Introduction
Many small-to-medium businesses do not suffer from a shortage of goals, ideas, plans or ambition. They suffer from something far more fundamental: they confuse goals, budgets, aspirations and lengthy action lists with strategy.
That distinction sits at the heart of Richard Rumelt’s influential book, Good Strategy/Bad Strategy: The Difference and Why It Matters.
For SME owners and leaders, Rumelt’s message is particularly important. Strategy is not a 60-page document. It is not next year’s budget. It is not a list of 25 priorities. It is certainly not a collection of statements such as “be the market leader”, “deliver exceptional customer service”, “grow sustainably” or “become an employer of choice”.
Those may be desirable outcomes, but they are not strategies.
Good strategy identifies the critical challenge confronting the business, makes a deliberate choice about how that challenge will be addressed, and concentrates resources and action accordingly.
That makes Good Strategy/Bad Strategy one of the most useful strategy books an SME owner can read.
It complements the choice-based approach discussed in Playing to Win, where strategy is similarly treated as a series of integrated choices about where to play and how to win. For SMEs with limited capital, management bandwidth and people, those choices matter enormously.
Having spent much of my career involved in strategic planning, business transformation, executive leadership, investment analysis, company valuation and advising businesses, I have repeatedly seen the same principle play out: the businesses that make the most progress are rarely those trying to do the most things. They are those that become exceptionally clear about the few things that matter most.
Here are 15 lessons from Good Strategy/Bad Strategy that every SME owner and leader should understand.
Table of Contents
- Strategy Is Not the Same as Ambition
- Start With Diagnosis
- Find the Crux of the Problem
- Face the Brutal Reality
- Create a Clear Guiding Policy
- Turn Strategy Into Coherent Action
- Stop Calling Goals Strategy
- Make Choices and Accept Trade-Offs
- Concentrate Resources Where They Matter
- Use Your Strengths as Leverage
- Build Competitive Advantage Rather Than Chase Growth
- Anticipate Change Before It Becomes Obvious
- Simplify Complexity
- Strategy Requires Leadership
- Execution Is Part of Strategy
- A Practical SME Strategy Framework
- Practical Recommendations
- Key Takeaways
- FAQs
- Conclusion
1. Strategy Is Not the Same as Ambition (Business Strategy Perth)
One of Rumelt’s most important contributions is exposing the difference between strategy and aspiration.
Consider statements frequently appearing in SME strategic plans:
- Grow revenue by 20%.
- Become the market leader.
- Increase profitability.
- Deliver exceptional customer service.
- Build a high-performance culture.
- Expand nationally.
- Double the value of the business.
There is nothing inherently wrong with these ambitions.
The problem is that none tells you how the business will achieve them.
Saying that you intend to increase revenue from $10 million to $15 million is a target. Strategy asks:
Where will the additional $5 million come from, why will customers buy from us rather than competitors, what capabilities must we develop, what must we stop doing, and what resources must we concentrate behind the opportunity?
This is why effective strategic planning must go much deeper than setting objectives.
Lesson 1: Never mistake a destination for the route
A strategic objective tells you where you want to go.
A strategy explains how you intend to overcome the obstacles preventing you from getting there.
That distinction sounds simple. In practice, it changes everything.
2. Good Business Strategy Starts With Diagnosis (Business Strategy Perth)
Rumelt describes the essential structure of good strategy through what he calls the kernel:
Diagnosis → Guiding Policy → Coherent Actions
This is perhaps the single most useful framework in the entire book.
Diagnosis asks:
What is actually going on here?
For an SME, the real problem might not be declining revenue.
Revenue decline may simply be the symptom.
The underlying issue could be:
- poor customer retention;
- excessive dependence on one major customer;
- weak sales capability;
- an undifferentiated value proposition;
- declining margins;
- obsolete technology;
- poor leadership;
- weak accountability;
- capacity constraints;
- inappropriate pricing;
- owner dependency; or
- a changing competitive environment.
This is why I strongly advocate conducting a rigorous business diagnosis before deciding what needs to change.
Lesson 2: Diagnose before you prescribe
You would not expect a competent doctor to prescribe treatment before understanding the illness.
Business strategy should be no different.
If management incorrectly diagnoses the problem, even excellent execution may simply result in the business travelling very efficiently in the wrong direction.
3. Find the Crux of the Problem
Strategy requires leaders to identify what Rumelt elsewhere describes as the crux, the pivotal challenge where focused action can make the greatest difference.
SMEs frequently have dozens of problems simultaneously.
Cash flow may be tight. Staff turnover may be high. Margins may be falling. Sales conversion may be poor. Systems may be inadequate. The owner may be overwhelmed.
Trying to solve everything simultaneously usually results in solving very little.
The better question is:
Which problem, if solved, would have the greatest positive impact on the business?
That is strategic thinking.
It is closely related to identifying the critical performance levers within a business, rather than indiscriminately attempting to improve everything.
Lesson 3: Find the problem behind the problems
A business experiencing cash-flow pressure may instinctively pursue additional sales.
But suppose analysis shows the real problem is poor gross margin.
Generating another $2 million of low-margin revenue could make the cash problem worse.
The strategic intervention might instead be pricing, customer mix, procurement, labour productivity or service mix.
The obvious problem is not always the real problem.
4. Face the Brutal Reality
Bad strategy frequently begins with unwillingness to confront uncomfortable facts.
An owner may insist:
“Our service is excellent.”
Customers may disagree.
Management may believe:
“We have a strong competitive advantage.”
Competitors may offer virtually the same service.
The business may claim:
“Our people are our greatest asset.”
Yet staff turnover, engagement and productivity suggest otherwise.
Good strategy requires intellectual honesty.
Lesson 4: Reality must outrank ego
SME owners have an understandable emotional attachment to businesses they have spent years or decades building.
But strategy cannot be based upon what management wishes were true.
It must be based upon what is true.
That requires reliable financial information, customer feedback, competitor analysis, operational data, market intelligence and sometimes an independent Business Advisor Perth willing to challenge assumptions management has stopped questioning.
5. Create a Clear Guiding Policy
Once the challenge has been diagnosed, Rumelt’s second element is the guiding policy.
The guiding policy establishes the broad approach the business will use to overcome the challenge.
Imagine an SME engineering company suffering declining margins because it competes heavily on price.
Its guiding policy might be:
Move away from low-margin commodity work and concentrate on technically complex projects where specialist expertise, responsiveness and engineering capability create meaningful differentiation.
That is not yet a complete implementation plan.
But it creates direction.
Lesson 5: Strategy needs a governing idea
Good strategy allows managers throughout the organisation to answer:
“Given our strategy, what should we do?”
Just as importantly, they should be able to answer:
“What should we not do?”
Without a guiding policy, businesses become collections of disconnected initiatives.
6. Turn Business Strategy Into Coherent Action (Business Strategy Perth)
Rumelt’s third component is coherent action.
This is where many strategic plans collapse.
A strategy might say the business will become the premium provider in its market.
But then:
Marketing promotes discounts.
Salespeople compete primarily on price.
Recruitment focuses on cheap labour.
Training expenditure is reduced.
Customer complaints remain unresolved.
Technology investment is deferred.
These actions contradict the supposed strategy.
Lesson 6: Activities must reinforce one another
If your strategy is premium differentiation, your:
- people;
- pricing;
- customer experience;
- technology;
- marketing;
- sales process;
- operating systems;
- performance measures; and
- leadership behaviour
should collectively reinforce that position.
Strategy becomes powerful when multiple actions work together rather than independently.
7. Stop Calling Goals Strategy
Rumelt is particularly critical of what he calls bad strategy, including the tendency to substitute goals for genuine strategic thinking.
“Achieve $30 million revenue by 2030” is not strategy.
Neither is:
“Become number one in our industry.”
Lesson 7: Ask “How?” until the strategy becomes visible
Whenever somebody presents a strategic objective, ask:
How?
Then ask again.
How will revenue grow?
Through increased customers.
How?
Through improved conversion.
How?
Through a specialised sales team targeting three specific customer segments.
Why those segments?
Because the business possesses capabilities competitors struggle to replicate.
Now strategic logic is emerging.
8. Make Choices and Accept Trade-Offs
One reason businesses produce vague strategies is that genuine strategy requires uncomfortable choices.
Owners often want:
Every customer.
Every market.
Every service.
Every opportunity.
Maximum quality.
Lowest price.
Fastest delivery.
Highest margin.
You cannot optimise everything simultaneously.
Lesson 8: Strategy is partly deciding what you will not do
This is one of the strongest connections between Rumelt’s thinking and Playing to Win: strategy requires deliberate choices about where to compete and how to win.
SMEs should therefore ask:
- Which customers are most attractive?
- Which customers should we stop pursuing?
- Which services generate genuine value?
- Which activities destroy margin?
- Which geographic markets deserve investment?
- Which capabilities differentiate us?
- Where can competitors beat us easily?
- Where can we win?
A business unwilling to make choices does not have a strategy.
It has a wish list.
9. Concentrate Resources Where They Matter
Large corporations can sometimes afford multiple experiments.
Most SMEs cannot.
Capital is limited.
Management time is limited.
Talent is limited.
Working capital is limited.
This makes Rumelt’s concept of focus particularly relevant.
Lesson 9: Concentration creates disproportionate power
Suppose an SME has $500,000 available for investment.
It could spread that money across 20 initiatives.
Or it could identify two strategic priorities capable of materially changing its competitive position and concentrate resources behind them.
The second approach is often considerably more powerful.
This principle is central to building a sustainable competitive advantage.
Resources become strategically powerful when concentrated.
10. Use Your Strengths as Leverage
Rumelt emphasises leverage, using an organisation’s strengths against an important challenge or opportunity.
SMEs often underestimate the strategic assets already inside their businesses.
These might include:
- specialist technical expertise;
- trusted customer relationships;
- proprietary knowledge;
- geographic advantages;
- reputation;
- distribution;
- intellectual property;
- exceptional responsiveness;
- industry relationships;
- data;
- operational capability; or
- deeply embedded know-how.
Lesson 10: Ask where your strengths have the greatest economic value
Having a capability is not enough.
The strategic question is:
Where can this capability create an advantage competitors will struggle to match?
That is considerably more useful than producing another generic SWOT analysis.
11. Build Competitive Advantage Rather Than Simply Chase Growth (Business Strategy Perth)
Growth is seductive.
More customers. More employees. More locations. More revenue.
But growth without competitive advantage can magnify weaknesses.
A poorly differentiated $5 million business can become a poorly differentiated $20 million business with significantly greater complexity, working-capital requirements and risk.
Lesson 11: Strengthen the economic engine before pressing the accelerator
Before aggressively pursuing growth, understand:
- why customers choose you;
- why they stay;
- why they pay your price;
- what produces attractive margins;
- what competitors cannot easily reproduce; and
- whether the business model scales economically.
This also connects naturally with the strategic questions surrounding your business model and value proposition.
12. Anticipate Change Before It Becomes Obvious
Good strategy is not merely reactive.
Leaders must identify changes that could alter the economics of their industry.
These might include:
AI.
Automation.
Regulation.
Demographic change.
New competitors.
Changing customer behaviour.
New distribution models.
Industry consolidation.
Technological disruption.
Lesson 12: Look for second-order consequences
The question is not simply:
“What is changing?”
Ask:
“If this change continues, what happens next?”
Clayton Christensen’s The Innovator’s Dilemma provides an excellent companion perspective here, particularly regarding why successful businesses can be vulnerable to disruptive innovation even while apparently doing everything correctly.
Strategic leaders look beyond today’s numbers towards tomorrow’s competitive structure.
13. Simplify Complexity
One hallmark of bad strategy is unnecessary complexity.
Twenty strategic pillars.
Forty objectives.
Seventy KPIs.
Two hundred actions.
Nobody remembers them.
Nobody knows which matters most.
Lesson 13: If everything is strategic, nothing is strategic
A useful strategy should allow an owner or leadership team to explain:
Our major challenge is X.
We are addressing it by doing Y.
Therefore our three or four most important actions are Z.
That clarity creates alignment.
14. Strategy Requires Leadership
Strategy cannot simply be delegated to consultants, finance departments or annual planning workshops.
Leaders must make choices.
They must resolve competing priorities.
They must allocate resources.
They must sometimes say no to attractive opportunities.
They must hold people accountable.
Lesson 14: Strategic indecision is still a decision
Avoiding difficult choices does not preserve flexibility indefinitely.
Eventually the market makes the choice for you.
For SMEs that have reached greater organisational complexity, experienced external leadership through a Fractional CEO Perth or Non-Executive Chairman Perth can also provide independent challenge and strategic discipline when the owner and management team are too close to the business.
15. Execution Is Part of Strategy
The final lesson may be the most commercially important.
Strategy without execution produces nothing.
Businesses often spend considerable time creating strategic plans and surprisingly little time establishing how progress will be monitored.
Lesson 15: Strategy needs accountability
Every strategic priority should ultimately have:
- an accountable owner;
- defined actions;
- milestones;
- resources;
- KPIs;
- financial consequences;
- deadlines; and
- regular management or Board review.
This is where disciplined habits and systems become important. James Clear’s Atomic Habits provides a useful complementary perspective: repeated systems and behaviours ultimately determine whether good intentions become consistent execution.
A brilliant strategy badly executed is still a failed strategy.
A Practical SME Strategy Framework (Business Strategy Perth)
Rumelt’s ideas can be converted into a straightforward process for an SME leadership team.
Step 1: Diagnose
Ask:
What is really preventing this business from performing materially better?
Separate symptoms from causes.
Step 2: Identify the critical challenge
Of everything identified, determine:
What matters most?
Step 3: Decide where to play
Which customers, products, services, markets and opportunities deserve concentration?
Step 4: Determine how you will win
What compelling reason will customers have to choose you?
Step 5: Identify the required capabilities
What must the business become exceptionally good at?
Step 6: Concentrate resources
Move capital, management attention and talent towards strategic priorities.
Step 7: Define coherent actions
Translate the strategy into specific initiatives that reinforce one another.
Step 8: Establish accountability
Assign ownership, deadlines, KPIs and financial outcomes.
Step 9: Review relentlessly
Strategy should be reviewed against changing competitive circumstances, not ceremonially revisited once each year.
Practical Recommendations for SME Owners & Leaders
If you are reviewing your strategy, take your existing strategic plan and subject it to a simple test.
Remove all the financial targets, vision statements, mission statements, values and aspirational language.
Then ask:
What remains that actually explains how we intend to win?
If the answer is “very little”, you probably have a business plan rather than a genuine strategy.
Next, bring your leadership team together and ask five uncomfortable questions:
- What is the single most important challenge facing this business?
- What assumptions are we making that might be wrong?
- Where can we realistically create superior customer and economic value?
- What should we stop doing?
- Which three to five actions deserve disproportionate resources and management attention?
The quality of the discussion around those questions may tell you more about your business than another two days spent rewriting your strategic plan.
Key Takeaways
- Strategy is not ambition. Targets describe desired outcomes, not how they will be achieved.
- Diagnosis comes first. Do not prescribe strategic solutions before understanding the real problem.
- Find the crux. Identify the challenge that matters disproportionately.
- Strategy requires choices. You cannot serve every market, customer and opportunity equally well.
- A guiding policy creates direction. People need to understand the approach being taken.
- Actions must be coherent. Different parts of the business should reinforce the same strategic direction.
- Concentrate resources. SMEs rarely have sufficient resources to pursue everything simultaneously.
- Build leverage and competitive advantage. Use distinctive strengths where they create the greatest economic value.
- Leadership matters. Difficult strategic choices cannot be delegated away.
- Execution is inseparable from strategy. Accountability, measurement and disciplined follow-through convert strategic thinking into results.
FAQs About Good Strategy/Bad Strategy and SME Business Strategy Perth
What is the main message of Good Strategy/Bad Strategy?
The central message is that genuine strategy involves identifying an important challenge, establishing an approach for dealing with it and implementing coherent actions. Goals and aspirations alone do not constitute strategy.
What are the three elements of Rumelt’s strategy kernel?
The three elements are diagnosis, guiding policy and coherent action.
Why is Good Strategy/Bad Strategy particularly relevant to SMEs?
SMEs generally have limited capital, people and management bandwidth. They therefore benefit enormously from concentrating scarce resources on the few strategic issues capable of producing disproportionate results.
What is bad strategy?
Bad strategy often involves vague aspirations, avoidance of difficult problems, confusing goals with strategy and creating numerous disconnected objectives without a coherent approach for achieving them.
Is a strategic plan the same as a strategy?
No. A strategic plan is a document or implementation framework. Strategy is the underlying set of choices about the challenge being addressed and how the organisation intends to overcome it.
How many strategic priorities should an SME have?
There is no universal number, but fewer meaningful priorities are generally better than an extensive list. Management attention and resources should be concentrated on the issues that matter most.
How does Rumelt’s approach differ from SWOT analysis?
SWOT can help identify strengths, weaknesses, opportunities and threats, but listing them does not create strategy. Rumelt’s approach forces management to diagnose the central challenge, establish a guiding policy and take coordinated action.
How does Good Strategy/Bad Strategy relate to Playing to Win?
Both reject vague strategic planning and emphasise choices. Playing to Win focuses particularly on integrated choices such as where to play and how to win, while Rumelt emphasises diagnosis, guiding policy and coherent action. Together they provide highly complementary approaches to practical strategy.
How often should an SME review its strategy?
Strategy should be monitored continuously and formally reviewed whenever material changes occur in customers, competitors, technology, regulation, economics or internal capability. A more comprehensive review should normally form part of the annual strategic planning process.
Should SME owners use an external advisor when developing strategy?
Not necessarily, but independent challenge can be valuable. Owners and management teams inevitably develop assumptions and biases about businesses they work in every day. An experienced external advisor can test assumptions, challenge conventional thinking and help distinguish symptoms from underlying strategic problems.
Conclusion: Good Strategy Is About Making Difficult Choices
The enduring power of Good Strategy/Bad Strategy is that Richard Rumelt strips strategy of much of the jargon that has accumulated around it.
Good strategy is not complicated because it requires complicated language.
It is difficult because it requires clarity, judgement and choice.
You must diagnose what is really happening.
You must identify what matters most.
You must decide what you are going to do about it.
You must decide what you are not going to do.
Then you must concentrate resources behind a coherent set of actions and execute them relentlessly.
Throughout almost four decades of big corporate, being a start-up entrepreneur, and advising businesses across Australia and internationally, one lesson has repeatedly stood out for me:
Businesses rarely fail because their owners lacked ambition. They frequently struggle because ambition was never converted into sufficiently clear strategic choices, priorities and disciplined execution.
For SME owners and leaders, that may be the most valuable lesson in Rumelt’s book.
Do not ask only: “What do we want to achieve?”
Ask:
What is the critical challenge standing in our way, what are we going to do about it, and where will we concentrate our limited resources to win?
That is where strategy begins.
If your business has plenty of goals and activity but lacks clear strategic priorities, independent challenge can help expose the difference between having a plan and having a strategy. Contact Doug Verley to discuss your business, strategic challenges and opportunities.
