What Makes Good Strategy, What Makes Bad Strategy

What Makes Good Strategy, What Makes Bad Strategy

Rumelt says…

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What was so great about this book?

I’ve just read Good Strategy Bad Strategy: The Difference and Why it Matters by Richard P. Rumelt. It’s a small book that you can read in a few hours. It’s clear and simple, real world, and honest.

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This book frees you from the ‘cascading’ ‘avalanche’ of:

  • Values
  • Mission
  • Vision
  • Strategies
  • Objectives
  • Goals
  • KPIs

Good strategy is rare. Most companies just have performance goals but no strategy to achieve them. Or they have fluffy aspirations.

Signs of bad strategy:

  • Avoids identifying the company’s core problem
  • Makes no hard choices, pushes those onto others
  • Has no focus, company ends up with conflicting goals
  • Is a list of outcomes (even big, hairy, audacious ones)
  • Does not build on the competence and cumulative learning of the organization
  • A ‘cascading’ ‘avalanche’ of fluffy Values, Mission, Vision, Strategy, Objectives, and Goals

What is good strategy?

  • “It comes from top management identifying the problem and setting a path to addressing it.”
  • “A coherent strategy can become a source of competitive advantage.”
  • “The application of the scientific method.”
  • “Presses where you have an advantage.”
  • “Strength applied to the most promising opportunity.”
  • “Good strategy has an objective that is close enough to be feasible.”

Three components of good strategy

  • Diagnosis – Identifies the core challenge the company is facing
  • Choice – Decides the direction the company will take and what direction it will stop moving in
  • Action – Determines big picture actions to move in that direction, keeping the company focused

More thoughts on strategy

  • Strength – Takes advantage of an existing strength, but reorganizes or redirects it in a coherent direction
  • Choice – Makes a choice to focus energy and resources in that direction, to the determent of other choices
  • Losers – Since good strategy must make a choice, a sign of good strategy is that there will be losers in an organization, areas where the company will retreat and pull back resources
  • Beware of a “No losers” “strategy”, it is not
  • Strategy is about testing and refining your hypothesis
  • Based on scientific method of developing a hypothesis, running your test, honestly interpreting your results, re-testing with modifications
  • Another author, Dr. W. Edwards Deming, called this the PDSA cycle – Plan, Do, Study, Act
  • The objective should make a big difference and will likely address a limiting factor
  • It should be able to help a company lay out, step-by-step what actions to take, what goals to shoot for
  • Think outside of your organization from the customer and the competitors’ position
  • Good strategy often simple, but takes time

Competitive success and wealth creation

  • The joint outcome of the quality of an organization’s accumulated resources and its coordinated action
  • By strengthening a competitive advantage or by increasing the demand for the scarce resources supporting it

To wrap up, the parts to good strategy:

  • Diagnosis
  • Choice (Author calls this guiding principles)
  • Action (Author calls this coherent action)

Learn more about good strategy:

Good Strategy Bad Strategy: The Difference and Why it Matters, by Richard P. Rumelt

Transform Your Business with Dr.Deming’s 14 Points, by Andrew Stotz, PhD, CFA

Article by Dr. Andrew Stotz

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Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.

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