A summary of AG Lafley and Roger Martin's book on 'How strategy really works'
Told through the lens of AG Lafley and Roger Martin’s journey to double P&G’s sales and quadruple its profits in the 2000s, Playing to Win is an explanation of what business strategy is and how it works. At the book’s core is ‘the Strategic Choice Cascade’, a framework they demonstrate with case studies about brands such as Gillette, Pampers and Olay. For Lafley and Martin, strategy boils down to five interconnected, mutually reinforcing choices: not only choices about the enterprise’s aspirations, the arena in which it competes, and its approach to winning there, but the supporting capabilities the enterprise chooses to build and the systems it puts in place to enable these.
‘Playing to Win’ — the Strategic Choice Cascade
What is strategy, and where do you start?
Playing to Win articulates that:
Strategy is what you choose to do in pursuit of winning. This involves actively not choosing certain options. If everything is a priority, nothing is. It also means that the strategy is what is done in practice; therefore the choices must hang together consistently and not just remain as theory.
Strategy isn’t just a plan — there is no guarantee that a list of the things you will do, and when, will result in competitive advantage. Strategy isn’t just optimising — it is possible to get more and more efficient at the wrong things. Strategy isn’t just bench-marking, or ‘best practice’; being generic is a “recipe for mediocrity”.
The first step is defining what constitutes ‘winning’. Playing ‘to compete’ isn’t enough to inspire or focus an organisation to excel, to fight against opponents, to discipline it to make hard choices. The strategy starts with a vision of the organisation’s ‘why’ — its deepest purpose and ambition, and how this relates to the people it serves. It starts with people (consumers and customers) rather than money.
What are the most important aspects of strategy?
According to Lafley and Martin, ‘the heart of strategy’ is choosing ‘where to play’ and ‘how to win’.
Where to Play
Choosing ‘where to play’ identifies the geographies, industry segments, consumers, customers, product categories, occasions, parts of the value chain and so on in which the organisation will (and will not) compete.
Before trying to ‘win the game’, these strategic choices ask ‘are we competing in the right one?’ Instead of trying to win multiple ‘games’, competing against all-comers to capture every customer, this is choosing the most attractive ones to the organisation, and focusing.
As well as being demographically attractive — e.g. premium consumers willing to pay higher prices, or customers who have a lower cost to serve — some ‘places to play’ are more structurally attractive. These may be market segments with less intense competition, or where there is opportunity to grow the overall market, gaining new, loyal consumers and a competitive foothold before tackling stronger opponents.
How to Win
Identifying ‘how to win’ involves identifying / creating sources of sustainable competitive advantage in the arena in which the organisation has chosen to play.
These sources of advantage can be supply advantages (access to critical inputs unavailable to competition), scale advantages (ability to deliver the value proposition at a lower cost per unit of revenue than competition) or demand advantages (e.g. Consumers are “locked-in” due to high switching costs or habit)
A ‘value equation’ is the gap between the perceived value delivered to customers, and the costs of delivering that value. ‘Winning’ therefore can be defined as providing a better consumer and customer ‘value equation’ than your competitors. There are only two ways to do this, and the choices made about how the whole organisation operates must be consistent with whichever one is chosen.
The first approach to a ‘winning value equation’ is pursuing a low cost strategy. Choices consistent with this approach include the ‘sacrifice’ of nonconfroming customers, and emphasis on standardisation, and relentlessly addressing drivers of cost. The margin advantages in this kind of ‘value equation’ can be passed on to customers via reduced prices to gain share and undercut rivals, or reinvested to strengthen capability and stay ahead of competitors.
The second approach is to offer ‘differentiated value’, having a ‘customer focus’ rather than a ‘cost focus’. Margin advantages in this kind of ‘value equation’ are gained over competitors by commanding a disproportionately higher price for higher perceived value. Choices consistent with this approach include intensive brand building, jealous guarding of customers, and premium service.
If there is currently no ‘way to win’, and no prospect of changing the industry to allow it, then it’s time to find somewhere else to play.
What other choices are needed to get this strategy happening in practice, not just in theory?
‘Where to play’ and ‘how to win’ choices require corresponding capabilities to support them, and make them happen on-the-ground. These are the range and quality of activities the organisation uses to create value (see IKEA example below).
Advantage doesn’t come from a single capability, but an activity system of capabilities that fit together and reinforce one another. As a combination they must be feasible, distinctive, and defendable from competition.
When designing ‘rods’ of capabilities that run through all layers of the organisation, start at the ‘indivisible level’, where going down a level would look no different, going up a level will look totally different e.g. starting at the ‘Head and Shoulders’ brand, where the capabilities below for each product line will look the same, while the capabilities for ‘Hair Care’ in the level above will look very different. Additional levels shouldn’t be added if they can’t demonstrate value to the level below worth more than the administrative costs of putting it in.
Capabilities are built and maintained by management systems. These include technology and metrics to gauge performance against the strategic choices over the short and long term, governance rhythms to continue strategic decision-making throughout the year, and communication methods to ensure choices are shared with clarity and simplicity.
These systems should focus on measuring progress made in delivering improvements for customers, rather than just recording improvements to existing products’ performance.
How are good strategic choices made?
Playing to Win then outlines two techniques for helping make these choices:
To avoid spending a lot of time up front on analysis that might not be decisive, reverse engineering pinpoints the things you really need to know in order to make a given choice. It also encourages real buy-in from key players, by getting them to actually participate rather than selling them a strategy at the end. The process involves:
Strategic Choice Structuring
Beginning by focusing on the question not the analysis, re-framing it as a strategic choice, ensuring it is both clear and significant,
Generating a wide range of possibilities up front, without evaluating them. Even those which are unrealistic are retained, as there may be interesting and helpful elements,
Identifying ‘What would have to be true?’ for a given possibility to be the ‘winner’. Any possibility which does not satisfy this small number of non-negotiable conditions would be immediately discounted,
After this, skeptics have an opportunity to express ‘barriers’. These are concerns that a given possibility under consideration will be unable to meet one of the specific non-negotiable conditions. The most uncertain-and-critical barriers are prioritised (using a trusty 2x2 matrix), and
Finally, skeptics (not the possibility’s champion) devise and run tests to identify whether the barrier is real, beginning with the most likely barrier first, in order to inform the choice of possibility. These could range from consumer surveys, focus groups, interviews, prototypes and pilots to a single supplier conversation depending of the nature of the barrier and the burden of proof required.
The Strategy Logic Flow provides a set of four factors to analyse when weighing up ‘Where to Play and How to Win’ choices:
What segments the industry is made up of, and what factors drive the attractiveness of each,
What customers — distribution channels and end consumers — value (and will therefore pay for), ensuring that both groups, not just one, are being kept happy,
The relative position versus the best competitors, in terms of costs and capabilities, now and in future, and
The reaction that a given set of choices might prompt from others, and the resulting implications.
These four categories are designed as prompts, rather a comprehensive list; for some organisations ‘regulation’ might be a primary consideration for instance.
The Strategy Logic Flow
What does a good strategy look like?
When asked this question, Roger Martin summed it up like this:
My most important rule around the five choices is this: If the opposite of your choice is patently stupid, then it isn’t a valuable choice at all. For instance, if your choice is to ‘be customer-centric’, the opposite of that would be to ‘ignore customers entirely’ — which is unquestionably stupid. All you’ve really done is made a choice to be non-stupid, and that is never a useful strategy choice.
However, if you say, ‘We are going to define customer service in a new way that is entirely different from our competitors, because we believe that an important segment of customers care very much about that’ — that is a real choice.
Some ‘strategies’ can seem like ‘dreams that never come true’ — high level aspirations that never become concrete, or ‘Do-it-all’ lists, making every consumer segment or channel or geography or competitor or category a priority at once. Instead, Playing to Win summarised the signs of a winning strategy as:
Customers who adore you, and non-customers who can’t understand why anyone would,
Competitors make a good profit, and who attack each other, not you: this means that genuine choices have been made to trade off other good options. It also means those competitors don’t need to attack the heart of your market to survive.
An operation generating more resources to spend on an ongoing basis than competitors have: this means you are ‘winning the value equation’
A distinctive activity system, rather than settling for generically chasing the same customer segments in the same way, and
Customers who look to you first for innovations, new product and service enhancement to make their lives better — these are signs they believe you are uniquely positioned to create value for them.
Does the book have any interesting case studies?
The following case study examples are included:
P&G’s ‘grow from the core’ strategy: as a starting point, it ‘chose to play’ in the geographies where 85% of the profits were, with brands which were clear industry or category leaders, with core customers (mass merchandisers, and grocery), using core technologies its R&D teams understood deeply, and with core consumer types.
Olay’s use of pricing to change ‘where it played’. A small increase in price point got more margin from existing consumers, a medium increase priced them out, but a significantly higher increase repositioned the brand in a whole new premium segment of its category.
Red Hat’s ‘Where to play’ choice, dictated the ‘how to win’. It aimed to serve corporates with open source software. Having realised these customers would only buy from a supplier that was a leader in its market, and that a leader didn’t exist in the Linux market, RedHat gave away software for free until they gained this position, and sold services on top.
‘Playing to Win’ can be thought of in a consumer experience context, as well as in a macro-level strategy — the book highlighted the importance of CPG companies winning at ‘the two most important moments of truth’ — in-store experience, and first usage.
P&G even applied ‘playing to win’ to its internal functions. A construct was created where Global Business Services competed in an ‘Open market’ across P&G with the teams that supported each Category. This created a ‘pay for them if you want them’ approach where Categories which saw GBS as offering differentiating value for a given service, paid GBS to run it on their behalf instead of their own teams, driving competition which kept quality up and costs down. When it came to Business Process Outsourcing, GBS maintained core capabilities in-house, and then chose multiple smaller outsource suppliers who were interdependent with P&G, to extract good terms and service.
A range of example P&G Management Systems are discussed. They adopted Operating Total Shareholder Return (sales growth, profit margin improvement and increase in capital efficiency) as the measure of performance, (instead of Market TSR which was largely out of leaders’ control). Weighted Purchase Intent (WPI) was introduced, understanding areas where consumers thought products were weak, ensuring their needs drove R&D prioritisation rather than solely R&D teams.
The approach taken to strategy meetings at P&G, was called ‘Assertive Inquiry’. Coined by Chris Argyris at Harvard Business School, this combines explicit expression of your own thinking (advocacy) with a sincere exploration of the ideas of others (inquiry).
Worth a read?
On one hand, this is as good a strategy textbook as I’ve read. On the other, it does feel like a textbook at times!
It’s written about a bygone era, a period before the massive upheaval of disruption in CPG manifested itself in earnest, a time when ‘winning’ was primarily about being the biggest brand. While therefore the stories have dated a bit, the underlying logic and value hasn’t.
Equally ‘Winning’ isn’t language that is a natural fit for all sectors, but it’s worth persisting with, or transposing for your own context — the underlying principles themselves have wide applicability.
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