Good Strategy, Bad Strategy Summary

Good strategy works by harnessing and applying power where it will have the greatest effect. Bad strategy is just wishful thinking dressed up as a plan.

1. Strategy Is More Than a Goal or Slogan

A strategy isn’t just a lofty goal or a motivational phrase—it's a detailed plan to achieve a specific outcome. Richard Rumelt explains that aiming for a 20% profit increase isn’t a strategy; it's just a target. True strategy includes steps to get there. Without this, the goal is meaningless.

Some organizations confuse flashy buzzwords for strategy. Take the case of a major retail bank whose "strategy" was defined as “customer-centric intermediation.” When boiled down, this only described being a bank focused on customers—no actionable plan was embedded in that fluffy statement.

As the book points out, an effective strategy transforms grand visions into obtainable reality. It involves solving problems, planning logical actions, and avoiding empty promises or slogans that mislead both teams and customers.

Examples

• A graphic arts company falsely claimed its 20% revenue goal was its strategy.
• A football coach telling a team to win without giving a game plan.
• A retail bank's meaningless phrase "customer-centric intermediation" showing a lack of actual planning.

2. The Kernel of Every Good Strategy

The success of any strategy rests on its foundation—or kernel. A good strategy has three components: a diagnosis of challenges, a guiding policy to address them, and a set of coherent actions to implement the policy. Each part works together to create a clear, focused approach.

IBM’s turnaround in the 1990s highlights this concept. Declining and losing relevance, IBM resisted the industry's push toward decentralization. Instead, CEO Lou Gerstner diagnosed the problem as organizational fragmentation and centralized IBM's efforts into IT consulting. By realigning their resources and crafting coherent actions, they turned their struggles into triumph.

On the other hand, Ford failed when it acquired vehicle brands such as Jaguar and Volvo. Their guiding policy to unify manufacturing processes amongst diverse brands clashed with each brand’s unique identity, creating confusion and diminishing value.

Examples

• IBM’s integration strategy under Lou Gerstner in 1993.
• Ford’s misstep in consolidating car brands like Jaguar and Volvo.
• A guiding policy focused on incompatible values sabotages actions.

3. Strategy Requires Focus and Choice

Good strategies force you to prioritize and make tough decisions. Many leaders fail because they try to pursue conflicting objectives rather than focusing on something achievable. Choosing one path often means sacrificing others, but spreading yourself too thin rarely works.

A strong lesson comes from Digital Equipment Corporation (DEC) in the late 1980s. Faced with new competitors, DEC executives couldn’t agree whether to specialize in microchips, ready-to-use systems, or customer solutions. This indecision cost them valuable time and market position. They failed to act decisively and ultimately went under.

On the flip side, Intel succeeded because its leadership, despite resistance, pivoted away from memory chips to focus solely on microprocessors. This strategic focus helped Intel rise to dominate its market.

Examples

• DEC’s inability to choose a single direction and failure to adapt.
• Intel’s shift to exclusively manufacturing microprocessors.
• Leadership abandoning old solutions to concentrate on effective new areas.

4. Gaining Leverage Over Rivals

Leverage allows companies to gain a market advantage by acting on opportunities early while competitors lag behind. This often means understanding the present well enough to anticipate future needs.

Toyota, for example, invested over $1 billion in hybrid technology when gas-powered cars still dominated the market. Their deep understanding of trends positioned them to lead when demand for fuel efficiency rose. This foresight delivered a significant competitive advantage.

Similarly, 7-Eleven in Japan studied customer habits and introduced a strategy to regularly rotate beverages to keep the selection fresh and appealing. While competitors stuck to static inventories, 7-Eleven gained an edge by catering to local tastes.

Examples

• Toyota’s forward-thinking investment in hybrid technology.
• 7-Eleven maximizing localized product variety for Japanese customers.
• Companies capitalizing on emerging trends to outpace rivals.

5. Make the Most of Limited Resources

To succeed, strategies must balance available resources with the actions required. By carefully allocating resources and aligning actions, even small forces can make a big impact.

Hannibal’s victory over the Romans at the battle of Cannae illustrates this perfectly. Though vastly outnumbered, Hannibal created an arc formation to trick the Romans into pushing forward, trapping them. His actions, tailored to his resources, maximized his slim advantage and led to a historic victory.

In business, overestimating resources can lead to failure. Companies need to accurately assess what they have and create strategies that align with reality. This ensures that each action supports overall goals.

Examples

• Hannibal’s strategy to use fewer troops to outmaneuver the Roman army.
• Startups succeeding by taking small but focused actions instead of overreaching.
• Resource limitations driving innovation and creative solutions.

6. The Power of Navigating Change

Successful strategies leverage changes in the marketplace. Businesses that adapt to or instigate change frequently reap significant rewards. This involves identifying second-order effects rather than only reacting to surface-level consequences.

For instance, when television first emerged, it drastically impacted moviegoers. Studios responded not just by competing with TV, but by funding independent films aimed at niche audiences. This ability to adjust to change saved Hollywood studios from irrelevance.

Additionally, Kodak capitalized on market shifts by pioneering color film. At the time, black-and-white film technology had matured, leaving no room for innovation. Kodak adapted by exploring new territory, gaining a foothold in color imagery.

Examples

• Hollywood studios adjusting to TV by supporting niche films.
• Kodak outpacing older companies by developing color film.
• Firms that identify hidden effects of market shifts finding new opportunities.

7. Isolation Mechanisms and Competitive Defenses

To remain ahead, businesses must create barriers that limit competitors' ability to replicate their success. These “isolation mechanisms” help sustain long-term advantages.

Apple, for example, uses strong isolation mechanisms for the iPhone. Its iconic branding, exclusive iOS operating system, and integration with services like iTunes make it challenging for others to rival Apple directly. Competitors face a daunting task trying to replicate Apple’s ecosystem.

Another example is POM Wonderful, which built dominance in the pomegranate juice market by boosting pomegranate awareness and then controlling supply chains. This clever strategy effectively blocked rivals from entering the space.

Examples

• Apple’s use of branding, software, and exclusive features.
• POM Wonderful creating high demand for pomegranates while controlling supply.
• Businesses protecting distinct product attributes to reduce competition.

8. Develop and Test Strategic Hypotheses

Good strategists experiment, adjusting as they go. This approach is rooted in forming hypotheses and testing them under real-world conditions to learn and adapt.

Howard Schultz, founder of Starbucks, started with a hypothesis that Americans would embrace high-quality coffee served in a cozy environment. His initial experiments weren’t an exact match for Italy’s coffee bars, but by testing and refining, he adapted the core idea for the U.S. market, creating a massive success.

Trial and error isn’t just useful—it’s essential. Through small tests, strategists can gather data without risking everything on a potentially flawed assumption.

Examples

• Schultz testing his hypothesis with a single coffee bar.
• Entrepreneurs experimenting with prototypes to find product-market fit.
• Scientific methods applied to iterative business strategies.

9. Learn from Failures—Yours and Others’

Human nature often leads us to think “this time is different” when history shows otherwise. Avoiding this “inside view” bias is key to creating sound strategies.

The 2008 financial crisis happened, in part, because people believed the economy was immune to downturns. This assumption ignored past financial bubbles and didn’t account for repeating patterns. Looking at historical examples might have prevented the collapse.

By studying failures, strategists can uncover common flaws and avoid repeating them. Recognizing patterns provides opportunities to sidestep risk and prepare more effectively.

Examples

• The 2008 financial crisis and the dismissal of previous warning signs.
• Unsafe driving behaviors rationalized despite statistical risks.
• Companies reflecting on competitors' past mistakes to sidestep pitfalls.

Takeaways

1. Focus on achieving the most important goals first—don’t spread resources too thin. List clear priorities and tackle them sequentially.
2. Study past successes and failures, especially in comparable situations. Ask: Why did others succeed or fail in this scenario? How can I apply those lessons?
3. Treat strategy as a scientific experiment. Form a hypothesis, test it on a small scale, and use feedback to improve the bigger plan.