Playing to Win

Playing to Win

INTRODUCTION: How Strategy Really Works

“Along with Michael Porter, academics Peter Drucker and Chris Argyris were seminal influences who shaped our thinking and work.

It isn’t. 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 therefore requires making explicit choices—to do some things and not others—and building a business around those choices.

When an organizational bias for action drives doing, often thinking falls by the wayside.

Optimization has a place in business, but it isn’t strategy.

Sameness isn’t strategy. It is a recipe for mediocrity.” (Lafley and Martin, “Playing to Win”,

p.5)

“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.

CHAPTER ONE: Strategy is Choice

“The good news was that there was still widespread consumer awareness of Oil of Olay, and as every good marketer knows, awareness precedes trial.

The team wanted to turn the promise into a plan. The plan was to remake Oil of Olay—its brand, its business model, its package and product, its value proposition, and even its name. Out went “Oil of,” and the brand was rechristened “Olay.

To do so, the product itself was only a part of the battle; Olay also needed to shift consumer perception of the brand and channel through its positioning, packaging, pricing, and promotions.

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.

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.

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.

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.

We wanted to play where P&G’s core strengths would enable it to win.

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.

In sum, 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.

In great strategies, the where-to-play and how-to-win choices fit together to make the

company stronger.

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.

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.

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?

It isn’t entirely easy to make your way through the full choice cascade. Doing so isn’t a one-way, linear process. There is no checklist, whereby you create and articulate aspirations, then move on to where-to-play and how-to-win choices, then consider capabilities. Rather, strategy is an iterative process in which all of the moving parts influence one another and must be taken into account together.

Considering the dynamic feedback loop between all five choices, strategy isn’t easy. But it is doable. A clear and powerful framework for thinking about choices is a helpful start for managers and other leaders intent on improving the strategy for their business or function. Strategy needn’t be the purview of a small set of experts. It can be demystified into a set of

five important questions that can (and should) be asked at every level of the business: What is your winning aspiration? Where should you play? How can you win there? What capabilities do you need? What management systems would support it all? These choices, which can be understood as a strategic choice cascade, can be captured on a single page.

They can create a shared understanding of your company’s strategy and what must be done to achieve it.

“CHOICE CASCADE DOS AND DON’TS:

At the end of each chapter, we will share a few quick bits of advice—the things you should do or should avoid doing as you apply the lessons of the chapter to your own business.

• 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.

CHAPTER TWO: What is Winning

“Peter Drucker argued that the purpose of an organization is to create a customer, and it’s still true today.

Lots of companies try to win and still can’t do it. So imagine, then, the likelihood of winning without explicitly setting out to do so. 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.

I fear becoming a commodity,” he says. “[In IT] you need to be distinctive to avoid commoditization. We have been on a quest to deliver unique value to P&G. Whatever is distinctive and unique, we focus on; whatever is commodity, because there is not competitive advantage in doing it inside, we outsource.

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.

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.

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.

Strategy as Winning – A.G. Lafley:

By the time of my election to CEO in 2000, most of P&G’s businesses were missing their goals, many by a wide margin. The company was overinvested and overextended. It was not winning with those who mattered most—consumers and customers. When I visited all our top retailers in my first thirty days on the job, I found that P&G was their biggest supplier but nowhere near their best supplier. Consumers were abandoning P&G, as evidenced by declining trial rates and market share on most of our leading brands. I was

determined to get P&G’s strategy right. To me, right meant that P&G would focus on

achievable ways to win with the consumers who mattered the most and against the very

best competition. It meant leaders would make real strategic choices (identifying what they would do and not do, where they would play and not play, and how specifically they would create competitive advantage to win). And it meant that leaders at all levels of the company would become capable strategists as well as capable operators. I was going to teach strategy until P&G was excellent at it. 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.

CHAPTER THREE: Where to Play

“Laundry care, feminine care, and fine fragrances had all been written off as unwinnable categories, before P&G found a way to play to its strengths in only the most attractive segments. In each case, choosing where to play explicitly involved choosing where not to play as well, all within an overall industry structure.

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.

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?

Inevitably, the significance of each dimension of the where-to-play choice will vary by context. Each dimension must be considered thoughtfully and will hold different weight in different situations. A start-up might focus first on the products or services to be offered. A stagnating giant might focus on customers—looking for a deeper understanding of needs

and new ways to approach segmentation—to narrow and refine an overly broad where-to-

play choice.

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.” Those big ideas can be the basis of a powerful where-to-play choice.

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.

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.

The decision to focus on a very few emerging markets at a time enabled P&G to prioritize resource allocation, cash, and, most importantly, people, against moving up the learning curve and establishing successful businesses. Without such an explicit choice, P&G would have wound up with a mix of middling businesses scattered around the world, all starved

for the attention and resources needed to become a market leader.

Companies often attempt to move out of an unattractive game and into an attractive one through acquisition.

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.

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.

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.

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.

The Heart of Strategy:

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.”

(Lafley and Martin, “Playing to Win”, p.72) “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 seek.

• 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.

CHAPTER FOUR: How to Win

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

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.

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.

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.

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.

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. Strategic capability is required for thinking your way out of difficult positions—like the one that faced the Gain laundry

detergent team.

Like the home-care team, it attacked in an area of least resistance—men’s fragrances and younger, sportier scents, rather than in the heart of the most intense competition in women’s prestige brands. The team found new ways to win by creating brands based on specific consumer needs and wants, partnering in distinctively successful ways with fragrance houses and designers. In doing so, the fine-fragrance business became part of P&G’s larger how-to-win strategy, another way to differentiate brands along a dimension that consumers care about and to leverage the benefits of global scale.

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. At P&G, corporate functions are all tasked with crafting their own strategies in this way. Joan Lewis, global consumer market knowledge officer, explains: “Where to play and how to win has been a very important framework for us. 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.

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.

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.

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.

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.

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.

CHAPTER FIVE: Play to Your Strengths

“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.

Gillette had powerful brands (like Mach 3, Venus, and Oral B) that would importantly add to the P&G beauty and personal-care businesses. And it contributed significant cash flow.

But, as Daley explains, “then you get into ‘what did P&G bring to the party? How good of a fit are they with our sources of competitive advantage?’” The fit was quite good: in terms of where to play, Gillette provided the leading male and female shaving brands and the leading toothbrush business in the world, all large enough to instantly become core businesses for P&G. Gillette also fit well with the strategic choice to grow in the beauty- care and personal-care categories. Plus, geographically, it offered complementary strengths in emerging markets, providing leadership positions in countries where P&G was building presence (like Brazil, India, and Russia). On how to win, Gillette’s brand-building expertise, product innovation, core technologies, and retail merchandising mastery aligned well with P&G’s company-level choices.

But there was still more to consider. “At the end of the day,” Daley continues, “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. That usually gets down to your capabilities, in our case, your consumer capabilities, your branding capabilities, your R&D capabilities, your go-to-market capabilities, your global infrastructure, your back office. Are the capabilities and strengths that you’re bringing to the business going to improve it, grow it faster, and create more value than it did before?” In short, strategic fit between the new business and P&G capabilities was critical.

As discussed earlier, the five capabilities core to P&G’s where-to-play and how-to-win choices are consumer understanding, brand building, innovation, go-to-market ability, and global scale. The notion of bringing these capabilities to bear on the Gillette business was top of mind. From the first meeting post-acquisition, Bergh set out to incorporate P&G’s strategy framework into the Gillette DNA, working to articulate Gillette’s choice cascade.

Once the where-to-play and how-to-win choices were clear, the team could turn its attention to the capabilities required to deliver on those choices.

By engaging directly with the Indian consumer, by treating that consumer as the boss, the Gillette team was able to understand what he values and what he experiences.

They had to integrate two massive businesses, with two very different IT systems, without missing a beat. “We integrated Gillette in fifteen months,” he says, with just a hint of pride in his voice. “That was worth $4 million per day, doing it in fifteen months instead of doing it in the usual three to four years.” The accomplishment required that Passerini apply P&G’s

capabilities to his own IT infrastructures—thinking about scale and innovation in a new

way.

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 activity system is a visual representation of the firm’s competitive advantage, capturing on a single page the core capabilities of the firm. Articulating a firm’s core capabilities is a vital step in the strategy process. 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. P&G certainly needs to be good at manufacturing, but not distinctively good at it to win. On the other hand, P&G does need to be distinctively good at understanding consumers, at innovation, and at branding its products. 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.

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.

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.

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.

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 systems at multiple organizational levels.”

(Lafley and Martin, “Playing to Win”, p.122) “1. Start at the Indivisible Level...

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.” (Lafley and Martin, “Playing to Win”, p.122-123) “2. Add Competitive Advantage to the Level Below...

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...

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.

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.

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.

CHAPTER SIX: Manage What Matters

“Without supporting structures, systems, and measures, strategy remains a wish list, a set of goals that may or may not ever be achieved. 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 wanted to foster a team-like approach that would allow the CEO to collaborate with the presidents and to help advance their thinking in real time. We wanted to create useful dialogue in place of a one-way, bulletproof presentation. Instead of burying the issues, we wanted to talk about them openly. We wanted a new management system for the creation and review of the five strategic choices.

It was important to reframe the task or, as Daley puts it, “to create a framework of what a strategy discussion is and isn’t. 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. We really wanted to engage in a discussion.

So we worked up a new process to begin in the fall of 2001. It was a radical change for all involved. Previously, a president would come into a review meeting with a lengthy PowerPoint presentation, which captured all the material that he or she wanted to share. The president would go through the deck, slide by slide, revealing the material to the mass audience in real time. We changed the meeting completely. It went from a formal presentation (by the business to management) to a dialogue focused on a very few critical strategic issues identified in advance. Whatever strategic issues the president wanted to discuss were delivered in writing in advance of the strategy review meeting. The senior team would review the submission and select the issues it wished to discuss (or propose alternative points of discussion).

Third, participants would not be allowed to bring more than three new pages of material to the meeting to share—we did not want the participants to race off and create yet another PowerPoint deck with answers to the questions raised in the letter. We genuinely wanted to have a conversation about the key strategic issues in the business.

These reviews focused on very basic, very fundamental questions with the intent of helping the team make better strategic choices. The group would spend three or four hours chewing on the few critical issues together. We had three reasons for the shift in process.

First, we wanted to shift the culture of the organization to one that was more dialogue oriented. Second, we wanted to create a structure in which the business teams could truly benefit from the experience and cross-enterprise perspective of senior leaders. And finally, we wanted to build the strategic-thinking capabilities of P&G’s executives, asking them to practice thinking through strategic issues with others in real time. P&G executives are great operators in the businesses and the functions. The company needed its leaders to become better strategists because better, more choiceful strategies would enable yet better operations. P&G needed multidimensional leaders who could both make tough strategic calls and lead effective operating teams.

The change created a good deal of angst at first. Slowly but surely, though, the review meeting became what we hoped it would be: an inquiry into the competitiveness, effectiveness, and robustness of a strategy. In due course, the presidents came to understand that they wouldn’t be judged on whether they had every aspect of their strategy buttoned up but rather on whether they could engage in a productive conversation about the real strategic issues in their business. As a result, P&G leaders began to do more strategic thinking, to have more strategic conversations—not just at strategy reviews, but in the normal course of business—and the quality of strategic discourse improved. More importantly, the company saw better choice making, more willingness to make hard calls, and eventually better business results.

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.

We wanted to open dialogue and increase understanding through a balance of advocacy and inquiry. 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?”). These kinds of phrases, which blend advocacy and inquiry, can have a powerful effect on the group dynamic. While it may feel more forceful to advocate, advocacy is actually a weaker move than balancing advocacy and inquiry. Inquiry leads the other person to genuinely reflect and hear your advocacy rather than ignoring it and making their own advocacy in response.

The goal was to create a culture of inquiry that would surface productive tensions to inform smarter choices. The explicit goal was to create strategists at all levels of the organization. Over the course of a career, P&G leaders gain practice designing strategy for brands and products lines, categories, channels, customer relationships, countries and regions, and functions and technologies. The idea is to build up strategy muscles over time, in different contexts, so that as managers rise in the organization, they are well prepared for the next strategic task.

In any organization, but especially in an organization as large as P&G, there needs to be a framework for organizing the strategy discussion.

A sample OGSM (objectives, goals, strategy, and measures) statement:

Objectives

Strategy

Measures

Improve the lives of families

by providing consumer- preferred paper products for kitchen and bathroom Be the operating TSR leader in North American tissue/towel and value creator for P&G

Where to play:

• Win in North America

• Grow Bounty and Charmin margin of leadership

• Win in supermarket and

mass discount channels

• Build performance, sensory, and value consumer segments

• Operating TSR progress

• Share and sales growth

progress

• Profit growth progress

Efficiency measures:

• Capital efficiency

• Inventory turns

Goals

Year-on-year operating

TSR > x%

x% annual share and sales Growth

x% annual gross and operating profit margin Improvement

x% return on capital investments in plant equipment and inventory

How to win:

1. Be lean

• Get plant/equipment

capital spend to xx of sales

• Reduce inventory by x%

1. Be the choice of consumers

• Superior base products, prices right

• Preferred product

formats and designs

• Manage category growth

1. Be the choice of retailers

• Improve shelf availability

and service

• Develop differentiated

shopping solutions

• Win with the winners

Consumer preference measures:

• Weighted purchase intent

• Trial, purchase, and loyalty

Retailer feedback measures:

• Key business drivers (distribution, share of shelf, share of merchandising, etc.)

• Preferred vendor

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.

The notion that there are two crucial moments of truth—when the consumer encounters the product in the store for the first time and when he or she first uses at home—was significant for P&G. Previously, the whole company had focused primarily on that second moment—the at-home, in-use moment. We wanted to highlight and elevate the significance of the first moment of truth, illustrating just how important that in-store experience is to winning. Is the product in stock? Is it prominently positioned on the shelf? 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? Does something in the merchandizing and in-store marketing compel the consumer to pick up that product, rather than the one right beside it or down the aisle?

Indicating that winning would require winning both of the first two moments of truth signaled an important shift for the company. This message spoke to a broader set of capabilities as the core of a winning strategy—not just brand building and product innovation, but also retail, IT, logistics innovation, go-to-market capabilities, and the use of scale and consumer understanding to deliver the consumer value equation and drive consumer purchase.

While the messages themselves were pivotal for embedding the strategic intent in the organization, so too was the language used to convey them. It was simple, evocative, and memorable. In any organization, the choices at the top must be precisely and evocatively stated, so that they are easily understood. 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.

Because scale was a critical core competency, it was necessary to build supporting systems and to measure it in meaningful, impactful ways. It wasn’t enough to merely say that scale was important.

You have to integrate that into the company. The processes that you put in place to do that, they have to be very deliberate. It doesn’t happen by itself. What happens [naturally] is entropy. You have to leverage scale in a way that doesn’t disable entrepreneurialism, business ownership. It’s integrative. It’s not centralized. Centralized is a very different thing. This scale work is bringing the leaders of the businesses to work together towards a plan that not only optimizes the company, but in its best form, optimizes their category as well. As we approach a market, for instance, with multiple categories, the chance for success for each of them increases.” Going into a new emerging market with several complementary categories, rather than just one, for instance, can enable cost sharing and increase local influence, thereby increasing the chance of success in the region.

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.

Operating TSR is an amalgamated measure of three real operating performance measures—sales growth, profit margin improvement, and increase in capital efficiency.

Henretta wanted to explore the other measures that might drive consumer preference, purchase, and, over time, loyalty. “We created a metric that would look holistically at all of the components that made up product or brand preference. Our weighted purchase intent (WPI) measure looked at a number of product dimensions that included things like the aesthetic appeal, the design, the feel of the diaper, the look of the diaper in addition to technical performance; it also considered the brand proposition you were giving to the consumer and the price of the product.” The goal of WPI was to capture the complete picture, the full proposition as presented to consumers. It was to understand all the components of the consumer value equation: the drivers of consumer preference and the overall perceptions of product and brand value.

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.

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.

Communication to the Organization – A.G. Lafley

I prioritized the consumer ahead of all other stakeholders, including customers, shareholders, and employees. I started with consumers, because the purpose of a business is to create consumers and to serve them better than anyone else can. No consumers, no business. I said P&G had to win the consumer value equation and the first two consumer moments of truth. I talked about retail customers and suppliers as partners in serving consumers better...

I really tried to distill things down as a way to get the choices understood. There’s no doubt in my mind that clarity makes a difference. Clear and simple, easily translatable choices were crucial to get 135,000 P&G-ers in ninety countries operating with excellence every

day.

CHAPTER SEVEN: Think Through Strategy

“As you begin articulating your strategic choice cascade, the obvious place to start is at the top. We’ve argued that it is essential to define a winning aspiration up front, and it does make sense to begin thinking about strategy by defining the purpose of your enterprise; without having an initial definition of winning, it is difficult to assess the value of any subsequent choice. You need a winning aspiration against which you can weigh differentchoices. But remember that strategy is an iterative process, and you’ll need to return to refine your winning aspiration in the context of the subsequent choices. So, rather than dwell on crafting the perfect definition of winning, sketch a prototype, with the understanding that you will return to it later with the rest of the cascade in mind. Then consider the real work of strategy as beginning with where to play and how to win—the very heart of strategy. These are the choices that actually define what you will do, and where

you will do it, so as to generate competitive advantage.” (Lafley and Martin, “Playing to

Win”, p.159-160)

“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? 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:

The first component of the strategy logic flow is industry analysis. To determine where to play, you must assess the industry landscape. You must ask, what might be the distinct segments of the industry in question (geographically, by consumer preference, by distribution channel, etc.)? Which segmentation scheme makes the most sense for the given industry today, and what might make sense in the future? And what is the relative attractiveness of those segments, now and in the future?

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.

The company introduced Crest Pro-Health, Crest Vivid White, and a set of sensory Crest Expressions offerings, with flavors like cinnamon and vanilla. It took a decade, but Crest was able to reframe the business from toothpaste to oral care, to understand consumer preferences and unmet needs, and to broaden the product line in light of a richer

understanding of industry segments.” (Lafley and Martin, “Playing to Win”, p.163) “Attractiveness:

Once you have articulated existing and new segments, you must understand the structural attractiveness of the different segments. Other things being equal, a firm would want to play in segments that have higher profit potential based on their structural characteristics. To understand structural attractiveness, we can turn to Mike Porter’s seminal five-forces analysis and ask about the bargaining power of suppliers, the bargaining power of buyers, the degree of rivalry, the threat of new entrants, and the threat of substitutes (figure 7-2).

Porter’s framework is a very useful aid to understanding the profit potential of markets and segments.

The five forces can be divided into two axes. The vertical axis—threat from new entrants and threat of substitute products—determines how much value is generated by the industry (and is therefore available to be split up among industry players). If it is very

difficult for new players to enter the industry and there are no substitutes to the industry’s

product or services to which buyers can turn, then the industry will generate high value. This is why the pharmaceutical industry was so profitable through the 1980s and 1990s; it took enormous capital and expertise to get into the business and the buyers generally had little choice but to pay up for the products, which had no substitutes.

The horizontal axis determines which entity will capture the industry value—suppliers, producers, or buyers. If the suppliers are larger and more powerful than the producers, the suppliers will appropriate more of the value (think Microsoft and Intel in the PC business). If, on the other hand, the buyers are large and powerful, they will get a greater portion of the

value (think Walmart versus the many small manufacturers whose products fill their shelves). The degree to which there is fierce rivalry affects which group captures value too. If rivalry between competitors is high, the dynamic will facilitate the appropriation of value by suppliers or buyers. A low degree of rivalry will protect profitability for the producers. At P&G, the analysis of segment attractiveness was occasionally a decisive factor in setting the strategy. For Bounty, geographic segmentation, paired with an understanding of consumer preferences, demonstrated that the paper- towel business was only structurally attractive for P&G in North America, due to massive overcapacity and low willingness to pay in the rest of the world. The industry featured high rivalry, high buyer power, and plenty of substitutes. When assessing segment attractiveness for Crest, P&G came to realize that the health segment was not only the largest, but also the most structurally attractive.

Health claims need to be backed by clinical trials, and few companies—really only P&G and Colgate-Palmolive—have the resources and experience to play that game on an ongoing basis. This kind of analysis—crunching the numbers on the size and appeal of different segments—is crucial to determining the range of attractive where-to-play choices.

Industries with fewer rivals and with competitors that seek to serve different parts of the market with unique offerings are more attractive than those in which a number of competitors compete fiercely for the same consumers in the same way. P&G favored beauty and personal care, including feminine care, because these were industries with low capital cost in which highly fragmented rivals attempted to differentiate their products in unique ways.

Armed with a map of the playing field and an analysis of the structural attractiveness of the individual segments, the strategist can move to the second major category in this framework: an analysis of customer value. 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. This means understanding underlying needs, like recognizing, with Gain, that a sizable group of consumers cared deeply about the sensory experience of doing laundry, valuing the scent of the detergent in the box, in the wash, and in the drawer or closet. Only once this need was understood was it possible to position and differentiate Gain along this dimension.

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.

For channel customers, profit margin, the ability to drive traffic, trade terms, and delivery consistency all tend to play into the value equation, along with many other variables that depend on the nature of the business. An understanding of the channel customer value equation can help inform both the businesses you should be in and how you can win there. Understanding the channel value equation was particularly helpful to repositioning in oral care for P&G. At one time, P&G’s non-toothpaste oral-care products were not terribly appealing to the retailers. Inexpensive toothbrushes and largely undifferentiated rinses or flosses sold at lower volume than toothpastes did and at a lower margin—which meant that retailers were fairly ambivalent about them. Higher-end items, like electric toothbrushes, might have offered attractive margins but little in the way of volume; they sat for a long time on the shelves without turning or earning the retailers that high margin.

Retailers wanted products that would increase the total amount spent on oral care per visit—in other words, a balance of profit and volume, driven by greater engagement with the category overall. The answer was innovation—margin-boosting differentiation on floss (through Teflon technology that would enable the floss to easily slide between teeth without shredding) and category-expanding products like the CrestSpinBrush (an affordable power brush that represented a trade-up from manual brushes) and Crest Whitestrips (a totally new consumer proposition for at-home teeth whitening) that brought in entirely new spending. The dynamics of channel value were also essential to the Olay choice to stay in mass retail rather than moving up to department stores. In department and specialty stores, the manufacturer staffs its own mini beauty store within a larger retail format. Such a structure adds considerable complexity and lots of costs as the numerous cosmetics and skin-care competitors ratchet up the grandeur of their space and their level of staffing. Better to leverage existing retail relationships, the team decided, working with these retailers to create new value through an Olay premium-priced masstige positioning, which traded up current mass customers and attracted prestige customers from department and specialty stores. This strategy created more volume, profit, and margin for the mass retailers.

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. Only through this kind of deep user understanding can you hope to generate insights about where to play and how to win.

Often during the customer analysis stage, the industry thinking needs to be revisited. With more customer knowledge, the industry map can change. This certainly happened when oral care took an updated look at the dentifrice map and saw that the once-giant cavity-

protection segment wasn’t so giant anymore. It needed to be both resized (the pure “all I think about is cavity protection” segment was tiny) and recast (to capture a holistic mouth- health segment).

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?

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.

But relative cost was a concern for Olay as well. By staying in the mass channel, P&G could have a dramatically lower cost structure than its prestige competitors, which needed to invest massively in store fixtures and in-store personnel. The cost savings from keeping Olay in mass retail could be funneled into innovation and marketing to create competitive advantage. Finally, in GBS, costs have been a key factor in P&G’s strategy, which has been to consolidate and outsource where possible, to enable cost savings to be invested in boosting core capabilities throughout the organization.

This is the fourth and final element of the logic flow. 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?

Inevitably, this is guesswork to some degree; you can’t know for sure what a competitor will or won’t do in the face of your actions. But forming a thoughtful hypothesis is important. It is far better to ask what your competitors will likely do before you proceed than to simply wait and see what happens. 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.

To make good choices, you need to make sense of the complexity of your environment. The strategy logic flow can point you to the key areas of analysis necessary to generate sustainable competitive advantage. First, look to understand the industry in which you play (or will play), its distinct segments and their relative attractiveness. Without this step, it is all too easy to assume that your map of the world is the only possible map, that the world is unchanging, and that no better possibilities exist. Next, turn to customers. What do channel and end consumers truly want, need, and value—and how do those needs fit with your current or potential offerings? To answer this question, you will have to dig deep— engaging in joint value creation with channel partners and seeking a new understanding of end consumers. After customers, the lens turns inward: what are your capabilities and costs relative to the competition? Can you be a differentiator or a cost leader? If not, you will need to rethink your choices. Finally, consider competition; what will your competitors do in the face of your actions? Throughout the thinking process, be open to recasting previous analyses in light of what you learn in a subsequent box. The basic direction of the process is from left to right, but it also has interdependencies that require a more flexible path through it.

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. A process for working collaboratively on strategy is essential, because all companies are social entities, made up of a diverse network of individuals with different agendas and ideas.

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.

The Long Road to the Logic Flow – Roger L. Martin

In 1987, Eaton Corporation hired us to do just that: work with its various divisions to teach them how to create great strategies. I was dispatched to Battle Creek, Michigan, to work with their truck axle business. As I went through the first training session, I became painfully aware that I was teaching the Eaton managers a series of analytical tools related to strategy, rather than a holistic process for creating strategy. I found myself asking, how exactly does customer analysis relate to competitor analysis to relative cost analysis to five-forces analysis?

CHAPTER EIGHT: Shorten Your Odds

“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.

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.

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.

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.

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.

1. Specify Conditions

Once a diverse set of possibilities is established, the team then needs to reverse engineer the logic of each possibility. That is, it needs to specify what must be true for the possibility to be a terrific choice. Notice, this step is decidedly not for arguing about what is true, but rather for laying out the logic of what would have to be true for the group to collectively commit to a choice...

This process is a form of reverse engineering because the starting point is the (tentative) assumption that the conclusion is valid—namely, that this is a great possibility. The team then works to understand the conditions under which that assumption is correct. It works backward to declare the various conditions that would have to hold for this to be a great possibility. Figure 8-3 shows the logic flow of this reverse-engineering exercise. In each of the seven boxes, you can list what would have to be true along that dimension for the option in question to be valid.

Laying out the conditions: To pursue this possibility, what would have to be true?

Nice-to-have conditions need to be culled so that every condition is actually a binding one. The process of reverse engineering is complete only when each group member understands the logic of the possibility and can say, “Yes, if all of those conditions were

true, this would be a great possibility. And if any single condition weren’t true, this would not be a good possibility.

1. Identify Barriers to Choice

The fourth step in the process constitutes a 180-degree flip. The previous step stayed assiduously away from opinions on whether the conditions would hold true. This creates an environment that enables each team member to explore the logic behind the possibility and to codify and organize it. Now, and only now, you can cast a critical eye on the conditions your team has identified. The task is to assess which of the conditions your team believes are the least likely to hold true. In other words, now that you’ve specified what would have to be true for this possibility to be a great idea, which of those conditions worry the team the most and seem the least likely to be true? These conditions constitute the barriers that keep you and the team from choosing that possibility. Until you know if they are true or not, you can’t move ahead. In this step, it is extremely important to pay close attention to the group member who is the most skeptical that a condition will hold true; a skeptic can provide extremely valuable insurance against making a bad choice. So

skeptical group members must be encouraged to raise, not suppress, concerns at this point in the process. Even if only one person has concerns about a given condition, it should remain on the list of key barriers.

1. Design Valid Tests

Once key barrier conditions are identified, they must be tested in ways the entire group will find compelling. A test may involve surveying a thousand consumers or speaking to only one supplier. It may entail crunching thousands of numbers or doing a purely qualitative assessment...

At this point, the critical issue is whether the decision-making group regards the test as valid. In this sense, the most skeptical member of the team is the most valuable. Typically, this person will have the highest standard of proof for any test, and building his or her commitment to the choice will be the most challenging. However, without his or her commitment, any consensus will inevitably be false. Hence, the most effective approach to overcoming barriers is to put the test design for each barrier condition in the hands of that condition’s greatest skeptic. If that person is satisfied that a test is rigorous and that the standard of proof has been passed, then everybody else—who is by definition less skeptical—will also be satisfied that the test is legitimate and stringent.

1. Conduct Tests

The test design process leads to the actual testing phase and the analysis of results. Here,

we recommend taking what we sometimes call the lazy person’s approach to strategy. Simply put, first test the things you’re most dubious about. Take the condition the team feels is the least likely to hold up, and test it first. If the team’s suspicion is right, that possibility will be eliminated without the need to test any of the other conditions. The possibility has already failed an essential test, so no more tests are necessary. If, on the other hand, the possibility passes the first test, move on to the condition with the next- lowest confidence level, and so on...

To generate choice and commitment, companies actually need analysis that is an inch wide and a mile deep—focused precisely on the concerns that prevent the team from choosing and going deep enough in that particular area to meet the team’s standard of proof. That is what reverse engineering enables you to do: probe precisely and deeply into the barriers to choice.

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.

“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 Most Important Ǫuestion in Strategy – Roger L. Martin

At an impasse, an idea popped into my head. Rather than have them talk about

what they thought was true about the various options, I would ask them to specify what would have to be true for the option on the table to be a fantastic choice. The result was magical. Clashing views turned into collaboration to really understand the logic of the options. Rather than having people attempt to convince others of the merits of options, the options themselves did the convincing (or failed to do so). In this moment, 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 Power of an Outside Strategy Partner – A.G. Lafley

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. In contrast to the CEO, most company employees are more inward- focused. The content of their work and the nature of their working relationships inevitably draw their attention inside the company. The CEO may well be tempted to turn his or her attention inward as well, but consciously choosing a very few external advisers and counselors can help a CEO maintain and sustain that all-important external focus...

For the presidents, one of the advantages of working through strategic issues with Roger and not with me directly was that many of them perceived Roger as less judgmental and saw the stakes of any given conversation as a bit lower. After all, he wasn’t writing or signing off on their performance evaluation, deciding whether they would be promoted, or determining their compensation. But he was helping me build the strategic capability of the organization by teaching P&G’s strategy methodology in internal training sessions; by coaching business leadership teams who “hired him” to assess and review their business strategy; and by assessing and evaluating the strategic thinking skills and strategic

leadership effectiveness of the company’s presidents and functional leaders. Together, Roger and I were continually assessing individuals as well as coaching and teaching to improve strategic capabilities. Both of us believed that strategy could be taught and learned. But both of us also believed that it required the ability to think in an integrated and disciplined way, and the courage to work on the hard choices and then make the tough calls.

Over the course of nearly ten years, Roger was my principal external strategy adviser. Clay Christensen and Mark Johnson played the external adviser role for me on innovation, Tim Brown in design, and Kevin Roberts in leadership and branding. Stuart Scheingarten, a psychologist and “coach,” helped me come to grips with what worked and what didn’t work with my leadership style and effectiveness. Stuart was just beginning to make some meaningful and measurable progress with his student when he died suddenly and, sadly, too young.

CONCLUSION: The Endless Persuit of Winning

“For your own company, ask (and honestly answer):

• 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?

Six Strategy Traps:

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 Ǫuixote 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.