Good Strategy vs. Bad Strategy
Value Creation Plan Newsletter #110
"Strategy" has become one of the most abused words in the dictionary, now truly devoid of meaning. Its mere utterance evokes hundreds of PowerPoint pages filled with blindingly obvious statements from management consultants, the stale air of poorly ventilated strategy offsite conference rooms, or the polished smiles of marketing teams unveiling new company slogans as if they were revolutionary strategies.
But strategy is none of these things - it isn't fluffy, it isn't a compromise, and it certainly isn't an umbrella statement crafted to describe your company's purpose in a catchy way.
I was revisiting some of the classic books that shaped my thinking, and there's one I consistently return to: "Good Strategy Bad Strategy: The Difference and Why It Matters" by Richard Rumelt, one of the most influential boks on strategy.
The book's premise is powerful:
Strategy is not about ambition, leadership, vision, planning, tools, or slide decks. Bad strategy is like a verbal tic, used everywhere. Marketing teams start taliking about marketing strategy, data processing became IT strategy, and acquisitions morphed into growth strategy.
Instead, good strategy is as simple as discovering critical factors within a situation and designing coordinated, focused actions to address them.
Stripped to its essentials, a good strategy comprises three elements:
A diagnosis that defines or explains the challenge's nature, simplifying reality's complexity by identifying critical situational aspects
A guiding policy that specifies the chosen approach to overcome the critical observations identified in the diagnosis
A set of coherent actions, including resource commitments, to accomplish the guiding policy
As a shorthand to the above, I often use the Why, the What, and the How.
While diagnosis remains crucial, the findings might vary depending on the CEO that the company has at that time (“if all you have is a hammer, everything looks like a nail”).
Even if the diagnosis is flawed, it is useful in expressing a strong viewpoint to inform subsequent actions. Without a strong viewpoint, the company starts going into a spiral. E.g. if you are simultaneously pursuing international expansion, reducing costs of goods sold, and improving employee engagement… and you'll struggle to prioritize between sales teams' requests for rush custom orders and manufacturing's preference for uninterrupted production runs.
You can't have employees running around guessing what aligns with strategy, as too many decisions would escalate and paralyze the company.
The book emphasizes this clarity over complexity to ensure everyone understands how diagnosis, policy and actions come together.
"Without action, the world would still be an idea"
- INSEAD founder Georges Doriot
A good example of this in powerful simplicity in action is from the excellent podcast "Acquired" and its deep-dive company analysis of CostCo.
Here's how Costco aligns with these principles:
Diagnosis of the Problem
Costco identified traditional retail models' struggles with inefficiencies, high operational costs, and price-sensitive customers. They diagnosed that offering value through low prices and simplicity could address these challenges while fostering customer loyalty.
Guiding Policy
Costco adopted a clear guiding policy centered on cost leadership and differentiation:
Membership Model: Charging membership fees generates a stable revenue stream offsetting their low-margin pricing strategy.
Limited Selection: Offering around 4,000 SKUs (compared to 30,000–40,000 in traditional supermarkets) enables better supplier deals, reduces overhead costs, and simplifies operations.
Private Label (Kirkland Signature): Differentiating through high-quality private-label products at lower prices builds customer trust and loyalty.
Coherent Actions
Costco's actions align tightly with their guiding policy:
Bulk Purchasing: Encourages high inventory turnover and reduces holding costs, enabling lower customer prices.
Operational Efficiency: Minimal advertising, streamlined logistics, and disciplined product selection maintain low costs and operational efficiency.
Intelligent Loss of Sales: Costco foregoes unnecessary product variety or services that might compromise efficiency or profitability.
Once you start looking at strategy through the Good Strategy vs. Bad Strategy lens, you quickly realise how most companies still pursue laundry lists of desirable outcomes, without doing the hard work of thinking clearly.
Let’s make 2025 the year of Bad Good Great strategies,
Juan
Great insight. "Strategy" is definitely overused in corporate settings but the absence of coherent strategy is felt all over.