Chapter 4
Choose Where to Play-and Where Not to Play
Where-to-play choices define your competitive playing field across five key domains: geography, product type, consumer segment, distribution channel, and vertical stage of production. Even small businesses must make these choices carefully, considering how different elements work together.
The story of Bounty paper towels illustrates the importance of making clear where-to-play choices. By the late 1990s, despite strong brand recognition, Bounty was faltering as P&G pursued global expansion that drained resources from the core North American market. When Charlie Pierce became president of global family care in 2001, he "declared crisis" and questioned whether P&G should remain in the tissue business.
The team discovered that while the business was unattractive globally, it could be profitable in North America by focusing on specific consumer segments. Through consumer research, they identified three distinct paper towel user segments: those valuing strength and absorbency (Bounty's traditional market), those wanting cloth-like feel (addressed with new Bounty Extra Soft), and price-conscious consumers who still valued strength (served by new Bounty Basic).
By making clear where-to-play choices-North America only, three specific consumer segments, premium and basic product tiers, and specific retail channels-P&G transformed family care into a consistently profitable business with industry-leading growth.
When crafting where-to-play choices, companies must avoid three dangerous pitfalls:
1. **Refusing to choose** by attempting to play everywhere at once dilutes focus and resources. Even giants like Apple and P&G make deliberate choices about which markets to prioritize.
2. **Trying to buy your way out** of an unattractive market rarely succeeds, as acquisitions often come at premium prices and require unfamiliar capabilities.
3. **Accepting an existing choice as immutable** limits potential. Companies always have choices, as demonstrated by Apple's shift from desktop computers to portable devices, and Thomson Corporation's complete transformation from newspapers and oil to subscription-based information services.
Sometimes finding a new playing field requires simply believing one is possible. In 1995, Chip Bergh took over P&G's struggling US hard-surface cleaners business-a $200 million operation in "free fall" with once-dominant brands like Comet, Spic 'n Span, and Mr. Clean. Bergh challenged his team to fundamentally "change the game of cleaning" by leveraging P&G's unique technologies. By combining chemistry, surfactant technology, and paper technology-capabilities P&G had but competitors didn't-they created Swiffer within two years. This revolutionary product became a blockbuster that BusinessWeek listed among "20 Products That Shook the Stock Market" and reached 25% of US households within a decade.
Chapter 5
How to Win: Cost Leadership or Differentiation
After deciding where to play, you must determine how to win on your chosen playing field. At the highest level, there are only two fundamental ways to win: cost leadership or differentiation.
**Cost leadership** means creating a sustainably lower cost structure than competitors. When companies produce comparable products but one can do so at significantly lower cost, that company gains a powerful advantage. For example, if companies A, B, and C all make widgets that sell for $100, but company A produces them for $45 while B and C spend $60, company A enjoys a $15 margin advantage.
Low-cost players don't necessarily charge lower prices. Mars leveraged its cost advantage in candy bars by investing the margin differential in premium shelf space in convenience stores, transforming from a small player into Hershey's main rival. Similarly, Dell's early $300 per-computer cost advantage allowed it to underprice competitors while maintaining healthy margins, fueling explosive growth from dorm-room startup to $100 billion valuation by 1999.
**Differentiation strategies** offer products perceived as distinctively more valuable than competitive offerings while maintaining similar cost structures. When companies A, B, and C all produce widgets for $60, but customers willingly pay $115 for C's product versus $100 for A and B's, company C enjoys a $15 margin advantage.
Toyota exemplifies successful differentiation despite being mistaken for a low-cost player. Its manufacturing effectiveness offsets high Japanese production costs, while its reputation for quality, reliability and durability earns several thousand dollars in price premium per vehicle in the US market.
Despite popular notions of "winner-take-all" strategies, there are multiple paths to winning in almost any industry. The Gain laundry detergent story exemplifies this-when the brand was nearly discontinued in the late 1980s, CEO John Smale gave it "one more try." The team discovered an underserved consumer segment-"scent seekers" who prioritized fragrance experience throughout the laundry process. By leveraging P&G's fragrance expertise across categories, Gain transformed its positioning with bold packaging and marketing that spoke directly to this segment. Today it's a billion-dollar brand despite selling only in the US and Canada.
Where-to-play and how-to-win choices aren't independent variables but must reinforce each other to create distinctive competitive advantage. Olay exemplifies this synergy-targeting 35-49 year-old women interested in anti-aging products perfectly matched with its "masstige" positioning between mass and prestige products.
Chapter 6
Building Core Capabilities That Enable Winning
An organization's core capabilities are those activities that, when performed at the highest level, enable it to execute its where-to-play and how-to-win choices. Harvard's Michael Porter observed that sustainable competitive advantage rarely comes from a single capability, but rather from a system of reinforcing activities that both fit with and strengthen each other.
Porter calls this visual representation an "activity system"-a distinctive set of tailored activities delivering unique value different from competitors. The activity system captures on a single page the firm's competitive advantage through its core capabilities, helping to focus investment in essential capabilities while reducing investment in non-essential ones.
For a corporation to deliver greater value together than units could individually, some core activities must be shared across businesses and align with the organization's core capabilities. These shared capabilities create "reinforcing rods" linking different parts of the organization, just as steel rods connect floors in a building.
The Gillette acquisition succeeded because P&G's reinforcing rods drove powerfully through Gillette's activity system, especially in male shaving. Despite Gillette's already substantial advertising budget, P&G's scale as the world's largest advertiser reduced Gillette's advertising costs by 30%. P&G integrated Gillette brands into its multifunctional customer teams at major retailers, gaining both cost efficiencies and retailer leverage.
In consumer understanding and innovation, P&G brought advanced research techniques and global innovation capabilities. Simultaneously, Gillette strengthened P&G with its exceptional product launch expertise, targeted marketing, and in-store merchandising and display capabilities.
The acquisition worked because Gillette benefited dramatically from P&G's capabilities while already possessing substantial capabilities of its own. The fit was excellent for men's and women's shaving businesses and Oral B, good for Duracell, but challenging for Braun, which didn't benefit as directly from P&G's consumer understanding, R&D, and mass retail distribution.
For success, your activity system must be feasible, distinctive, and defensible. If it lacks any of these qualities, you must refine your where-to-play and how-to-win choices until they produce a winning system.
Chapter 7
Management Systems That Support Strategy
Even with winning aspirations, where-to-play and how-to-win choices, and defined capabilities, strategy can fail spectacularly without management systems that support those choices. To truly win, companies need robust processes for creating, reviewing, and communicating strategy; structures supporting core capabilities; and specific measures ensuring strategy effectiveness.
At P&G, strategy reviews were once "corporate theater" where brand managers performed before large audiences with extensive preparation, focusing on avoiding humiliation rather than discussing real strategic issues. Lafley and CFO Clayt Daley reinvented this process, transforming it from formal presentations into focused dialogues on critical strategic issues identified in advance. They limited participants to 4-5 business representatives plus relevant corporate leaders, banned PowerPoint presentations, and restricted new materials to three pages maximum.
To create effective strategy dialogues at P&G, leaders needed to shift from their default communication mode of pure advocacy to "assertive inquiry," a concept based on Harvard's Chris Argyris's work. This approach combines clearly articulating your own thinking while genuinely exploring others' perspectives. The fundamental stance required was "I have a view worth hearing, but I may be missing something."
Strategy must be clearly communicated at all levels of an organization to be successful. At P&G, leadership distilled the corporate strategy into three simple, compelling themes that everyone could understand:
1. Make the consumer the boss-reorienting the company to focus on improving consumers' lives above all other stakeholders
2. Win the consumer value equation-creating a bigger gap between consumer value and delivery cost than competitors through differentiation and cost management
3. Win the two most important moments of truth-succeeding both when consumers encounter products in stores and when they first use them at home
The adage "what gets measured gets done" reflects how measurement provides both focus and feedback for strategic execution. At P&G, measurement of revenue and profitability was prioritized, but the methodology needed change. They replaced market total shareholder return (TSR) with operating TSR-an amalgamated measure of sales growth, profit margin improvement, and capital efficiency. This measure better captured true performance across critical metrics that managers could actually influence, unlike stock price which reflects investor expectations.
Chapter 8
The Strategy Logic Flow: A Framework for Strategic Analysis
To craft a powerful strategy, you must answer the five key questions in the strategic choice cascade. While you should start by defining your winning aspiration, the real work begins with determining where to play and how to win-the heart of strategy.
Rather than getting overwhelmed by countless strategic tools and frameworks, focus on four critical dimensions through the "strategy logic flow": industry analysis, customer understanding, relative position assessment, and competitive reaction prediction. This framework poses seven questions across these dimensions to analyze your company's context and develop strategic choices.
The first component requires assessing the industry landscape through segmentation and attractiveness analysis. When Crest lost market leadership to Colgate Total in the 1990s, P&G had to fundamentally rethink oral care. Rather than viewing it as discrete products, they broadened their perspective to a full oral care regimen, launching Whitestrips, SpinBrush Pro, rinses and floss. They targeted multiple consumer needs-health, whitening, and sensory experiences-successfully reframing the business.
Understanding precisely what customers value is essential regardless of whether you pursue cost leadership or differentiation. This means uncovering underlying needs, like P&G's discovery that many consumers cared deeply about the sensory experience of doing laundry, which led to Gain's scent-focused positioning.
For channel customers like retailers, profit margin, ability to drive traffic, trade terms, and delivery consistency all factor into the value equation. Understanding these elements helps inform strategic choices about which businesses to enter and how to win.
Understanding end consumers requires going beyond simply asking what they want. As Henry Ford noted, if he'd asked consumers what they wanted, they would have said "a faster horse." True consumer insight demands deeper engagement-watching them shop, listening to their stories, and observing product usage in their homes.
After understanding industry and customers, the next step is analyzing your relative position in terms of capabilities and costs compared to competitors. This assessment led P&G to exit pharmaceuticals despite profitability, as the business required capabilities misaligned with P&G's structure-lengthy clinical trials, selling to doctors rather than consumers, limited long-term usage opportunities, and minimal technology crossover with P&G's core innovations.
Before finalizing where-to-play and how-to-win choices, evaluate their robustness against current competitive strategies and anticipated reactions. Though partly guesswork, forming thoughtful hypotheses about competitor responses is essential. Only strategies providing sustainable advantage or a significant lead in developing future advantages are worth pursuing.
Chapter 9
Reverse-Engineering Strategy: The Power of "What Would Have to Be True?"
In conventional strategy processes, teams typically seek the single "right answer," construct unassailable supporting arguments, and then sell this solution to the organization. This approach usually begins with rigorous analysis by internal teams or external consultants to determine customer needs and competitive dynamics-or sometimes with predetermined answers that analyses are designed to confirm.
Asking "what would have to be true?" changes everything. This question focuses analysis on what matters, creates room for inquiry rather than advocacy, encourages consideration of unpredictable options, and reduces team conflict. Instead of battling over what is true, teams work together to explore possibilities, surfacing differences and resolving them to create more robust strategies with stronger commitment.
The process for exploring what would have to be true involves seven specific steps:
1. **Frame the Choice**: Until a real choice is articulated, teams can't understand the consequences of different approaches. Framing an issue as a choice with at least two mutually exclusive options makes the stakes clear and motivates action.
2. **Generate Strategic Possibilities**: After framing the initial choice, the team broadens the list of possibilities, encouraging creative and unexpected strategies. Each possibility should be expressed as a narrative describing a positive outcome.
3. **Specify Conditions**: The team reverse-engineers the logic of each possibility by specifying what would have to be true for it to be a terrific choice. The process is complete when every team member agrees that if all conditions were true, the possibility would be excellent-and if any single condition weren't true, it would fail.
4. **Identify Barriers to Choice**: After specifying conditions, the team flips 180 degrees to critically assess which conditions are least likely to hold true. These constitute the barriers to choosing that possibility.
5. **Design Valid Tests**: Once key barrier conditions are identified, they must be tested in ways the entire group finds compelling. The most effective approach is putting test design for each barrier in the hands of that condition's greatest skeptic.
6. **Conduct Tests**: The testing phase follows a "lazy person's approach to strategy"-test what you're most dubious about first. If the most questionable condition fails testing, that possibility is eliminated without needing to test other conditions.
7. **Choose**: Unlike standard processes where choosing is difficult and acrimonious, the reverse-engineering process makes the choice simple and even anticlimactic. The team simply reviews test results and makes the choice dictated by the pattern.
Chapter 10
The Endless Pursuit of Winning
In today's volatile, uncertain, complex, and ambiguous world, winning is increasingly difficult. Growth is slowing while change accelerates, competition intensifies, and consumers grow more demanding. Digital disruption, shifting consumer preferences, and global economic uncertainties have created an environment where traditional competitive advantages quickly erode. Yet strategy can significantly improve your odds of success, while its absence virtually guarantees failure.
While no perfect strategy exists, certain warning signs indicate problematic approaches that commonly lead to failure:
• The do-it-all strategy fails to make choices, spreading resources too thin across multiple initiatives without clear prioritization or focus
• The Don Quixote strategy attacks the strongest competitors head-on, ignoring asymmetric opportunities and wasting resources in direct confrontation
• The Waterloo strategy fights on too many fronts simultaneously, diluting organizational focus and exhausting available resources
• The something-for-everyone strategy tries to capture all segments at once, resulting in mediocre value propositions that truly satisfy no one
• The dreams-that-never-come-true strategy creates aspirations without concrete choices, failing to translate vision into actionable plans
• The program-of-the-month strategy pursues generic industry approaches indistinguishable from competitors, leading to commoditization
Despite market complexity, winning strategies share recognizable characteristics that set them apart:
• An activity system distinctly different from competitors, creating unique value through integrated choices
• Passionate customers alongside bewildered non-customers, indicating clear strategic focus and positioning
• Profitable competitors operating in different spaces, suggesting successful market segmentation
• Greater ongoing resources than competitors, enabling sustained investment in competitive advantages
• Rivals who attack each other rather than you, demonstrating defensive positioning strength
• Customers who look to you first for innovations and improvements, reflecting market leadership
Even companies exhibiting these positive signs must continually evolve their strategies, viewing strategy as an ongoing process rather than a static result. This requires regular assessment of market conditions, competitive dynamics, and internal capabilities. Successful organizations maintain strategic flexibility while staying true to their core positioning.
The strategic choice cascade provides a structured approach to strategy development:
1. Define winning clearly - establish specific, measurable objectives
2. Choose where to play - select markets, segments, and channels
3. Determine how to win - develop unique value propositions
4. Build enabling capabilities - invest in required skills and resources
5. Create supporting systems - align organization and processes
This framework, while requiring iteration and revision, can guide organizations toward sustainable competitive advantage. Regular strategy reviews, scenario planning, and competitive analysis help maintain strategic relevance. Organizations must balance commitment to strategic direction with the ability to adapt to changing conditions.
Success requires not just formulating strategy but executing it effectively through:
• Clear communication of strategic priorities
• Aligned incentives and metrics
• Resource allocation supporting strategic choices
• Regular monitoring of progress and outcomes
• Continuous refinement based on market feedback
While all strategy involves risk, operating without one in today's challenging environment is far riskier. Organizations must make explicit choices about where to compete and how to win, while building the capabilities and systems needed for successful execution.
