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Introduction

How Strategy Really Works

This is a book about strategy, written by a former CEO and a business school dean. When we met, we were neither of those things. More than twenty years ago, when we first worked together on a study of P&G’s distribution channels, it was as a category manager in P&G’s laundry business and an outside consultant from a small but growing strategy firm called Monitor Company. Working on that assignment, we formed the basis of a very productive and very long friendship. By the time we became, respectively, CEO of P&G and dean of the Rotman School of Management, we were true thinking partners on strategy and worked together in earnest on the transformation of P&G between 2000 and 2009. This book is the story of that transformation and the approach to strategy that informed it. (Details on the results of the transformation may be found in appendix A.)

This approach grew out of the strategy practice at Monitor Company and subsequently became the standard process at P&G. Over the course of our careers, we worked to develop a robust framework around our strategic approach, a way to teach the concepts to others, and a methodology for bringing it to life in an organization. Within Monitor, Michael Porter, Mark Fuller, Sandi Pocharski, and Jonathan Goodman played important roles in advancing this thinking. At P&G, Tom Laco, Steve Donovan, Clayt Daley, Gil Cloyd, and dozens of other business and functional leaders (including those whose stories are told in this book) all contributed substantially to the work of sharpening the strategy of the company. Along with Michael Porter, academics Peter Drucker and Chris Argyris were seminal influences who shaped our thinking and work.

Ultimately, this is a story about choices, including the choice to create a discipline of strategic thinking and strategic practice within an organization. Though we use P&G as our main example, this doesn’t mean that our approach to strategy can only be effective in a global consumer goods company. We’ve seen it powerfully used in all manner of industries and all sizes of organizations, including start-ups, not-for-profits, and government agencies. But it was at P&G that we were really able to use this approach across a wide range of businesses, geographies, and functions and over a decade (and to see where it worked and didn’t work)—so that is the story we have chosen to tell. We will use P&G brand, category, sector, function, and company examples to illustrate the strategy concepts and tools throughout the book. Of course, not all companies look like P&G. But it is our hope that through examples from across P&G’s diverse businesses, organizations, and levels, the lessons for your organization will become clear.

What Is Strategy?

Strategy is a relatively young discipline. Until the middle of the last century, much of what people now think of as strategy was categorized simply as management. So it is really no wonder that many organizations struggle to define what a strategy is and how to create a useful one; there is no single, clear, and pervasive definition of strategy and even less consensus on how to build one. When a strategy succeeds, it seems a little like magic, unknowable and unexplainable in advance but obvious in retrospect.

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.”¹ Strategy therefore requires making explicit choices—to do some things and not others—and building a business around those choices.² In short, strategy is choice. More specifically, strategy is an integrated set of choices that uniquely positions the firm in its industry so as to create sustainable advantage and superior value relative to the competition.

Making choices is hard work, and it doesn’t always fit with all the other work to be done. In our view, far too few companies have a clear, choiceful, and compelling winning strategy in place. Too often, CEOs in particular will allow what is urgent to crowd out what is really important. When an organizational bias for action drives doing, often thinking falls by the wayside. Instead of working to develop a winning strategy, many leaders tend to approach strategy in one of the following ineffective ways:

1 They define strategy as a vision. Mission and vision statements are elements of strategy, but they aren’t enough. They offer no guide to productive action and no explicit road map to the desired future. They don’t include choices about what businesses to be in and not to be in. There’s no focus on sustainable competitive advantage or the building blocks of value creation.

2 They define strategy as a plan. Plans and tactics are also elements of strategy, but they aren’t enough either. A detailed plan that specifies what the firm will do (and when) does not imply that the things it will do add up to sustainable competitive advantage.

3 They deny that long-term (or even medium-term) strategy is possible. The world is changing so quickly, some leaders argue, that it’s impossible to think about strategy in advance and that, instead, a firm should respond to new threats and opportunities as they emerge. Emergent strategy has become the battle cry of many technology firms and start-ups, which do indeed face a rapidly changing marketplace. Unfortunately, such an approach places a company in a reactive mode, making it easy prey for more-strategic rivals. Not only is strategy possible in times of tumultuous change, but it can be a competitive advantage and a source of significant value creation. Is Apple disinclined to think about strategy? Is Google? Is Microsoft?

4 They define strategy as the optimization of the status quo. Many leaders try to optimize what they are already doing in their current business. This can create efficiency and drive some value. But it isn’t strategy. The optimization of current practices does not address the very real possibility that the firm could be exhausting its assets and resources by optimizing the wrong activities, while more-strategic competitors pass it by. Think of legacy airlines optimizing their spoke-and-hub models while Southwest Airlines created a transformative new point-to-point business model. Optimization has a place in business, but it isn’t strategy.

5 They define strategy as following best practices. Every industry has tools and practices that become widespread and generic. Some organizations define strategy as benchmarking against competition and then doing the same set of activities but more effectively. Sameness isn’t strategy. It is a recipe for mediocrity.

These ineffective approaches are driven by a misconception of what strategy really is and a reluctance to make truly hard choices. It is natural to want to keep options open as long as possible, rather than closing off possibilities by making explicit choices. But it is only through making and acting on choices that you can win. Yes, clear, tough choices force your hand and confine you to a path. But they also free you to focus on what matters.

What matters is winning. Great organizations—whether companies, not-for-profits, political organizations, agencies, what have you—choose to win rather than simply play. What is the difference between the Mayo Clinic and the average research hospital in your neighborhood? Your local hospital is, most likely, focused on providing a service and on doing good. The Mayo Clinic, though, sets out to transform the world of medicine, to be at the vanguard of medical research, and to win. And it does.

The Playbook: Five Choices, One Framework, One Process

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 1 introduces these five essential choices as strategic questions. Each of chapters 2 through 6 dwells at some length on one of the questions, explaining the nature of the choice to be made, providing a number of examples of that choice, and offering some advice for making the choice in your own context. The five choices make up the strategic choice cascade, the foundation of our strategy work and the core of this book.

To really think through strategy, though, the cascade isn’t quite enough. In chapter 7, we will provide another tool—the strategy logic flow, a framework designed to helpfully direct your thinking to the key analyses that inform your five strategy choices. Then, in chapter 8, we provide a specific methodology for making sense of conflicting strategic options, a process—called reverse engineering—for making strategic choices with others. Taken together, the five choices, one framework, and one process provide a playbook for crafting strategy in any organization.

Our intent is to provide you with a do-it-yourself guide to strategy. We offer you the concepts, process, and practical tools you need to create and develop a winning strategy for your business, function, or organization—a strategy that serves your customers better and enables you to compete more successfully and to win.

The world needs more business leaders who understand strategy and are capable of leading the strategy process for their companies. It needs strategic capabilities at all organizational levels in industries of all kinds, in government, in health care, in education, and in the social sector. Strategy needn’t be mysterious. Conceptually, it is simple and straightforward. It requires clear and hard thinking, real creativity, courage, and personal leadership. But it can be done.