Strategy is ostensibly meant to create a competitive advantage for an organization. Richard Rumelt's book Good Strategy / Bad Strategy: The Difference and Why It Matters takes the contrarian position that simply having a strategy itself is a competitive advantage. That's because so many organizations today simply don't have one. They might have financial plans, budgets, SWOT analyses, and even roadmaps.

But that's not strategy.

What is strategy?

Strategy, Rumelt writes, is action supported by argument. It's not so much decision-making as it is design. After all, rarely is the strategist presented with a set of clear alternatives. Strategy isn't chosen so much as it is orchestrated.

It takes shape in what he calls the kernel of strategy: a tripartite structure that encapsulates the essence of strategic thought.

The strategy comprises three pieces: a diagnosis; a guiding policy; and coherent action. Strategy may include other aspects, like a vision, goals, scope, or a timeline, but these are ancillary to these main components.

Diagnosis

The diagnosis is an unflinchingly honest look at the situation at hand. It answers the simple question "What is going on here?" This isn't a perspective that can be discovered through deduction alone. In a dynamic environment, and amid uncertainty, it takes effective abductive reasoning and sensemaking to produce an effective strategic hypothesis that can subsequently be tested.

To be effective, the diagnosis must be clear—and honest. Bad strategy skirts past the truth and its uncomfortable details in order to placate the demands or appease the feelings of others. It may try to be everything to everyone, or sweep the real difficulties under broad generalizations or shiny blue-sky language, empty buzzwords, or fill-in-the-blanks templates. This is not good strategy.

The diagnosis must be accurate, but part of its work is to simplify the complexity of a situation into something that the organization and its members can wrap their heads around. It is, Rumelt writes, a "simplified model of reality." In other words, it’s a narrative: it draws attention toward some facets of the problem and away from others. In so doing, it may create analogies or parallels with adjacent spaces that can then inform the best approach and help drive the second part of the strategic kernel, guiding policy.

Guiding policy

The guiding policy describes the overall approach to overcoming the challenge as articulated in the diagnosis. It outlines the approach to the problem that the strategist feels will create the optimal point of leverage for the organization. That is, it identifies where strength should be applied to maximize advantage or create the greatest opportunity. This requires anticipating the actions of others, including competitors and consumers. But just as importantly, it means imposing constraints or guardrails around how the organization will approach the problem.

Strategy means saying no. It's as much about what you won't do as what you will do. This requires hard choices: a strategic leader must be able to choose from among many competing options, many of which may be desirable and even viable. This is perhaps among the hardest jobs of the strategic leader: they need to decide which situations are worth investing resource in, and overcome their own biases and be able to question and evaluate their own judgment.

Moreover, making the hard choice, some people will be worse off. This is especially true in organizations that have succumbed to inertia: they've become comfortable with long-term habits that they've come to believe are entitlements. Inertia creates powerful internal narratives that filter organizational perception and limit action. But strategy, if nothing else, must craft a new narrative for the organization and, in so doing, instigate a shift in perspective.

A good guiding policy is essential for this work to be successful: it defines the terrain and sets the boundaries around how the organization moves forward and reacts to the diagnosis. The guiding policy defines the domain of coherent action, the third part of Rumelt's structure.

Coherent action

Coherent action is the set of coordinated activities, including resource allocations, projects, or initiatives, that implement the guiding policy. It's important to pause over the word coherent. For Rumelt, coherent action means that the activities must be orchestrated, coordinated, and consistent with one another. They cannot pull the organization in disparate or conflicting directions; they must integrate well with one another. It's in this coherence that any strategy draws its strength. Without coherence, the organization will lack focus and be unable to create the leverage it needs to build a meaningful advantage. It is through coherent action that the organization applies its strength against weakness or toward the best opportunity.