Good Strategy vs. Bad Strategy: Understanding Strategic Principles with Real-World Examples

In Good Strategy, Bad Strategy, Richard Rumelt outlines three key components necessary for a good strategy: diagnosis, guiding policies, and coherent actions. These elements allow an organization to build a clear and effective path forward, addressing real challenges with actionable solutions. This document explores these principles and provides insights into the characteristics of both good and bad strategies, with practical examples to clarify each component.

1. The Foundations of a Good Strategy

A good strategy consists of three key components:

• Diagnosis: A clear understanding of the current state.
• Guiding Policy: Strategic direction to address the main challenges.
• Coherent Actions: Concrete steps to implement the guiding policy.

Component 1: Diagnosis

The diagnosis is the foundational element of any good strategy. It involves identifying the root challenges, understanding market dynamics, and mapping out where the company and competitors stand. Diagnosis sets the stage for effective action by painting a realistic picture of the current situation.

For example, a product team might use a two-axis chart to identify critical dimensions (e.g., integration ease and specialization) to visualize their product’s position relative to competitors. This type of honest self-assessment lays the groundwork for setting realistic objectives and identifying areas for improvement.

Component 2: Guiding Policies

A guiding policy gives direction. It defines the “how” and “where” a company will focus its resources and efforts to overcome identified challenges. Guiding policies aren’t about specific actions; instead, they set strategic priorities and boundaries, clarifying the overarching approach.

Example of Guiding Policy: Competing in a Specialized Market

In 2016, the product team at RD Station faced competition from both horizontal and vertical market players. Horizontal competitors offered comprehensive marketing tools, while vertical competitors focused on specific areas, like social media (e.g., Hootsuite, Buffer) or email marketing (e.g., MailChimp).

RD Station's guiding policy was to differentiate itself by embracing its horizontal approach, offering tools for every stage of the customer journey, from traffic to lead qualification. While RD Station's social media tools might not match dedicated platforms like Hootsuite, their broader approach meant that RD Station could offer insights across the entire marketing funnel, which vertical competitors couldn’t.

In practice, this guiding policy meant:

• Competing by integrating social media with the other stages of the funnel.
• Focusing on features that added value to the entire marketing journey, rather than trying to compete head-to-head in specific verticals.

This guiding policy helped RD Station leverage its unique position, using a “good enough” approach for specific features and excelling in areas that vertical competitors couldn’t match.

Example of Partnership-Based Strategy

For traffic analytics, RD Station lacked the resources to match competitors’ technical capabilities in keyword tracking and data analytics. The guiding policy here was to form partnerships with third-party providers to deliver necessary data, rather than building these tools in-house. This approach allowed RD Station to maintain competitive offerings without the costly investment of developing every tool.

Component 3: Coherent Actions

Coherent actions translate guiding policies into concrete steps. These actions must be aligned and should logically follow from the guiding policy.

Example of Coherent Actions in RD Station:

For the traffic and social media tools, the guiding policy was to maintain a horizontal approach, competing in areas where RD Station had a unique advantage. This policy was translated into specific actions:

1. Identify and Resolve Product Gaps: Map out any “must-have” features and ensure they meet minimum standards, focusing on areas that support the full funnel.
2. Integrate Social Media with Other Tools: Encourage users to cross-utilize social media tools within the platform (e.g., prompting users who create a landing page to publish it on social media).
3. Establish Partnerships for Traffic Data: Partner with companies that provide keyword data, enabling RD Station to offer a complete experience without having to develop these features internally.

Example of Coherent Actions in Xerpay:

In the case of Xerpay, a financial wellness platform, the guiding policies were:

• Increase liquidity for users by giving early access to earned wages.
• Improve financial education for customers.

These guiding policies led to coherent actions, such as:

• Strengthening payroll integration to facilitate wage advances.
• Partnering with financial service providers for discounts or automatic payment options, helping users manage expenses effectively.
• Developing tools that encouraged users to save and invest, supporting financial health goals.

These examples demonstrate how coherent actions are born from the guiding policies, helping to build alignment across the product and ensuring a clear path toward strategic goals.

2. Characteristics of a Bad Strategy

Bad strategies often fail due to vague or unrealistic goals, ignoring critical problems, or confusing aspirations with actionable plans. Here are common signs of a poor strategy:

1. Using Vague or Grandiose Language

Grand statements like “We will be the best digital marketing tool in the world” may sound inspiring but lack clarity and specificity. These statements are often empty promises, more suitable for marketing than actionable strategy. Good strategy must be concrete, providing clear and actionable objectives.

Example: Rather than stating, “We will revolutionize personal finance,” a more effective approach might be, “We will improve user financial health by implementing features that support savings habits and reduce financial stress.”

2. Ignoring Core Problems

A common pitfall in bad strategy is neglecting to address significant challenges. For instance, a company may aim to enter a new market without first addressing existing product issues, like low customer satisfaction or a high churn rate. Attempting to expand with a weak foundation can lead to wasted resources and missed opportunities.

Example: If a product has an inadequate Net Promoter Score (NPS) due to service or feature gaps, fixing these issues should take precedence over expanding into new markets. Ignoring core problems creates a poor user experience, which can jeopardize growth initiatives.

3. Confusing Goals or OKRs with Strategy

Objectives and Key Results (OKRs) are performance targets, not strategic plans. While it’s essential to set measurable goals, these targets need to be backed by actionable steps that guide how to achieve them. Saying, “Our strategy is to reach 50 million users” is not a strategy – it’s a goal.

A good strategy would specify how to reach that goal, including a clear understanding of market position, competitor moves, and customer needs.

Example of a Good Approach: Instead of just setting a target of 1 billion transactions, a good strategy might include steps like:

• Developing new partnerships to drive user acquisition.
• Enhancing the product’s ease of use to reduce churn.
• Building new features to increase engagement and expand market reach.

Conclusion

A good strategy is more than an aspiration – it’s a well-defined path to achieving meaningful objectives. By following the principles laid out in Good Strategy, Bad Strategy – diagnosis, guiding policy, and coherent actions – organizations can build strategies that are clear, actionable, and effective. A good strategy diagnoses the core challenges, sets a direction, and defines a series of aligned actions to get there.

Conversely, a bad strategy is vague, ignores critical issues, and confuses goals with actionable plans. Whether designing a new product roadmap or expanding into a new market, applying these principles can help ensure that your strategy leads to sustainable success.