Playing to win: How strategy really works

by A.G. Lafley

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?

The status quo—continuing on in the locations and segments you’ve always been—is all too often an implicit, unexamined choice. Simply because you have made a given where-to-play choice in the past is not a reason to stay there.

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.

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.

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.

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 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.

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.

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).

The heart of strategy is the answer to two fundamental questions: where will you play, and how will you win there?

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.

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 seek.

But going into business with Clorox would send an important signal externally—and internally—about how P&G would do business in the future. “When most people talk innovation, they think molecules,” Weedman says. “This would be innovation of the business model—innovation across the whole spectrum.”

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 (for more on the microeconomic foundations of these two strategies, see appendix B).

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.

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.

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 (figure 4-1). This is ultimately the goal of any strategy.

Differing imperatives under low-cost strategies and differentiation strategies

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.

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.

There simply is no one perfect strategy that will last for all time. There are multiple ways to win in any almost any industry. That’s why building up strategic thinking capability within your organization is so vital.

It is tempting to believe that strategy in general, and where-to-play and how-to-win choices in particular, are needed only for outward-facing functions—those folks who interact with external consumers and competitors. But every line of business and function should have a strategy—one that aligns with the strategy of the company overall and decides where to play and how to win specifically for its context.

Organizations are often good at one or the other without realizing that they’re two different sets of decisions. At one point, we weren’t as disciplined about our where-to-play choices. It was everywhere anybody needed consumer insight or anywhere we thought it could add value. Just like a business dilutes its focus and in turn its growth potential when you try to do too many things at a time or do things that are further away from your core strengths, we were relatively diluted in the nature of the impact we could have.”4

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.

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.

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.

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.

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.

In all my business life, I have never seen any more competitive industry than baby care. Consumers are demanding and discriminating, and they turn over quickly—it’s a whole new consumer base every three years.

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). For Porter, a company’s “strategic position is contained in a set of tailored activities designed to deliver it.”9 He calls the visual depiction of this set of activities an activity system. Since “competitive strategy is about being different … [and] means deliberately choosing a different set of activities to deliver unique value,” an activity system must also be distinctive from the activity systems of competitors.10 In his landmark 1996 article “What Is Strategy?,” Porter illustrated his theory with examples from Southwest Airlines, Progressive Insurance, and The Vanguard Group, articulating the way in which each organization made distinctive choices and tailored an activity system to deliver on those choices. The activity system is a v...

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.

When thinking about capabilities, you may be tempted to simply ask what you are really good at and attempt to build a strategy from there. The danger of doing so is that the things you’re currently good at may actually be irrelevant to consumers and in no way confer a competitive advantage. Rather than starting with capabilities and looking for ways to win with those capabilities, you need to start with setting aspirations and determining where to play and how to win. Then, you can consider capabilities in light of those choices. Only in this way can you see what you should start doing, keep doing, and stop doing in order to win.

five core 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.

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 distinct...

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.

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.

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.

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.

Activities that don’t add value to activity systems below should be minimized, because they destroy value.

From the where-to-play and how-to-win choices follows the next question: what capabilities are required to deliver on that strategy? To understand and visualize those capabilities, you will find it helpful to prepare an activity system based on the strategy. 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 activity system should be feasible, distinctive, and defensible if it is to enable you to win. If the system is missing any of these three qualities, you need to return to the where-to-play and how-to-win choices, refining or even entirely changing those choices until they result in a distinctive and winning activity system. By identifying the capabilities required to achieve competitive advantage, the firm can apply resources, attention, and time to the things that matter most. There may well be work to do to bolster and grow those capabilities, including training and development, investing in additional resources, building supporting systems, and even reorganizing the company around the capabilities.

BUILDING CAPABILITIES DOS AND DON’TS

To truly win in the marketplace, a company needs a robust process for creating, reviewing, and communicating about strategy; it needs structures to support its core capabilities; and it needs specific measures to ensure that the strategy is working. These management systems are needed to complete the strategic choice cascade and ensure effective action throughout the organization.

We knew we had to reinvent the process entirely, to actually focus on strategy rather than on budget negotiations or product and marketing execution.

A strategy discussion is not an idea review. A strategy discussion is not a budget or a forecast review. A strategy discussion is how we are going to accomplish our growth objectives in the next three to five years.

The kind of dialogue we wanted to foster is called assertive inquiry.