Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!
- Strategy is about making specific choices to win in the marketplace.
Strategy is an integrated set of choices that uniquely positions the firm in its industry so as to create sustainable advantage and superior value relative to the competition.
Instead of working to develop a winning strategy, many leaders tend to approach strategy in one of the following ineffective ways: They define strategy as a vision. Mission and vision statements are elements of strategy, but they aren’t enough. They offer no guide to productive action and no explicit road map to the desired future. They don’t include choices about what businesses to be in and not to be in. There’s no focus on sustainable competitive advantage or the building blocks of value creation. They define strategy as a plan. Plans and tactics are also elements of strategy, but they aren’t enough either. A detailed plan that specifies what the firm will do (and when) does not imply that the things it will do add up to sustainable competitive advantage. They deny that long-term (or even medium-term) strategy is possible. The world is changing so quickly, some leaders argue, that it’s impossible to think about strategy in advance and that, instead, a firm should respond to new threats and opportunities as they emerge. Emergent strategy has become the battle cry of many technology firms and start-ups, which do indeed face a rapidly changing marketplace. Unfortunately, such an approach places a company in a reactive mode, making it easy prey for more-strategic rivals. Not only is strategy possible in times of tumultuous change, but it can be a competitive advantage and a source of significant value creation. Is Apple disinclined to think about strategy? Is Google? Is Microsoft? They define strategy as the optimization of the status quo. Many leaders try to optimize what they are already doing in their current business. This can create efficiency and drive some value. But it isn’t strategy. The optimization of current practices does not address the very real possibility that the firm could be exhausting its assets and resources by optimizing the wrong activities, while more-strategic competitors pass it by. Think of legacy airlines optimizing their spoke-and-hub models while Southwest Airlines created a transformative new point-to-point business model. Optimization has a place in business, but it isn’t strategy. They define strategy as following best practices. Every industry has tools and practices that become widespread and generic. Some organizations define strategy as benchmarking against competition and then doing the same set of activities but more effectively. Sameness isn’t strategy. It is a recipe for mediocrity.
Winning should be at the heart of any strategy. In our terms, a strategy is a coordinated and integrated set of five choices: a winning aspiration, where to play, how to win, core capabilities, and management systems.
- Strategy can seem mystical and mysterious. It isn’t. It is easily defined. It is a set of choices about winning. Again, it is an integrated set of choices that uniquely positions the firm in its industry so as to create sustainable advantage and superior value relative to the competition. Specifically, strategy is the answer to these five interrelated questions: What is your winning aspiration? The purpose of your enterprise, its motivating aspiration. Where will you play? A playing field where you can achieve that aspiration. How will you win? The way you will win on the chosen playing field. What capabilities must be in place? The set and configuration of capabilities required to win in the chosen way. What management systems are required? The systems and measures that enable the capabilities and support the choices. These choices and the relationship between them can be understood as a reinforcing cascade, with the choices at the top of the cascade setting the context for the choices below, and choices at the bottom influencing and refining the choices above.
- The nested cascades mean that choices happen at every level of the organization. Consider a company that designs, manufactures, and sells yoga apparel. It aspires to create fierce brand advocates, to make a difference in the world, and to make money doing it. It chooses to play in its own retail stores, with athletic wear for women. It decides to win on the basis of performance and style. It creates yoga gear that is both technically superior (in terms of fit, flex, wear, moisture wicking, etc.) and utterly cool. It turns over its stock frequently to create a feeling of exclusivity and scarcity. It draws customers into the store with staff members who have deep expertise. It defines a number of capabilities essential to winning, like product and store design, customer service, and supply-chain expertise. It creates sourcing and design processes, training systems for staff, and logistics management systems. All of these choices are made at the top of the organization. But these choices beget more choices in the rest of the organization.
- Should the product team stay only in clothing or expand to accessories? Should it play in menswear as well? Should the retail operations group stay in bricks and mortar or expand online? Within retail, should there be one store model or several to adapt to different geographies and customer segments? At the store level, how should the staff person serve the customer, here and now, in order to win? Each level in the organization has its own strategic choice cascade.
- The first question—what is our winning aspiration?—sets the frame for all the other choices. A company must seek to win in a particular place and in a particular way. If it doesn’t seek to win, it is wasting the time of its people and the investments of its capital providers. But to be most helpful, the abstract concept of winning should be translated into defined aspirations. Aspirations are statements about the ideal future. At a later stage in the process, a company ties to those aspirations some specific benchmarks that measure progress toward them. At Olay, the winning aspirations were defined as market share leadership in North America, $1 billion in sales, and a global share that put the brand among the market leaders. A revitalized and transformed Olay was expected to establish skin care as a strong pillar for beauty along with hair care. Establishing and maintaining leadership of a new masstige segment, positioned between mass and prestige, was a third aspiration. This set of aspirations served as a starting point to define where to play and how to win, enabling the Olay team to see the larger purpose in what it was doing. Clarity about the winning aspirations meant that actions at the brand, category, sector, and company level were directed at delivering against that ideal.
At the overall company level, winning was defined as delivering the most valuable, value-creating brands in every category and industry in which P&G chose to compete (in other words, market leadership in all of P&G’s categories). The aspiration was to create sustainable competitive advantage, superior value, and superior financial returns. P&G’s statement of purpose, at the time, read as follows: “We will provide products and services of superior quality and value that improve the lives of the world’s consumers. As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders, and the communities in which we live and work to prosper.” Improving consumers’ lives to drive leadership sales, profit, and value creation was the company’s most important aspiration. It drove all subsequent choices.
- Aspirations can be refined and revised over time. However, aspirations shouldn’t change day to day; they exist to consistently align activities within the firm, so should be designed to last for some time. A definition of winning provides a context for the rest of the strategic choices; in all cases, choices should fit within and support the firm’s aspirations.
A definition of winning provides a context for the rest of the strategic choices.
- The next two questions are where to play and how to win. These two choices, which are tightly bound up with one another, form the very heart of strategy and are the two most critical questions in strategy formulation. The winning aspiration broadly defines the scope of the firm’s activities; where to play and how to win define the specific activities of the organization—what the firm will do, and where and how it will do this, to achieve its aspirations. Where to play represents the set of choices that narrow the competitive field. The questions to be asked focus on where the company will compete—in which markets, with which customers and consumers, in which channels, in which product categories, and at which vertical stage or stages of the industry in question. This set of questions is vital; no company can be all things to all people and still win, so it is important to understand which where-to-play choices will best enable the company to win. A firm can be narrow or broad. It can compete in any number of demographic segments (men ages eighteen to twenty-four, midlife urbanites, working moms) and geographies (local, national, international, developed world, economically fast-advancing countries like Brazil and China). It can compete in myriad services, product lines, and categories. It can participate in different channels (direct to consumer, online, mass merchandise, grocery, department store). It can participate in the upstream part of its industry, downstream, or be vertically integrated. These choices, when taken together, capture the strategic playing field for the firm.
- Olay made two strategically decisive where-to-play choices: to create, with retail partners, a new masstige segment in mass discount stores, drugstores, and grocery stores to compete with prestige brands and to develop a new and growing point-of-entry consumer segment for anti-aging skin-care products. Many other where-to-play options were considered (like moving into prestige channels and selling through department and specialty stores), but to win, Olay’s choices on where to play needed to make sense in light of P&G’s company-level where-to-play choices and capabilities. P&G tends to do well when the consumer is highly involved with the product category and cares a good deal about product experience and performance. It excels with brands that promise real improvement when the consumer puts in effort on a regular basis, as part of a well-defined regimen. P&G also does well with brands that can be sold through its best customers, retailers with which it has strong relationships and with which it can create significant shared value. So, the Olay team decided where to play with the P&G choices and capabilities in mind. Corporately, when it came to where to play, the company needed to define which regions, categories, channels, and consumers would give P&G a sustainable competitive advantage. The idea was to play in those areas where P&G’s capabilities would be decisive and to avoid areas where they were not. The concept that helped P&G leaders sort one area from the other and to define the strategic playing field clearly was the idea of core. We wanted to play where P&G’s core strengths would enable it to win. We asked which brands truly were core brands, identifying a set of brands that were clear industry or category leaders and devoting resources to them disproportionately. We asked what P&G’s core geographies were. With ten countries representing 85 percent of profits, P&G had to focus on winning in those countries. We asked where consumers expected P&G brands and products to be sold, that is, mass merchandisers and discounters, drugstores, and grocery stores. Core became a theme in innovation as well. P&G scientists determined the core technologies that were important across the businesses and focused on those technologies above all others. We wanted to shift from a pure invention mind-set to one of strategic innovation; the goal was innovation that drove the core. Core consumers were a theme too; we pushed businesses to focus on the consumer who matters most, targeting the most attractive consumer segments. Core was the first and most fundamental where-to-play choice—to focus on core brands, geographies, channels, technologies, and consumers as a platform for growth. The second where-to-play choice was to extend P&G’s core into demographically advantaged and structurally more attractive categories. For example, the core was to move from fabric into home care, from hair care into hair color and styling, and more broadly into beauty, health, and personal care. The third where-to-play choice—to expand into emerging markets—was driven by demographics and economics. The majority of babies would be born, and households formed, in emerging markets. Economic growth in these markets will be as much as four times as high as in the OECD (Organisation for Economic Co-operation and Development) developed markets. The question was how many markets P&G could take on and in what priority order. The company started with China, Mexico, and Russia, building capability and reach over time to include Brazil, India, and others. As Chip Bergh, former group president for global grooming and now CEO of Levi Strauss & Co., notes, “In 2000, about 20 percent of P&G’s total sales were in emerging markets compared to Unilever and Colgate, which were already up near 40 percent. We were a company of premium-priced products, always going after product superiority. We tended to play, as a company, in the premium tiers in almost all categories.”6 To compete in the developing world, Bergh says, a change in orientation was required: “We needed to begin broadening our portfolio and developing competitive propositions, including cost structures that would allow us to reach deeper into these emerging markets. There are a billion consumers in India, and we were reaching the top 10 percent of them.”
- There were three critical where-to-play choices for P&G at the corporate level:
- Grow in and from the core businesses, focusing on core consumer segments, channels, customers, geographies, brands, and product technologies.
- Extend leadership in laundry and home care, and build to market leadership in the more demographically advantaged and structurally attractive beauty and personal-care categories.
- Expand to leadership in demographically advantaged emerging markets, prioritizing markets by their strategic importance to P&G.
- Where to play selects the playing field; how to win defines the choices for winning on that field. It is the recipe for success in the chosen segments, categories, channels, geographies, and so on. The how-to-win choice is intimately tied to the where-to-play choice. Remember, it is not how to win generally, but how to win within the chosen where-to-play domains. The where-to-play and how-to-win choices should flow from and reinforce one another. Think of the contrast between two kinds of restaurant empires—say, Olive Garden versus Mario Batali. Both specialize in Italian food, and both are successful across multiple locations. But they represent very different where-to-play choices. Olive Garden is a midpriced, casual dining chain with considerable scale—more than seven hundred restaurants around the world. As a result, its how-to-win choices relate to meeting the needs of average diners and focus on achieving reliable, consistent outcomes when hiring thousands of employees to reproduce millions of meals that will suit a wide array of tastes. Mario Batali, on the other hand, competes at the very high end of the fine-dining space and does so in just a few places—New York, Las Vegas, Los Angeles, and Singapore. He wins by designing innovative and exciting recipes; sourcing the very best of ingredients; delivering superlative, customized service; and sharing his cachet with his foodie patrons—cachet generated by Batali’s Food Network celebrity and friendships with the likes of actress Gwyneth Paltrow.
- In great strategies, the where-to-play and how-to-win choices fit together to make the company stronger. Given their where-to-play choices, it would not make sense for Olive Garden to try to win by increasing the celebrity status of its head chef, nor for Batali to even contemplate making each location look just like the others. But if Batali wanted to seriously expand to a lower-priced, casual dining range, as Wolfgang Puck has done, Batali would need to expand his how-to-win choices to fit the new, broader where-to-play choice. If he failed to do so, he would likely fail to engage the new market. Where-to-play and how-to-win choices must be considered together, because no how-to-win is perfect, or even appropriate, for all where-to-play choices.
- To determine how to win, an organization must decide what will enable it to create unique value and sustainably deliver that value to customers in a way that is distinct from the firm’s competitors. Michael Porter called it competitive advantage—the specific way a firm utilizes its advantages to create superior value for a consumer or a customer and in turn, superior returns for the firm.
For Olay, the how-to-win choices were to formulate genuinely better skin-care products that could actually fight the signs of aging, to create a powerful marketing campaign that clearly articulated the brand promise (“Fight the Seven Signs of Aging”), and to establish a masstige channel, working with mass retailers to compete directly with prestige brands. The masstige choice, which was a decision to win in the channels P&G knew best, required significant changes in product formulation, package design, branding, and pricing to reframe the value proposition for retailers and consumers. Corporately, P&G chose to compete from the core; to extend into home, beauty, health, and personal care; and to expand into emerging markets. The how-to-win choices needed to work optimally with these where-to-play choices. To be successful, how-to-win choices should be suited to the specific context of the firm in question and highly difficult for competitors to copy. P&G’s competitive advantages are its ability to understand its core consumers and to create differentiated brands. It wins by relentlessly building its brands and through innovative product technology. It leverages global scale and strong partnerships with suppliers and channel customers to deliver strong retail distribution and consumer value in its chosen markets. If P&G played to its strengths and invested in them, it could sustain competitive advantage through a unique go-to-market model. P&G’s where-to-play and how-to-win-choices aren’t appropriate for every context. The key to making the right choices for your business is that they must be doable and decisive for you. If you are a small entrepreneurial firm facing much larger competitors, making a how-to-win choice on the basis of scale would not make much sense. But simply because you are small doesn’t mean winning through scale is impossible. Don’t dismiss the possibility that you can change the context to fit your choices. Bob Young, cofounder of Red Hat, Inc., knew precisely where he wanted his company to play: he wanted to serve corporate customers with open-source enterprise software. In his view, the how-to-win in that context required scale—Young saw that corporate customers were much more likely to buy from a market leader, especially a dominant market leader. At the time, the Linux market was highly fragmented, with no such clear leader. Young had to change the game—by literally giving his software away via free download—to achieve dominant market share and become credible to corporate information technology (IT) departments. In that case, Young decided where to play and how to win, and then built the rest of his strategy (earning revenue from service rather than software sales) around these two choices. The result was a billion-dollar company with a thriving enterprise business. The myriad ways to win, and possibilities for thinking through them, will be explored in greater depth in chapter 4. There, we begin with the story of a set of technologies that posed a particularly challenging how-to-win choice for P&G.
Two questions flow from and support the heart of strategy: (1) what capabilities must be in place to win, and (2) what management systems are required to support the strategic choices? The first of these questions, the capabilities choice, relates to the range and quality of activities that will enable a company to win where it chooses to play. Capabilities are the map of activities and competencies that critically underpin specific where-to-play and how-to-win choices. The Olay team had to invest in building and creating its capabilities on a number of fronts: clearly, innovation would be vital—and not just product innovation—but packaging, distribution, marketing, and even business model innovation would play a role. The team would need to leverage its existing consumer insights to truly understand a different segment. It would have to build the brand, advertise, and merchandise with mass retailers in new ways. Olay and P&G skin care couldn’t go it alone. So, they partnered with product ingredient innovators (Cellderma), designers (IDEO and others), advertising and PR agencies (Saatchi & Saatchi), and key influencers (like beauty magazine editors and dermatologists, for credible product performance endorsements). This networked alliance of internal and external capabilities created a unique and powerful activity system. It required deepening existing capabilities and building new ones. At P&G, a company with more than 125,000 employees worldwide, the range of capabilities is broad and diverse.
- A few capabilities are absolutely fundamental to winning in the places and manner that it has chosen:
- Deep consumer understanding. This is the ability to truly know shoppers and end users. The goal is to uncover the unarticulated needs of consumers, to know consumers better than any competitors do, and to see opportunities before they are obvious to others.
- Innovation. Innovation is P&G’s lifeblood. P&G seeks to translate deep understanding of consumer needs into new and continuously improved products. Innovation efforts may be applied to the product, to the packaging, to the way P&G serves its consumers and works with its trade customers, or even to its business models, core capabilities, and management systems.
- Brand building. Branding has long been one of P&G’s strongest capabilities. By better defining and distilling a brand-building heuristic, P&G can train and develop brand leaders and marketers in this discipline effectively and efficiently.
- Go-to-market ability. relationships. P&G thrives on reaching its customers and consumers at the right time, in the right place, in the right way. By investing in unique partnerships with retailers, P&G can create new and breakthrough go-to-market strategies that allow it to deliver more value to consumers in the store and to retailers throughout the supply chain.
- Global scale. P&G is a global, multicategory company. Rather than operate in distinct silos, its categories can increase the power of the whole by hiring together, learning together, buying together, researching and testing together, and going to market together. In the 1990s, P&G amalgamated a whole suite of internal support services, like employee services and IT, under one umbrella—global business services (GBS)—to allow it to capture the scale benefits of those functions globally.
These five core capabilities support and reinforce one another and, taken together, set P&G apart. In isolation, each capability is strong, but insufficient to generate true competitive advantage over the long term. Rather, the way all of them work together and reinforce each other is what generates enduring advantage. A great new idea coming out of P&G labs can be effectively branded and shelved around the world in the best retail outlets in each market. That combination is hard for competitors to match.
The final strategic choice in the cascade focuses on management systems. These are the systems that foster, support, and measure the strategy. To be truly effective, they must be purposefully designed to support the choices and capabilities. The types of systems and measures will vary from choice to choice, capability to capability, and company to company. In general, though, the systems need to ensure that choices are communicated to the whole company, employees are trained to deliver on choices and leverage capabilities, plans are made to invest in and sustain capabilities over time, and the efficacy of the choices and progress toward aspirations are measured. Beneath Olay’s choices and capabilities, the team built supporting systems and measures that included a “love the job you’re in” human resources strategy (to encourage personal development and deepen the talent pool in the beauty sector) and detailed tracking systems to measure consumer responses to brand, package, product lines, and every other element of the marketing mix. Olay organized around innovation, creating a structure wherein one team was working on the strategy and rollout of current products while another was designing the next generation. It developed technical marketers, individuals with expertise in R&D as well as marketing, who could speak credibly to dermatologists and beauty editors. It created systems to partner with leading in-store marketing and design firms, to create Olay displays that were eye-catching and inviting to shop. It also leveraged P&G systems like global purchasing, the global market development organization (MDO), and GBS so that individuals on the skin-care and Olay teams were freed up to focus where they added the most value. At the corporate level, management systems included strategy dialogues, innovation-program reviews, brand-equity reviews, budget and operating plan discussions, and talent assessment development reviews. From the year 2000 on, every one of these management systems was changed significantly so that it became more effective. All of these systems were tightly integrated, mutually reinforcing, and crucial to winning.
- It also leveraged P&G systems like global purchasing, the global market development organization (MDO), and GBS so that individuals on the skin-care and Olay teams were freed up to focus where they added the most value. At the corporate level, management systems included strategy dialogues, innovation-program reviews, brand-equity reviews, budget and operating plan discussions, and talent assessment development reviews. From the year 2000 on, every one of these management systems was changed significantly so that it became more effective. All of these systems were tightly integrated, mutually reinforcing, and crucial to winning.
- CHOICE CASCADE DOS AND DON’TS
- Do remember that strategy is about winning choices. It is a coordinated and integrated set of five very specific choices. As you define your strategy, choose what you will do and what you will not do.
- Do make your way through all five choices. Don’t stop after defining winning, after choosing where to play and how to win, or even after assessing your capabilities. All five questions must be answered if you are to create a viable, actionable, and sustainable strategy.
- Do think of strategy as an iterative process; as you uncover insights at one stage in the cascade, you may well need to revisit choices elsewhere in the cascade.
- Do understand that strategy happens at multiple levels in the organization. An organization can be thought of as a set of nested cascades. Keep the other cascades in mind while working on yours.
- Do remember that there is no one perfect strategy; find the distinctive choices that work for you. It isn’t entirely easy to make your way through the full choice cascade.
- Aspirations are the guiding purpose of an enterprise.
Winning is what matters—and it is the ultimate criterion of a successful strategy. Once the aspiration to win is set, the rest of the strategic questions relate directly to finding ways to deliver the win.
Saturn was GM’s answer to the Japanese imports that threatened to dominate the small-car market; it was a defensive strategy, a way of playing in the small-car segment, designed to protect what remained of the ground GM was losing.
The folks running Saturn aspired to participate in the US small-car segment with younger buyers. By contrast, Toyota, Honda, and Nissan all aspired to win in that segment. Guess what happened? Toyota, Honda, and Nissan all aimed for the top, making the hard strategic choices and substantial investments required to win. GM, through Saturn, aimed to play and invested to that much lower standard. Initially Saturn did OK as a brand. But it needed substantial resources to keep up against Toyota, Honda, and Nissan, all of which were investing at breakneck speed. GM couldn’t and wouldn’t keep up. Saturn died, not because it made bad cars, but because its aspirations were simply too modest to keep it alive. The aspirations did not spur winning where-to-play and how-to-win choices, capabilities, and management systems.
- To be fair, GM had myriad challenges that made playing to win a daunting prospect—troubling union relations, oppressive legacy health-care and pension costs, and difficult dealer regulations. However, playing to play, rather than seeking to play to win, perpetuated the overall corporate problems rather than overcoming them. Contrast the approach at GM to the approach at P&G, where the company plays to win whenever it chooses to play. And the approach holds even in the unlikeliest of places. Playing to win is reasonably straightforward to contemplate in a consumer market.
- The desire to win spurs a helpfully competitive mind-set, a desire to do better whenever possible. For this reason, GBS competes for its internal customers. Passerini explains: “We don’t mandate new services; we offer them [to businesses and functions] at a cost. If the business units like them, they will buy them. If they don’t like them, they will pass.” This open market provides important feedback and keeps GBS thinking about how to win with its internal customers and create new value. So much so that Passerini famously stood at a global leadership team meeting and promised: “Give me anything I can turn into a service, and I’ll save you seventeen cents on the dollar.” It was a provocative offer, and one that set the tone for his team. Good enough wasn’t an option. Providing services wasn’t the strategy. Providing better services at higher quality and lower costs—while serving as an innovation engine for the company—was the strategy. It was a strategy aimed at winning.
- Companies in the grips of marketing myopia are blinded by the products they make and are unable to see the larger purpose or true market dynamics. These companies spend billions of dollars making their new generation of products just slightly better than their old generation of products. They use entirely internal measures of progress and success—patents, technical achievements, and the like—without stepping back to consider the needs of consumers and the changing marketplace or asking what business they are really in, which consumer need they answer, and how best to meet that need. The biggest danger of having a product lens is that it focuses you on the wrong things—on materials, engineering, and chemistry. It takes you away from the consumer. Winning aspirations should be crafted with the consumer explicitly in mind. The most powerful aspirations will always have the consumer, rather than the product, at the heart of them. In P&G’s home-care business, for instance, the aspiration is not to have the most powerful cleanser or most effective bleach. It is to reinvent cleaning experiences, taking the hard work out of household chores. It is an aspiration that leads to market-shifting products like Swiffer, the Mr. Clean Magic Eraser, and Febreze.
- P&G had a run of six years of strong revenue and double-digit earnings per share growth, and Reckitt-Benckiser was outperforming even that. It wasn’t so much about Reckitt-Benckiser itself as it was about getting the general managers to question their assumptions and their current judgments. The push was to ask, “Who really is your best competitor? More importantly, what are they doing strategically and operationally that is better than you? Where and how do they outperform you? What could you learn from them and do differently?” Looking at the best competitor, no matter which company it might be, provides helpful insights into the multiple ways to win.
- Unless winning is the ultimate aspiration, a firm is unlikely to invest the right resources in sufficient amounts to create sustainable advantage. But aspirations alone are not enough. Leaf through a corporate annual report, and you will almost certainly find an aspirational vision or mission statement. Yet, with most corporations, it is very difficult to see how the mission statement translates into real strategy and ultimately strategic action. Too many top managers believe their strategy job is largely done when they share their aspiration with employees. Unfortunately, nothing happens after that. Without explicit where-to-play and how-to-win choices connected to the aspiration, a vision is frustrating and ultimately unfulfilling for employees. The company needs where and how choices in order to act. Without them, it can’t win.
- WINNING ASPIRATION DOS AND DON’TS
- Do play to win, rather than simply to compete. Define winning in your context, painting a picture of a brilliant, successful future for the organization.
- Do craft aspirations that will be meaningful and powerful to your employees and to your consumers; it isn’t about finding the perfect language or the consensus view, but is about connecting to a deeper idea of what the organization exists to do.
- Do start with consumers, rather than products, when thinking about what it means to win.
- Do set winning aspirations (and make the other four choices) for internal functions and outward-facing brands and business lines. Ask, what is winning for this function? Who are its customers, and what does it mean to win with them?
- Do think about winning relative to competition. Think about your traditional competitors, and look for unexpected “best” competitors too.
- Don’t stop here. Aspirations aren’t strategy; they are merely the first box in the choice cascade.
I wanted my team to understand that strategy is disciplined thinking that requires tough choices and is all about winning. Grow or grow faster is not a strategy. Build market share is not a strategy. Ten percent or greater earnings-per-share growth is not a strategy. Beat XYZ competitor is not a strategy. A strategy is a coordinated and integrated set of where-to-play, how-to-win, core capability, and management system choices that uniquely meet a consumer’s needs, thereby creating competitive advantage and superior value for a business. Strategy is a way to win—and nothing less.
- Deep consumer understanding is at the heart of the strategy discussion. To be effective, strategy must be rooted in a desire to meet user needs in a way that creates value for both the company and the consumer. In considering where to play among consumer segments, the Bounty team asked some critical questions: Who is the consumer? What is the job to be done? Why do consumers choose what they do, relative to the job to be done? Bounty had tremendous awareness and brand equity in the North American marketplace. “It had by far the best equity in its category—one of the strongest brand equities in the company,” says Pierce. “If you asked, virtually 100 percent of people would say Bounty is a great brand and a really good product. Then some would go off and buy something else. What’s wrong with this picture?” Pierce and his team set out to truly understand consumer needs, habits, and practices as they relate to paper towels. In watching and talking to consumers, they found that there were three distinct types of paper towel users. The first group cared about both strength and absorbency. For this group, Bounty was a perfect fit—a great combination of the two attributes they cared most about. The team found that among these consumers, Bounty was already the clear winner. Here, “Bounty didn’t have a forty share,” Pierce says. “It had an eighty share.” But many consumers didn’t fit into the strength-and-absorbency category; those consumers fell squarely into the remaining two segments. The second segment consisted of consumers who wanted a paper towel with a cloth-like feel. They didn’t care much about strength or absorbency, certainly much less than the core Bounty group did. Rather, this group of customers cared about how soft the paper towel felt in their hand. The final segment had price as their top priority, though not as their sole concern, says Pierce: “The need of those consumers was also on strength. It wasn’t at all on absorbency, because they had a compensating behavior to address the absorbency shortfalls of lower-priced paper-towel products: they would simply use more sheets.” These consumers were happy to use more sheets of a lower-priced paper towel, when needed, rather than spend more money for a premium brand that enabled the use of fewer sheets each time. It was a trade-off that made good sense to them. Bounty had captured most of the first consumer segment, but had made few inroads with the other two groups. Pierce wanted to play in all three segments to achieve more scale and enhance profitability. Going forward, Bounty would become not one but three distinct products—each one designed to target a specific consumer segment. Traditional Bounty would remain unchanged and serve the first segment, which already loved the brand. A new product called Bounty Extra Soft would target the consumers who craved a soft, cloth-like feel. And then there was the final segment—the strength-and-price segment. These consumers presented something of a challenge. Most of the lower-priced paper towels on the market were of poor quality, and the Bounty team didn’t want to devalue the core brand by associating it with a subpar product. “Those products fail miserably on strength,” Pierce notes. “They shred, they tear. They disintegrate in the face of a spill. Then, you not only have to deal with the spill, but you also have the mess of the towel residue to deal with.” To have the Bounty name—even at a value price point—a product would have to live up to the equity of the Bounty brand. The new offering for the strength-and-price segment was designed not as a stripped-down version of Bounty, but as a new product with specific consumer needs in mind. Bounty Basic was considerably stronger than any other value brand and priced at about 75 percent of the cost of regular Bounty. Shelved away from traditional Bounty, with the other lower-priced brands, it spoke directly to the third segment of consumers. While there was some concern that existing Bounty consumers might trade down to Bounty Basic, the relative attributes of the three products fit each segment’s needs so perfectly that little shifting actually occurred. Pierce notes, “The old Bounty was one product that existed for decades. The modern-day Bounty is now three products that were designed against very clear consumer understanding and consumer segmentation. They’re all very different from each other on a product performance standpoint, and each is designed to meet the needs of its users.” Ultimately, the family-care team chose not to play in the truly commodity portion of the market; while Bounty Basic is a value offering, it is priced at a premium to private-label brands and offers a clear strength advantage. By staying in the noncommodity space, in terms of both product assortment and price point, P&G can target its core consumers through its most valued core retailers (its best and biggest customers), levering core advantages in innovation and brand building. Pierce and his team made where-to-play choices on geography (North America), consumers (three segments in the top half of the market), products (paper towels, branded basic and premium), channels (grocery stores, mass discounters, drugstores, and membership club stores like Costco), and stages of production (R&D and production of the paper towel itself, but not growing, harvesting, or pulping the trees). Making these clear where-to-play choices, for Bounty and the family-care category, spurred innovation and helped powerful brands grow even stronger. As a result, P&G family care consistently delivered business growth and value creation at industry-leading levels.
- The choice of where to play defines the playing field for the company (or brand, or category, etc.). It is a question of what business you are really in. It is a choice about where to compete and where not to compete. Understanding this choice is crucial, because the playing field you choose is also the place where you will need to find ways to win. Where-to-play choices occur across a number of domains, notably these:
- Geography. In what countries or regions will you seek to compete?
- Product type. What kinds of products and services will you offer?
- Consumer segment. What groups of consumers will you target? In which price tier? Meeting which consumer needs?
- Distribution channel. How will you reach your customers? What channels will you use? Vertical stage of production.
- In what stages of production will you engage? Where along the value chain? How broadly or narrowly?
- At P&G, where to play choices start with the consumer: Who is she? What does the consumer want and need? To win with mom, P&G invests heavily in truly understanding her—through observation, through home visits, through a significant investment in uncovering unmet and unexpressed needs. Only through a concerted effort to understand the consumer, her needs, and the way in which P&G can best serve those needs is it possible to effectively determine where to play—which businesses to enter or leave, which products to sell, which markets to prioritize, and so on. As current CEO Bob McDonald explains, “We don’t give lip service to consumer understanding. We dig deep. We immerse ourselves in people’s day-to-day lives. We work hard to find the tensions that we can help resolve. From those tensions come insights that lead to big ideas.”2 Those big ideas can be the basis of a powerful where-to-play choice. The distribution channel choice also tends to loom large for P&G, because of the dominant size and market power of the retailers in question. Tesco has more than 30 percent of the UK market.3 Walmart serves some 200 million Americans every week.4 Other players, like Loblaw in Canada or Carrefour in Europe, have substantial regional presence. For this reason, channel is a particularly crucial where-to-play consideration for the company. Of course, for some industries, there is no real channel consideration (e.g., in service industries that deal directly with the end consumer). Again, context matters—and each company must assess the weight of the different where-to-play choices for itself. One final consideration for where to play is the competitive set. Just as it does when it defines winning aspirations, a company should make its where-to-play choices with the competition firmly in mind. Choosing a playing field identical to a strong competitor’s can be a less attractive proposition than tacking away to compete in a different way, for different customers, or in different product lines. But strategy isn’t simply a matter of finding a distinctive path. A company may choose to play in a crowded field or in one with a dominant competitor if the company can bring new and distinctive value. In such a case, winning may mean targeting the lead competitor right away or going after weaker competitors first. So it was with Tide. When Liquid Tide was introduced in 1984, P&G was entering the liquid-detergent category against a strong, established competitor. Even with strong brand equity from its powdered detergent, this wouldn’t be an easy win. Wisk, Unilever’s market-leading liquid detergent, was a powerful, established brand with loyal customers. For the first two or three years, Wisk did not give up a share point against Liquid Tide. In Liquid Tide’s first year, Wisk actually gained share. Clearly, Wisk users weren’t moving to Tide. But P&G didn’t need to steal Wisk users to win in the category, at least not right away. The high-profile launch of Liquid Tide helped expand the overall liquid-detergent category, and P&G picked up the lion’s share of the expansion. Liquid Tide created new consumers for liquid detergent, and none of them had a loyalty to Wisk. As the category grew, Tide could begin to take share from smaller players, like Dynamo, which couldn’t compete with P&G’s R&D, scale, and brand-building expertise. Only then, having built critical mass, would Liquid Tide need to go after Wisk directly. At that point, the battle was all but won. For Liquid Tide, it wasn’t a matter of avoiding a playing field that held a fierce competitor. It was about expanding the playing field to make room for the two competitors and creating time to gain momentum. In the end, Liquid Tide won and took the market lead decisively.
There is a lot to consider when crafting a winning where-to-play choice, from consumers to channels and customers; to competition; to local, regional, and global differences. In the face of that kind of complexity, your strategy can easily fall prey to oversimplification, resignation, even desperation. In particular, you should avoid three pitfalls when thinking about where to play. The first is to refuse to choose, attempting to play in every field all at once. The second is to attempt to buy your way out of an inherited and unattractive choice. The third is to accept a current choice as inevitable or unchangeable. Giving in to any one of these temptations leads to weak strategic choices and, often, to failure.
Focus is a crucial winning attribute. Attempting to be all things to all customers tends to result in underserving everyone. Even the strongest company or brand will be positioned to serve some customers better than others. If your customer segment is “everyone” or your geographic choice is “everywhere,” you haven’t truly come to grips with the need to choose. But, you may argue, don’t companies like Apple and Toyota choose to serve everyone? No, not really. While they do have very large customer bases, the companies don’t serve all parts of the world and all customer segments equally. As late as 2009, Apple derived just 2 percent of its revenue from China. That was a choice—about where and when to play. It was a choice based on resources, capabilities, and an understanding that even Apple can’t be everywhere at once.
Companies often attempt to move out of an unattractive game and into an attractive one through acquisition. Unfortunately, it rarely works. A company that is unable to strategize its way out of a current challenging game will not necessarily excel at a different one—not without a thoughtful approach to building a strategy in both industries. Most often, an acquisition adds complexity to an already scattered and fragmented strategy, making it even harder to win overall. Resource companies are particularly susceptible to this trap, as they often lust after the value-added producers in their industries. Whether in aluminum, newsprint, or coal, an acquirer is often seduced by the idea of access to the higher prices and faster growth rates of a downstream industry. Unfortunately, there are two big problems with this kind of acquisition. The first is price. It costs a great deal to buy into attractive industries—quite often, acquirers must pay more than the asset could ever be worth to them, which dooms the acquirer in the long run. Second, the strategy and capabilities required in the targeted industry are often very different from those in the current industry; it is seriously tough sledding to bridge the two approaches and have an advantage in both (in mining bauxite and processing aluminum, for instance). Such acquisitions tend to be both overly expensive and strategically challenging. Rather than attempting to acquire your way into a more attractive position, you can set a better goal for your company. The real goal should be to create an internal discipline of strategic thinking that enables a more thoughtful approach to the current game, regardless of industry, and connects to possible different futures and opportunities.
It can also be tempting to view a where-to-play choice as a given, as having been made for you. But a company always has a choice of where to play. To return to a favorite example, Apple wasn’t bound entirely by its first where-to-play choice—which was desktop computers. Though it eventually established a comfortable niche in that world, as the desktop of choice for creative industries, Apple chose to change its playing field to move into the portable communication and entertainment space with the iPod, iTunes, iPhone, and iPad. It is tempting to think that you have no choice in where to play, because it makes for a great excuse for mediocre performance. It is not easy to change playing fields, but it is doable and can make all the difference. Sometimes the change is subtle, like a shift in consumer focus within a current industry—as with Olay. Other times the change can be dramatic, like at Thomson Corporation. Twenty years ago, the company’s where-to-play choice was North American newspapers, North Sea oil, and European travel; today (as Thomson Reuters), it competes only in must-have, software-enhanced, subscription-based information delivered over the web. There is almost zero overlap between the old and new where-to-play choices for Thomson. The change didn’t happen overnight—it took twenty years of dedicated work—but it demonstrates that changing an existing where-to-play choice is doable.
Even well-established brands have multiple choices. We’ve already seen the Olay where-to-play choice and how it changed over time. Rather than attempting to deliver products to all women, in all age categories, at the lower end of the market, the Olay team chose to compete primarily on a narrower field—women aged thirty-five-plus who were newly concerned with the signs of aging. This was just one of many possible choices for the brand, an explicit narrowing and shifting of the previous where-to-play choice. Then there is one of P&G’s biggest brands: Tide. It gained strength by broadening its where-to-play choice. Once, the Tide team was focused almost entirely on the dirt you can actually see on clothes. As late as the 1980s, Tide had two forms—the traditional washing powder and the liquid version—both geared at getting the visible dirt out of your clothes (“Tide’s in, Dirt’s out”). P&G broadened its where-to-play choice for Tide by moving beyond visible dirt. Tide introduced product versions designed to address a whole range of cleaning needs—Tide with Bleach, Tide Plus a Touch of Downy, Tide Plus Febreze, Tide for Coldwater, Tide Unscented; then, P&G expanded the Tide offering from detergents to other laundry-related products—creating a line of stain-release products, most notably the highly successful Tide-to-Go instant stain remover. The goal was to build a product line that effectively addressed different loads, different consumers, even different family members. Tide expanded its distribution model as well. The team started to look at the distributors that offer a very limited number of brands, like drugstores, wholesale stores like Costco, dollar stores, and vending machines at self-service laundries and campgrounds. These channels tend to offer just one national brand and a private-label option. P&G pushed hard to have Tide chosen as the national brand in each case. As the leading brand in the category, it had a compelling case. The horizon has even expanded to Tide-branded dry cleaners. A broader definition of where to play served as the building block to extend the brand. Each new Tide product is built on the superior cleaning ability of Tide and its value-added benefits, reinforcing the core brand. In this way, Tide broadened to get stronger. Times had changed, and P&G had failed to change with them. There were fewer hard surfaces in homes, as fiberglass (and porous marbles and other stones) replaced porcelain. Competitors had introduced less abrasive cleansers that resonated with consumers; P&G had not. “It was clear we had to do something very, very different,” Bergh notes. “We realized that our products were no longer relevant for the consumer and that we had been out-innovated.” So Bergh challenged his team to think about where to play from an entirely new perspective that would be grounded in an understanding of the competitive landscape and of P&G’s core capabilities. “I took my leadership team off-site for two days,” he says. “The focus was to come up with a set of choices that would make a difference on the business. The rallying cry we had around the new choices, and around the new strategy, was to fundamentally change the game of cleaning at home and make cleaning less of a chore.” As ever, the starting point was consumer needs—like quick surface cleaning without muss and fuss, addressing a particular job and doing it better than current offerings. Bergh continues: “We asked, how do we leverage the company scale and size and technology expertise to fundamentally change cleaning at home? The key breakthrough for us was to start putting together different technologies that P&G had, but our competitors didn’t. How do you marry chemistry, surfactant technology, and paper technology? All of that led, within two years, to the launch of Swiffer.” Swiffer proved to be a whole new where-to-play choice for the hard-surface cleaners business. It was a consumer-led blockbuster. BusinessWeek listed it as one of “20 Products That Shook the Stock Market.”6 Ten years later, Swiffer is now in 25 percent of US households. And as competition enters into the category it created, P&G is turning its attention to the next strategic frontier for Swiffer, asking what’s next.
It can be easy to dismiss new and different where-to-play choices as risky, as a poor fit with the current business, or as misaligned with core capabilities. And it is just as easy to write off an entire industry on the basis of the predominant where-to-play choices made by the competitors in that industry. But sometimes, you must dig a bit deeper—to examine unexpected where-to-play choices from all sides—to truly understand what is possible and how an industry can be won with a new place to play.
- Fine fragrances, however, were important to hang on to, for two strategic reasons. First, a fine-fragrance presence was an important component of a credible and competitive beauty business. P&G wanted to be a beauty leader, on the strength of hair care (Pantene, Head & Shoulders) and skin care (Olay). But to be truly credible with the industry and consumers as a beauty player, the company needed a position in cosmetics and fragrances as well. The knowledge transfer between the different categories is significant, meaning that what you learn in cosmetics and fragrances—through both product R&D and consumer research—has a lot of spillover into hair care and skin care, and vice versa. In other words, just being in the fragrance business makes you better in beauty categories overall. In addition, fragrance is a very important part of the hair-care experience—scent alone can significantly influence consumer product preferences. And it isn’t just true in hair care, which leads to the second strategic reason to play in fine fragrances: in many household and other personal-care businesses, there were significant consumer segments that cared deeply about the sensory experience. P&G could affect consumer purchase intent with the right fragrance. It soon became clear that fragrance was an important part of creating delightful consumer experiences and that P&G was the biggest fragrance user in the world. This little fine-fragrance business was important well beyond its existing size; it was crucial to building core capabilities and systems that could differentiate and create competitive advantage for brands and products across the entire corporation. So P&G not only held on to the fine-fragrances business, but also built it strategically. P&G turned the industry business model inside out by making a totally different set of strategic where-to-play and how-to-win choices. Within the fine-fragrances industry, there was a well-established way to do business: new fragrances were pushed out of the fashion studios and fragrance houses, down the fashion runway, and into department stores at Christmas time. Most new fragrance brands were launched for holiday shopping and began to decline by the next spring. It was a push-and-churn model. And in most cases, it was secondary to another, primary business: fashion. By contrast, P&G started with the consumer, hiring its own internal team of master perfumers to design fragrances against specific consumer wants and needs, as well as brand concepts. It partnered with the very best fragrance-house perfumers and designers. Before long, P&G became the preferred innovation partner in the fine-fragrance space. P&G brands are consumer-centric, concept-led, and designed to delight consumers. As it dedicated time and attention to the fine-fragrance business, P&G attracted the best agency partners and won numerous awards for advertising, marketing, and packaging. It built product portfolios that expanded and strengthened its consumer user base. It built brands that became leaders in their segments. Another norm for the fragrance industry was to compete most aggressively within the high-end women’s market. Rather than go head-to-head with the biggest players, the P&G fine-fragrance team decided to attack along the line of least expectation and least resistance—in men’s fragrances with Hugo Boss and in younger, sporty fragrances through a partnership with Lacoste. The competition was focused on women’s classic and fashion fragrances, where existing sales and profits were. Choosing a different place to play gave the fine-fragrance team the time and opportunity to test its strategy and business model, to hone its capabilities, and to build confidence that it could win. To win in fine fragrances, the team leveraged all it could from P&G’s core capabilities. It used P&G brand-building expertise to assess the strength and value of brands to determine which fashion brands to license and how much to pay for them. It used an understanding of the discipline of strategy to match its choices with the choices of the licensors, creating greater value for both. On the innovation front, world-leading expertise with scents enabled P&G to create licensed-brand products that were uniquely appealing to consumers and that could last beyond a season. And P&G’s scale as the world’s largest purchaser of fragrances enabled it to buy critical and expensive perfume ingredients at lower cost than any competitors could. With all these capabilities applied full force to the business, P&G built a fragrance house with licenses from Dolce & Gabbana, Escada, Gucci, and others. In the process, P&G became one of the largest and most profitable fine-fragrance businesses in the world, less than two decades after a modest entry into the industry. Staying in the fine-fragrances business is a choice that seemed counterintuitive at first and required a new way of thinking about just where to play within it, but the choice has paid huge dividends to the company overall. Some things, however, happen by way of serendipity, and the acquisition of Max Factor is a perfect case in point. Max Factor was acquired to make the P&G cosmetics business more global. That really never panned out. Max Factor did sufficiently poorly in North America that it was discontinued there. Nor did it provide much of a cosmetics platform outside North America. So, the acquisition would likely be called a failure, considering the intent of the purchase. But as it turns out, the cosmetics business came along with two businesses—a small fine-fragrances portfolio and a tiny, super-high-end Japanese skin-care business called SK-II. That fragrance portfolio became the seed of a multi-billion-dollar, world-leading fine-fragrances business. SK-II has expanded into international markets and has crossed the billion-dollar mark in global sales, with extremely attractive profitability. In this case, serendipity smiled on P&G—though it also took smart choices and hard work to realize the potential of the businesses.
- Where to play is about understanding the possible playing fields and choosing between them. It is about selecting regions, customers, products, channels, and stages of production that fit well together—that are mutually reinforcing and that marry well with real consumer needs. Rather than attempt to serve everyone or simply buy a new playing field or accept your current choices as inevitable, find a strong set of where-to-play choices. Doing so requires deep understanding of users, the competitive landscape, and your own capabilities. It requires imagination and effort. And every so often, some luck doesn’t hurt. As you work through your own choices, recall that where-to-play choices are equally about where not to play. They take options off the table and create true focus for the organization. But there is no single right answer. For some companies or brands, a narrow choice works best. For others, a broader choice fits. Or it may be that the best option is a narrow customer choice within a broad geographic segment (or vice versa). As with all things, context matters. The heart of strategy is the answer to two fundamental questions: where will you play, and how will you win there? The next chapter will turn to the second question and to the matter of creating integrated choices, in which where to play and how to win reinforce and support, rather than fight against, one another.
- WHERE-TO-PLAY DOS AND DON’TS
- Do choose where you will play and where you will not play. Explicitly choose and prioritize choices across all relevant where dimensions (i.e., geographies, industry segments, consumers, customers, products, etc.).
- Do think long and hard before dismissing an entire industry as structurally unattractive; look for attractive segments in which you can compete and win.
- Don’t embark on a strategy without specific where choices. If everything is a priority, nothing is. There is no point in trying to capture all segments. You can’t. Don’t try.
- Do look for places to play that will enable you to attack from unexpected directions, along the lines of least resistance. Don’t attack walled cities or take on your strongest competitors head-to-head if you can help it.
- Don’t start wars on multiple fronts at once. Plan for your competitors’ reactions to your initial choices, and think multiple steps ahead. No single choice needs to last forever, but it should last long enough to confer the advantage you see
- Do be honest about the allure of white space. It is tempting to be the first mover into unoccupied white space. Unfortunately, there is only one true first mover (as there is only one low-cost player), and all too often, the imagined white space is already occupied by a formidable competitor you just don’t see or understand.
Suffice it to say, Minute Maid and Tropicana fought their new competitor as though their lives depended on it—which, given P&G’s reputation, was not likely an exaggeration. P&G always aimed for leading market share in each category—and sometimes, but rarely, settled for second place. So if P&G was allowed to succeed, the competitors saw, one of them would probably die and both could be displaced. By all appearances, Minute Maid and Tropicana treated the Citrus Hill launch as a battle for survival and not just another competitive foray. For P&G, this wasn’t like entering a new category against hundreds of small cloth-diaper producers with the launch of Pampers, or like mop manufacturers with Swiffer. Citrus Hill was going up against two gigantic, deep-pocketed, and entrenched competitors. Sadly for P&G, the orange juice wars turned out to be a humbling experience. Citrus Hill never made meaningful headway against the defenses of Minute Maid and Tropicana, and P&G exited the business after a decade of frustration. The final insult was that the brand had to be shuttered, rather than sold, because no one could be found to buy it. The only bright spot was that P&G made a nice annual profit post-exit, by licensing the calcium technology to its two former competitors. It turned out that both firms were happy to pay to add an attractive benefit to their existing offerings.
- With the development of these new film-wrap technologies, P&G was faced with a series of choices about where to play and how to win. The challenge was to find a way to win, rather than just compete, with these new technologies. Finding the answer meant taking a new and creative approach to what winning could mean and how P&G could win in a different way. The how-to-win choice had to be made thoughtfully with an understanding of the full playing field. The result was a first-of-its-kind partnership between P&G and Clorox—a partnership that made both companies stronger and created a billion-dollar, category-leading brand.
- Where to play is half of the one-two punch at the heart of strategy. The second is how to win. Winning means providing a better consumer and customer value equation than your competitors do, and providing it on a sustainable basis. As Mike Porter first articulated more than three decades ago, there are just two generic ways of doing so: cost leadership and differentiation.
- In cost leadership, as the name suggests, profit is driven by having a lower cost structure than competitors do. Imagine that companies A, B, and C all produce widgets for which customers will gladly pay $100. The products are comparable, so if one company charges more for its product than the others do, most customers will elect not to buy it in favor of the less expensive versions. Company B and company C have comparable cost structures and produce the widgets for $60, earning a $40 margin. Company A has a lower cost structure for producing essentially the same product and is able to do so for $45, producing a $55 margin. In this instance, company A is the low-cost leader and has a dramatic advantage over its competitors. The low-cost player doesn’t necessarily charge the lowest prices. Low-cost players have the option of underpricing competitors, but can also reinvest the margin differential in ways that create competitive advantage. Mars is a great example of this approach. Since the 1980s, it has held a distinct cost advantage over Hershey’s in candy bars. Mars has chosen to structure its range of candy bars such that they can be produced on a single super-high-speed production line. The company also utilizes less-expensive ingredients (by and large). Both of these choices greatly reduce product cost. Hershey’s and other competitors have multiple methods of production and more-expensive ingredients and hence higher cost structures. Rather than selling its bars at a lower price (which is nearly impossible because of the dynamics of the convenience-store trade), Mars has chosen to buy the best shelf space in the candy bar rack in every convenience store in America. Hershey’s can’t effectively counter the Mars initiative; it simply doesn’t have the extra money to spend. On the strength of this investment, Mars moved from a small player to goliath Hershey’s main rival, competing for overall market share leadership. While all companies make efforts to control costs, there is only one low-cost player in any industry—the competitor with the very lowest costs. Having lower costs than some but not all competitors can enable a firm to stick around and compete for a while. But it won’t win. Only the true low-cost player can win with a low-cost strategy.
The alternative to low cost is differentiation. In a successful differentiation strategy, the company offers products or services that are perceived to be distinctively more valuable to customers than are competitive offerings, and is able to do so with approximately the same cost structure that competitors use. In this case, companies A, B, and C produce widgets and all do so for $60 per widget. But while customers are willing to pay $100 for widgets from company A or B, they are willing to pay $115 for company C’s widgets, because of a perception of greater quality or more-interesting designs. Here, company C has a $15 higher margin than its competitors and a substantial advantage over them. In this type of strategy, different offerings have different consumer value equations and different prices associated with them. Each brand or product offers a specific value proposition that appeals to a specific group of customers. Loyalty emerges where there is a match between what the brand distinctively offers and the consumer personally values. In the hotel industry, for instance, one consumer would have a much higher willingness to pay for a service-oriented offering, like Four Seasons Hotels and Resorts, while another would more highly value a unique, boutique experience, like the Library Hotel in New York. Differentiation between products is driven by the activities of the firm: product design, product performance, quality, branding, advertising, distribution, and so on. The more a product is differentiated along a dimension consumers care about, the higher price premium it can demand. So, Starbucks can charge $3.50 for a cappuccino, Hermès can charge $10,000 for a Birkin bag, and they can do so largely irrespective of input costs.
- All successful strategies take one of these two approaches, cost leadership or differentiation. Both cost leadership and differentiation can provide to the company a greater margin between revenue and costs than competitors can match—thus producing a sustainable winning advantage. This is ultimately the goal of any strategy.
- Because markets are dynamic and new competitors find unexpected and innovative ways to deliver value, the companies that pursue low-cost and differentiation at the same time are eventually forced to choose (as IBM was, when Hitachi and Fujitsu Microelectronics entered mainframe computing with much lower cost strategies or as eBay has been forced to do, in the face of Craigslist and other alternatives). It is very difficult to pursue both cost leadership and differentiation, because each requires a very specific approach to the market.
- In other words, life inside a cost leader looks very different from life inside a differentiator. In a cost leader, managers are forever looking to better understand the drivers of costs and are modifying their operations accordingly. In a differentiator, managers are forever attempting to deepen their holistic understanding of customers to learn how to serve them more distinctively. In a cost leader, cost reduction is relentlessly pursued, while in a differentiator, the brand is relentlessly built. Customers are seen and treated very differently. At a cost leader, nonconforming customers—that is, customers who want something special and different from what the firm currently produces—are sacrificed to ensure standardization of the product or service, all in the pursuit of cost-effectiveness. At a differentiator, customers are jealously guarded. If customers indicate a desire for something different, the firm tries to design a new offering that the customers will adore. And if a customer leaves, the departure drives a stake in the heart of the firm, indicating a failure of the strategy with that customer. It is as simple as the difference between Southwest Airlines and Apple. If, as a customer, you say to Southwest, “I really would like advance seat selection, interline baggage checking, and to fly into O’Hare not Midway when I go to Chicago,” Southwest will say, “Great, you should try United Airlines.” At Apple, if customers say, “Wow, this iPad is beautiful,” Apple will take that as a cue to bring out an even prettier next-generation iPad.
Both cost leadership and differentiation require the pursuit of distinctiveness. You don’t get to be a cost leader by producing your product or service exactly as your competitors do, and you don’t get to be a differentiator by trying to produce a product or service identical to your competitors’. To succeed in the long run, you must make thoughtful, creative decisions about how to win. In doing so, you enable your organization to sustainably provide a better value equation for consumers than competitors do and create competitive advantage.
- Competitive advantage provides the only protection a company can have. A company with a competitive advantage earns a greater margin between revenue and cost than other companies do for engaging in the same activity. A firm can use that additional margin to fight those other companies, which will not have the resources to defend themselves. It can use that advantage to win. Low cost and differentiation seem like simple concepts, but they are very powerful in terms of keeping companies honest about their strategies. Many companies like to describe themselves as winning through operational effectiveness or customer intimacy. These sound like good ideas, but if they don’t translate into a genuinely lower cost structure or higher prices from customers, they aren’t really strategies worth having. Across its categories and markets, P&G pursues branded differentiation strategies that allow it to command price premiums.
- Strategic capability is required for thinking your way out of difficult positions—like the one that faced the Gain laundry detergent team. At one point, Gain was virtually out of business—with distribution in just a few southern states. In fact, in the late 1980s, the Gain brand manager, John Lilly, sent a memo to then-CEO John Smale recommending that the brand be discontinued. Smale sent the memo back to Lilly with his full response written across the top: “John, one more try please.” Smale didn’t dispute the logic of the memo; he just wanted to give Gain another chance, even if it was a long shot. The Gain team (then led by subsequent brand manager Eleni Senegos) set out to redefine the Gain where-to-play and how-to-win choices, giving it one more try. Again, the team started with the consumer. Tide was the overwhelming market leader and largely owned the all-purpose-cleaning position. But the consumer segmentation data showed that a small but passionate group of consumers wasn’t well served by Tide or by any other competitive product. This segment cared very much about the sensory laundry experience—about the scent of the product in the box, the scent during the washing process, and especially the scent of clean clothes. Scent was the proof of clean for these consumers. At the time, there wasn’t a brand positioned for scent seekers, people who want a dramatic and powerful fragrance experience from the moment the box is opened through the entire wash process, out of the dryer, and into the drawer. Gain could fill that niche. Moving Gain into the scent-seeker position was possible through P&G’s expertise with fragrance across product categories. P&G, as we’ve noted, is the largest fragrance company in the world; not only does it have a robust business in fine fragrances, but virtually every P&G product has a distinctive fragrance, geared to create a unique and desirable user experience. The scent-seeker positioning played to P&G’s ability to create scents that are robust at all of those points in the process, and to make that clear in every way. The package was totally changed to be bright, loud, and in-your-face. It really says that if you like big, bold scents, this is the product for you. The Gain team plugged away at that positioning on the shelf and in advertising. Gain is now one of P&G’s billion-dollar brands, even though it is only sold in the United States and Canada. And the impetus was Smale’s push to think again, to find a new way to win.
- Where-to-play and how-to-win choices do not function independently; a strong where-to-play choice is only valuable if it is supported by a robust and actionable how-to-win choice. The two choices should reinforce one another to create a distinctive combination. Think of Olay, in which the new where-to-play (thirty-five- to forty-nine-year-old women interested in age-defying skin-care products) was perfectly matched with the new how-to-win (in the high-end masstige segment with mass-retail partners and products that fight the seven signs of aging). With Bounty, narrowing where to play to North America enabled the team to decide how to win around North American consumers’ different needs. In the Glad joint venture, some where-to-play choices (like creating a new P&G wraps and trash bags category) would have made it difficult to win with consumers, given the nature of competition in the category and the likely response of competitors. Instead, the company found a how-to-win choice, a joint venture with a competitor, and the venture created new value for consumers and for both P&G and Clorox. The where and how were considered together, and a very different approach was created.
- In choosing where to play, you must consider a series of important dimensions, like geographies, products, consumer needs, and so on, to find a smart playing field. How-to-win choices determine what you will do on that playing field. Because contexts, like competitive dynamics and company capabilities, differ greatly, there is no single, simple taxonomy of how-to-win choices. At a high level, the choice is whether to be the low-cost player or a differentiator. But the how of each strategy will differ by context. Cost leaders can create advantage at many different points—sourcing, design, production, distribution, and so on. Differentiators can create a strong price premium on brand, on quality, on a particular kind of service, and so forth. Remember that there is no one single how-to-win choice for all companies. Even in a single market, it is possible to compete in many different ways and succeed. Choosing a how-to-win approach is a matter of thinking both broadly and deeply, in the context of the playing fields available to the company. Action consistent with the how-to-win choice is vital. Cost leadership and differentiation have different imperatives that should lead to different sets of activities within a firm. Structuring a company to compete as a cost leader requires an obsessive focus on pushing costs out of the system, such that standardization and systemization become core drivers of value. Anything that requires a distinctive approach is likely to add cost and should be eliminated. In a differentiation strategy, costs still matter, but are not the focus of the company; customers are. The most important question is how to delight customers in a distinctive way that produces greater willingness to pay. Where to play and how to win are not independent variables. The best strategies have mutually reinforcing choices at their heart. As a result, it is not a matter of choosing where to play and then how to win and then moving on. Though we have placed these two choices in separate chapters for the sake of clarity, they are intertwined and should be considered together: what how-to-win choices make sense with which where-to-play choices? And which combination makes the most sense for your organization? From there, the next step is to understand the capabilities that will be required to support the where-to-play and how-to-win choices.
- HOW-TO-WIN DOS AND DON’TS
- Do work to create new how-to-win choices where none currently exist. Just because there isn’t an obvious how-to-win choice given your current structure doesn’t mean it is impossible to create one (and worth it, if the prize is big enough).
- But don’t kid yourself either. If, after lots of searching, you can’t create a credible how-to-win choice, find a new playing field or get out of the game.
- Do consider how to win in concert with where to play. The choices should be mutually reinforcing, creating a strong strategic core for the company.
- Don’t assume that the dynamics of an industry are set and immutable. The choices of the players within those industries may be creating the dynamics. Industry dynamics might be changeable.
- Don’t reserve questions of where to play and how to win for only customer-facing functions. Internal and support functions can and should be making these choices too.
- Do set the rules of the game and play the game better if you’re winning. Change the rules of the game if you’re not.
- Back in the late 1950s, a P&G chemist named Vic Mills had a profound dislike for cleaning his grandson’s cloth diapers; he was convinced there had to be a better way and began studying the nascent disposable-diaper product segment, which then represented less than 1 percent of the billions of diaper changes in the United States every year. After studying first-generation disposable baby diapers from around the world, and after several designs failed in premarket consumer tests, P&G tested a three-layer, rectangular pad design (a plastic back sheet, absorbent wadding material, and water-repellent top sheet) in Peoria, Illinois, in December 1961. It failed too. Mothers liked the disposable diaper product, but the $0.10-per-diaper price was too high. After another six market tests, further refinements in design and engineering, and the development of an entirely new manufacturing process, P&G finally had a success—this time at $0.06 a diaper. The company launched the new diaper as Pampers.a Throughout the rest of the 1960s and the 1970s, Pampers built significant unit volume and dollar sales by converting cloth-diaper users to disposables users. P&G effectively created a new category and easily won a leading share in it. Looking back, the Pampers story is a great example of strategic insight and vision. A better product fulfilled an unmet consumer need, delivered a better user experience, and created better total consumer value. In Peter Drucker’s terms, Pampers disposable baby diapers “created customers” and served them better than competitors did. By the mid-1970s, Pampers had achieved a 75 percent share in the United States and had been expanded to about seventy-five countries worldwide. Imagine what Pampers could have become, then, had P&G chosen a different strategy in 1976. That’s when it introduced a second diaper brand, Luvs, which featured an hourglass-shaped pad with elastic gathers. Luvs delivered superior fit, absorbency, and comfort for about a 30 percent price premium to Pampers. The decision to launch Luvs with a better product might have been the most unfortunate strategic miscalculation in P&G history. So why did P&G introduce a new brand rather than improving or extending the existing brand? First, company practice at the time dictated a multibrand strategy—a new brand for every new product in each category—and the approach seemed to be working well in laundry detergents and several other categories. Second, the new design would drive higher operating costs and required considerable investment in manufacturing capital; projections suggested that a 20 percent retail price premium would be needed to hold margins, and the company worried that current users would reject a premium-priced line of Pampers. So, Pampers stayed the same and the advanced design was introduced at the premium price as Luvs. Unfortunately, the company had miscalculated. While consumers virtually always say they won’t buy (or even try) an improved product if it is sold at a higher price, those same consumers often change their minds when the product and usage experience are clearly better and the price premium still represents value. This turned out to be the case with shaped diapers, and Pampers suffered. Then, a new threat emerged. In 1978, Kimberly-Clark introduced Huggies, a new brand with a Luvs-like hourglass shape, a better fit, and an improved tape fastening system. On the strength of its new product, Huggies surged to a 30 percent market share. Meanwhile, the introduction of Luvs did little to bring new consumers to P&G. Instead, it split the Pampers market share between two brands. P&G still sold more diapers overall, but Pampers and Luvs individually ranked behind Huggies in market share. Future CEO John Pepper, who had assumed control for the US operation around this time, recalls a series of focus groups that left him “in a cold sweat.” Every single mom using Huggies, Luvs, or Pampers preferred the shaped diaper. Mothers had decided. So, finally, did P&G. In 1984, CEO John Smale approved the decision to move Pampers to the shaped diaper design as well. P&G launched Ultra Pampers, a design with the hourglass shape, a new, proprietary absorbent gel, a leak-proof waist-shield, elastic leg gathers, and a breathable leg cuff. The company invested $500 million in capital to build and run new diaper lines and another $250 million in marketing and sales promotion. Ultra Pampers was a success, in the sense that it converted most Pampers users to the new-generation product design and moved Pampers back ahead of Luvs in market share. But it did not provide a definitive win against Huggies in the United States; nor did it resolve the tension between Pampers and Luvs—two virtually identical products that P&G struggled mightily (but unsuccessfully) to differentiate with advertising for another decade. Finally, in the 1990s, Luvs was repositioned as a simpler, more basic value offering.
- CEO Ed Artzt summarized the lessons of the Pampers story in a strategy class he taught in the early 1990s:
- Determine whether a product innovation is really brand specific or ultimately category generic. Never give your current brand user a product-based reason to switch away. By denying Pampers the hourglass shape and better-fit features for a decade, the brand lost five generations of new parents and new babies.
- Competition will follow your technology, trying to at least match it and ideally beat it. Technical superiority alone is not sustainable.
- The roots of the acquisition’s success go back to the initial consideration of the opportunity. As Clayt Daley, who retired as chief financial officer in 2009, explains, P&G had three relevant criteria for any acquisition.
- First, any acquisition had to be “growth accretive—in a market that was growing (and likely to continue growing) faster than the average in its space and in a category or segment, geography or channel where we thought that we could grow as fast as the market, if not faster.” This was the first, and most obvious, hurdle.
- Second, the acquisition had to be structurally attractive—a business “that tended to have gross and operating margins above the industry or company average. We were looking for businesses that could generate strong, free cash flow.” Free cash flow was an important driver of value creation for P&G corporately.
- Once those two hurdles were cleared, there was a final criterion—one that too few companies consider systematically: how the potential acquisition would fit with the company’s strategy—its winning aspiration, its choices about where to play and how to win, its capabilities, and its management systems.
- Bergh was convinced that going to India was the right things to do. His experiences told him it would be necessary to engage with real Indian consumers on the ground in the actual Indian market. So he sent the team to India. He was gratified by the result: the same scientist sought him out a few months later during an innovation review. Bergh recalls the man’s words: “‘Now I completely get it,’ he said, ‘You can look at pictures in the books, you can hear the stories, but it’s not until you’re there [that you understand]. I spent three days with this one guy, shopping with him, going to the barber shop with him, watching him shave. Now I really understand the company’s statement of purpose about improving consumers’ lives … I was so motivated and so inspired, I designed the first razor on a napkin flying back to London.” The man, Bergh says, had tears in his eyes as he told the story. Only in India did the scientist really begin to understand the needs of the Indian consumer. He learned what he could not learn inside his lab or from consumer testing outside London. Typically, razors are designed and tested with the assumption that everyone shaves as people do in the West, with reliable access to a large sink and running hot water. In India, the team members saw that this simply wasn’t true. Many of the men they met shaved with only a small cup of cold water. Without hot running water to clean the razor, small hairs tend to clog the blade, making shaving far more difficult. Gillette’s new product would take that unique challenge into account. It would be a new kind of razor, custom-built to meet the needs of consumers in India.
- An organization’s core capabilities are those activities that, when performed at the highest level, enable the organization to bring its where-to-play and how-to-win choices to life. They are best understood as operating as a system of reinforcing activities—a concept first articulated by Harvard Business School’s Michael Porter. Porter noted that powerful and sustainable competitive advantage is unlikely to arise from any one capability (e.g., having the best sales force in the industry or the best technology in the industry), but rather from a set of capabilities that both fit with one another (i.e., that don’t conflict with one another) and actually reinforce one another (i.e., that make each other stronger than they would be alone).
- The group came to five core capabilities:
- Understanding consumers. Really knowing the consumers, uncovering their unmet needs, and designing solutions for them better than any competitor can. In other words, making the consumer the boss in order to win the consumer value equation.
- Creating and building brands. Launching and cultivating brands with powerful consumer value equations for true longevity in the marketplace.
- Innovating (in the broadest sense). R&D with the aim of advancing materials science and inventing breakthrough new products, but also taking an innovative approach to business models, external partnerships, and the way P&G does business.
- Partnering and going to market with customers and suppliers. Being the partner of choice by virtue of P&G’s willingness to work together on joint business plans and to share joint value creation.
- Leveraging global scale. Operating as one company to maximize buying power, cross-brand synergies, and development of globally replicable capabilities.
- Once the capabilities were articulated, the team then spent most of the day deciding how and where to begin investing in each capability to broaden and deepen competitive advantage. It wrote an action plan for each of the five capabilities to create competitive advantage at the corporate, category, and brand levels.
- In this system, the core capabilities are shown as large nodes, and the links between the large nodes represent important reinforcing relationships. These reinforcing relationships make each capability stronger, which is an essential characteristic of an activity system: the system as a whole is stronger than any of the component capabilities, insofar as those capabilities fit with and reinforce one another. For instance, there is a close connection between consumer understanding and innovation. For P&G, innovation must be consumer centered if it is to be meaningful and provide competitive advantage—so innovation requires a deep understanding of the needs of consumers. The goal is to connect consumer needs with what is technologically possible. Innovation is also connected to go-to-market capabilities. New innovative products keep retail channel partners excited about P&G and reinforce the close relationship between the company and its best customers—but only if P&G takes care to think of both retailers and end consumers during the R&D process. A great new product for consumers is of little use to P&G if it can’t be shelved and sold effectively within retail channels. And of course, innovation can also be brought to bear on retail relationships, improving in-store merchandising and supply-chain efficiencies. The subordinate nodes are the activities that support the core capabilities. Scale, for instance, is supported by the way in which P&G is structured. At P&G, GBUs oversee categories, brands, and products, providing a holistic, consistent approach to each element on a worldwide basis. At the same time, MDOs have responsibility for a continent, region, country, channel, or customer, paying close attention to its specific needs and demands. The GBUs and MDOs work together to create a global approach with local applicability and customization. This matrix allows P&G to drive scale where it is needed but to stay nimble on the ground. Scale is also supported by global purchasing and global business services. Scale also enables, and is supported by, customer teams (i.e., teams who work solely with specific customers, like Tesco or Walmart), agency relationships (P&G has the largest ad budget in the world), and consumer- and customer-driven measurement systems (qualitative and quantitative approaches to understanding and reporting performance). Through the sheer size and volume of activity, P&G is able to afford more resources than competitors in each of these areas—and to get better performance. An activity system is of no value unless it supports a particular where-to-play and how-to-win choice. Again, the various choices along the cascade must be considered iteratively. You need to go back and forth between the choices. You can think through a tentative where-to-play and how-to-win choice. Then you can ask, what activities system would effectively underpin this choice? Once you lay out such a system map, you can ask a sequential set of questions about feasibility, distinctiveness, and defensibility. In addressing feasibility, ask several questions: is this a realistic activity system to build? How much of it is currently in place, and how much would you have to create? For the capabilities you would need to build, is it affordable to do so? If upon reflection, you find that the activity system isn’t feasible, then you need to reconsider where to play and how to win. When you have a feasible activity system, you can ask more questions: is it distinctive? Is it similar to or different from competitors’ systems? This is an important point. Imagine that a competitor has a different where-to-play and how-to-win choice, but a very similar set of capabilities and supporting activities. In such a situation, the competitor could shift to your potentially superior where-to-play and how-to-win choices and begin to cut in to your competitive advantage. If the activity system isn’t distinctive, the where and the how and the map must be revisited until such time as a distinctive combination emerges. As Porter notes, not all of the elements need to be unique or impossible to replicate. It is the combination of capabilities, the activity system in its entirety, that must be inimitable. When it has a feasible and distinctive activity system, you can ask, is the system defensible against competitive action? If the system can be readily replicated or overcome, then the overall strategy is not defensible and won’t provide meaningful competitive advantage. In that case, you need to revisit your where-to-play and how-to-win choices to find a set of strategic choices and an activity system that are difficult to replicate and hard to defend against. The goal, then, is an integrated and mutually reinforcing set of capabilities that underpin the where-to-play and how-to-win choices and that are feasible, distinctive, and defensible. Measuring the P&G activity system against these criteria, it fairs well. Time has demonstrated that it was feasible to build: some capabilities, such as Connect + Develop (P&G’s version of open innovation), design, globally distributed R&D, and the global business services organization, had to be built, so P&G invested in them. The activity system as a whole is distinctive. While competitors have some of the capabilities, none has the entire combination that P&G has. L’Oréal has powerful brands and innovative design, but a fraction of P&G’s scale. Unilever has similar scale but doesn’t have P&G’s global go-to-market capability, because of Unilever’s country-based rather than global organizational structure. No competitor invests as much in consumer understanding or product innovation—and has introduced so many new products across so many categories. Finally, the activity system has been defensible: no competitor has been able to replicate the entire system map or outperform against the full set of capabilities. Note, however, that this does not mean P&G has an obviously superior strategy. As we have noted before, there are many ways to play in any industry. There are numerous where-to-play and how-to-win choices, backed by core capabilities, in any field of competition. In the consumer-goods industry, P&G’s strategy is but one of the successful ones.
- If you are in a business that has one product line or brand, you may well have a single set of core capabilities and one activity system for the whole company. In a corporation, though, with different brands, categories, and markets, each different business line makes its own where-to-play and how-to-win choices within the context of organizational choices. Logically, then, each unit must have an activity system that supports its choices, a system that is informed by the corporate-level map. In other words, layers of capabilities occur throughout the organization, and the activity systems look at least a little different in different parts of the company.
- For a corporation to have a chance of delivering greater value together than the units could individually, there must be some core activities in common—both among businesses in the portfolio and between those businesses and the company overall. It is essential that all of the systems have at least some capabilities and activities that line up with the core capabilities of the organization. These shared capabilities—the ones that run through multiple divisions or units and the organization overall—create reinforcing rods that link different parts of the organization together, just as steel reinforcing rods run from floor to floor in a concrete building to keep it standing (figure 5-2). These reinforcing rods help drive strategy forward at all levels. FIGURE 5-2 Reinforcing rods Again, although the baby-care, laundry, skin-care, GBS, and European MDO activity systems will be distinct from one another and from the P&G system in some respects, they will each have some crucial reinforcing rods that tie their capabilities together. For instance, all five of P&G’s company-level core capabilities are important for the baby-care business. Scale and innovation are critical to GBS, which oversees IT and other central services. Go-to-market capabilities are obviously critical to the European MDO, but so too are consumer understanding and scale. As discussed, P&G’s consumer insights, innovation, and scale were important for Gillette. The links between the systems are crucial to create brand, category, sector, function, and overall company competitive advantage—to make the system stronger than the sum of its parts. Multilevel Strategy Given that core capabilities exist at different levels of the organization, it is hard to know just where to start thinking about them—with corporate strategy or with business strategy. Ultimately, there is no perfect place to start and the process isn’t linear—you need to go back and forth between the levels, just as you need to loop back and forth between the five questions in the strategic choice cascade. However, you can use three principles to help the company put together integrated activity.
- Three principles to help the company put together integrated activity systems at multiple organizational levels.
- Start at the Indivisible Level. When building an activity system, you will know that you are in the right spot if the following conditions hold true: (1) the activity system would look more or less the same down one level, but (2) it looks meaningfully different up one organizational level. In the case of Head & Shoulders, for instance, one level down from brand would be individual product (Head & Shoulders Classic Clean, Head & Shoulders Extra Volume, and so on). If you were to build the activity system for each of these products and compare it with the brand system, there would be little difference. Each product represents a small variation in formulation. But going up a level from brand to the hair-care category, the activity systems would be quite different. At the hair-care category level, the portfolio includes products such as Nice ’n Easy hair colorants, Herbal Essences hair gels, and so on. The Head & Shoulders map is geared to produce advantage via innovation in therapeutic ingredients, while the Nice ’n Easy map prominently features implements, dispensers, and color research. The hair-care category activity system would need to be a more general system that captures the essence of those below it and connects to those above. The ground-level maps (e.g., Head & Shoulders and Nice ’n Easy) can be thought of as indivisible activity systems: below this level, the activity system doesn’t divide into distinct maps, while above this level, multiple distinct maps are aggregated together into a unique system. This indivisible level will not be the same in every organization (i.e., the indivisible activity system is not always found at the brand level). Every company has to find the level of direct competition and begin articulating capabilities there. Build activity systems starting at the ground level—the point of indivisible activity systems—and work your way up from there. Why? The capabilities at the indivisible level drive the ones above.
- Add Competitive Advantage to the Level Below. All levels above the indivisible activity system are aggregations that must add net competitive advantage in some way. Since aggregation inevitably creates costs (financial and administrative) that wouldn’t exist if the indivisible activity systems existed as separate businesses, the strategy at all levels of aggregation must contribute a countervailing benefit to those below, somehow improving their competitiveness. A level can contribute a net benefit in two ways—through two kinds of reinforcing rods. First, it can provide the benefit of a shared activity. For example, the hair-care category can have a research laboratory that does fundamental research on cleaning, conditioning, and styling, which, because of its massive scale across all the hair brands, performs at a fraction of the cost that it would take for Head & Shoulders to do on its own. The technology advantage that is enabled through shared activities can be powerful. The second way a higher level of aggregation can provide value is through skills and knowledge transfer. For example, if Head & Shoulders needs well-trained brand managers and R&D managers to work in its business, and those can be provided by the hair-care category, then this represents a valuable transfer of skills to Head & Shoulders. Management at the each level of aggregation should seek to develop an activity system that focuses as exclusively as possible on the key reinforcing rods through which that level has chosen to add value to the levels below it. The aggregator’s primary job is to help the level below compete more effectively through shared activities and transfer of skills. This means having a clear view of how the level wishes to add value and then focusing all of its resources on doing so. Activities that don’t add value to activity systems below should be minimized, because they destroy value. For example, only if the hair-care category can demonstrate value (from sharing of activities and transfer of skills) that is greater than the financial and administrative costs that it imposes on Head & Shoulders, Nice ’n Easy, Pantene, Herbal Essences, and so forth, should it exist as a level of aggregation in the corporation. Otherwise, the level should be eliminated.
- Expand or Prune the Portfolio Below to Enhance Competitiveness. While the first job of each aggregation level is to develop capabilities that support those levels below, the second job is to expand and prune the lower-level portfolio on the basis of fit to broader capabilities. With respect to enhancing the portfolio, consider the organizational reinforcing rods—the capabilities that run through and create advantage in the whole of your organization—and determine whether the portfolio can be expanded into other businesses that would benefit competitively from those reinforcing rods. The creation of the Swiffer and Febreze brands within P&G’s home-care category are excellent examples of expanding a portfolio according to advantaged reinforcing rods in consumer understanding and innovation. Without the ability to understand unmet consumer needs and innovate against them, neither product would exist today. Equally important is pruning of the portfolio below when the benefits of the reinforcing rods cannot match the financial and administrative costs of aggregation. These are businesses that would be better off in another company’s portfolio or as independent operations. P&G aggressively pruned businesses for which its five corporate capabilities couldn’t assist substantially in generating competitive advantage, divesting about fifteen businesses a year for ten years, between 2000 and 2009. Big, profitable brands such as Folgers and Pringles had to go because they were not going to benefit from company reinforcement enough to sustain competitive advantage over the long term. Both had built strong brands, but had limited opportunity for product innovation within P&G’s mass channels of distribution.
- BUILDING CAPABILITIES DOS AND DON’TS
- Do discuss, debate, and refine your activity system; creating an activity system is hard work and may well take a few tries to capture everything in a meaningful way.
- Don’t obsess about whether something is a core capability or a supporting activity; try your best to capture the most important activities required to deliver on your where-to-play and how-to-win choices.
- Don’t settle for a generic activity system; work to create a distinctive system that reflects the choices you’ve made.
- Do play to your own, unique strengths. Reverse engineer the activity systems (and where-to-play and how-to-win choices) of your best competitors, and overlay them with yours. Ask how to make yours truly distinctive and value creating.
- Do keep the whole company in mind, looking for reinforcing rods that are strong and versatile enough to run through multiple layers of activity systems and keep the company aligned.
- Do be honest about the state of your capabilities, asking what will be required to keep and attain the capabilities you require.
- Do explicitly test for feasibility, distinctiveness, and defensibility. Assess the extent to which your activity system is doable, unique, and defendable in the face of competitive reaction.
- Do start building activity systems with the lowest indivisible system. For all levels above, systems should be geared to supporting the capabilities required to win.
- In any conversation, organizational or otherwise, people tend to overuse one particular rhetorical tool at the expense of all the others. People’s default mode of communication tends to be advocacy—argumentation in favor or their own conclusions and theories, statements about the truth of their own point of view. To create the kind of strategy dialogue we wanted at P&G, people had to shift from that approach to a very different one. The kind of dialogue we wanted to foster is called assertive inquiry. Built on the work of organizational learning theorist Chris Argyris at Harvard Business School, this approach blends the explicit expression of your own thinking (advocacy) with a sincere exploration of the thinking of others (inquiry). In other words, it means clearly articulating your own ideas and sharing the data and reasoning behind them, while genuinely inquiring into the thoughts and reasoning of your peers. To do this effectively, individuals need to embrace a particular stance about their role in a discussion. The stance we tried to instill at P&G was a reasonably straightforward but traditionally underused one: “I have a view worth hearing, but I may be missing something.” It sounds simple, but this stance has a dramatic effect on group behavior if everyone in the room holds it. Individuals try to explain their own thinking—because they do have a view worth hearing. So, they advocate as clearly as possible for their own perspective. But because they remain open to the possibility that they may be missing something, two very important things happen. One, they advocate their view as a possibility, not as the single right answer. Two, they listen carefully and ask questions about alternative views. Why? Because, if they might be missing something, the best way to explore that possibility is to understand not what others see, but what they do not.
- P&G created supporting systems for each of its core strengths, investing resources and attention to building sustainable structures:
- On consumer understanding, P&G invested aggressively in new consumer-research methodologies, striving to lead the industry with real in-house consumer and market research capability.
- P&G invested significantly in innovation—in understanding the innovation process, in exploring disruptive innovation with Clay Christensen and Innosight, and in creating Connect + Develop (the P&G version of open innovation), so that more than half of the company’s new brand and product innovation had one or more external partners by 2008.
- P&G formalized its brand-building framework and set out to create new brands that would improve the lives of consumers. P&G introduced more brands than any other company in its industry over the first decade of the twenty-first century. Some did not achieve or sustain commercial success (like Fit, Physique, and Torengos), but the majority ended up as successful, going concerns, and some created significant new categories or segments (e.g., Actonel, Align, Febreze, Prilosec, and Swiffer).
- On the go-to-market front, P&G invested heavily in strategic partnerships with retailers. It created new ways of doing business with retail customers, suppliers, and even competitors (in noncompetitive categories), leading the charge to change the traditional business model in which all important activities exist within the walls of the firm.
- P&G invested significantly in scope and scale, articulating the ways in which the advantages they confer are more about learning curves and re-applicability than about size.
- The company launched a project to codify P&G’s approach to brand building for the first time. Deb Henretta, then general manager of laundry, was the executive sponsor, and the team comprised three outstanding marketing experts: Lisa Hillenbrand, Leonora Polonsky, and Rad Ewing. Their work led to the creation of P&G’s brand-building framework (BBF) 1.0, which explained P&G’s approach to brand building in one coherent document for the first time. In 2003, the team updated the framework and released BBF 2.0 to the organization, followed by BBF 3.0 in 2006 and BBF 4.0 in 2012. Each version was an enhancement over the prior one in comprehensiveness, clarity, and actionability. Now, with the BBF frameworks in place, new marketers can learn the trade more quickly and senior managers have an organized and written resource to guide their efforts. The BBF and its subsequent refinements serve as a management system that nurtures and enhances the critical brand-building capacity of P&G.
- Measurement provides focus and feedback. Focus comes from an awareness that outcomes will be examined, and success or failure noted, creating a personal incentive to perform well. Feedback comes from the fact that measurement allows the comparison of expected outcomes with actual outcomes and enables you to adjust strategic choices accordingly. For measures to be effective, it is crucial to indicate in advance what the expected outcomes are. Be explicit: “The following aspiration, where to play, how to win, capabilities, and management systems should produce the following specific outcomes.” Expected outcomes should be noted in writing, in advance. Specificity is crucial. Rather than stating “increase in market share” or “market leadership,” quantify a thoughtful range within which you would declare success and below which you would not. Without such defined measures, you can fall prey to the human tendency to rationalize any outcome as more or less what you expected. Within an organization, every business unit or function should have specific measures that relate to the organizational context and that unit’s own choices. These measures should span financial, consumer, and internal dimensions, to prevent the team from focusing exclusively on a single parameter of success.
- Operating TSR is an amalgamated measure of three real operating performance measures—sales growth, profit margin improvement, and increase in capital efficiency. This measure more accurately captures P&G’s true performance across the most critical operational metrics and, moreover, measures things that business-unit presidents and general managers can actually influence, unlike the market-based TSR number. The operating TSR measure integrates revenue growth, margin growth, and cash productivity and it does so regardless of the type of assets being managed—whether you have hard assets like tissue/towel paper converting machines or inventory like cosmetics and fragrance products. In other words, the measure could be equitably and usefully applied to all of P&G’s diverse businesses. And it isn’t utterly unconnected to stock performance—there is a high correlation over the medium and long term between operating TSR and market TSR. But unlike the stock price, the operating TSR measures are ones over which P&G managers have real influence in the short and medium term.
The use of operating TSR also enabled P&G to compare itself to competitors in a meaningful way; P&G could actually calculate an operating TSR for competitive firms using public data. When P&G didn’t fare as well, it became an impetus to improve performance on one or more of the operating TSR drivers. Operating TSR also reduced some of the gamesmanship inherent in other systems that allow businesses to choose their own performance metrics. Having a single measure of value creation at the company and business-unit levels (and using that same measure across businesses and over time) enabled more balanced, consistent, and reliable performance.
- MANAGEMENT SYSTEMS AND MEASURES DOS AND DON’TS
- Don’t stop at capabilities; ask yourself which management systems are needed to foster those capabilities.
- Do continue strategic discussions throughout the year, building an internal rhythm that keeps focus on the choices that matter.
- Do think about clarity and simplicity when communicating key strategic choices to the organization. To get at the core, don’t overcomplicate things.
- Do build systems and measures that support both enterprise-wide capabilities and business-specific capabilities.
- Do define measures that will tell you, over the short and long run, how you are performing relative to your strategic choices.
One of the biggest lessons I had learned in my years at P&G was the power of simplicity and clarity. I found that clearer, simpler strategies have the best chance of winning, because they can be best understood and internalized by the organization. Strategies that can be explained in a few words are more likely to be empowering and motivating; they make it easier to make subsequent choices and to take action.
- There are four dimensions you need to think about to choose where to play and how to win:
- The industry. What is the structure of your industry and the attractiveness of its segments?
- Customers. What do your channel and end customers value?
- Relative position. How does your company fare, and how could it fare, relative to the competition?
- Competition. What will your competition do in reaction to your chosen course of action?
These four dimensions can be understood through a framework we call the strategy logic flow, which poses seven questions across the four dimensions. The strategy logic flow spurs a thoughtful analysis of your company’s current reality, context, challenges, and opportunities and leads to the development of multiple possible where-to-play and how-to-win choices.
With an understanding of the industry and customers, the next step is to explore your own relative position on two levels: capabilities and costs. Capabilities In terms of relative capabilities, the question is, how do your capabilities stack up, and how could they stack up, against those of your competitors in meeting the identified needs of customers (both channel and end consumer)? In particular, could you configure your capabilities to enable your company to meet the needs of customers in a distinctively valuable way, underpinning a potential differentiation strategy? Or, at a minimum, could you configure your capabilities to enable the company to match competitors in meeting the needs of customers, underpinning a potential cost-leadership strategy? In other words, how could your capabilities be configured to translate to a measurable, sustainable competitive advantage? As with each of the other elements in the logic flow, an assessment of relative capabilities proved decisive for a number of strategic choices at P&G. For instance, it led the company to exit several profitable businesses, like pharmaceuticals, which required a number of capabilities that did not fit well within the P&G structure. Pharmaceuticals require a long, complex clinical trial and FDA-approval process; they are largely sold directly to doctors and pharmacies, with little or no ability to influence the end consumer; for many of the products, there was no long-term usage opportunity, which made it hard to use P&G brand-building capabilities to build a sustainable tie with consumers; and there was little crossover between P&G core technologies and the technologies needed to innovate in pharmaceuticals. So, P&G exited the industry, after much debate and soul-searching. Costs The other half of an analysis of relative position relates to cost and the degree to which the organization can achieve approximate cost parity with competitors or distinctly lower costs than competitors. These are the key questions to consider on this front: does the organization have a scale, branding, or product development advantage that enables it to deliver a superior value offering at the same cost as the cost incurred by competitors? Or, does it have a scale advantage, a learning-curve advantage, a proprietary process, or a technology that enables it to have a superior cost position? The answers to these questions start to put parameters around the myriad how-to-win options.
Only strategies that provide a sustainable advantage—or a significant lead in developing future advantages—are worth investing in. You don’t want to design and build a strategy that a competitor can copy in a heartbeat, or one that will prove ineffective against a simple defensive maneuver on a competitor’s part. A strategy that only works if competitors continue to do exactly what they are already doing is a dangerous strategy indeed.
An analysis of the competitive landscape and potential competitive reaction was particularly decisive in the Impress and ForceFlex technologies, the bags and wraps innovations that would eventually form the basis of P&G’s joint venture with Glad. The family-care team was quite sure that P&G’s entry into an already competitive space would cause an all-out war, one in which P&G might not prevail, even with a superior technology. So the team knew it needed to find another way to play to win. The analysis of anticipated competitive response was the spur to create a new and better strategy for commercializing the technologies.
Competitive reaction was also a crucial consideration in P&G’s decision to launch a new dish detergent in Japan in the 1990s. At the time, the market was dominated by two massive players: Kao and Lion. Both sold dish soap in bottles that were quite sizable because the soap was diluted with lots of water. There was little differentiation between the products, other than name and fragrance. Bob McDonald, then vice president of laundry and cleaning products in Asia (and soon to be president of Japan operations), and his team saw an opportunity to launch Joy, using the proprietary grease-fighting technology from P&G’s successful US Dawn brand. The product would be sold in a highly concentrated form, in a bottle one-quarter the size of competitive offerings. Joy looked to be a good fit with consumer values (a better grease-fighting technology was the answer to a genuine consumer need), and the team believed it could get retailers excited about selling more bottles with less shelf space and a healthy price premium. But how would the entrenched and powerful competitors react? The team modeled the possible reactions and determined that if the competitors stayed with their existing diluted format, Joy could win handily. If the competitors chose to launch a concentrated version, but continued to produce diluted as well, Joy would still win, as the competition would face considerably higher costs and be challenged by a split focus. The only real danger was if the competitors dropped their diluted versions and threw everything behind new, concentrated detergents. If they did, Joy would have little chance with a similar product going against established local competitors. The team had to make its best guess about the competitors’ likely course of action. Kao and Lion were large, traditional firms with a great deal invested in their current approach, especially given that the vast majority of their category profit came from these diluted formulas. The team believed that at worst, the competitors would move to producing both dilute and concentrate. This would give Joy time to gain a foothold. The competitors indeed chose to defend their existing dilute product lines while also launching a concentrated version—which gave Joy the opportunity to create a sizable new segment and take most of it. By 1997, Joy had captured 30 percent of the total dish detergent market and was the number one dish brand in the country.
- STRATEGY LOGIC FLOW DOS AND DON’TS
- Do explore all four critical dimensions of strategy choice: industry, customers, relative position, and competition.
- Do look beyond your current understanding of the industry, pushing to generate new ways of segmenting the market.
- Don’t accept that entire industries are or must be unattractive; explore the drivers of different dynamics in different segments, and ask how the game could be changed.
- Do consider both channel and end consumer value equations; if only one of these constituents is happy, your strategy is a fragile one. A winning strategy is a win-win-win; it creates value for consumers, customers, and the company.
- Don’t expect either the channel or the end consumers to tell you what constitutes value; that is your job to figure out
- Don’t be blasé about your relative capabilities or costs; compare them with those of your best competition, and really push to understand how you can win against them.
- Do explore a range of possible competitive reactions to your choices, and ask under what conditions competitors could block you from winning.
- In strategy, there are no absolute answers or sure things, and nothing lasts forever. Having a clear definition of winning, a robust analytical framework such as the logic flow, and a thoughtful review process can help organize thinking and improve analysis, but even still, a successful outcome is not guaranteed. In the end, building a strategy isn’t about achieving perfection; it’s about shortening your odds.
- In a typical strategy process, participants seek to find the single right answer, build unassailable arguments to support it, and sell it to the rest of the organization. At the beginning, an internal project team or an external consultant, or both, will set out to rigorously analyze everything they can to ferret out answers about the world—what consumers want, the competitive dynamics of the industry, and so on. Or perhaps the team already has a view as to what the right answer will be, so it conducts analyses that are designed to confirm the hypothesis. Either way, a dive into the data is the starting point. At some point, through the cloud of data, a few plausible strategic options emerge. Because there is intense pressure to be practical, creativity is tacitly discouraged throughout the option-generation process. The team sees it as its job to ensure that all of the options will ultimately be actionable. The implication is that unexpected (even wild) strategic options and creative ideas will slow down the process and add no value—and might become dangerous if momentum is built behind them. So there is a drive to expected, straightforward options that stay relatively close to home. Then, the options are typically assessed using a single metric: the financial plausibility test. A high net present value or internal rate of return helpfully buttresses the claim that a particular option is the best choice. At this stage, arguments often ensue as to which truly is the superior option, with each side dipping into the vast body of analysis for proof or tweaking the assumptions behind the financial metric. To create a consensus, the team makes a series of compromises to bring key managers on-side. The compromise option is then taken to senior management (or the board of directors), where it is aggressively sold as the right answer. With perhaps a little more compromising to get senior managers on board, the choice is given final approval and the strategy is rolled out to the organization. The problems with this traditional approach are numerous. First, it is expensive and time-consuming to analyze everything up front. The analysis itself tends to be scattershot and superficial, because there is so much material to cover. Plus, because so many different analyses are being conducted, they are often done independently of one another, making it difficult to see the whole picture at any point. Hard feelings tend to emerge as individuals advocate for one choice or another and feel marginalized if their option doesn’t make the cut. Since the goal is for everyone to buy in, weak compromises are made instead of real, hard choices. Creativity is discouraged; the pressure to converge on an answer on the basis of existing data eliminates the possibilities that are off the mainstream path. The buy-in process is long and tedious, yet it often results in only the appearance of concurrence, followed by foot-dragging by those who never truly bought in. And senior management is engaged only at the end of the process, after the strategy is buttoned up, which means that these leaders’ experience, insights, and ideas are barely taken into account (if at all). In all, it is a painful and unproductive process that produces few powerful choices. No wonder managers have little enthusiasm for the strategy process.
- Asking a single question can change everything: what would have to be true? This question helpfully focuses the analysis on the things that matter. It creates room for inquiry into ideas, rather than advocacy of positions. It encourages a broader consideration of more options, particularly unpredictable ones. It provides room to explore ideas before the team settles on a final answer. It dramatically reduces intrateam tension and conflict, during decision making and afterward. It turns unproductive conflict into healthy tension focused on finding the best strategic approach. And it leads to clear strategic choices at the end. We all ultimately want to find the strategy that is best for our business. Rather than asking individuals to find that answer for themselves and then fight it out, this approach enables the team to uncover the strongest option together. A standard process is characterized by arguments about what is true. By turning instead to exploring what would have to be true, teams go from battling one another to working together to explore ideas. Rather than attempting to bury real disagreements, this approach surfaces differences and resolves them, resulting in more-robust strategies and stronger commitment to them. The process for exploring what would have to be true has seven specific steps. It begins with framing the fundamental choice, articulating at least two different ways forward for the organization (or category, function, brand, product, etc.), on the basis of your winning aspiration. Then, the team works to brainstorm a wider variety of possible strategic choices, different where-to-play and how-to-win choice combinations that could result in winning. These strategic possibilities are then each considered in turn by asking what would have to be true for this possibility to be a potentially winning choice. (Or, flipped around, by asking, under what conditions could we win with this possibility?) FIGURE 8-2 Reverse-engineering strategic options The answers—the things that would have to be true—are the conditions under which the group would choose to move ahead with a particular possibility.
- REVERSE-ENGINEERING DOS AND DON’TS
- Don’t spend a lot of time up front analyzing everything you can; instead, use reverse engineering to pinpoint only what you really need to know.
- Do frame a clear and important choice up front; make it real and significant.
- Do explore a wide range of where-to-play and how-to-win possibilities, rather than narrowing the list early on to those that feel realistic; unexpected possibilities often have interesting and helpful elements that can otherwise be dismissed out of hand. Learn from them.
- Do stay focused on the most important question (what would have to be true for this to be a winning possibility?), listing the conditions under which this possibility would be a really good one.
- Don’t forget to go back and eliminate any nice-to-have conditions; every condition should be truly binding—if it weren’t true, you wouldn’t pursue the possibility.
- Do encourage skeptics to express concerns at the specify-barriers stage; have them articulate the precise nature of their concerns about specific conditions.
- Don’t have proponents of a given possibility set and perform the tests; ask the skeptics to do it. If the skeptics are satisfied in the end, everyone else will be too.
- Do test the biggest barrier first. Start with the condition the group feels is least likely to be true. If it isn’t true, the conditions required do not hold and you can stop testing.
- Do use a facilitator to run the reverse-engineering process; it helps to have someone to attend to process and group dynamics as you work through the thinking tasks.
The best role of the consultant became clear to me: don’t attempt to convince clients which choice is best; run a process that enables them to convince themselves.
- The playbook can guide your strategic thinking and help create true and lasting competitive advantage.
- There is no perfect strategy—no algorithm that can guarantee sustainable competitive advantage in a given industry or business. But there are signals that a company has a particularly worrisome strategy. Here are six of the most common strategy traps:
- The do-it-all strategy: failing to make choices, and making everything a priority. Remember, strategy is choice.
- The Don Quixote strategy: attacking competitive “walled cities” or taking on the strongest competitor first, head-to-head. Remember, where to play is your choice. Pick somewhere you can have a chance to win.
- The Waterloo strategy: starting wars on multiple fronts with multiple competitors at the same time. No company can do everything well. If you try to do so, you will do everything weakly.
- The something-for-everyone strategy: attempting to capture all consumer or channel or geographic or category segments at once. Remember, to create real value, you have to choose to serve some constituents really well and not worry about the others.
- The dreams-that-never-come-true strategy: developing high-level aspirations and mission statements that never get translated into concrete where-to-play and how-to-win choices, core capabilities, and management systems. Remember that aspirations are not strategy. Strategy is the answer to all five questions in the choice cascade.
- The program-of-the-month strategy: settling for generic industry strategies, in which all competitors are chasing the same customers, geographies, and segments in the same way. The choice cascade and activity system that supports these choices should be distinctive. The more your choices look like those of your competitors, the less likely you will ever win.
- Six Telltale Signs of a Winning Strategy Because the world is so complex, it is hard to tell definitely which results are due to the strategy, which to macro factors, and which to luck. But, there are some common signs that a winning strategy is in place. Look for these, for your own business and among your competitors.
- An activity system that looks different from any competitor’s system. It means you are attempting to deliver value in a distinctive way.
- Customers who absolutely adore you, and noncustomers who can’t see why anybody would buy from you. This means you have been choiceful.
- Competitors who make a good profit doing what they are doing. It means your strategy has left where-to-play and how-to-win choices for competitors, who don’t need to attack the heart of your market to survive.
- More resources to spend on an ongoing basis than competitors have. This means you are winning the value equation and have the biggest margin between price and costs and the best capacity to add spending to take advantage of an opportunity or defend your turf.
- Competitors who attack one another, not you. It means that you look like the hardest target in the (broadly defined) industry to attack.
- Customers who look first to you for innovations, new products, and service enhancement to make their lives better. This means that your customers believe that you are uniquely positioned to create value for them.