1-Sentence-Summary: Good Strategy, Bad Strategy is a concise guide to great business-planning for the long term, revealing the 4 symptoms of bad strategy, the 3 pieces of a good one, and the 10 sources of power businesses can tap into to realize theirs.
Read in: 4 minutes
Favorite quote from the author:
This week, I received some sad news: The only burger place in my hometown is closing up shop. Why? In a nutshell, bad business strategy.
The burger place owners also operate the best hotel in our 40,000-people city. It was a great idea to open a burger place where none existed, but a bad one to apply the same high-class concepts and pricing. Our town gets plenty of business travelers but not enough locals to support a $20-burger place. Could a more rustic but affordable menu have done the trick? Who knows?
Actually, Richard Rumelt would. Rumelt is a former Harvard and UCLA professor of business and a legend in corporate strategy. His 2011 book, Good Strategy/Bad Strategy: The Difference and Why It Matters, condenses his 5-decade career into one coherent framework for propelling any organization to the top of its industry.
Here are 3 lessons to help you and your company succeed:
- Bad strategy often goes back to the same 4 mistakes.
- A good strategy only has 3 simple components.
- Study Nvidia’s history to see an example of good strategy in action.
Let’s understand the difference between good and bad strategy and how we can put the former into action!
Lesson 1: Bad strategy is based on 4 mistakes many companies make over and over again.
Good strategy is often easy to explain in hindsight. Of course it was a great idea for Apple to focus all of its resources on the Macintosh, or for McDonald’s to build playgrounds next to each restaurant. The Macintosh was a global success, and McDonald’s became the family-friendly fast-food restaurant of choice.
Examples of bad strategy are harder to find, partially because many bad-run businesses go bust sooner or later. It’s also not nearly as cool to talk about. Thankfully, Rumelt breaks down the 4 main symptoms of bad strategy for us:
- Fluff is “a form of gibberish masquerading as strategic concepts or arguments.” Whenever someone uses big words to describe a plan that makes no sense, you know bad strategy is in the air.
- Failure to face the challenge is what may have ended my town’s only burger place. What we needed was an affordable joint with homemade burgers. What we got was a fancy dining experience which most people couldn’t afford.
- Mistaking goals for strategy. Growing your revenue by 20% isn’t a strategy. That’s a wish you have for your business. Neither are “maintaining your profit margins,” “delighting your customers,” or “being the firm of choice.” Strategy is about the how, not the what.
- Bad strategic objectives include long but unfocused to-do lists (“dog’s dinner objectives”) and “blue-sky objectives” that don’t actually address the challenge at hand.
Okay, so much for what not to do. But what is good strategy? Let’s find out!
Lesson 2: A good strategy only has 3 parts: diagnosis, guiding policy, and a set of actions.
Ever since Elon Musk became the CEO of Tesla in 2008, the company’s mission has been “accelerating the world’s transition to sustainable energy.” But how did they deliver on this mission so far and become one of the most valuable companies in the world along the way? Good strategy was not the only, but surely one big piece of the puzzle.
According to Rumelt, the “kernel” of a good strategy goes back to 3 elements:
- Diagnosis. First, you must identify the challenge and simplify it to its most critical aspects.
- Guiding policy. Next, you choose an overarching approach of you’ll deal with the challenge.
- A set of coherent actions. Finally, you decide on a series of actions you’ll take to implement your policy.
Tesla’s first diagnosis was that electric cars were neither performant nor desirable. If the world was to transition to EVs, EVs would have to be something people actually want. Therefore, their guiding policy became to make cool-looking electric cars that could do everything a comparable gas car could do and more, starting with one, the Tesla Roadster. Then, they developed, built, sold, and shipped the Roadster to customers.
The Roadster was a hit with early buyers, and it enabled them to get more financing to build more cars. Today, Tesla sells 5 different models, with several more in the works and over 5 million units sold to date!
As you can see, good strategy is simple in its essence, but it can be hard to develop and even harder to make a reality. Let’s look at a case study to understand what that looks like in action.
Lesson 3: Nvidia is the perfect case study of good strategy in action.
As I’m writing these words, the chip manufacturer and leading hardware provider for the AI revolution, Nvidia, is the 3rd-largest company in the world. Back in the early 90s, however, no one knew their name. Rumelt explains the origins of their meteoric rise.
After their first product, a multimedia processing chip, failed, Nvidia noticed the nascent PC-gaming market’s strong desire for 3D-graphics chips. If early local and online multiplayer games like Doom and Quake were anything to go by, the demand for 3D-chips would be virtually limitless. That was Nvidia’s diagnosis.
Their guiding policy was to only focus on those chips going forward. Also, instead of using technological advances in the industry to cut costs, they would boost each chip’s performance as much as they possibly could. Finally, they would release new products every 6 months instead of every 18, which was the current industry cycle.
Nvidia then took action to implement their policy. First, they set up 3 different development teams with overlapping schedules to meet their 6-month release cycle goal. Next, they invested heavily in simulating each chip’s performance and electrical characteristics up front in order to minimize errors for each release. Finally, Nvidia began making and shipping its own driver software with each chip, greatly simplifying the usability and efficiency of their graphics cards for end users.
The result of Nvidia’s good strategy? The first GeForce graphics card, released in 1999, was “one $100 chip, running faster than the Reality Engine, which had cost $100,000 dollars in 1992.” Their chips became 157% more performant every year from 1997-2001, and then 62% each year from 2002-2007 — and today, they are the gold standard with an 80% market share for desktop GPUs.
In the long run, good strategy makes all the difference. Diagnose your challenges, form a guiding policy, and then commit to an action plan to see it through. May the market be with you, and here’s to your good strategy!
Good Strategy, Bad Strategy Review
Good Strategy, Bad Strategy offers a simple but classic business framework that cuts through the noise. It’s packed with useful examples and case studies. Whether you’re studying business in college, working at a big firm, or running your own, I recommend you browse this book and see what helpful bits you can find!
Who would I recommend our Good Strategy, Bad Strategy summary to?
The 21-year-old business student who’s bored of her college materials, the 33-year-old CEO of a fast-growing company, and anyone who wants to know why some of the world’s biggest companies succeeded.
