Good Strategy, Bad Strategy

Good Strategy, Bad Strategy Plot Summary

Introduction

The conference room fell silent as the CEO finished his presentation. His ambitious five-year plan included doubling revenue, becoming the industry leader, and expanding into three new markets. When he asked for questions, an older board member leaned forward. "That's not a strategy," she said quietly. "Those are goals. What's your diagnosis of our challenge? What approach will you take to overcome it? And what coherent actions are you proposing?" The CEO looked stunned. He had plenty of aspirations but lacked the essential elements of good strategy. This moment captures the heart of what makes strategy effective. Many leaders mistake setting goals for creating strategy. They declare they'll "be number one" or "grow by 20% annually" without identifying the critical challenge they face or how they'll overcome it. But true strategy contains what the author calls "the kernel"—three essential elements working together: a diagnosis that defines the challenge, a guiding policy that addresses it, and coherent actions designed to carry out that policy. When these elements work together, they create a strategy that can overcome even the most formidable obstacles.

Chapter 1: The Kernel: Diagnosing Challenges and Designing Responses

In 1805, England faced a daunting challenge. Napoleon had conquered large portions of Europe and planned to invade England. To cross the Channel, he needed to wrest control of the sea from the English. Off the southwest coast of Spain, the French and Spanish combined fleet of thirty-three ships met the smaller British fleet of twenty-seven ships. The traditional naval tactics of the day called for opposing fleets to stay in line, firing broadsides at each other. But British admiral Lord Nelson had a strategic insight. He broke the British fleet into two columns and drove them perpendicularly into the Franco-Spanish line. The lead British ships took enormous risk, but Nelson correctly judged that the less-trained enemy gunners would struggle with the heavy swell that day. By the end of the Battle of Trafalgar, the French and Spanish had lost twenty-two ships—two-thirds of their fleet—while the British lost none. Nelson's challenge was that he was outnumbered. His strategy was to risk his lead ships to break the coherence of his enemy's fleet. With coherence lost, the more experienced English captains would prevail in the ensuing melee. Good strategy almost always looks this simple and obvious after the fact. It doesn't require a thick deck of PowerPoint slides to explain. Instead, a talented leader identifies the one or two critical pivot points that can multiply the effectiveness of effort, then focuses 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. This is what makes the kernel so powerful. The diagnosis names or explains the nature of the challenge, simplifying the often overwhelming complexity of reality. The guiding policy is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. And the coherent actions are steps that are coordinated with one another to support the guiding policy. When facing a complex situation, many leaders jump straight to action without properly diagnosing the challenge or developing a coherent approach. They mistake setting goals for creating strategy. But as Nelson demonstrated at Trafalgar, the power of strategy comes from focusing resources precisely where they can have the greatest impact.

Chapter 2: The Flaws of Bad Strategy: Ambition Without Direction

The conference room at the Department of Defense was packed with military brass and civilian leadership. The PowerPoint presentation on the new national security strategy had just concluded, and the room erupted in applause. The document contained soaring rhetoric about America's values, listed numerous goals across multiple domains, and emphasized the importance of leadership in a changing world. As people filed out, two veteran strategists lingered behind. "What did you think?" asked the first. "Honestly?" replied the second. "It's bad strategy. It doesn't identify our true challenges or make any real choices. It's just a list of things we wish would happen." Bad strategy has become surprisingly common across government, business, and non-profit sectors. It typically follows predictable patterns: it fails to recognize or define the challenge; it confuses goals with strategy; it presents strategic objectives as a list of "things to do"; and it contains fluff—empty slogans and buzzwords that masquerade as high-level thinking. Perhaps the most common form of bad strategy is the failure to face the challenge. Leaders often avoid naming and analyzing obstacles because it requires making difficult choices and acknowledging uncomfortable truths. Another hallmark of bad strategy is mistaking goals for strategy. Many organizations proudly announce they will "double revenue in five years" or "become the industry leader," as if stating the desired outcome constitutes a strategy. But this skips the critical question: how? Without a coherent approach to overcome obstacles, goals remain wishful thinking. The proliferation of bad strategy reflects deeper societal trends—our aversion to making hard choices, our preference for feeling good over facing reality, and the increasing pressure on leaders to accommodate competing demands rather than focus resources. When a company declares its strategy is to "be the industry leader" without specifying how it will overcome competitors or what distinctive value it will provide customers, it's offering ambition without direction. Similarly, when a school district announces its strategy is to "provide a world-class education" without addressing specific challenges like resource constraints or student needs, it's substituting aspiration for strategy. The antidote to bad strategy isn't more detailed planning or more ambitious goals. It's the discipline to identify the critical challenge, develop a coherent approach to overcome it, and design coordinated actions that concentrate resources where they can have the greatest impact. Good strategy requires leaders willing to say no to good ideas that don't address the core challenge, and to make difficult choices about where to focus limited resources.

Chapter 3: Strategic Design: Creating Advantage Through Coherence

When Steve Jobs returned to Apple in 1997, he found a company with too many products, confused positioning, and dwindling market share. At his first strategy meeting, he drew a simple two-by-two grid on a whiteboard. "Here's what we need," he said, placing "Consumer" and "Professional" across the top, and "Desktop" and "Portable" down the side. "Four great products. One for each quadrant. That's it." The room erupted in protests. Apple had dozens of products! Jobs listened briefly, then cut everyone off. "Deciding what not to do is as important as deciding what to do," he said firmly. Over the next two years, Apple eliminated 70% of its products and focused intensely on creating four exceptional ones. This clarity of design—this willingness to concentrate resources where they could create the most value—was the beginning of Apple's remarkable turnaround. Jobs understood that strategic advantage comes not from doing many things reasonably well, but from designing a system where multiple elements work together coherently. The simplification of Apple's product line allowed the company to focus its engineering talent, marketing resources, and management attention on creating truly distinctive offerings. This coherence extended beyond products to retail stores, the iTunes ecosystem, and eventually the App Store—all elements reinforcing each other in a coordinated system competitors found difficult to imitate. Crown Cork & Seal, a metal container manufacturer, demonstrated similar principles by designing its entire business around shorter production runs. While competitors pursued economies of scale through long production runs for major customers, Crown focused on smaller customers, rush orders, and specialty products. Its manufacturing facilities, technical assistance programs, and rapid response capabilities all reinforced this strategic choice, creating a coherent system that delivered higher margins and stronger customer relationships. The power of strategic design extends beyond business. When Hannibal defeated the Romans at Cannae in 216 BCE, his victory came not from superior numbers (he was outnumbered) or better weapons, but from designing a battle plan where each element—the weak center that would intentionally collapse, the strong wings that would hold, the cavalry positioned to attack from behind—worked together in a coordinated system that turned the Romans' numerical advantage against them. The essence of strategic design is coherence—the coordination of policies and actions to focus resources on a pivotal objective. This coherence doesn't happen by accident. It requires a deep understanding of how different elements interact, the discipline to say no to opportunities that don't fit, and the insight to recognize where concentrated effort can create the greatest impact. When these elements come together, they create advantage that competitors find difficult to imitate because the strength comes not from any single component but from how the pieces work together.

Chapter 4: Overcoming Inertia: Why Organizations Resist Change

The executive team of a major telecommunications company sat stunned as their industry analyst finished his presentation. "The Internet Protocol will completely transform your business model," he concluded. "Your current pricing structure for long-distance calls will collapse." The room was silent until the CFO spoke up. "That's ridiculous. Our network cost billions to build. People will always pay premium rates for quality service." Five years later, that same CFO was updating his resume as the company filed for bankruptcy. The company had failed not because they couldn't see change coming, but because they couldn't overcome their own inertia to respond effectively. Organizations, like physical objects, resist changes to their motion. This inertia takes multiple forms. First is the inertia of routine—the standardized processes and procedures that make organizations efficient but slow to adapt. Continental Airlines clung to pricing models designed for the regulated era long after deregulation had fundamentally changed the competitive landscape. These routines become embedded in systems, training programs, and performance metrics, making them difficult to change even when leaders recognize the need. The second form is cultural inertia. AT&T's Bell Labs was renowned for fundamental research but struggled to develop commercial products because its culture valued scientific breakthrough over practical application. When asked to create a simple demonstration program, Bell Labs engineers quoted three million dollars and two years—for something an outside programmer could build in three weeks. The organization's identity and values had become so intertwined with its traditional approach that even obvious improvements were rejected as "not how we do things here." Alongside inertia, organizations face entropy—the natural tendency toward disorder and loss of focus. Without constant attention, product lines proliferate, costs creep up, and strategic coherence dissolves. General Motors' once-clear brand hierarchy gradually blurred until, by 2008, it offered nine different vehicles at the same $25,500 price point across multiple brands. This entropy occurs because saying yes is easier than saying no, because different parts of the organization pursue their own interests, and because maintaining coherence requires ongoing discipline. Successful strategists understand both forces. They recognize that overcoming inertia requires more than just declaring change—it demands redesigning systems, realigning incentives, and sometimes replacing key personnel. And they fight entropy through regular pruning of products, processes, and initiatives that don't align with core strategic priorities. They understand that strategy isn't a one-time exercise but an ongoing process of diagnosis, design, and adaptation in the face of both internal resistance and external change.

Chapter 5: Thinking Like a Strategist: From Diagnosis to Action

The boardroom was silent as the CEO finished presenting his strategy for entering the Chinese market. The plan was comprehensive, with detailed financial projections, marketing analyses, and implementation timelines. When he asked for questions, a senior board member leaned forward. "Before we discuss specifics," she said, "I'd like to understand your diagnosis. What challenge are we trying to solve? What advantage do we bring? And why do we believe we can succeed where others have failed?" The CEO hesitated. He had done extensive analysis but had jumped straight to action plans without clearly articulating the fundamental strategic logic. This pattern is surprisingly common. Even experienced executives often struggle with the mental discipline required for strategic thinking. They confuse planning with strategy, produce detailed roadmaps without first establishing whether they're heading in the right direction. Strategic thinking begins with diagnosis—defining the nature of the challenge. When Howard Schultz visited Milan and observed the vibrant espresso bar culture, he recognized an anomaly: Americans were drinking poor-quality coffee in uninspiring environments despite their willingness to pay premium prices for quality experiences in other categories. This diagnosis led to his hypothesis that the Italian espresso experience could be successfully transplanted to America. But Schultz didn't stop with diagnosis. He tested his hypothesis by opening Il Giornale, a faithful reproduction of an Italian espresso bar. The initial results were promising but revealed needed adaptations. Americans wanted chairs, not just standing bars. They wanted nonfat milk options and takeout cups. By carefully observing customer responses and adjusting his approach, Schultz gradually evolved the concept into what would become Starbucks—a uniquely American interpretation of Italian coffee culture that created an entirely new category in the U.S. market. This scientific approach to strategy—forming hypotheses, testing them, and refining based on results—distinguishes effective strategists. They recognize that even brilliant insights must be tested against reality and modified based on feedback. They also understand that proprietary information generated through this process becomes a competitive advantage. Starbucks learned things about American coffee preferences through its operations that competitors couldn't easily access. Strategic thinking also requires overcoming cognitive biases. Most people grab the first plausible solution that comes to mind rather than exploring multiple approaches. They become attached to their initial diagnosis and resist evidence that might challenge it. Effective strategists deliberately create processes to counter these tendencies—using techniques like "create-destroy" where they actively try to disprove their own ideas, or assembling diverse perspectives to critique their thinking from different angles. They understand that the quality of their diagnosis determines the effectiveness of their strategy, and they invest time in truly understanding the situation before rushing to action.

Chapter 6: Case Studies: How Great Strategies Transformed Organizations

In 1993, a small company called Nvidia was founded by three engineers with a vision to revolutionize computer graphics. Their first product failed commercially, forcing them to rethink their entire approach. After careful diagnosis, they identified a critical insight: while computer processing power was increasing steadily according to Moore's Law, the demand for graphics processing was growing even faster, driven by increasingly realistic video games and computer-aided design. This diagnosis led to a guiding policy: Nvidia would focus exclusively on 3D graphics, embrace industry standards rather than proprietary approaches, and release new products on a six-month cycle—three times faster than the industry norm. To execute this policy, they designed a coherent set of actions: creating three separate development teams working on overlapping schedules, investing heavily in simulation and emulation tools to reduce design errors, and developing a unified driver architecture that simplified software updates. The results were remarkable. While competitors like 3dfx pursued mass-market strategies and Intel stuck to its traditional 18-24 month development cycle, Nvidia's rapid release strategy meant its chips were the best in class 83% of the time. By 2000, Nvidia had become the dominant player in high-performance graphics chips, and by 2007, Forbes named it "Company of the Year." Southwest Airlines provides another powerful example of strategic transformation. When Herb Kelleher and his team launched the airline, they diagnosed a fundamental challenge in the industry: the hub-and-spoke model created complexity, increased costs, and reduced aircraft utilization. Their guiding policy was to create a point-to-point airline with rapid turnarounds and consistent service. The coherent actions included using only one type of aircraft (Boeing 737s), avoiding congested major airports, eliminating assigned seating and meals, and fostering a distinctive culture that emphasized both efficiency and customer service. Each element reinforced the others: the single aircraft type simplified maintenance and training; the secondary airports reduced delays; the no-frills approach enabled faster turnarounds; and the culture ensured employees found ways to maintain both speed and service quality. While competitors tried to copy individual elements, they couldn't replicate the coherent system Southwest had created. The result was an airline that remained profitable for 35 consecutive years in an industry where bankruptcies were common. These case studies illustrate the power of good strategy in action. In each instance, leaders didn't just set ambitious goals; they diagnosed specific challenges, developed guiding policies that leveraged their strengths against those challenges, and designed coherent actions that reinforced each other. They also recognized and exploited their competitors' inertia—Nvidia taking advantage of Intel's unwillingness to change its development process, Southwest exploiting major carriers' commitment to their hub-and-spoke operations. The lesson is clear: good strategy isn't about predicting the future—it's about designing systems that can create and capture value under conditions of uncertainty and change.

Summary

The essence of good strategy lies not in elaborate planning documents or inspirational vision statements, but in the clear-eyed diagnosis of challenges and the coherent design of responses to those challenges. Throughout this journey, we've seen how effective strategists—from Lord Nelson at Trafalgar to Steve Jobs at Apple to the founders of Nvidia—approached strategy as a hypothesis to be tested rather than a plan to be followed. They recognized that the world is too complex and unpredictable for rigid blueprints, yet too demanding to navigate without a coherent approach. The most valuable insight may be that strategy is fundamentally about choice—about deciding what not to do as much as what to do. In a world that constantly pushes us toward more—more products, more markets, more initiatives—the discipline to focus resources where they can have the greatest impact becomes increasingly rare and valuable. As we face our own challenges, whether personal or professional, we would do well to remember the kernel: diagnose the critical challenge, establish a guiding policy that addresses it, and design coherent actions that concentrate effort where it matters most. By embracing this approach, we can move beyond wishful thinking and empty aspirations to create strategies that actually make a difference in the world.

About Author

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Richard P. Rumelt

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