Good Strategy / Bad Strategy

In Good Strategy Bad Strategy, Richard Rumelt argues that most organizations lack genuine strategy, substituting slogans, goals, and visions for the hard work of identifying challenges and designing coherent approaches to overcome them. He defines the essential structure of good strategy, which he calls the "kernel," as three elements: a diagnosis of the situation, a guiding policy for dealing with the challenge, and a set of coherent actions to carry out that policy. The book proceeds in three parts: the first distinguishes good strategy from bad, the second explores sources of strategic power, and the third offers guidance on thinking like a strategist.

Rumelt opens with the 1805 Battle of Trafalgar, where British admiral Lord Nelson, outnumbered 33 to 27, broke his fleet into two columns to strike the enemy line perpendicularly. Nelson judged that less-trained Franco-Spanish gunners could not compensate for the day's heavy swell. The British lost no ships while the enemy lost 22. This anchors the book's central claim: Good strategy identifies one or two critical factors and focuses action on them. Rumelt contrasts this with examples of bad strategy. Lehman Brothers CEO Richard Fuld decided in 2006 to increase risk appetite without mitigation, contributing to the firm's 2008 collapse. The U.S. military lacked a counterinsurgency approach in Iraq, one centered on protecting civilians, until General David Petraeus arrived in 2007.

In Part I, Rumelt argues that good strategy is surprising because so few organizations have one. When Steve Jobs returned to Apple as interim CEO in 1997, he shrank the company to a viable core, cutting fifteen desktop models to one, eliminating printers and peripherals, and moving manufacturing to Taiwan. This was basic business logic, yet unexpected because most organizations do not execute such focused action. Similarly, General Norman Schwarzkopf's Desert Storm strategy secretly shifted 250,000 soldiers west into the Iraqi desert, then wheeled them east to strike the Republican Guard's flank while diversionary attacks drew Iraqi forces southward. The maneuver was standard U.S. Army doctrine, yet it surprised nearly everyone.

Rumelt argues that good strategy also gains advantage from shifts in perspective. Sam Walton, the founder of Wal-Mart, did not break the rule that a discount store needs a population base of at least 100,000. He redefined "store" by making a regional network of 150 outlets, served by a central distribution hub, the basic unit. Competitor Kmart, whose decentralized model gave each store manager control over product lines and pricing, could not replicate this integrated system and filed for bankruptcy in 2002.

Rumelt identifies four hallmarks of bad strategy: fluff (buzzwords masquerading as analysis), failure to face the challenge, mistaking goals for strategy, and bad strategic objectives. International Harvester's 1979 plan projected growth but ignored grossly inefficient work organization and terrible labor relations; the company lost over $3 billion and shed 85,000 workers. Chad Logan, CEO of a graphics arts company, set targets of 20 percent revenue growth and 20 percent margins with no strategy for achieving them.

Rumelt identifies three pathways to bad strategy. The first is the inability to choose: The Digital Equipment Corporation produced a meaningless consensus statement in 1992 and was acquired by Compaq in 1998. The second is template-style strategy, which reduces thinking to a fill-in-the-blanks exercise of vision and mission. The third is New Thought, an American motivational philosophy holding that thinking about success creates success, traced from Prentice Mulford's Thoughts Are Things (1889) through Rhonda Byrne's The Secret (2007).

Part I concludes by explaining the kernel. George Kennan, author of the 1946 "long telegram," diagnosed Soviet ideology as resting on antagonism between communism and capitalism, recommending containment: a policy of vigilant counterforce to limit Soviet expansion. Rumelt illustrates guiding policy through Stephanie, a corner grocery store owner who reduces complexity by choosing to target busy professionals, a decision that coordinates dozens of operational choices. He illustrates coherent action through the president of a European Business Group who wants Pan-European products but is unwilling to take painful organizational steps until forced to confront the initiative's importance.

Part II explores sources of strategic power. Rumelt examines leverage, the focusing of energy at a pivotal moment. Pierre Wack and Ted Newland, planners at Shell International, anticipated the rise of the Organization of the Petroleum Exporting Countries (OPEC) by analyzing income and population patterns in oil-producing nations. Rumelt discusses proximate objectives, near-term targets feasible enough for an organization to hit. President Kennedy's moon-landing commitment illustrates the concept: Rocket scientist Wernher von Braun advised that the required performance leap gave the United States an advantage due to its resource base. IKEA's tightly coordinated policies, which have resisted imitation for over 50 years, illustrate the power of chain-link systems, where performance is limited by the weakest link and advantage flows from strengthening every link together.

Rumelt uses Hannibal's 216 B.C. victory at Cannae to argue that strategy is fundamentally a design problem. He uses Crown Cork & Seal to illustrate focus: Under CEO John Connelly, Crown targeted shorter production runs, reversing the bargaining dynamic that trapped larger can makers as captive suppliers. When successor William Avery pursued rapid acquisition-driven growth, Crown's stock collapsed from $55 to $5 between 1998 and 2001; annual shareholder returns dropped from 18.5 percent under Connelly to 2.4 percent after. Examining competitive advantage, Rumelt introduces a thought experiment: An imaginary machine producing $10 million in silver annually at zero cost yields only an ordinary return at fair value, because there is no way to increase its value. Advantage creates wealth only when actively deepened or extended.

Rumelt traces Cisco Systems' rise by riding four waves: the centrality of software, corporate networking, networking based on Internet Protocol (IP) standards, and the explosion of Internet use. He also examines inertia and entropy as forces that both threaten and create strategic opportunity. Continental Airlines after 1978 deregulation continued using a regulation-era fare model. AT&T after 1984 could not develop competitive products because Bell Labs' culture favored research over product development. At General Motors, Alfred Sloan's 1921 brand-pricing hierarchy eroded over decades as divisions blurred brand distinctions; GM declared bankruptcy in 2009. Part II concludes with Nvidia's rise in 3-D graphics chips. After its first product flopped, CEO Jen-Hsun Huang committed to a six-month release cycle through three overlapping development teams. When board maker Diamond Multimedia refused new arrangements, Nvidia went directly to Dell. Rival 3dfx spread resources too thin, and Intel could not adapt its longer development cycle.

Part III addresses strategic thinking. Rumelt argues that strategy resembles a scientific hypothesis that must be tested against evidence. He traces this idea through Galileo Galilei, the astronomer whose support for the Copernican model inspired the Enlightenment, and through Howard Schultz's founding of Starbucks. In Milan in 1983, Schultz noticed that expensive espresso was a mass-market product while Americans drank cheap coffee. Schultz iteratively localized the concept to American tastes. Rumelt presents techniques for sharpening strategic thinking, including using the kernel as a checklist, working backward from actions to problems, and maintaining a virtual panel of imagined experts. He concludes with warnings against social herding and the inside-view bias, the tendency to treat each situation as unique while ignoring historical parallels. Global Crossing illustrates these dangers: The company was valued at $38 billion despite commodity products and capacity vastly exceeding demand. Rumelt examines the 2008 financial crisis, identifying errors including engineering overreach, risk-seeking incentives, and social herding. Tracing recurring easy-credit booms through American history, he argues that the remedy is attention to data that contradicts crowd consensus.