Good Strategy, Bad Strategy

Introduction: Targeted Approach

Strategy is about designing and executing a combination of punches: Where is the enemy? Where should we strike, and where should we not? How do we throw our punches? How can the first punch set up the second and third? It’s not a vague mission statement or a list of aspirational goals; it’s a specific, focused plan to overcome a challenge.

The core of any strategy can be broken down into a simple but powerful formula:

Core of Strategy = Analyzing the current situation + Guiding principles + Coherent actions

Let's dive into what separates a good, effective strategy from the fluff and formalism that so often passes for one.

Part One: Good Strategy, Bad Strategy

1 Good Strategy is Unexpected

A truly good strategy is often unexpected, yet upon reflection, it seems perfectly reasonable. It cuts through the noise and complexity to find a simple, powerful path forward.

Consider Steve Jobs' return to Apple in 1997. The company was on the verge of bankruptcy, with a bewildering array of products. A "bad strategy" would have been to set aggressive growth targets for every product line. Instead, Jobs did the unexpected: he drastically simplified, slashing the product line to just a few core offerings he knew could be profitable and excellent. When asked how he would compete with the dominant Wintel alliance, he didn't deliver a grand strategic plan. He simply smiled and said he would wait for the next big wave of change in the industry. His strategy was one of focus and patience.

Another example is Operation Desert Storm during the Gulf War. The media narrative focused on a slow, deliberate advance of the main forces. This was intentional. The real strategic maneuver was a flanking "left hook," where another massive force secretly penetrated deep into enemy territory from an unexpected direction, leading to a swift and decisive victory.

These examples highlight a critical lesson: doing everything and believing everything is important is the same as believing nothing is important. Good leaders and strategists must have the courage to choose not only what to do but, more importantly, what not to do.

2 Viewing Strengths with a Discoverer's Eye

The most fundamental type of strategy is the SO strategy—leveraging Strengths (S) to seize Opportunities (O). But where do these strengths come from? Often, they are not obvious and must be discovered by looking at a situation from a new perspective.

As Shakespeare wrote in Hamlet, "There is nothing either good or bad, but thinking makes it so." In strategy, strengths and weaknesses are relative and dynamic. The classic story of David and Goliath is a perfect illustration. To the conventional observer, Goliath was the strong one—an experienced, giant warrior. David was a weak newcomer. Yet, David's agility and proficiency with a sling, a ranged weapon, turned Goliath's size and close-combat specialization into a fatal weakness.

This principle applies in business as well. Walmart's victory over the once-dominant Kmart came from discovering an advantage in an unexpected place. The prevailing retail wisdom was that a large supermarket needed a population base of at least 100,000 people to be viable. Walmart defied this by opening stores in smaller towns. How? Through superior supply chain management. Walmart created an integrated network of stores, allowing for efficient distribution, lower inventory costs, and greater bargaining power. Kmart's stores were geographically scattered, making their logistics far less efficient.

During the Cold War, strategist Andy Marshall advised the U.S. to pursue a strategy of competitive advantage against the Soviet Union. Instead of matching the Soviets tank for tank, the U.S. should leverage its technological and economic strengths to develop systems that were cheap for America to build but incredibly expensive for the Soviets to counter. This included developing hyper-accurate missiles and stealthy submarines. This asymmetric strategy placed unbearable economic strain on the Soviet Union, contributing to its eventual collapse.

3 Bad Strategy

Bad strategy is more than just the absence of a good one; it's a specific kind of formalism with four common characteristics:

1. Empty rhetoric / Fluff: It's a collection of buzzwords and grand-sounding statements that lack substance. For example, a bank claiming, "Our core strategy is to be a customer-centric intermediary," is essentially saying, "Our bank's core strategy is to be a bank." It's meaningless.

2. Inability to confront challenges: If your strategy doesn't identify and address the primary obstacles, it's just a wish list. A plan to climb a mountain that doesn't mention the sheer cliffs, bad weather, or limited supplies isn't a strategy; it's a daydream. This is a reminder that choosing foundational metrics is crucial; if it cannot be quantified, it cannot be improved. A positive example of confronting challenges head-on is DARPA, which defines its mission by tackling specific, high-risk, high-reward technological hurdles.

3. Mistaking goals for strategy: Goals are not strategy. A company announcing a "20/20 strategy"—meaning 20% revenue growth and a 20% profit margin—has not articulated a strategy. It has stated a goal. It says nothing about how these numbers will be achieved. Metrics are a way to measure progress, not a plan for making it.

4. Sub-goals that are irrelevant or unrealistic: Goals are the overall aim; objectives are the sub-goals to get there. Good strategy channels limited energy and resources into one or a few pivotal sub-goals that, once achieved, create a cascade of new advantages. Bad sub-goals are often just a long list of things to do, with no prioritization, or they are completely disconnected from reality.

4 Why Are There So Many Bad Strategies?

If the hallmarks of bad strategy are so clear, why is it so pervasive? There are three primary reasons:

1. Making choices is painful. Strategy is about focus, which means saying "no" to many appealing options. This is difficult for individuals and even more so for organizations. Consensus-seeking often leads to watered-down, meaningless compromises. When DEC was facing a strategic crisis, its leaders couldn't agree on whether to focus on "servers," "chips," or "solutions." To avoid conflict, CEO Ken Olsen chose a compromise that satisfied everyone and meant nothing: "DEC is committed to being a leader in providing high-quality data products and services." It was a death sentence. In contrast, great leaders like Eisenhower, who abandoned his campaign promise to roll back Soviet influence in Eastern Europe after realizing it was unfeasible, and Intel's Andy Grove, who made the gut-wrenching decision to exit the DRAM market to focus on microprocessors, understood that true strategy requires hard choices.

2. People prefer to use templates without thinking. We are surrounded by books, consultants, and tutorials offering fill-in-the-blanks "strategic plans." This creates a dangerous confusion. For instance, leadership is often mistaken for strategy. Leadership inspires and motivates people, making them feel good about transformation. Strategy articulates what specific transformation is worth pursuing. Having a document titled "Strategy" does not mean you have a good one.

3. People believe in human dominance over fate. There is a pervasive belief that a positive attitude can conquer all obstacles. New Age ideas like the "Law of Attraction" create a fantasy that simply wanting something badly enough will make it happen. This is mental opium. It distracts from the hard work of diagnosing the problem and designing a coherent set of actions to solve it. It’s far more productive to imagine the process of achieving a goal, like simulation training, than to simply visualize the successful outcome.

5 The Core of Good Strategy

At its heart, a good strategy has a simple, logical structure known as the kernel. It consists of three essential elements:

1. Diagnosis: A clear-eyed explanation of the nature of the challenge. A good diagnosis simplifies a complex reality by identifying the crucial aspects of the situation.
2. Guiding Principles: The overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. It's the guiding light for action.
3. Coherent Actions: A set of coordinated steps that are consistent with the guiding principle. These actions should be reinforcing, creating a synergy where the whole is greater than the sum of its parts.

Let's look at three examples:

• In Business Competition: The challenge often comes from external changes.

  1. Diagnosis: Analyze the structure of the competition, not just performance metrics.
  2. Guiding Principle: Choose a policy that addresses the competitive landscape and creates a new advantage.
  3. Coherent Actions: Allocate resources and design actions to execute that policy.

• In Large Organizations: The challenge is often internal.

  1. Diagnosis: Identify internal obstacles like bureaucracy, conflicting interests, and outdated processes as the primary problem.
  2. Guiding Principle: Adopt a restructuring strategy designed to foster innovation and break down silos.
  3. Coherent Actions: Change the distribution of power and people to enable new, more effective processes.

• Amazon's Flywheel Effect:

  1. Diagnosis: E-commerce and cloud services are industries with high fixed costs and high potential returns. The key is to relentlessly lower the cost structure to pass savings to customers, driving growth.
  2. Guiding Principle: Design a self-reinforcing "flywheel" where lower prices attract more customers, which attracts more sellers, which expands the store and distribution, which allows for greater efficiency and even lower costs.
  3. Coherent Actions: Build AWS data centers, fulfillment networks, and e-commerce services that power this flywheel, creating a nearly unassailable infrastructure.

The point about "coherent actions" is especially powerful. These actions are not just a to-do list; they are designed to help each other. As a manager, you might introduce a principle like, "I will never make you do anything that does not help your core work." This creates coherence and focus.

This kind of strategic coordination doesn't happen by accident. It must be deliberately designed and centrally imposed. While centralization can be a negative, a completely disorganized approach is also doomed because different departments have conflicting incentives. A sales team wants to please customers with urgent, custom orders, while the production department needs stable, long-term runs to be efficient. You can't do both perfectly. Smart organizations don't aim for 100% communication; they achieve the right amount of coordination to execute the strategy.

Part Two: Sources of Strength

The power of a good strategy comes from focusing limited resources on the few pivotal objectives that will generate the biggest results. It's about using your best steel on the cutting edge. So, where does this strategic power come from?

• Leverage: Finding a pivot point where a small amount of focused effort can create a massive effect. Leverage can come from:

  1. Forecasting: Accurately anticipating buyer demand or competitor reactions.
  2. Pivot Points: Identifying a critical point that amplifies your power. When 7-Eleven entered Japan, it discovered that customer tastes were highly localized. By empowering store managers to adjust their own inventory based on local feedback, they created a massive advantage.
  3. Concentration: Many efforts have a threshold effect; investing below a certain level is the same as investing nothing. Diffusing an advertising budget thinly across the country is less effective than concentrating it in a few key regions to achieve dominance there first. As Mao Zedong practiced, concentrate superior forces to annihilate the enemy's effective strength one piece at a time.

• Grasp: To deal with a complex problem, break it down into a set of solvable sub-problems. When President Kennedy announced the goal of landing a man on the moon, NASA broke it down into clear, achievable milestones: developing larger rockets, unmanned exploration, parallel development of fuel types, and building the lunar lander.

• Chain Systems: In a system where performance is determined by the weakest link, the entire system must be strong. Such systems are incredibly difficult for competitors to replicate. IKEA is a prime example—its unique advantage comes from the tight integration of product design, sourcing, flat-pack logistics, and customer assembly. Strengthening a chain system is a non-linear process; the true benefit is often only realized when the final link is fortified, which requires leaders with immense patience.

• Design: A good strategy is a well-designed solution to a problem. Hannibal's victory at the Battle of Cannae, one of the most crushing defeats in Roman history, was a masterpiece of strategic design. He intentionally weakened his center to lure the Roman legions forward, then enveloped them with his stronger flanks. In business, this means analyzing how a system works—who the key players are, how they interact, and what their needs are—and then designing an offering that perfectly meets the needs of the most critical decision-makers.

• Focus Strategy: Instead of trying to serve everyone, provide superior service to a specific customer group. The Crown Cork & Seal Company thrived in a competitive industry by focusing exclusively on small, urgent orders for small manufacturers—a niche the big players ignored.

• Growth: Healthy growth should be the result of a great product and a sound strategy, not the goal itself. Forcing growth through reckless acquisitions, as the aforementioned Crown company did, often leads to disaster. Its stock price crashed from $55 to$5. Cases like LeEco and Yahoo's acquisition spree serve as similar warnings.

• Utilizing Advantages: Advantage is always specific to a domain. A world-class marathon runner won't necessarily excel at the high jump. A startup the author advised excelled at making innovative fabrics but failed when it tried to move into clothing manufacturing, not realizing they were two completely different industries with different skill sets and competitive dynamics.

• Dynamics: A powerful source of advantage is a wave of exogenous change. Good strategists don't just react to change; they anticipate and ride the wave.

• Inertia, Momentum, and Entropy: Large organizations have tremendous inertia. This can be a weakness, but it can also be harnessed. Microsoft successfully used its massive B2B inertia in Office suites to transition into a B2B cloud giant with Azure. At the same time, closed systems decay due to entropy, which may be why American companies are so keen on bringing in external managers—to introduce new energy and perspectives.

Among these, riding a wave of external change is particularly powerful. There are generally two ways to gain a strategic high ground that is easy to defend:

1. Independent innovation.
2. Riding the wave of change.

It's easy to be an armchair general in hindsight. To make predictions before the fact requires a deep understanding of the present, allowing you to deduce the second and third-order effects of a change. For example, when television emerged in the 1950s, everyone saw that the film industry would suffer. But few predicted the next step: the rise of independent films. With the old studio system dying, independent producers were free to focus on making truly great films, because only a great film could draw audiences away from their TVs and into theaters.

Here are some signposts that may point to a new competitive high ground:

1. Fixed costs soar: High capital investment creates barriers to entry. The massive cost of blockbuster films gives rise to major studios; the development cost of large software systems gives rise to large software companies.
2. Deregulation: When rules change, new opportunities emerge. China's reform and opening-up is a prime example.
3. Prediction bias: Most people are bad at seeing beyond the immediate trend.

• The illusion of growth: Growth never lasts forever. The faster sales grow, the faster a market can become saturated. A person who buys a TV is unlikely to buy a second one right away.
• The illusion of winner-takes-all: While network effects are real, large companies are often plagued by internal problems, and new waves of change can disrupt even the most entrenched incumbents.
• The illusion of winners always winning: History is littered with dominant companies that failed to adapt. Just ask Yahoo.

4. The incumbent effect: Established players are often unwilling to cannibalize their short-term profits to embrace a new, disruptive model, as described in the Innovator's Dilemma.
5. Attractor state: This is the state the market should reach in equilibrium. It’s an incredibly powerful concept for thinking about the future.

The attractor state is different from a company's vision. A vision is internal; an attractor state is an objective analysis of where the entire industry is heading. It is shaped by two forces:

• Accelerants: These are events that prove a new model is viable and trigger rapid change. Napster showed the world that digital music could be easily shared. Bitcoin showed that virtual currencies could create immense wealth. Mao Zedong's idea that a single spark can start a prairie fire is an example: concentrating forces to win a decisive battle could demonstrate the regime's weakness and ignite a wider revolution.

• Impediments: These are forces that slow down the transition to the attractor state. The public's fear of nuclear power, for example, is a major impediment to its adoption, even if it is a technically viable energy source.

Let's apply this to the newspaper industry. Take The New York Times. Its printing and distribution costs were two to three times its subscription revenue, with the difference covered by advertising. After 2009, two waves hit: new digital media eroded readership, and Google and others siphoned away advertising dollars. News media can differentiate on three dimensions: space (local vs. global), frequency (breaking vs. weekly), and depth. The market's attractor state likely leans toward specialization in these niches, not broad coverage. To adapt, The New York Times should leverage its powerful brand to aggregate information from many sources, rather than relying solely on its expensive staff of journalists, and focus on the deep-analysis niche where it has a true advantage. The more specialized the reader base, the more valuable it is to advertisers.

Part Three: Thinking Like a Strategist

So, how do you develop the mind of a strategist? The short answer is to cultivate an "external perspective"—to constantly think about why you think the way you do.

16 What Kind of Discipline is Strategy?

Strategy is not a deductive science like engineering. The author recalls meeting with Hughes engineers who disliked strategy because their thinking was deductive. They planned with certainty; they wouldn't design a bridge that might hold the required weight.

Deductive reasoning only works in a closed system where you have all the information. When facing the unknown and the competition, it fails. Worse, deductive reasoning can stifle innovation. The trial of Galileo, who used empirical observation to challenge deductive dogma, helped spark the Enlightenment, which showed us how to deal with uncertainty through scientific empiricism.

Good strategy is not deduced; it's an inductive process. It's a hypothesis about what will work, which is then tested in the real world. You observe, form a hypothesis, collect data, validate or reject the hypothesis, and repeat. When Howard Schultz founded Starbucks, his hypothesis was that Americans would pay a premium for an Italian-style café experience. He didn't bet the farm at once. He started with a small café, tested and optimized the model, and only then scaled up to full vertical integration.

17 Focus on the Process of Thinking

Steel magnate Andrew Carnegie once asked the father of scientific management, Frederick Taylor, for his single best piece of management advice, offering him $10,000 (a fortune in 1890). Taylor's advice was simple: "List the ten most important things you have to do, then start with the first one and stick to it until it's done." A week later, Taylor received his check.

The power of this exercise isn't in the final list. It's in the process of creating the list. We cannot always control our thoughts, but we can control the process by which they arise. The core solution is to think about your thinking.

Here are some tools to help:

• Develop good habits:

  1. Use frameworks and processes to fight shortsightedness.
  2. Rigorously question your own judgments.
  3. Write down your judgments so you can review them later and see how they held up.

• Tools and Processes:

  • The Strategic Kernel: Always return to the Diagnosis, Guiding Principle, and Coherent Actions.
  • Create-Destroy: Don't just argue against a straw man. Set up a virtual expert committee in your head, with each member arguing for a different, credible alternative.
  • Corner Solutions: Good strategies are often "corner solutions." They don't try to please everyone with a bland compromise. They focus intensely on solving a specific problem for a specific group.

• Contact Review:

  • Before meetings or major decisions, predict how people will behave. Rehearse the situation. This forces you to recognize your own biases, understand others' motivations, and get a clearer picture of the market.
  • Through this practice, you can cultivate your own informed viewpoint and gain the confidence to disagree with the consensus when necessary.

18 Maintain Your Views

The final challenge is to have strong opinions without being stubbornly narrow-minded. The solution, once again, is to constantly seek an external perspective.

Global Crossing was a company that made decisions based on its own rising stock price and subjective desires. This created a dangerous, closed feedback loop between the market's perception and the company's actions, leading to a spectacular collapse. As Gödel's incompleteness theorem suggests, any sufficiently complex logical system has propositions that cannot be proven true or false from within the system itself. To judge right from wrong, you need knowledge from the outside.

The 2008 financial crisis was a product of this same internal perspective, combined with herd behavior. Everyone inside the system believed housing prices could only go up, and anyone who disagreed was ignored. A true strategist cultivates an independent viewpoint based on external facts and principles, allowing them to see what the herd misses.