Recognising Good and Bad Strategies - Part 1: What is a Good Strategy?

WHAT IS A GOOD STRATEGY?

End of last year a friend of mine recommended me to read the book “Good Strategy/Bad Strategy” by Richard Rumelt. I found it one of the better books on strategy I have read, so I shared the book with my friend and strategy specialist Ignaz Furger. As the book is a bit too long to ready for the typical busy executive, we decided to write a series of five articles for those interested in creating better strategies for their business. This is the first article.

According to R. Rumelt, a good strategy contains at least three elements: 1) diagnosis, 2) guiding policy and 3) coherent action. He calls this the KERNEL of a good strategy.

A strategy is more than just formulating revenue, profit or market share objectives. Neither is something by default strategic because it is general, high-level or happens to have been decided at C-level.

Hardly any other topic is approached with so many different ideas and concepts as the topic of strategy. While there are clear generally accepted guidelines, standards and regulations for accounting, taxes and legal, there is nothing comparable for strategy. On the basis of Rumelt’s book, we would like to make an attempt to define the foundations of strategy.

The Kernel of a strategy

Rumelt calls the three necessary and sufficient elements of a strategy the “Kernel”. A good strategy may consist of more than just the Kernel, but if the Kernel is missing or broken, then the whole strategic construct is built on a flawed foundation. 

The Kernel of a good strategy consists of three elements: 

(1) the diagnosis that defines or explains the major challenges 

(2) the guidelines to deal with those challenges and 

(3) a set of coherent actions to implement the guidelines.

What is not (yet) a strategy

Knowing the minimal components of a strategy makes it easier to recognize when a strategy is fundamentally incomplete. Here some examples:

• An objective alone is not a strategy.
• Take, for example, these well-known two-number objectives top executives like to communicate when talking about their strategy: 
• 20/20 or 10/10 for 20% market share and 20% EBIT or 10% growth and 10% profit. While such objectives are easy and striking to communicate, they do not constitute a strategy. Here the foundation is simply missing.
• Not everything decided at C-Level is strategic.
• The epithet “strategic” is used to try to give extra weight to any top-level decisions. But a strategy consists of more than just what the highest paid people in the company decide.
• A rough strategic direction, be it for a business area or the entire company, is not yet a strategy.
• While defining the direction is important, it is not sufficient if it lacks concrete actions and projects that guide efforts and resources towards the chosen direction.
• A bundle of strengths and opportunities with vague goals is not yet a strategy.
• Without guidelines on how to make the best out of a given set of strengths and opportunities, no coherent action is possible. 

This is a first step to determine whether a company has a strategy or, what is usually even worse, a “bad strategy”.

 Bad strategy

In the next article, we will go into the topic “bad strategy” in more detail, and then in the following articles, we will describe – step by step – how to build a good strategy.

Authors: Andreas Wettstein / Ignaz Furger

Reference

Rumelt, R., Good Strategy, Bad Strategy, New York 2017