Good Strategy, Bad Strategy | Richard Rumelt

Richard Rumelt is a legend in the world of strategy. Author of "Good Strategy/Bad Strategy" and "The Crux," he's been teaching strategy for over four decades at UCLA's Anderson School of Management and Harvard Business School. His strategic insights are sought after by major corporations including Microsoft, Apple, and Intel, plus governmental organizations like the U.S. Army Special Operations Command. This conversation reveals the concrete elements that separate good strategy from bad strategy—and why most organizations are doing it wrong.

Key Takeaways

• Strategy is simply a design for overcoming a high-stakes challenge, not a list of goals or ambitions
• The three essential elements (the "kernel"): diagnosis of the challenge, guiding policy for approach, and coherent actions that reinforce each other
• Bad strategy disguises itself as goals, fluff, or contradictory actions—saying "we want to grow faster" isn't a strategy
• Focus creates power—trying to address too many priorities simultaneously turns good strategy into bad strategy
• Power comes from asymmetries and advantages you can exploit, whether through relationships, timing, unique knowledge, or network effects
• Don't call it "strategy"—call it an "action agenda" focused on specific things you will do to address your biggest challenge
• Organizations need a decider who can resolve conflicting interests and actually commit to choices rather than trying to please everyone
• Historical knowledge provides the analogies and patterns necessary for strategic thinking since there's no universal science of strategy

Timeline Overview

• 00:00–15:04 — Strategy Fundamentals: What strategy actually is and the three essential components (diagnosis, guiding policy, coherent actions) that form the "kernel" of good strategy
• 15:04–41:13 — Bad Strategy and Focus: Common signs of bad strategy including goal-setting masquerading as strategy, plus why focus creates power and the importance of identifying asymmetries
• 41:13–55:23 — Power and Historical Thinking: Different types of power available to organizations, why historical knowledge enables strategic insight, and practical examples from business and warfare
• 55:23–01:15:44 — Action Agendas and The Crux: Why to call strategies "action agendas," how to identify the hardest challenge (the crux), and the role of insight in breakthrough solutions
• 01:15:44–01:26:04 — Organizational Dynamics: Why hierarchy and decisive leadership are necessary to overcome conflicting interests and execute strategies within complex organizations
• 01:26:04–END — Startup Strategy and Practical Tools: How strategy applies to early-stage companies, the "value denials" exercise for finding opportunities, and Richard's consulting approach

The Strategy Kernel: Three Elements That Actually Work

Most business leaders confuse strategy with goal-setting, but Richard Rumelt's decades of experience reveal that real strategy requires three specific components working together. He calls this framework "the kernel"—the irreducible core that separates genuine strategy from wishful thinking.

Diagnosis means understanding the challenge you face, not just stating what you want to achieve. When clients tell Rumelt "we want to grow faster," he responds with a crucial question: "What makes it hard?" This forces leaders to move beyond aspirations to identify the actual barriers preventing success.

Guiding policy defines your approach to the challenge. This isn't a comprehensive plan but rather the core principle that guides your actions. Rumelt encountered a client with "17 priorities"—the opposite of a guiding policy. As he notes, "Priority means the first. It doesn't mean the grab bag of everything you can think of that might matter."

• Diagnosis requires identifying what specifically makes your challenge difficult rather than simply stating desired outcomes
• Guiding policy provides coherent direction rather than a wish list of everything the organization wants to accomplish
• Coherent actions must reinforce each other and directly address the diagnosed challenge
• All three elements must be present—missing any one means you don't have a strategy

Coherent actions represent the specific steps you'll take that reinforce each other and address your diagnosis. These actions must not contradict each other—a surprisingly common problem. Many companies simultaneously pursue growth and profit maximization without recognizing the inherent tension.

The kernel's power lies in its simplicity and coherence. Each element reinforces the others: diagnosis informs the guiding policy, which shapes coherent actions, which in turn validate or challenge the original diagnosis. This creates a self-reinforcing system rather than the scattered efforts that characterize most organizational "strategies."

Bad Strategy: When Goals Masquerade as Strategy

Bad strategy pervades organizations because it's easier to create than good strategy. Rumelt identifies several common forms, with goal-setting being the most prevalent. Leaders mistake ambitions for strategy, creating documents filled with performance targets rather than approaches for achieving them.

"Goals are aspirations and ambitions are non-strategy," Rumelt explains. When organizations say they'll "work together more effectively" or "grow faster," they're describing desired outcomes without addressing how to achieve them or what obstacles prevent current success.

Fluff represents another form of bad strategy—using fancy words to describe situations without providing clarity. Organizations often believe abstraction equals sophistication, creating word salad that obscures rather than illuminates their actual challenges and approaches.

• Bad strategy often lacks diagnosis, jumping directly to solutions without understanding the problem
• Incoherent actions that fight each other signal strategic confusion rather than clarity
• Template thinking replaces genuine analysis of specific situations and challenges
• Missing any element of the kernel typically indicates bad strategy rather than good strategy

Incoherent actions reveal strategic confusion. Organizations pursuing contradictory objectives—like simultaneously cutting costs and expanding rapidly—haven't thought through the tensions inherent in their choices. Good strategy requires making trade-offs rather than trying to have everything.

Rumelt emphasizes that bad strategy isn't just ineffective—it's actively harmful. It wastes resources, confuses employees, and prevents organizations from focusing energy on solvable problems. The prevalence of bad strategy makes good strategy even more powerful as a competitive advantage.

The Power of Focus: Why Concentration Creates Advantage

Focus transforms potential energy into actual results, much like a magnifying glass concentrates sunlight to create fire. Rumelt learned this lesson as a child at summer camp, struggling to burn cloth with scattered sunlight until a counselor showed him how to focus the rays on a single black thread.

This metaphor captures strategy's essential dynamic: you need a source of power, focus that power on a specific target, and ensure the target can actually be affected. Diffusing effort across multiple objectives dilutes impact and prevents breakthrough results.

"Each time you say yes, you risk turning a decent good strategy into a bad strategy," Rumelt warns. Organizations naturally accumulate priorities as different stakeholders advocate for their interests. Without disciplined focus, good strategies gradually become bad strategies as scope expands beyond manageable limits.

• Focus requires choosing what not to do, not just what to do—the hardest part of strategy
• Complex organizations struggle with focus because different groups have different interests and agendas
• Power without focus dissipates—you need both source and concentration to create impact
• Sustainable competitive advantage often comes from doing fewer things better rather than doing more things adequately

Modern technology companies exemplify both the power and difficulty of focus. Network effects create enormous advantages for platforms that achieve scale, but only if they resist the temptation to chase every opportunity simultaneously. The companies that maintain focus while others dilute their efforts often capture disproportionate value.

Rumelt's framework helps leaders distinguish between legitimate strategic expansion and unfocused drift. True strategic evolution builds on existing strengths and advantages, while undisciplined expansion simply creates more complexity without corresponding benefits.

Identifying and Leveraging Strategic Power

Power in strategy doesn't mean authority—it means competitive advantage that creates asymmetry between you and competitors. In any competitive situation where opponents are equally matched, outcomes become random. Strategy requires exploiting or creating differences that tip odds in your favor.

"For a strategy you need to exploit an asymmetry of some kind," Rumelt explains. This asymmetry might involve being first to recognize opportunities, having unique relationships, possessing specialized knowledge, or controlling scarce resources. The key is identifying what makes your situation different from competitors.

Sometimes power comes from unexpected sources. When Lou Gerstner took over IBM during the microprocessor revolution, he recognized that IBM's primary asset wasn't its technology but its relationships with large corporate customers. This insight shaped IBM's transformation into a services company.

• Power requires asymmetry—some advantage that competitors don't equally possess
• First-mover advantages often prove temporary unless reinforced by other sources of power
• Network effects create powerful advantages but require achieving critical mass before competitors
• Specialized knowledge or capabilities can provide power within defined market segments

Network effects represent one of the most powerful forms of competitive advantage in modern business. The more users a platform attracts, the more valuable it becomes to each user. This creates winner-take-all dynamics where early leaders can maintain dominance even if competitors offer superior features.

Amazon exemplifies how network effects compound over time. The convenience of shopping on Amazon keeps customers from leaving, while the vast selection attracts more merchants, which improves selection for customers, creating a self-reinforcing cycle that's difficult for competitors to break.

However, power sources aren't permanent. What provides advantage in one era can become a liability in the next. IBM's large corporate customer base, once a source of strength, became a weakness when those same customers resisted moving to cloud computing, allowing smaller, more agile competitors to capture the next wave of growth.

Historical Thinking: The Foundation of Strategic Insight

Unlike physics or engineering, strategy has no universal equations or predictable laws. Strategic thinking relies heavily on analogies drawn from historical experience, making broad historical knowledge essential for effective strategists.

"I'm a big fan of history," Rumelt emphasizes. "If you don't have access to other times and other places and other things that have happened, it's very hard to think strategically about the situation you're in."

Historical knowledge provides pattern recognition that enables leaders to see familiar dynamics in new situations. Understanding how previous companies, armies, or governments addressed similar challenges offers frameworks for approaching current problems.

• Historical analogies provide frameworks for understanding current challenges since strategy lacks universal laws
• Business history reveals recurring patterns of success and failure across different eras and industries
• Military history often provides insights into competition, resource allocation, and strategic thinking
• Reading primary sources from historical periods provides richer insights than secondhand interpretations

Rumelt recommends studying primary sources rather than just historical summaries. Reading Wall Street Journal front pages from September 1928 forward reveals how the Great Depression unfolded in real-time, showing that even experts didn't understand what was happening as events occurred.

This historical perspective provides humility about predictions while building pattern recognition for strategic challenges. Understanding how similar situations played out previously helps leaders identify potential approaches and avoid common mistakes.

The most valuable histories focus on specific decisions and their consequences rather than broad trends. Learning how particular leaders addressed concrete challenges provides actionable insights for current strategic thinking.

Action Agendas: A Better Way to Think About Strategy

Rumelt advocates abandoning the word "strategy" in favor of "action agenda"—a simple shift that clarifies thinking and improves results. This reframing focuses attention on specific actions rather than abstract concepts or aspirational goals.

"Don't call it a strategy, call it an action agenda," he advises. "You're not creating a strategy, you're creating an action agenda—what are we going to do about this problem?"

This approach starts with identifying important, addressable challenges rather than beginning with missions, visions, or values. Many organizations get trapped in elaborate strategic planning processes that produce impressive documents but little actionable guidance.

• Action agendas focus on specific things you will do rather than outcomes you hope to achieve
• Starting with challenges rather than ambitions provides clearer guidance for action
• The word "strategy" carries baggage from decades of business literature that often confuses rather than clarifies
• Simplicity in language often leads to simplicity in thinking and execution

An effective action agenda balances importance with achievability. Challenges must be significant enough to matter but addressable enough that your organization can actually make progress. This balance requires honest assessment of organizational capabilities and market realities.

The action agenda approach naturally creates focus by forcing choices about which challenges to prioritize. When leaders see all potential challenges listed simultaneously, they quickly realize the impossibility of addressing everything simultaneously.

Rumelt's clients often resist this simplicity, expecting strategies to be more complex or comprehensive. However, the most effective strategies are often surprisingly straightforward once properly focused and clearly articulated.

The Crux: Finding the Critical Challenge That Unlocks Everything

The concept of "the crux" comes from mountain climbing, where it refers to the hardest part of any climb. Rumelt extends this metaphor to strategy: every significant challenge has a crux—the most difficult aspect that, once overcome, makes everything else achievable.

"If you can't do the crux, don't do the climb, because you're going to fall off there," Rumelt explains. In business, identifying and focusing on the crux prevents organizations from working on easier but less critical problems while avoiding the central challenge.

Finding the crux requires deep immersion in the problem rather than surface-level analysis. Like designers and engineers who focus intensely on the hardest technical challenges, strategists must identify what makes their situation genuinely difficult rather than working around the edges.

• The crux represents the hardest part of achieving your ambitions—the make-or-break challenge
• Focusing on the crux prevents wasting energy on secondary issues while avoiding the core problem
• Insight often emerges from sustained focus on understanding what makes problems difficult
• Design thinking and engineering provide models for identifying and solving crux challenges

Insight plays a crucial role in crux-solving. While not guaranteed, insight often emerges from sustained focus on understanding problem complexity. Like Charles Darwin's sudden realization about evolution while stepping off a carriage, strategic breakthroughs often come after extended periods of immersion in challenge details.

The SpaceX reusable rocket example illustrates crux-thinking in action. Elon Musk focused on what made rockets expensive—they burned up on reentry—and developed the insight to land them vertically instead of accepting high heat shield costs.

Organizations often avoid their real crux by working on problems that feel more manageable. However, until the crux is addressed, other improvements typically provide only marginal benefits. Identifying and confronting the crux becomes the foundation for breakthrough results.

Organizational Dynamics: Why Strategy Fails in Practice

Even when leaders understand good strategy principles, organizational dynamics often prevent effective implementation. Different groups within organizations have different interests, creating natural resistance to focused strategies that might disadvantage some constituencies.

"You have a hierarchy because someone in the end has to say it's going to be this way," Rumelt observes. Strategy requires making choices that inevitably create winners and losers within organizations, necessitating clear decision-making authority.

Complex organizations struggle with strategy because achieving focus requires overriding the natural tendency to accommodate all stakeholder interests. When everyone gets something they want, the result is usually a scattered list of initiatives rather than a coherent strategy.

• Organizational complexity creates natural resistance to strategic focus since different groups have different priorities
• Effective strategy requires decisive leadership willing to make choices that disappoint some stakeholders
• Modern leadership literature often emphasizes inspiration over decision-making, making strategic choices more difficult
• Matrix organizations and consensus-building can prevent the clear accountability necessary for strategic execution

Decision-making authority becomes critical for strategic success. Rumelt notes that modern leadership literature often focuses on self-improvement and inspiration rather than making tough choices about resource allocation and organizational priorities.

The Nokia example illustrates how organizational structure can undermine strategic execution. By replacing engineers with lawyers and accountants and implementing matrix management, Nokia diffused decision-making authority just when clear technical leadership was most needed to compete with Apple's iPhone.

Secretary of Defense Donald Rumsfeld's observation captures this challenge: despite having experts on every relevant topic, they all disagreed and pursued different agendas. Creating strategy from this diversity requires someone with authority to synthesize information and make final decisions.

Startup Strategy: Search, Adaptation, and Betting

Strategy for startups differs fundamentally from established company strategy because early-stage ventures operate under extreme uncertainty. Rather than executing known formulas, startups must search for viable business models while adapting quickly to market feedback.

"You're making a bet," Rumelt explains about startup strategy. "You should be clear about the nature of the bet. The reality is going to be revealed to you in bits and pieces as time passes."

Research on Silicon Valley startups reveals that successful companies typically pivot multiple times before finding sustainable business models. They start with initial hypotheses about target markets and solutions, then adapt based on market response rather than rigidly pursuing original plans.

• Startup strategy involves systematic search for viable business models rather than executing predetermined plans
• Successful founders maintain dual mindsets—conviction about eventual success combined with willingness to adapt when current approaches aren't working
• Early-stage companies must balance commitment to current direction with openness to market feedback and course corrections
• The action agenda framework applies to startups through rapid experimentation and adaptation cycles

The dual mindset challenge proves particularly difficult for founders. Success requires absolute conviction that the venture will ultimately succeed while simultaneously maintaining flexibility about specific approaches and target markets.

Historical perspective helps founders understand this dynamic. The early automotive industry illustrates how market leaders can change dramatically as underlying technologies and customer preferences evolve. Electric vehicles dominated initially before gasoline engines took over, showing how early bets don't always predict final outcomes.

For startups, the action agenda becomes a cycle of hypothesis formation, testing, and adaptation. Rather than creating five-year strategic plans, successful startups focus on near-term experiments that reveal market realities while preserving options for future adaptation.

Common Questions

Q: What are the three essential elements of good strategy according to Rumelt?
A: Diagnosis (understanding the challenge), guiding policy (approach to addressing it), and coherent actions (specific steps that reinforce each other and address the diagnosis).

Q: Why does Rumelt recommend calling strategies "action agendas" instead?
A: Because the word "strategy" has been diluted by decades of business literature, while "action agenda" focuses attention on specific things you will do rather than abstract goals.

Q: What is "the crux" and why is it important for strategy?
A: The crux is the hardest part of any challenge—the make-or-break element that, once overcome, makes everything else achievable. Focusing on the crux prevents wasting energy on secondary issues.

Q: How does power relate to strategy according to Rumelt?
A: Power comes from asymmetries—advantages that competitors don't equally possess, such as unique relationships, timing, knowledge, or network effects that tip competitive odds in your favor.

Q: Why is historical knowledge important for strategic thinking?
A: Unlike science or engineering, strategy has no universal laws, so strategic thinking relies on analogies from historical experience to recognize patterns and potential approaches.

Q: What makes startup strategy different from established company strategy?
A: Startups operate under extreme uncertainty and must search for viable business models through experimentation, requiring both conviction about eventual success and willingness to adapt approaches based on market feedback.

Richard Rumelt's lifetime of studying strategy reveals that most organizational "strategies" aren't strategies at all—they're wish lists, goal statements, or scattered initiatives masquerading as coherent plans. True strategy requires the discipline to diagnose real challenges, focus on addressable problems, and take coherent actions that reinforce each other.

His framework provides a practical alternative to the elaborate strategic planning processes that often produce impressive documents but little actionable guidance. By focusing on action agendas that address specific challenges, organizations can achieve the clarity and focus necessary for breakthrough results.

The key insight is that strategy isn't about predicting the future or having perfect information—it's about dealing effectively with the challenges you face today while positioning yourself to adapt as circumstances change. This requires the intellectual honesty to diagnose problems accurately, the discipline to focus on what matters most, and the organizational capability to execute coherent actions over time.

Practical Implications

• Start with challenges, not goals: Ask "what makes this hard?" rather than "what do we want to achieve?" to identify real strategic problems
• Create action agendas, not strategies: Focus on specific things you will do rather than abstract outcomes you hope to achieve
• Apply the three-element test: Ensure you have diagnosis, guiding policy, and coherent actions—missing any element means you don't have strategy
• Identify your sources of power: Look for asymmetries and advantages that competitors don't equally possess before crafting your approach
• Focus relentlessly on the crux: Find the hardest part of your challenge and concentrate resources there rather than working around the edges
• Study historical analogies: Build pattern recognition through broad reading of business history, biographies, and primary sources from similar situations
• Establish clear decision-making authority: Ensure someone has the power to make tough choices rather than trying to accommodate all stakeholder interests
• Test the coherence of your actions: Check whether your planned initiatives reinforce each other or work at cross-purposes
• Practice the "value denials" exercise: Identify things you should be able to buy but can't to discover market opportunities and innovation possibilities