme. On the contrary, a leader discovers one or two critical issues in the situation that can increase the effectiveness of effort and then concentrates action and resources on them.
Strategy is not ambition, leadership, vision, planning, or the economic logic of competition. In other words, the kernel of strategy does not include visions, hierarchies of goals and objectives, references to time span or scope, and ideas about adaptation and change. Strategy is identifying critical factors in a situation and devising a way of coordinating and focusing actions to manage those factors.
You have no strategy if you do not identify and analyze the obstacles. Rumelt criticizes that current fill-in-the-blanks strategy template starts with a statement of a vision, then a mission statement or list of core values, then a list of strategic goals, then for each goal a list of strategies, and then in the end list of initiatives.
These strategic plans are bad because they don’t identify or understand the fundamental problems and obstacles that stand in the organization’s way. These don’t capture strategic thinking.
Replacing amorphous goals with a true problem-solving strategy. Strategy is a well-integrated response to an important challenge different from a standalone decision or a goal. A strategy is a well-integrated set of analyses, concepts, policies, arguments, and actions to deal with the challenge.
A good strategy has 3 essential elements: a diagnosis, a guiding policy, and coherent action.
Diagnosis
A diagnosis defines the nature of a challenge. Discovering difficulties and obstacles provides a much clearer picture of the pattern of existing and possible strategies. Many tries at creating a strategy do not have a good diagnosis.
A good diagnosis makes it easier to understand the complexity of reality by recognizing certain part of the situation as critical.
Diagnosis may not be proven to be correct – each is a judgment about which issue is greatest in importance.
Thus, diagnosis is a judgment about the meanings of facts. Diagnosis has to be an educated guess as to what is going on in the situation, specifically about what’s critically important. The discipline of analysis is to not stop there but to test that first insight against the evidence.
The Guiding Policy.
A guiding policy for managing the challenge. This is an all-inclusive approach chosen to overcome the obstacles discovered in the diagnosis.
The guiding policy defines clearly the approach to manage the challenges identified in the diagnosis. It is like a signpost, marking the direction forward, however not specifying the details of the trip.
The guiding policy gives the main points of a comprehensive approach for overcoming the challenges found by the diagnosis. It is “guiding” because it channels action in specific directions without defining specifically what shall be done.
The guiding policy directs and limits action without completely defining its content, similar to the guardrails on a highway.
Goals, visions, or images of desirable end states are not good guiding policies. The guiding policies are a way of dealing with the situation and exclude a vast array of possible actions.
A good guiding policy handles the obstacles recognized in the diagnosis by creating sources of advantage. The essence of strategy is usually advantage. Similar to leverage, which uses mechanical advantage to multiply force, strategic advantage multiple effectiveness of resources and /or actions.
Modern treatments of competitive strategy start with detailed descriptions of specific sources of competitive advantage. Having a lower cost, a better brand, a faster product development cycle, more experience, and more information about customers, can all be sources of advantage.
However, it is imperative to take a broader perspective (How does someone take a broader perspective?). A good guiding policy itself can be a source of advantage (How?).
A guiding policy develops advantage by expecting the actions and reactions of others, by minimizing complexity and ambiguity in the situation by taking advantage of the leverage inherent in concentrating effort on an important or decisive element of the situation, and by devising policies and actions that are coherent, each building on the other rather than canceling one another out.
Coherent Action
A set of coherent actions that are created to execute the guiding policy. These are steps that are intentionally matched with one another to work together in recruiting the guiding policy. Coherent actions are possible coordinated policies, resource commitments, and actions devised to execute the guiding policy.
Doing something, action is strategy. Strategy is mainly about deciding what is truly important and focusing resources and actions on that objective. It is not each discipline because focusing on one thing ignores the other.
The actions with the essence of strategy should be logical and orderly and consistent relation of parts. The resource deployments, policies, and maneuvers that are undertaken should be consistent. All actions operating together in synch as a unit provide the most basic source of leverage or advantage available in strategy.
A strategy matches action to address a specific challenge.
Most organizations don’t create focused strategies. Instead, they create lists of desirable outcomes and, simultaneously, give little or no attention to the need for competence in coordinating and concentrating their resources. Strategy is about what an organization does not do, as it is about what it does. Good strategy is about saying no to a wide variety of actions and interests.
No complex charts or graphs, no abstruse formula, no acronym jammed buzz speak: just an idea and some pointers to how it might be used – the great simplicity of the discovery of hidden power in a situation. Utilize your relative advantage to increase the cost on the competitors and make competing with you difficult.
Bad Strategy
To find a bad strategy, look for four things.
Fluff. Fluff is a form of nonsense masking as strategic concepts or arguments. It uses words that are difficult to understand and esoteric concepts to create deception of high-level thinking.
Failure to face the challenge. Bad strategy does not recognize or define the challenge. If you cannot define the challenge, you cannot form a critical opinion of a strategy or make it better.
Mistaking goals for strategy. Instead of creating plans for overcoming obstacles, bad strategies are just statements of desire.
Bad strategic objectives. Goal is overall values and desires and objectives means specific operational targets. Strategy is to transform vague overall goals into a coherent set of actionable objectives. If strategic objectives don’t address critical issues or they are not practicable, then they are bad.
Strategic objectives should deal with a specific process or accomplishment, for example, halving the time it takes to respond to a customer or getting work from several Fortune 500 corporations.
Annual exercises that are called strategic planning don’t provide with a pathway to real higher performance. To gain higher performance, leaders must discover the critical obstacles to forward progress and then create a well-integrated approach to overcoming them.
This may necessitate product innovation, novel approaches to distribution, or change in organizational structure. Or it may take advantage of insights into the implications of changes in the environment – in technology, consumer tastes, laws, resource prices, or competitive behavior.
The leader is responsible for deciding which of these pathways will be the most beneficial and use the organization’s knowledge, resources, and energy to that end. Opportunities, challenges, and changes don’t happen in nice annual packages. The need for real strategy work is occasional, not necessarily annual.
Good strategy functions by focusing energy and resources on one or a very few important objectives whose accomplishment will lead to a cascade of favorable outcomes. If there are many things to accomplish, then it results in bad strategic objectives.
Bad Strategy
A long list of things to do, defined as strategies or objectives, is not a strategy. It is just a list of things to do. Those lists come out of planning meetings in which different stakeholders suggest things to be done. Instead of focusing on a few important items, they bring everything together they want to see done into a strategic plan.
A good strategy not only defines a critical challenge but also builds a bridge between that challenge and action, between desire and immediate objectives that lie within reach. As a result, the objectives a good strategy sets should have a good chance of being accomplished, with existing resources and competence, if a leader identifies the key challenge and suggests an approach to handle the challenge.
But if the consequent strategic objectives are blue sky (unrealistic, out of reach), a little has been achieved. The purpose of a good strategy is to offer a potentially achievable way of overcoming a key challenge.
Why so much bad strategy?
Bad strategy is the deliberate avoidance of demanding work of creating a good strategy. Bad strategy comes out when leaders are reluctant or lack the ability to make choices between competing values and parties. Another reason for bad strategy is the siren song of template style strategy – filling in the blanks with vision, mission, values, and strategies.
The template style strategy offers a one-size-fits-all substitute for demanding work of analysis and coordinated action. A third reason for bad strategy is New – Thought – the belief that all one needs to succeed is a positive mental attitude.
Putting it together.
The kernel of good strategy is diagnosis, guiding policy, and coherent actions. Building blocks of good strategy, intelligent anticipation, a guiding policy that reduced complexity, the power of design, focus, using advantage, dynamic wave of change, and inertia and entropy.
The power of design. Strategists are designers, not decision-makers. It is generally accepted that a strategy is a choice or a decision. These words conjure someone considering a list of alternatives and then selecting one of them. Formal theory of decisions suggests making a choice by identifying alternative actions, valuing outcomes, and assessing the probability of events. Rarely, you have a clear set of alternatives.
Intelligent anticipation. Premeditation, the anticipation of others’ behavior, and the purposeful design of coordinated actions. A fundamental element in a strategy is judgment or anticipation regarding the thoughts and/or behavior of others. Buyer demand and competitive reactions are the key anticipations, anticipation, considering the habits, preferences, and policies of others, and various inertia and constraints on change.
Focus. Focusing minds, energy, and action strengths strategy. That focus directed at the right moment onto a significant objective can produce a cascade of favorable outcomes. A pivot point increases the effect of effort.
It is a natural or created imbalance in a situation, a place where a relatively small adjustment can release much larger restrained forces. Focusing efforts on fewer, or more limited objectives generates larger payoffs.
Proximate objective is a target the organization can achieve or succeed. Objective’s feasibility. A simpler problem that is solvable. The strategic objective must be more proximate when the situation is more uncertain and dynamic. Only one objective is feasible. What one single feasible objective, when accomplished, would make the biggest difference? Make more proximate objective – more like tasks and less like goals.
Using advantage. Improvements come from examining the details of how work is done, not only from cost controls or incentives. Build on your strengths, skills, and resources that will create a competitive advantage.
Deepening advantage is about increasing value to buyers, reducing costs, or both, the gap between buyer value and cost. You have a competitive advantage if you can produce at a lower cost, or if you can deliver more perceived value, or a mix of the two than competitors, then you have a competitive advantage.
Healthy growth is the outcome of the growing demand for special capabilities or expanded capabilities. It is the result of a firm having higher quality products and skills. It is the payoff for successful innovation, cleverness, efficiency, and creativity.
A strategic resource is fairly long-lasting that has been built, created over time, designed by a company and that competitors cannot copy without suffering a net economic loss. Existing resources can both be a lever for the creation of new resources and be an impediment/obstruction to innovation.
Dynamic wave of change. Try to understand forces that are changing the structure of the industry. Guideposts for industry transitions are escalating fixed costs, deregulation, predictable biases in forecasting, incumbent response to change, and attractor state.
Inertia and Entropy. Inertia is an organization’s noncompliance or inability to adapt to changing circumstances. Organizations become less organized and focused if they are managed weakly. Entropy forces leaders to maintain an organization’s purpose, form, and methods, even if there are no changes in strategy or competition.
Thinking like a strategist.
To create a strategy, one needs lots of knowledge about the specifics. However, having deep knowledge is not sufficient, one needs to build the three essential skills. First, tools for dealing with one’s own myopia to guide his attention. Our own myopia is a challenge.
One should look into how he arrives at recommendations, insights, or responses to the challenge. Asking, How did I arrive at my recommendations? How did I come up with my response to the challenge? How did I arrive at that insight? These questions can be helpful in dealing with one’s myopia. In addition, go back and consider rethinking the initial identification of a key problem area.
Create a better diagnosis of the situation before getting into recommendations. Investigate more than one solution to a problem.
Second, the ability to question one’s own judgment. Revisit the judgment and generate alternative views, evaluate them in light of one another. A new alternative should derive from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives.
To create higher-quality alternatives, one must destroy any existing alternatives and make their fault lines and internal conditions visible. A panel of experts, getting their opinion. What is wrong with this approach to the situation? What would you do in this case? Most people are bad at making many kinds of judgments about the probability of events, about one’s competence compared to others, and about cause-and-effect relationships.
In reasoning about natural data, people usually see patterns where there is only randomness, see causes rather than associations, and ignore information that conflicts with maintained theory.
Most of the crucial judgments are about people, anticipating their actions and reactions. Judgment starts with knowing yourself, your abilities, and your biases. Then it goes to knowing other individuals.
To destroy circular logic, one must look at knowledge and principles that are more deeply established than current popular opinion. The inside view defines the fact that people see themselves and their group, their project, their company, or their nation as special and different.
Inside view is a propensity to ignore relevant data to believe that “this case is different.” Push back against social herding and inside view by paying attention to real-world data that refutes the echo chamber chanting of the crowd- and by learning the lessons taught by history and by other people in other places.
A reasoning that can stand vigorous attack can also stand in the face of actual competition. The ability to think about your own thinking, and to make judgments about your own judgments is a skill which is more important than any one so-called strategy concept, tool, matrix, or analytical framework.
Third, having the habit of making and recording judgments to improve.
Good strategy is established on functional knowledge about what works, what does not, and why. A strategy is a hypothesis, and its execution is an experiment. Strategy is a living experiment.
In science, you first test a hypothesis against known laws and experience. Is the new hypothesis contradicted by basic principles or by the results of past experiments? If the hypothesis passes the test, the scientist has to create a real-world test an experiment to see how well the hypothesis stands up.
Likewise, a new strategic insight is tested against well-established principles and against accumulated knowledge about the business. If it passes those challenges, the next phase would be trying it out and see what happens.
In a changing world, strategy must have an entrepreneurial part. To create a strategy, one must use induction, analogy, judgment, and insight, and set aside the comfort and security of pure deduction. A scientist tests a belief by experiment or by the analysis of real-world data. The idea of refutation is the centerpiece of scientific thinking. Good strategy work is empirical and pragmatic.
To sum up, a good strategy is not vision, mission, or hierarchies of goals and objectives. A good strategy is simple and does not require PowerPoint slides complex charts, or metrics. A good strategy is made of diagnosis, guiding policy, and coherent action. To create a good strategy, one has to think scientifically deal with its own myopia, question one’s own judgment, and have the habits of making and recording judgments to improve.