What Are the Signs of a Bad Business Strategy?

Bad Strategy vs. Good Strategy: How to Tell the Difference

The constant clash between good and bad strategy often favors the latter. Forbes reports that fewer than 10% of leaders show adequate strategic skills, leaving many organizations susceptible to bad strategy. Richard Rumelt’s book, Good Strategy/Bad Strategy: The Difference and Why it Matters, serves as a guide to distinguishing between the two.

What Makes a Good Strategy?

A good strategy is not a collection of buzzwords but a coherent plan of action backed by thoughtful analysis. Richard Rumelt defines a good strategy as containing three critical elements:

Diagnosis
This is where a business asks, "What's happening?" It involves analyzing complex situations and identifying the most critical factors that must be addressed. For example, in a competitive industry, you would need to isolate the elements that differentiate your organization from competitors.

Guiding Policy
A guiding policy focuses on how to approach the identified problems. It’s the overall strategy, outlining how to deploy resources effectively. For example, if a business faces high operational costs, its guiding policy might be to streamline logistics.

Coherent Action
These are the specific steps needed to execute the guiding policy. Each action is consistent with the overall plan, creating alignment within the organization.

Sources of Power in Good Strategy

Good strategy isn’t just about having a plan; it’s about leveraging power in key areas.

Leverage
Leverage comes from spotting and exploiting imbalances in the market or competitive landscape. It’s about using an organization’s unique strengths to maximize impact in critical areas.

Constraints
Constraints aren’t just limitations—they can drive innovation. For instance, limited resources might push an organization to find creative solutions that can lead to significant breakthroughs.

Proximate Objectives
These are short-term goals that pave the way for achieving larger strategic objectives. Success in these immediate targets boosts morale and creates momentum.

Chain-Link Systems
A strategy’s success often depends on how well different parts of the organization work together. In a chain-link system, each element supports the others, ensuring that all efforts contribute to the larger goal.

Design
Good strategies are intentionally crafted, not randomly chosen. They align various activities and policies to focus on creating competitive advantage.

Focus
Strategic focus means concentrating efforts on fewer, but more significant, objectives. Targeting a niche market can yield greater success than spreading resources too thin.

Competitive Advantage
To maintain a competitive edge, organizations must offer either lower costs or greater perceived value. This requires isolating mechanisms like patents, reputation, or economies of scale.

The Impact of Complexity on Strategy

Strategic concepts must take complexity into account. The modern business landscape is shaped by technological, social, and economic complexities. Rumelt argues that failing to understand this leads to poorly structured strategies that don’t address underlying problems. Walmart is a prime example of navigating complexity, using supply chain management and economies of scale to lower prices while maintaining efficiency.

Developing a Coherent Strategy

A coherent strategy goes beyond off-the-shelf solutions. It requires deep insight into both the external environment and the organization’s internal capabilities. Businesses need to set proximate objectives and financial goals that are achievable and aligned with their long-term aspirations. For example, Apple’s decision under Steve Jobs to cut down its product line from 15 to 1 was a proximate strategy focused on survival. It wasn’t flashy, but it was coherent and necessary.

Signs of a Bad Strategy

Recognizing bad strategy is just as important as identifying good ones. Bad strategies don’t just fail to meet their objectives—they often arise from specific leadership issues.

Fluff
Bad strategy often relies on inflated language to create the illusion of substance. Buzzwords and jargon like "customer-focused disintermediation" sound sophisticated but offer no actionable insight.

Failure to Face the Challenge
Bad strategy avoids dealing with real challenges. If a strategy fails to address the core issues, it’s bound to collapse.

Mistaking Goals for Strategy
Setting goals isn’t the same as forming a strategy. Simply stating that a company wants to "increase market share" doesn’t offer a roadmap for how to achieve that.

Bad Strategic Objectives
A bad strategy will often set objectives that are too vague or too ambitious, without providing clear steps for execution. Without a realistic plan, these objectives become unachievable.

Testing for Real Strategy

One way to identify a real strategy is by asking, “Can I say no?” A genuine strategy involves making trade-offs. For instance, a hospital can’t say no to patient safety, so it’s not a strategic priority—it’s an operational necessity. A true strategy forces you to choose what not to do, which makes it distinctive.

How Good Strategies Become Bad

Good strategies can deteriorate through organizational dysfunction, particularly when leadership fails to remain focused on the core goals. For example, during business planning, strategies often get watered down to appease different stakeholders. The result is a diluted version of the original strategy that’s easier to execute but far less effective.

Avoid bad strategy by confronting difficult truths head-on. Good strategy is scarce because it requires patience, critical thinking, and a willingness to simplify.

When Steve Jobs returned to Apple, his strategy wasn’t bold or flashy, it was simple and effective, focusing on what was essential for the company’s survival. That’s the essence of good strategy.