Good Strategy/Bad Strategy: The Key to Effective Business Decision-Making (Book Digest)

In "Good Strategy/Bad Strategy," Richard Rumelt presents a clear framework for understanding effective business strategy. Good strategy is about identifying the one or two critical issues in a business situation and concentrating effort on these pivot points. Effective strategists focus their energy where it will have the greatest impact rather than spreading resources thinly across many initiatives.

These ideas are important for salespeople because the most powerful forms of value aren't just about features and benefits. They're about helping your customer's strategy succeed. The path to selling transformative deals is to show your prospects that your product will help them overcome their most important obstacles and create distinctive advantage in their market.

To do that, you have to understand their strategy.

The Kernel of Good Strategy

The foundation of Rumelt's approach is what he calls "the kernel" of good strategy, consisting of three essential elements:

1. Diagnosis: A clear-eyed assessment that defines the nature of the challenge. This involves identifying patterns in the problem, determining which aspects are most critical, and defining a domain for action. The diagnosis honestly acknowledges obstacles rather than avoiding them.

2. Guiding Policy: The overall approach to overcoming the obstacles identified in the diagnosis. A good guiding policy creates advantage by anticipating others' actions, reducing complexity, exploiting leverage points, and ensuring that actions are coherent rather than working at cross-purposes. The guiding policy narrows the field of action and explains why certain approaches are being taken.

3. Coherent Actions: Specific, coordinated steps that implement the guiding policy. These actions must reinforce one another to create a concentration of power against a pivotal objective. Coordination itself becomes a source of advantage, as the whole becomes greater than the sum of its parts.

This three-part kernel distinguishes good strategy from vague aspirations or a simple collection of goals. Understanding this framework allows you to position your solutions as essential components of a coherent strategic response to your customer's key challenges.

Bad Strategy and Its Sources

Rumelt believes that most organizations have either bad strategy or no strategy at all.

He identifies four hallmarks of bad strategy:

1. Fluff: Empty, superficial language that uses unnecessarily complex words to mask the absence of thought.

2. Failure to face the challenge: Neglecting to identify and analyze the obstacles that must be overcome.

3. Mistaking goals for strategy: Simply stating desires without addressing how to overcome obstacles.

4. Bad strategic objectives: Objectives that fail to address key issues or are impractical to implement.

Bad strategy often stems from specific organizational failures:

• Avoiding choices: Creating consensus by accommodating multiple conflicting objectives rather than making hard priority decisions.

• Template-style strategy: Relying on generic vision statements and inspirational language rather than thoughtful analysis.

• "New Thought" positive thinking: The mistaken belief that positive thoughts alone can create success.

For salespeople, recognizing these patterns of bad strategy can help them make more effective strategic arguments in favor of a purchase by focusing on the kernel of good strategy and avoiding arguments based on the hallmarks of bad strategy.

Leverage: The Key to Strategic Impact

Good strategy works by harnessing power and applying it where it will have the greatest effect.

Rumelt identifies three primary sources of strategic leverage:

1. Anticipation: Foreseeing changes before others do. This involves considering the habits and constraints of other players and identifying predictable downstream effects of current trends. Toyota's early development of hybrid engines anticipating rising fuel prices exemplifies this approach.

2. Pivot Points: Identifying places where small adjustments can unleash significant energy. These are the fulcrums where focused effort multiplies effectiveness.

3. Concentration: Focusing resources on fewer objectives to generate larger payoffs. This often involves threshold effects where a certain critical mass must be achieved before returns materialize. Dominating a small market completely can be more profitable than having minor presence in many markets.

Salespeople can persuade more effectively by framing your product as providing leverage against the buyer's key challenges—showing how your solution can create outsized returns by addressing pivotal issues rather than merely incremental improvements.

Advantage: The Foundation of Strategic Success

Advantages are rooted in differences between you and your competitors. Good strategy identifies which differences matter most and maximizes their impact.

Rumelt outlines several mechanisms for increasing the value of an advantage:

1. Deepening advantages: Widening the gap between buyer value and cost, either by increasing perceived value or reducing costs.

2. Broadening advantages: Extending existing skills and resources to serve new markets or customer segments.

3. Creating higher demand: Redefining products to increase their perceived value, as seen in the transformation of pomegranate juice into a premium health food.

4. Strengthening isolating mechanisms: Creating barriers that prevent competitors from replicating your advantage, such as continuous innovation that creates a moving target.

Advantages deliver either lower costs or greater perceived value. The most valuable advantages are hard to duplicate, like network effects or established brands.

Salespeople can create an effective value proposition by demonstrating how your product strengthens a customer's strategic advantages or helps them develop new ones.

Strategic Thinking in Practice

Good strategy emerges from clear thinking about specific challenges.

Rumelt emphasizes that effective strategists avoid common cognitive traps:

• They focus on the intersection of what's important and what's actionable

• They question their initial intuitions and avoid overconfidence

• They commit to clear priorities rather than endless lists of options

• They take an "outside view" that considers how similar situations have played out elsewhere

The key insight for salespeople is that organizations develop strategy to address specific challenges by concentrating resources where they will have the greatest effect. By understanding these challenges and responses, you can align your product with the buyer's strategy and build momentum for a purchase.

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If you liked this article, have a look at our other book digests in our series Required Reading for Salespeople. You can also check out the P.S.I. Selling Content Page for more insights on sales communication, strategy, and leadership.

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