First, spot the similarities. Over time, the strategies of incumbents tend to converge. A useful exercise is to overlay the business models of companies in the same industry and then look for areas of overlap. Wherever you see competitors doing the same thing, ask yourself, “What’s the shared assumption behind this policy or practice?” and then, “What would happen if we challenged that belief?” For centuries, innkeepers assumed you had to own rooms to offer guests a bed for the night. Airbnb inverted this belief and now has more than six million listings across the world.

Second, focus on what hasn’t changed. What aspects of your strategy have remained stagnant for years or decades? Over time, legacy practices, like wallpaper, become invisible. Your job is to question whether those 12 13 taken-for-granted practices still make sense. For example, though it endured a lot of pushback from traditional carmakers, Tesla challenged the long-held practice of selling cars through independent dealers. The company’s sleek stores, often located in luxury shopping venues, offer customers a hassle-free buying process. Tesla understands that the best orthodoxies to challenge are those that degrade the customer experience.

Third, go to extremes. Pick some parameter of performance—price, choice, availability, speed—and ask what would happen if we aimed for a 10X improvement? Fifty years ago, a retired physician, Dr. Govindappa Venkataswamy, launched an epic quest to eradicate unnecessary blindness in India. Millions of his compatriots had cataracts but couldn’t afford corrective surgery. How, Dr. V. wondered, could he reduce the cost of surgery by 90 percent or more? For inspiration, he looked at the fast-food industry. “If McDonald’s can sell millions of burgers,” he thought, “why can’t [we] sell millions of sight-restoring operations?” Today, Dr. V.’s network of specialty hospitals, the Aravind Eye Care System, performs half a million cataract surgeries annually.

The new, blank-sheet-of-paper approach required a different way of thinking about innovation capability. Traditionally, in diapers and elsewhere, the emphasis had been on cutting-edge technology. Here, the R&D teams had a different challenge—to address the specific, differentiated needs of consumers in emerging markets within specific cost parameters. It was a different way of thinking about and using the core innovation capability—but one on which the R&D teams were able to deliver. The result was market leadership in China in a rapidly growing category.

Pampers: P&G’s Single Most Important Strategic Lesson – A.G. Lafley

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. 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.

At P&G, it boiled down to three themes that would enable the company to win, in the places and ways it had chosen, regardless of the details of individual differences between businesses:

• Make the consumer the boss.

• Win the consumer value equation.

• Win the two most important moments of truth.” (Lafley and Martin, “Playing to Win”,

p.141)

“The first dictum, that the consumer is boss, was a reorientation to the company’s aspiration—to improve the lives of consumers. We wanted everyone focused on the end consumer in all aspects of the business: in innovation, branding, go-to-market strategies, investment choices, and so on. We wanted to be clear about just who the most important stakeholder is and always should be. Not shareholders. Not employees. Not retail customers. But rather the end user: the people who buy and use P&G products. The second crucial theme was to win the consumer value equation. This quickly and unambiguously defined the way that P&G would win: by opening up a bigger gap between

the value it offers to consumers and the cost of delivering that value than competitors’ gaps. This meant providing unique value to consumers (through brand differentiation and innovative products). And it meant maintaining a cost position that would let P&G offer that value to the consumer at an attractive price and still make a healthy profit. This edict turned everyone’s attention toward the where-to-play and how-to-win choices that create sustainable competitive advantage through differentiation.

Reverse-engineering strategic options:

(Lafley and Martin, “Playing to Win”, p.187) “1. Frame the Choice

As a general rule, an issue—for example, declining sales or technology change in the industry—can’t be resolved until it is framed as a choice. Until a real choice (e.g., should the company go in this direction or that one?) is articulated, team members can’t understand cognitively or feel emotionally the consequences of the different ways to resolve the issue. A team could talk endlessly about declining sales, making no progress toward solving the problem...

With Olay, framing the choice was crucial. It made the stakes clear immediately. Rather than agonizing endlessly about what to do with a fading brand, the team framed the choice and provided an impetus to action. The team laid out two possibilities: it could attempt to transform Oil of Olay into a worthy competitor to brands like Lancôme and La Prairie, or it could spend billions of dollars to buy a major existing skin-care brand to compete

instead.” (Lafley and Martin, “Playing to Win”, p.188-189) “2. Generate Strategic Possibilities

Framing the issue as a choice identifies a preliminary set of options for resolving the problem; the next task is to broaden the list of possibilities. The objective in this step is to be inclusive rather than restrictive of the number and diversity of possibilities on the table. Here is the opportunity to encourage creative and more-unexpected strategies. In this

context, a possibility should be expressed as a narrative or scenario, a happy story that describes a positive outcome. That is why we like to call them possibilities rather than options. Characterizing the possibilities as stories helps ensure that they are not seen negatively as unsubstantiated opinions. No one is yet arguing for a possibility; you and your colleagues are simply envisioning a world in which that story makes good sense...

Culling a possibility about which a particular individual feels strongly may well cause that individual to withdraw, perhaps for the rest of the process. So inclusion, rather than exclusion, is the rule at this stage...

In the end, the P&G beauty team focused on five where-to-play and how- to-win possibilities for skin care. One was to largely give up on Oil of Olay and to acquire a major global skin-care brand. A second was to keep Oil of Olay positioned as an entry-priced, mass-market brand, strengthening its appeal to current consumers by leveraging R&D capabilities to improve wrinkle-fighting performance. A third was to take Oil of Olay up- market into the prestige distribution channel as an upscale brand. A fourth was to reinvent Olay totally—as a prestige-like brand that appealed more broadly to younger women (age thirty-five to fifty), but sold in the traditional mass channels with retail partners that would be willing to create a masstige experience with a special display section in the store. A fifth was to extend the Cover Girl brand from cosmetics into skin care.