Book Review of Good Strategy, Bad Strategy by Richard Rumelt

Good Strategy, Bad Strategy by UCLA Anderson professor Richard Rumelt is by far my favorite book on strategy.  In this post I’ll explain why I love this book, provide an overview of Rumelt’s core concepts, and offer a few thoughts on (and dare I say an enhancement to) his strategy framework.

Why I Love This Book
I love this book for two reasons.  First, he skillfully eviscerates all of the garbage that far too often passes for strategy in corporate America.  It’s borderline therapeutic to watch him tear down case after case of junk that is pitched by executives and consultants as strategy.  His four telltales:

• Fluff.  Corporate doublespeak that,“uses ‘Sunday’ words and apparently esoteric concepts to create the illusion of high-level thinking.”
• Failure to face the challenge.  “Bad strategy fails to recognize of define the challenge.  If you can’t define the challenge, you cannot evaluate a strategy.”
• Mistaking goals for strategy.  Here at the center of the OKR universe, it’s common to find companies with lists of “statements of desire” rather than “plans for overcoming obstacles.” [1]
• Bad strategic objectives.  “Strategic objectives are ‘bad’ when they fail to address critical issues or when they are impracticable.”

His dismemberment of bad strategy is so surgical and so deft that it alone is worth the price of the book.

The second thing I love about this book is focus.  As my high school Latin teacher, Mr. Maddaloni, always reminded us:  focus is singular [2].  Most companies — often due to the group consensus process used to create strategy — fail at rising to the challenge of picking and end up with multiple, strategic foci instead of a single, strategic focus [3].

This can reflect avoidance of a dead moose issue threatening the company or simply lead to a laundry list of incoherent and unattainable goals.  Either way, Rumelt’s approach sidesteps this problem by forcing the company to focus on a single issue.

The Core Concepts of Good Strategy, Bad Strategy
Per Rumelt, “good strategy is coherent action backed up by an argument, an effective mixture of thought and action with a basic underlying structure called the kernel.”

Excerpt:

The kernel of a strategy contains three elements:

A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.

A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.

A set of coherent actions that are designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

This is brilliant in its simplicity and in its recognition that a huge part of strategy is an accurate and insightful simplification of the situation:  determining which elements are essential and boiling it down to a short, simple narrative as to “what’s going on”  and ergo what to do about it.

I use a trick to indirectly make this point when I’m in a strategy meeting.  At some point the discussion inevitably fades into, “argh, this is so complicated, there are so, so many things to consider” and room is lost to a sense of hopelessness.  I’ll then ask one of the participants, “can you tell me the story of the last company you worked at?”

You’ll usually hear something like this in response:

• “We pushed too far up market without the product to support it.”
• “We got caught in a squeeze between a high-end enterprise vendor and low-end velocity disrupter.”
• “We got out-marketed by a company with more capital and a more aggressive team.”

I’ll then say, “why do you suppose it’s so easy for us to tell short, simple stories about our prior employers but nearly impossible to make one about us?  What do you think we’ll say in four years about this company?”  It’s the same idea as Rumelt’s — to force simplification of the story to its core narrative and to focus on one thing in the diagnosis.  We do it naturally when looking at the past.  In the present, we resist it like the plague.

I believe that 80% of strategy is the diagnosis — and sometimes the diagnosis simply can’t get made through a group process, but instead has to be decided by the CEO [4] [5].  The other half, to paraphrase Yogi Berra, is the guiding policy and coherent actions.

Thoughts on the Framework
While I love the fact that Rumelt forces executives to diagnose the single most important challenge facing the company — and avoid creating lists of many such challenges — doing so is quite difficult for both good and bad reasons.

The good reason is that it forces “table stakes” conversations, well, “off the table.”  If it’s a discussion about something that everyone in the industry must do (e.g., build quality product, train and scale sales), then it’s almost definitionally not the single most important challenge facing that company.  That’s good, because while those table stakes operations are undoubtedly hard work, they are not strategic.  Operating executives too often confuse the two.

The bad reason it’s difficult is that you might get it wrong.  And in this framework, where everything is tied to a diagnosis about the company’s single-most important challenge, if you get the diagnosis wrong, the whole strategy collapses along with it.

The hardest part I’ve found is balancing immediate vs. longer-term challenges.  For example, say it’s 2003 and you’re at CRM leader Siebel Systems.

• Your most immediate challenge is likely your direct competition, PeopleSoft or Oracle who are much larger than you and providing broad suites.
• Your biggest strategic challenge is your indirect competitor Salesforce.com, who is disrupting the business model with software as a service.

Perhaps one of my friends who worked at Siebel at the time can weigh in with an informed comment, but my guess is that Siebel (who was doing $1.4B in annual revenue) minimized Salesforce (who reported doing a mere $65M in its S-1) and, to the extent they would have used a framework like this, would have picked the wrong challenge and gotten the wrong strategy as a result.

Another potential criticism of this framework is that it tends to orient you to competitive threats in a Silicon Valley that would much rather talk about vision (and making the world a better place) than competition.  In my experience, there are few vendors who have the luxury of being totally vision-driven, those who claim otherwise are often practicing revisionism [6], and there’s nothing in the framework, per se, that says the central challenge has to be competition-related.  It could be about building the product, creating distribution channels, or landing your first ten customers.  The framework doesn’t dictate the nature of the challenge, it simply demands that you pick one.

My last thought on the framework is that it appears to be missing an element [7].  In order to make a guiding policy from a diagnosis it helps to have a set of beliefs (or assumptions) as the bridge in between, because these beliefs are neither an explicit part of the guiding policy nor necessarily documented in the diagnosis.

So my slightly revised format of the template is:

• Diagnosis:  the single most important challenge faced by the company (whether immediate or strategic)
• Beliefs:  a short list of key assumptions that bridge from the diagnosis to the guiding policy.
• Guiding policy:  the overall approach to dealing with the challenge
• Coherent actions:  a set of actions designed to carry out the guiding policy

Or, in English form, given the diagnosis and this set of beliefs, we have chosen this guiding policy which is to be carried out through this set of coherent actions.

Closing Thoughts
I’d say that while I love this book it might have been better titled Bad Strategy, Good Strategy because it’s stronger at tearing apart the garbage that masquerades as strategy than at helping you build good strategy yourself [8].  That said, if you can learn by example and through emulation of the many good strategy examples Rumelt provides, it should be enough to help you and your company not only avoid falling for garbage instead of strategy, but building a good strategy yourself.

I’ll end with the best news of all:  I wrote Rumelt to ask him a few questions and he told me that he’s working on a new book that should address some of my issues.  I can’t wait to read it.

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Notes
[1] OKRs are great and I love OKRs.  But OKRs are for establishing clarity about goals, their unambiguous measurement, and (typically by omission) their priority.  OKRs should be implied by a strategy, but the existence of OKRs (particularly an overly long or incoherent set) does not imply the existence of strategy.

[2] The plural, of course, being foci.

[3] A common case of this is simply failing to make a strategy at all, instead saying (as I’ve actually heard at strategy meetings), “well we’re going to need two financial goals, two sales goals, two product goals, a marketing goal, a customer goal, an alliances goal, and a people goal, so there you go, that’s 10, so let’s just sit down and start making them.  I know the people goal (“attract, develop, and retain the best talent”) and customer goal (“delight our customers”) already, so there’s only 8 more to go.”

[4] I’m slightly twisting Rumelt’s example of a Condorcet Paradox which was really about strategy formulation, not diagnosis, but to the extent that people often gun jump in offering a diagnosis that leads to their desired strategy it still holds.  Adapting his example, the Services person wants a diagnosis that leads to Solutions, the design head wants a diagnosis that leads to Chips, and the systems person wants a diagnosis that leads to Boxes.  The paradox actually occurs not there, but in how each ranks the relative strategies.

[5] If everyone on the team can agree to it, I’d argue it’s almost definitionally a bad strategy.  In a good strategy choices are made, some areas are resources, others are starved, and some are discontinued.  The Chips person voting for Solutions would be, as the saying goes, like the turkeys voting for Thanksgiving.

[6] In conference talks and podcasts it’s far cooler to talk about being vision-driven than talking about competitive strategies; thus I have found the best companies talk little about the competition externally, but are fiercely competitive internally.

[7] Hat tip to my friend Raj Gossain for figuring this out.

[8] By this I mean that while the book provides examples of good strategy, and a simple framework for expressing it, I find the framework missing an important element (beliefs) and the book doesn’t even attempt to outline a process whereby an executive team can work together to devise a good strategy.