Good strategy bad strategy – my reading notes

These are my notes from the book: Good Strategy Bad Strategy: The Difference and Why It Matters by Richard P. Rumelt

I read this in 2026. The book is from 2011, but I find the knowledge there up-to-date. At the time of reading the book I was not aiming at becoming a CEO. But I still found it valuable to read it. It really helped me broaden perspective how leaders build strategies, what challenges they face, but also gave me tools to challenge product decisions.

0. Introduction

A talented leader identifies the one or two critical issues in the situation and then focuses and concentrates action and resources on them.

The word strategy or strategic is often used to refer to decisions made by high grade management and for example involving expensive investments.
Rather it should mean a cohesive response to an important challenge. Set of analysis, concepts, policies, arguments, and actions(S6). Actions are important to include because they help with execution.

Strategy is not goal setting. It’s how to achieve them.

1. Good strategy is unexpected

History of Apple. Jobs took over interim CEO when Apple was going down because of windows. He cut down size and scope to be again the niche company and focused on a single product to simplify offering.
When asked what his strategy for the future was “I am going to wait for the next big thing”. After that came iPod, and iPhone.

Second example: first gulf war. Envelopment maneuver. It’s obvious because it’s basic move from US army guidelines. Yet no one expected that because of the deception (and speculations in media how difficult the frontal attack is going to be).
They had air force, marines and yet focused on only using troops.

Good strategy is as much about what you do, as what you say “no” to.

2. Discovering power

David vs Goliath. Goliaths strengths are obvious: big, brave, experienced, armored.
David rejected the armor. He would be the weaker version of Goliath. Instead he used his hidden skills.

Walmart example:
Conventional wisdom: a full-line discount store needs a population base of at least 100k.
Walmart didn’t break conventional wisdom. It redefined the store. It created a network.
It’s needed to consider competitors. Behind each successful company, there are many failed ones.
Adopting one piece of their success is not enought. It’s the whole design. Coherent set of actions, policies and structure.

Marshall and Roche – strategy on competing with Soviet union during Cold War: do not focus on catching up with whatever Soviets buy. Instead invest in things that bring value to US, but for Soviets are expensive, and do not bring too much offensive power.

Do not focus on catching up with weaknesses, focus on increasing your competitive advantage.

3. Bad strategy

Hallmarks of bad strategy:

• Fluff , gibberish and inflated, abstract concepts creating illusion of high-level thinking
• failure to face the challenge. If you don’t define what the challenge is, you cannot create strategy to improve the situation. You end up with a stretch goal, a budget or a list of things you wish would happen
  • today it’s fill-in-the-blanks template: vision, mission, core values, strategic goals, a list of strategies, and a list of initiatives
• mistaking goals for strategy – There is often confusion between strategy and strategic goals.
  • soldiers died at Passchendale from the “last one push” – not from lack of motivation, but lack of competent strategic leadership
  • goal – overall values and desires, objectives – specific operational targete
  • e.g. USA may have the goal of freedom, justice, peace, and the objective of defeating Taliban and rebuilding decaying infrastructure
  • e.g. Chen Brothers may have a goal of growing profit and being a good place to work, and an objective to split retailers into tiers: dominate in top tier, promote in middle tier and grow penetration on the low tier
• bad strategic objectives – when they fall to address critical issues or when they are impracticable
  • dog’s dinner objectives – total mix of everything e.g. “47 strategies and 178 action items”. Common with city, school district, and non-profit strategy work
  • blue sky objectives – restating the desire without tangible steps how to get there

When a leader characterizes the challege as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reasons for the underperformance – example of improving test scores or schools in LA. Students dropping out, increased the tests score. But that’s not the point. (P55)

4. Why so much bad strategy

The unwillingness or inability to choose

Not choosing makes no incentive to develop and sharpen arguments. Only the prospect of choice inspires people’s best argumente about the pluses of their own proposals and negatives of others’. (p60) “Disciplined conflict”

Condorcet’s paradox: if people choose B over A, C over B, but A over C.

Strategy is scarcity’s child and to have a strategy, rather than vague as-pirations, is to choose one path and eschew others. There is difficult psychological, political, and organizational work in saying “no” to whole worlds of hopes, dreams, and aspirations. When a strategy works we tend to remember what was accomplished, not the possibilities that were painfully set aside (P62)

The longer the pattern of activity is maintained, the harder it is to change it.

Template-style strategy

The transformational (charismatic) leader develops or has a vision, inspires people to sacrifice (change) for the good of the organization and empowers people to accomplish the vision.

Leadership and strategy may be joined in the same person but they are not the same thing.

The template:

• vision – what your org will be in the future. “The best”, “the leading”, “the best known”
  • e.g. to be the most profitable and respected science-driven chemical company in the world
• mission – high-soundiny politically correct statemente of the purpose
  • e.g. to passionately innovate what is essential to human progress by providing sustainable solutions tp our customere
• values – fill in a statement describing the company’s values. Make sure they are not controversial
  • e.g. integrity, respect for people and protecting our planet
• strategies – fill in some aspirations but call them strategies
  • e.g. preferentially invest in a portfolio of technology integrated market driven performance business that create value for…. Blablabla

These templates are an attempt to turn the magic of personal charisma into a bureaucratic product.

New thought

Positive thinking. Motivational speakers. Achieving success by thinking about success and removing failure from your mind.
the secret by Rhonda Byrne.

Elements of New Thought have seeped into strategic thinking through literature on leadership and vision.

I would not want to fly on an airplane envision by someone who only imagined pictures of the aircraft flying but haven’t considered modes of failure.

5. The kernel of good strategy

The diagnosis

• 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.

For a doctor, the challenge may be a set of signs and symptoms together with a history.
In foreign policy challenging situations are usually diagnosed in terms of anologies with past situations.
In business the challenge is usually dealing with change and competition.
In many large organizations the challenge is often diagnosed as internal (processes, bureaucracy)

Majority of the strategy work is asking “what’s going on in there”. Naming, classifying the situation, linking facts into patterns amd suggesting that more attention be paid to some issues and less to others.

Diagnosis can’t be proven to be correct. It’s a judgement.

The diagnosis should replace the overwhelming complexity of reality with a simpler story that calls attention to its crucial aspects.

Guiding policy

• 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.

It’s not a set of things to do. It’s more like guardrails on the highway. It doesn’t tell the content. Example of the grocery store – thousands of decisions to make: what hours to open; should she create the 2nd cash stand; should she create more parking spaces; should she keep low prices or offer more expensive fresh products.
Diagnosing the problem of competing with local supermarket and identifying who were the most common customers the problem could have been boiled down to: “serve the students” or “serve the busy professionals”. Deciding on one creates a guiding policy and helps resolve many of these individual questions.

Coherent Actions

• 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

Policy without action stays an idea. It needs to be clear what is the priority. And actions need to be taken to back this up. Even if tough ones.

Story of conflicting priorities: country-based marketing vs pan-european idea. “If it was indeed a priority – what would you do?”

Actions need to be coherent and coordinated.
Coordinated but not coherent can lead to conflicting priorities: Ford buying Volvo (“we don’t want save Jaguars”) and Jaguar (“we don’t want fast Volvos”)

Non-conflicting but not coordinated: e.g. 1 – buy a plant, 2 – spend more on ads, 3 – introduce 360 feedback program. Here “strategic” means it’s just approved by a upper management.

Coordination is a subtle balancing act.
Done incorrectly – centrally planned economics in USSR or North Korea.

Decentralization works well but sometimes some coordination is needed. E.g. US army coordination during WW2 – to first focus on Europe and then go to Japan.
Or in business – sales wants to please customers with rush orders, manufacturing wants uninterrupted and predictable production line.

Coordinating despecializes people. So only the minimum amount of coordination is needed – when there are big benefits.

6. Using leverage

Leverage arises from a mixture of anticipation, insights into what is most pivotal or critical in a situation, and making a concentrated application of effort.

Anticipation

Anticipation that the demand will change. E.g. investing in apartments; Toyota investing in hybrid engine
Anticipation about behavior of others. E.g. US army not anticipating Iraqis insurgency.

Anticipation can be made based on observations and patterns.

Pivot points

A pivot point magnified the effect of effort. It is a natural or created imbalance in a situation, a place where a relatively small adjustment can unleash much larger forces.

Sensing imbalances in pent-up demand that has yet to be fulfilled or in robust competence developed in one context that can be applied to good effect in another

Example of 7-Eleven in Japan where the strategy was not focusing on profit and goals but the local tastes and a quick sense of boredoom of customers by constantly introducing local brands and making agreements.

Concentration

Threshold effect – when there is a critical level of effort needed to affect the system. E.g. advertising: small amount brings little result.
Similarly politicians target specific groups and business strategist prefer to dominate the small market segment than have equal number of customers who represent only a sliver of a larger market

7. Proximate objectives

Example: Kennedy’s “to put a man on a moon by the end of 1960s”. Ambitious but possible to achieve if resources are focused and coordinated.

Resolving ambiguity

Providing sepcification that makes the problem simpler to solve.
Example of building Surveyors to land on Moon. The ambiguity was what type of surface to expect. They took the whitepaper on the surface. Even though it could have not been the most accurate, it resolved ambiguity and let the team move forward.

Taking a strong position and creating options

When dealing with ambiguity it’s illogical to look too far ahead in the future because the situation is dynamic and can easily change. Better to create feasible goals. Like a task even.

Hierarchies of objectives

To achieve the next step you have to get skills on the previous one. First you learn basics of flying helicopter. Once it’s automatic, only then you can think about flying in combat formation etc.

8. Chain-link systems

A system has a chain-link logic when its performance is limited by its weakest subunit – weak link.

Quality matters when quantity is an inadequate substitute: one two-ton truck can be replaced with two one-ton trucks. One top chef can’t be replaced with 2 bad cooks.

You want to identify limiting factor and fix them if possible.

Getting stuck

If you are in charge of one link of the chain, there’s no point in investing resources in making your link better if other link managers are not.

It is of little use to supply advanced machinery to unskilled workers, but it is also useless to educate people for jobs that do not exist.

Without corruption, it would be impossible to get around the stifling bureaucracy, but bureaucracy is a necessary counter to nepotism and a culture of corruption.

Getting unstuck

Example of a machinery company:

• low quality of machines
• bad sales team
• high costs

The director identified them, and focused on each one separately, in sequence. Didn’t care about short-term loses, with the perspective of the long-term win. He took the personal responsibility and absorbed the loses.

Getting unstuck in a chain-link system may require moving more towards centralization and coordination

Excellence

Example of IKEA. They have their own stores, their own storage with flat packs, catalogs instead of salespeople, they design the furniture. This all makes a chain-link system which is hard to replicate. It doesn’t work to adopt only one of them. It would require the whole system.

9. Using design

The father of strategy

Example of Hannibal: he mocked retreat, to bend the arc, and surround Romans.
He predicted behavior, and coordinated actions.
But it was not a decision picked from alternatives. It was “designed”.

The parts of a whole

You change one part, you have to change others.
Then put competition on top of it.
It’s the act of finding the most effective combination.

Examples:

• designing a sports car vs SUV. You can’t just change the chassis. The other parts need to follow
• designing a spacecraft. You have weight as constraint. You use less heavy component, it needs more cooling which increases the cooling system’s weight. And so on.

The greater the challenge, the greater the need for a good, coherent, design-type strategy.

But a more tightly integrated design is harder to create, narrower in focus, more fragile in use. E.g. Formula 1 is fast on the track, but a SUV is useful in wider range of purposes.

The Arc of Enterprise

To find a well integrated design-type strategy look at the upstarts: e.g. early Microsoft trying to beat IBM, Google trying to dominate over Yahoo.

The successful companies start to rely on their accumulated resources and lose a discipline to create tightly integrated strategy.

Order out of chaos

Example of Paccar.
They target owner drivers. Because they work more and spend more time on the road, the truck is more comfortable, and they are willing to pay that price.

The strategy design is expressed in actions that are consistent with its positioning and that are consistent over time. It makes only heavy trucks. It doesn’t make cheaper trucks. The product-buyer focus is maintained by its dealers, designers and engineers.

10. Focus

Can company.
Identify policies that are not standard in the industry. Then try to understand the target.

Big companies have long runs to optimize costs. That takes away bargaining power from them because one big customer has many producers.

Crown company instead has many smaller customers, does short runs and can charge higher margin because no one else wants to do small orders.

Focus = a concentration and coordination of action and resources that creates an advantage

11. Growth

Growth in a commodity is an industry phenomenon driven by increase in demand. Growing demand induces firms to invest in new capacity. Most of the profits are illusion because they are plowed back into new plant and equipment as the business grows.
As soon as the growth in demand slows down, the profits vanish for firms without competitive advantage.

Unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by such expansion.

Doing merger only to have bigger cash flow doesn’t make sense if both companies don’t have an idea how to use that cashflow wisely.

12. Using advantage

wrestling the gorilla

Company which developed porous material wanted to start a textile brand.
You can win at 1000m run. But now you want to change the sport and start wrestling the gorilla.

competitive advantage in business

If you can produce cheaper than competition, or provide more value.

For an advantage to be sustainable, your competition must not be able to reproduce it. Isolating mechanism: patent, reputation, commercial and social relationships, network effect, economy of scale, knowledge and skills gained through experience.

“interesting” advantages

Interesting business when you can find ways to increase value:

• fiji water – it’s just a water but positioned as clean water from before industrial revolution
• roll – bought farmland as hedge. Then started increasing demand for nuts via marketing. Then invested in nut processing. In the meantime competition was falling behind because in agriculture there’s a 7-10 lag until the trees mature

Deepening advantage

Increase value or/and reduce costs
(Buyer’s costs include: searching for product, evaluating it, traveling to buy it, waiting for it to arrive, switching to it, installing it, learning it)

You need to analyze the process to identify improvements. It doesn’t happen organically. E.g. bricklayers have been putting bricks for thousands years without improvements

Broadening the extent of advantage

Building on skills and resources.
Companies need to be careful to not enter field they know nothing about.

Extensions based on proprietary know-how benefit from the fact that knowledge is not “used up” when it is applied; it may even be enhanced. By contrast, extensions based on customer beliefs, such as brand names, relationships, and reputation, may be diluted or damaged by careless extension. Although great value can sometimes be created by extending these resources, a failure in the new arena can rebound to damage the core.

Example of extension based on Brand: Disney. You go to the movie for a Disney movie. But you don’t do the same with Sony or Paramount. They have a brand and carefully decide what makes a Disney movie – a set of rules. Thanks to that they could have released Pirates of The Carrebinaen even though it’s not a cartoon.

Creating higher demand

Example POM drink. They had pomegranate bushes. They invested into research of benefits of the fruit.

Strengthening isolating mechanism

Example : oil industry. Government set the rule that oil belongs to the one who pumped it out. But they used the same reservoir. So it mattered who pumped the fastest.

Another approach is to set moving target. E.g. windows. By constantly evolving it’s harder to replicate it

13. Using dynamics

It’s easier to defend if you’re on a hill.

One way to get to the hill is through innovation. E.g. developing new business model.

Another one is through a wave of change. A leader needs to sense the wave, and its second-order effects.
E.g. popularity of TVs led to more independent movie producers because old-school Hollywood studios didn’t produce good enough movies to lure customers.

Sensing the wave’s swell

Shift from economy of scale ( e.g. big projects at IBM) to skills of individuals (e.g. software advantage of Cisco)

discerning the fundamentals

To make good bets on how a wave of change will play out you must acquire expertise to question the experts.

One example wave: rise of software as a source of competitive advantage.
Intel initially was only a producer, the design belonged to customers. They traded the ownership of designs with lower prices. This let Intel sell general-purpose microprocessors.

Both hardware design and software were expensive. But software had shorter feedback loop. It let experimenting cheaper.

Why computing deconstructed

The invention of microprocessors was the inflection point.
There was no longer a need for integration, buying a computer from a single manufacturer who build everything.
The industry switched from vertical to horizontal.
Now the microprocessor was built in every component. There were dedicated GPU, Hard drive, OS, manufacturers etc.

Cisco systems rides the wave

Three waves

• shift towards software
• explosion of corporate networks
• IP protocol

Big players had their proprietary protocols so the were unwilling to support IP which would decrease their isolation

Some guideposts

• Rising fixed costs
  • e.g. color film – Kodak, computers – IBM. The industry consolidated so only big players could afford
• Deregulation
  • some buyers subsidize others
  • big regulated players do not know their own costs
• Predictable biases
  • fallacy : the growth will not stop. No one projects a sudden drop in sales. But it’s natural especially for durable goods like flat screen tv. The markets saturate
  • fallacy: copying the biggest players is the way to go.
• incumbent response
  • they usually resist transition that undermines their complex skills
• attractor states
  • a desired state based on efficiency
  • e.g. move towards unification and IP
  • general purpose newspapers make no sense. Advertisers want more targeted users (e.g. Google)

14. Inertia and entropy

Inertia – inability to change.
Entropy makes it necessary to work on maintaining organization’s purpose, form and methods even if there are no changes in strategy or competition.

Intertia

The inertia of routine

• example of airlines which didn’t change their planning routines after deregulation
• it can help to hire consultants, acquire company with better methods. It may be necessary to replace people who invested many years developing and using obsolete methods

The Inertia of culture

• example of AT&T – turned out they were first and foremost research lab and didn’t have competence to build consumer products
• The first step to fix if to simplify – routines, processes; remove excess administrative layers; fragment operating units to break political coalitions and expose them to more performance scrutiny

The Inertia by proxy

• not changing because the customers don’t change. Relying on customer’s inertia
• example of telephone companies who didn’t offer cheaper DSL to not cannibalize existing profit streams

Entropy

Hump chart. If you accumulate “gain to operate” and start accumulating, if there locations that generate loss and others subsidize it, the chart will create a “hump”

The company increased revenue from 100k to 5m by closing 5 worst locations, and sharing best practices from the best locations to the rest.

Another example from General Motors:
It was not clear what are the differences between brands. The Sloans product policy was “quality competition against below that price tag; price competition against cars above that price tag”.
This cleaned up offering of the brands. Chevrolets were cheaper, Cadillac were expensive.
Over time entropy creeped in. Chevrolet could increase sales by introducing more expensive products. This broke the design. It caused internal cannibalization.

15. Putting it together

Nvidia

• shorten release cycle from 18months to 6.
  • make 3 teams with 18-month cycle but overlap to ship new product every 6m
  • faster cycle means your product is the top one more often. It also creates more buzz
  • investing heavily in simulation to not waste time on fixing design errors
• building drivers themselves (UDA Unified Driver Architecture) because boardmakers had no incentive to share learnings to not benefit competition
• Intel didn’t manage to compete on GPU because they wouldn’t redesign their pipelines for a side business. And they had longer development cycles
• Nvidia could have acquires ArtX but ignored that, and they were eventually acquired by AMD which was able to also catch up with 6 months release cycles

16. The science of strategy

A new strategy is a hypothesis and its implementation is an experiment

The problem of coming up with a good strategy has the same logical structure as the problem of coming up with a good scientific hypothesis.

The key differences are that most scientific knowledge is broadly shared, whereas you are working with accumulated wisdom about your business and your industry that is unlike anyone else’s.

Building new strategy is not deduction. Because this would assume that all important knowledge is already known. And that kills innovation.
Instead you need induction, analogy, judgement and insight.

Anomalies are the starting point for new discoveries

Business anonaly. Italians drank “fast coffee”, and it was relatively expensive. Yet there were 200k espresso bars in Milan. Schultz wanted to recreate that experience in America -> Starbucks

Initial idea needed modifications. After hundreds of iterations (localizing) it has gone far away from the original concept

Europeans think Starbucks is a “american coffee”. Americans think Starbucks is an “Italian espresso bar”. They are so different

• tables vs standing at the bar
• take out vs no take out
• owning coffee brand vs using segafredo
• chain vs local bars
• milk vs pure coffee

17. Using your head

Make a list of 10 most important things you can do, and then start doing number one.

• listing 10 to counter myopia
• you can do – they are actionable

Example of strategy workshops: assignment was to think about one sentence recommendation to TiVo.
The host was asking how they reached the conclusion and wether they considered other ideas.
We usually go with the first idea, instinct. We rather think about rationales for our idea than questioning it.

People normally think of strategy in terms of action. But strategy also embodies an approach to overcoming some difficulty. Identifying the difficulties and obstacles will give you a much clearer picture of the pattern of existing and possible strategies.

You can create a virtual panel of experts in your mind. Imagining what certain people would say about your idea, based on your interpretation of them and their personality.

A sailor has to judge the wind. In business and politics judgements are about people, anticipating their actions and reactions. It starts with knowing yourself, your abilities and biases.

18. Keeping your head

Global crossing case

• cable traffic which was a typical commodity. The customer didn’t care who was the provider. There was big competition on price.
• people believed that this company is special because of the stock prices – closed circle: growth projected based on stock price growth, and capacity of cables – no one question whether the capacity is going to be even used (overcapacity)

2008 financial crisis case

• social herding – looking at others assuming they know what they are doing
• the inside view – theory says it’s going to collapse, but “this time it’s different”
• smooth sailing fallacy – there was no disaster so far so why would it happen now?
• if you get profits when things go well but someone else takes loss when things go bad you seek risk