Good Strategy Bad Strategy

A good strategy has an essential logical structure that I call the kernel. The kernel of a strategy contains three elements: a diagnosis, a guiding policy, and coherent action.

Diagnosis is key. Good strategy begins with a clear-eyed assessment of the challenge at hand. This diagnosis simplifies complex realities by identifying critical aspects of the situation. The guiding policy then outlines an overall approach to overcome the obstacles identified in the diagnosis. Finally, coherent action involves coordinated steps designed to support the guiding policy.

Unexpected power. Effective strategies often gain advantage because rivals don't anticipate them. This element of surprise comes from insightful diagnosis and creative problem-solving, not just from secrecy. Good strategies coordinate policies and actions in ways that create a competitive punch or powerful problem-solving effect.

Examples of good strategy:

• Hannibal's victory at Cannae: Anticipated Roman behavior and designed coordinated actions

• Walmart's retail strategy: Integrated network of stores, distribution centers, and information systems

• Apple's turnaround under Steve Jobs: Simplified product line and focused on design and user experience

Bad strategy follows the crowd, substituting popular slogans for insights.

Hallmarks of bad strategy:

• Fluff: Excessive use of buzzwords and jargon to hide lack of substance

• Failure to face the challenge: Avoiding the hard work of identifying and analyzing obstacles

• Mistaking goals for strategy: Stating desires without a plan to overcome difficulties

• Bad strategic objectives: Impractical or incoherent goals that fail to address critical issues

Common causes of bad strategy:

• Unwillingness to make tough choices

• Reliance on template-style strategy formulation

• Overemphasis on "vision" without concrete plans

• New Thought-style positive thinking that ignores real-world obstacles

Bad strategy often arises from organizational inertia, political compromises, or leaders' desire to please everyone. It can also stem from a misunderstanding of what strategy actually is, confusing it with goal-setting or financial forecasts.

To achieve leverage, the strategist must have insight into a pivot point that will magnify the effects of focused energy and resources.

Leverage involves identifying and exploiting pivot points where concentrated effort can produce outsized results. This requires deep understanding of the situation and creative problem-solving to find unexpected advantages.

Proximate objectives are goals that are close enough at hand to be feasible. They provide clear direction and help coordinate problem-solving efforts. Good proximate objectives break down larger challenges into manageable steps.

Design in strategy involves creating a cohesive configuration of resources and actions that yields advantage. Like designing a high-performance machine, good strategic design coordinates multiple elements to work together efficiently.

Key elements of strategic design:

• Mutual adjustment of parts

• Focus on critical interactions

• Balance between integration and flexibility

• Adaptation to competitive context

To generate a strategy, one must put aside the comfort and security of pure deduction and launch into the murkier waters of induction, analogy, judgment, and insight.

Riding waves of change. Successful strategies often capitalize on broader trends and transitions in technology, markets, or regulations. This requires leaders to develop a keen sense for emerging patterns and the ability to anticipate second-order effects.

Identifying inflection points. Strategic opportunities often arise during periods of significant industry change. These inflection points can upset existing competitive positions and enable new strategies.

Examples of strategic exploitation of change:

• Cisco Systems' rise in networking equipment

• Apple's transformation of the music industry with iTunes and iPod

• Amazon's pioneering of e-commerce and cloud computing

Attractor states. Understanding the long-term equilibrium state an industry is moving towards can provide valuable strategic insight. This concept helps leaders distinguish between temporary fluctuations and fundamental shifts in industry structure.

Even with change programs running at full throttle, it can take many years to alter a large company's basic functioning.

Types of organizational inertia:

• Inertia of routine: Entrenched processes and habits resist change

• Cultural inertia: Deeply held beliefs and values impede adaptation

• Inertia by proxy: Stakeholders' resistance to change affects the organization

Entropy in organizations refers to the tendency for order and focus to degrade over time without active maintenance. This requires leaders to constantly work on reinforcing purpose, structure, and methods.

Overcoming inertia and entropy:

• Simplification: Strip away unnecessary complexity

• Fragmentation: Break political coalitions and expose inefficiencies

• Triage: Identify units to close, repair, or use as nuclei for new structures

• Challenge: Set ambitious goals to build new habits and routines

Leaders must recognize that changing large organizations is an intensely strategic challenge requiring diagnosis, guiding policy, and coherent action.

A strategy is, like a scientific hypothesis, an educated prediction of how the world works.

Strategy as hypothesis. Good strategies, like scientific theories, are testable predictions about what will work in a given situation. They should be based on careful observation and analysis, but also involve creative insight.

Empirical approach. Effective strategists, like good scientists, pay close attention to real-world results and are willing to revise their theories based on new evidence. This requires:

• Careful observation of outcomes

• Willingness to acknowledge and learn from failures

• Continual refinement of strategic hypotheses

Importance of anomalies. Unexpected results or contradictions to prevailing wisdom often point to important strategic insights. Leaders should cultivate the ability to spot and investigate anomalies.

Proprietary information. Like scientific experiments, business operations generate valuable data. Strategists should design their organizations to capture and learn from this proprietary information.

Being strategic is being less myopic—less shortsighted—than others.

Overcoming cognitive limitations. Good strategists develop techniques to counteract natural human biases and limitations in thinking. This includes:

• Making lists to overcome forgetfulness and force prioritization

• Using mental models and frameworks to structure complex problems

• Cultivating a "panel of experts" to critique ideas

Dangers of social herding. During market bubbles or periods of excessive optimism, it's crucial for leaders to maintain independent judgment. This requires:

• Understanding fundamental industry economics

• Recognizing patterns from historical examples

• Resisting the temptation to follow the crowd

Inside view vs. outside view. Strategists must balance the detailed knowledge of their specific situation (inside view) with broader patterns and statistics (outside view). Overreliance on the inside view can lead to overconfidence and failure to learn from relevant examples.

Practicing judgment. Good strategic thinking is a skill that can be developed through practice. Leaders should:

• Commit judgments to writing before discussions

• Evaluate the accuracy of past predictions

• Continuously refine their ability to assess situations and make decisions