The Components of a Good Strategy: Key Insights from "Good Strategy, Bad Strategy"

In any product or business strategy, having a well-structured approach is critical. Richard Rumelt's book, Good Strategy, Bad Strategy, provides valuable insights into creating effective strategies and highlights the difference between a good strategy, a bad one, and the absence of strategy altogether. Rumelt outlines three key components necessary for a good strategy, and we'll explore each of them in this document with examples and practical applications.

1. The Importance of a Good Strategy

Before diving into the components, it’s helpful to understand why having a good strategy matters. A well-defined strategy provides direction and coherence, guiding every part of the organization to achieve a common goal. Rumelt emphasizes that a good strategy not only involves having a clear plan but also addressing real problems and setting actionable objectives.

Bad strategies, in contrast, are vague, often avoiding addressing core issues. Meanwhile, the absence of strategy means there is no coherent plan or vision to follow, leading to confusion and misaligned efforts.

A good strategy includes three essential components:

Component 1: Diagnosis – Understanding Where You Are

The first element of a good strategy is diagnosis. Diagnosis helps define the starting point, often described as the “point A,” or where you are today. A thorough diagnosis enables you to understand your current position, the strengths and weaknesses of your product or service, and the market environment.

Practical Example: Plotting a Two-Axis Diagram

A helpful exercise for diagnosis is to use a two-axis chart to assess your position in the market. This tool allows you to select two critical dimensions that are relevant to your customers, competitors, and the overall market.

For instance:

• Integration (easy to integrate versus difficult to integrate) and Specialization (generalist versus specialized).
• Feature Breadth (few features versus many features) and Market Target (small businesses versus enterprise).

This diagram is useful for visualizing where you stand relative to competitors, helping you see which competitors are moving toward more integrations, greater specialization, or targeting different customer segments.

Honesty in Diagnosis: When assessing your position, it’s essential to be honest. Avoid inflating your strengths or downplaying your weaknesses. If a competitor has an advantage, acknowledge it. An accurate diagnosis lays the groundwork for a realistic strategy.

Key Elements in Diagnosis:

• Identify Your Product’s Job to Be Done: What problem does your product solve for customers?
• Determine Your Product’s Performance-Defining Component: What defines success for your customers? This component could be speed, reliability, simplicity, or flexibility.

Example: For Netflix, the performance component evolved from DVD delivery speed to content relevance (through recommendation algorithms) and, later, to content quality and exclusivity.

Component 2: Guiding Policy – Defining Where You Want to Go

Once you have a clear diagnosis, the next step is establishing a guiding policy. This is your “point B” – the target or goal you’re aiming to achieve. This component helps you outline the high-level decisions that will direct your actions toward achieving your objectives.

Example of a Guiding Policy:

If your goal is to serve enterprise customers, your guiding policy might be to:

• Focus on adding enterprise-grade features.
• Improve security and scalability.
• Create integrations that are essential for enterprise operations.

Guiding policies should be practical and provide clarity about how to respond to challenges and opportunities that align with the company’s long-term vision.

Example: In the case of Netflix, as competitors began to enter the streaming market, Netflix’s guiding policy shifted toward creating original content to differentiate itself and build a loyal audience. This focus on unique content provided a clear direction for their efforts and investments.

Component 3: Coherent Actions – Defining How You Will Get There

The final component of a good strategy is to outline the specific coherent actions that will drive the organization toward achieving its guiding policy. These are actionable steps and initiatives that align with both your diagnosis and guiding policy.

Example of Coherent Actions:

To achieve the goal of serving enterprise customers, the coherent actions might include:

• Hiring a specialized team to develop enterprise-focused features.
• Developing strategic partnerships for integrations.
• Investing in high-security infrastructure to meet enterprise standards.

The coherent actions need to support the guiding policy consistently, ensuring that each action directly contributes to achieving the strategic objective.

Example: When Netflix’s strategy shifted to content creation, coherent actions included hiring top content creators, acquiring exclusive rights to popular shows, and analyzing viewer data to inform content investment decisions. These steps directly supported the strategy of building a compelling, unique content library.

Real-World Application: Understanding Components in Product Strategy

To help illustrate how these three components work together, consider the example of a financial product aimed at employees who need salary advances. The initial job to be done might be helping employees access earned wages in emergencies, with a focus on speed. However, as the market changes, the job to be done might evolve to include broader financial health support.

1. Diagnosis:

   • Identify what customers need most urgently. For a salary advance product, the need might initially be fast, reliable access to funds.
   • Identify what defines performance for users, like low fees or immediate transfers.

2. Guiding Policy:

   • Shift to a broader guiding policy, such as offering solutions that help customers improve their overall financial well-being.
   • Make adjustments based on competitive moves and changes in technology, such as the adoption of faster payment methods like Pix, which impacted how the product needed to perform.

3. Coherent Actions:

   • Actions might include developing financial planning tools or offering access to financial education resources.
   • These actions support the guiding policy of financial wellness by providing customers with new tools to manage their finances beyond just salary advances.

Strategy Tools to Support Diagnosis

Numerous tools can assist in performing a proper diagnosis, including:

• SWOT Analysis: Helps identify strengths, weaknesses, opportunities, and threats.
• Competitive Landscape Analysis: Mapping out the market and competitors to understand positioning and differentiation.
• Customer Interviews: Gaining insights directly from users about what matters most to them.

Using these tools, teams can develop a comprehensive and objective diagnosis that sets the foundation for a well-informed guiding policy and coherent actions.

Summary

A good strategy is structured yet adaptable, with clear components that guide decision-making and align the team’s efforts. By following Rumelt’s three components – Diagnosis, Guiding Policy, and Coherent Actions – organizations can build strategies that address real problems, provide direction, and remain responsive to market changes.

The Netflix case illustrates how a company’s strategy can evolve and shift focus over time, with different components taking priority depending on customer needs and competitive pressures. Whether you’re creating a new product strategy or refining an existing one, focusing on these components will help ensure that your strategy is well-grounded, realistic, and aligned with your organization’s long-term vision.