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Playing to Win: How Strategy Really Works

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Playing to Win: How Strategy Really Works

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Highlights & Notes

Really, strategy is about making specific choices to win in the marketplace. According to Mike Porter, author of Competitive Strategy, perhaps the most widely respected book on strategy ever written, a firm creates a sustainable competitive advantage over its rivals by “deliberately choosing a different set of activities to deliver unique value.”

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.

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.

These ineffective approaches are driven by a misconception of what strategy really is and a reluctance to make truly hard choices. It is natural to want to keep options open as long as possible, rather than closing off possibilities by making explicit choices. But it is only through making and acting on choices that you can win. Yes, clear, tough choices force your hand and confine you to a path. But they also free you to focus on what matters.

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 needn’t be mysterious. Conceptually, it is simple and straightforward. It requires clear and hard thinking, real creativity, courage, and personal leadership. But it can be done.

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.

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.

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.

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.

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.

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.

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.

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?

Rather, strategy is an iterative process in which all of the moving parts influence one another and must be taken into account together. A company must understand its existing core capabilities and consider them when deciding where to play and how to win. But it may need to generate and invest in new core capabilities to support important, forward-looking where-to-play and how-to-win choices, too.

Aspirations are the guiding purpose of an enterprise. Think of the Starbucks mission statement: “To inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.” Or Nike’s: “To bring inspiration and innovation to every athlete* in the world.” (The additional note, indicated by the asterisk, reads: “*If you have a body, you’re an athlete.”) And McDonald’s: “Be our customers’ favorite place and way to eat.” Each is a statement of what the company seeks to be and a reflection of its reason to exist. But a lofty mission isn’t a strategy. It is merely a starting point.

The first box in the strategic choice cascade—what is our winning aspiration?—defines the purpose of your enterprise, its guiding mission and aspiration, in strategic terms. What does winning look like for this organization? What, specifically, is its strategic aspiration? These answers are the foundation of your discussion of strategy; they set the context for all the strategic choices that follow.

And that is the single most crucial dimension of a company’s aspiration: a company must play to win. To play merely to participate is self-defeating. It is a recipe for mediocrity. 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.

When a company sets out to participate, rather than win, it will inevitably fail to make the tough choices and the significant investments that would make winning even a remote possibility. A too-modest aspiration is far more dangerous than a too-lofty one. Too many companies eventually die a death of modest aspirations.

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.

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.

The essence of great strategy is making choices—clear, tough choices, like what businesses to be in and which not to be in, where to play in the businesses you choose, how you will win where you play, what capabilities and competencies you will turn into core strengths, and how your internal systems will turn those choices and capabilities into consistently excellent performance in the marketplace. And it all starts with an aspiration to win and a definition of what winning looks like.

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.

“If it is true that we can’t get a decent return from the existing business, we should get out of the business entirely.”

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.

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.

But even the largest companies must make explicit choices to compete in some places, with some products, for some customers (and not in others). A choice to serve everyone, everywhere—or to simply serve all comers—is a losing choice.

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.

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.

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.

Sometimes the key to finding a new place to play is to simply believe that one is possible.

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.

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.

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.

Differentiation between products is driven by the activities of the firm: product design, product performance, quality, branding, advertising, distribution, and so on.

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.

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 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.

“it really comes down to, are you, as an acquirer, going to bring value to that acquisition or not? The acquisition is only really successful if you’re a better owner of the business than either the previous owner or the company as an independent company.

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

Identifying the capabilities required to deliver on the where-to-play and how-to-win choices crystallizes the area of focus and investment for the company. It enables a firm to continue to invest in its current capabilities, to build up others, and to reduce the investment in capabilities that are not essential to the strategy.

With capabilities, again, winning is an essential criterion. Companies can be good at a lot of things. But there are a smaller number of activities that together create distinctiveness, underpinning specific where-to-play and how-to-win choices.

When articulating core capabilities, you need to distinguish between generic strengths and critical, mutually reinforcing activities. A company needs to invest disproportionately in building the core capabilities that together produce competitive advantage.

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.

However, if there is nothing in common between these different activity systems, it is a sign that the organization has businesses that may fit poorly in the same portfolio. 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.

An activity system captures the most important activities of the organization in a single visual representation. The large nodes of the map are the core capabilities, while the smaller nodes are the activities that support those core capabilities.

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.

“I have a view worth hearing, but I may be missing something.”

This approach includes three key tools: (1) advocating your own position and then inviting responses (e.g., “This is how I see the situation, and why; to what extent do you see it differently?”); (2) paraphrasing what you believe to be the other person’s view and inquiring as to the validity of your understanding (e.g., “It sounds to me like your argument is this; to what extent does that capture your argument accurately?”); and (3) explaining a gap in your understanding of the other person’s views, and asking for more information (e.g., “It sounds like you think this acquisition is a bad idea. I’m not sure I understand how you got there. Could you tell me more?”).

Creating a truly robust strategy takes the capabilities, knowledge, and experience of a diverse team—a close-knit group of talented and driven individuals, each aware of how his or her own effort contributes to the success of the group and all dedicated to winning as a collective.

A massive binder or thick PowerPoint deck won’t rally an organization.

In consumer terms, the notion behind moments of truth is that a company’s performance is the sum total of all its interactions with its consumers, the moments in which the brand promise is either realized or not in the consumer’s mind.

Does the packaging help the consumer understand the performance promise and the value proposition? Is it merchandised in a way that reinforces the brand promise and builds on it?

Only when the choices are clear and simple can they be acted upon—only then can they effectively shape choices throughout the rest of the organization. These simple strategy messages can capture the very heart of the organization’s intent—and to be effective should be repeated over and over again—to different groups, in different contexts, creating a mantra for the organization.

It’s an old saying that what gets measured gets done. There’s more than a little truth to this. If aspirations are to be achieved, capabilities developed, and management systems created, progress needs to be measured. 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.

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.

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.

“We proved, market by market, that when we used this WPI metric, we could explain the dynamics in the marketplace,” Henretta says. “The WPI winner was the fastest-growing brand in the marketplace and often the market leader.”

WPI was just one of many measures that better helped P&G win. The company took existing best-in-class measures, adopted them, and adapted them to make them better, like using an adapted net promoter score to track consumer sentiment and loyalty.7 The company also developed unique and proprietary test methodologies. Together, these measures were very important contributors to P&G’s strategic success.

Do continue strategic discussions throughout the year, building an internal rhythm that keeps focus on the choices that matter.

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.

Ultimately, 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?

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.

Industry segments are distinctive subsets of the larger industry along lines such as geography, product or service type, channel, customer or consumer needs, and so on. Mapping industry segments is rarely straightforward; it takes work, reflection, and, often, the willingness to explore beyond the current or obvious segments to segments that do not currently exist. In many cases, the accepted, traditional industry maps are imperfect. Like the old maps of a flat world that showed edges you could sail off, industry maps have limitations; only by exploring the edges of those maps can you see things differently.

Understanding structural attractiveness allows individual managers to determine how to invest in various segments within their business.

Regardless of whether a firm wishes to be a cost leader or a differentiator, it needs to understand precisely what customers (its own and its competitors’ customers) value.

So, given that P&G needs retailers to stock Gain, the company needs to offer a compelling value proposition to retailers, or the end consumer will never see the product. Wherever there is an intermediary channel between the firm and the end consumer, that intermediate customer and what it values must be understood. Wherever there is no intermediate customer or channel (like a retail bank, for example, which offers services directly to its consumers), a direct-to-consumer or solely business-to-business firm can eliminate the channel box from the diagram.

In customer value analysis, the company assesses what its channel customers and end consumers really want and need, and what value they derive from the firm’s products and services relative to the costs they incur from buying and using the products or services.

Understanding customer value requires deep engagement. The traditional approach of checking in with salespeople occasionally to see what retailers are thinking and doing is no longer enough. A much higher level of sophistication—and real commitment—is required.

Their job was to understand their customer so well that they could work collaboratively to develop mutual business goals, joint value creation strategies, and shared action plans to win.

To understand the consumer value equation, you must truly get to know your consumers—to engage with them beyond the quantitative survey, through deeper, more personal forms of research—watching them shop, listening to their stories, visiting them at home to observe how they use and evaluate your products.

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?

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.

The question to address is this: is there some competitive response that could undermine or trump the where-to-play and how-to-win choices?

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.

Any new strategy is created in a social context—it isn’t devised by an individual sitting alone in an office, thinking his or her way through a complex situation. Rather, strategy requires a diverse team with the various members bringing their distinct perspectives to bear on the problem.

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.

Asking a single question can change everything: what would have to be true?

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. At this stage, there is no discussion of whether the conditions are likely to hold, just an understanding that if they did hold, this possibility would be a great choice.

To frame the choice, explicitly ask, what are the different ways of resolving this problem? Work to generate several options that stand in opposition to one another (i.e., such that you could not easily pursue the different remedies at the same time). Until you have identified a minimum of two mutually exclusive options to resolve the issue, the choice is not truly framed. This stage, framing the choice, is the proverbial crossing of the Rubicon; it makes the stakes clear and the consequences apparent and motivates the team to move ahead with finding the best answer it can.

That, in sum, is the process for choosing between possibilities for where to play and how to win. First, frame a choice. Second, explore possibilities to broaden the set of mutually exclusive possibilities. Third, for each possibility, ask, what would have to be true for this to be a great idea, using the logic flow framework to structure your thinking. Fourth, determine which of the conditions is the least likely to actually hold true. Fifth, design tests against those crucial barriers to choice. Six, conduct tests. Finally, in light of the outcome of the tests and how those outcomes stack up against predetermined standards of proof, select the best strategic choice possibility. This process broadens the possibilities up front and then systematically narrows the field. It leverages different perspectives to enrich the discussion, rather than bogging it down.

CEO is an extraordinarily lonely job when done well. The CEO is the chief external officer with primary responsibility for translating the meaningful outside into winning strategies for the business and the organization. This means choosing what business or businesses to be in and which to exit, to shut down, or not to enter. This means balancing the delivery of an acceptable return from current businesses and investing in businesses that will ensure steady growth and a strong return in the future. This means setting the standards for how an organization will behave and setting the bar high for performance.

A lack of strategy has a clearer and more obvious result: it will kill you.

Have you defined winning, and are you crystal clear about your winning aspiration? Have you decided where you can play to win (and just as decisively where you will not play)? Have you determined how, specifically, you will win where you choose to play? Have you pinpointed and built your core capabilities in such a way that they enable your where-to-play and how-to-win choices? Do your management systems and key measures support your other four strategic choices?

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 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.

All companies need to evolve their strategies—to improve, sharpen, and change to stay competitive and, ultimately, to win year after year.

A firm can face only two fundamental economic conditions, one of which gives rise to low-cost strategies, and another that gives rise to differentiation strategies. In microeconomics, the two central structures are demand and supply, and where they cross, the price is determined.

When a firm offers a product or service that buyers consider unique, the pricing and profit dynamics are quite different. The firm providing the unique offering is a price-setter, not a price-taker; the demand for the unique offering depends upon the price the firm sets—the higher the price, the lower the demand and vice versa. But this time, because the producer of a unique offering serves the entire market, the firm feels the shift in demand directly. Unlike in a commodity business, here price setting is one of the producer’s most important choices.

In a differentiated offering, there is an optimal price: the price at which the marginal revenue is equal to the marginal cost to the producer. The marginal-revenue curve falls faster than the demand curve because the firm needs to drop the price to all customers, not just the marginal customer, when pursuing incremental demand. As a consequence, marginal revenue doesn’t increase by the price of the incremental unit. It increases by that amount less the revenue lost on each prior unit. At some point, the marginal revenue is lower than the marginal cost and the firm has pushed price too far, as shown in figure B-8.

Only if its offerings seem unique to the customers will a firm continue to earn a price premium over nonunique competitors and hence maintain its competitive advantage.

So firms can always choose to win as either a cost leader or a differentiator. What they can’t do is win any other way. Due to the fundamental microeconomics of business, there are only two ways to win: higher margin through lower cost or higher margin through differentiation.

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