Strategy guru Michael Porter likes to say that strategy is about making choices and indeed it is. Good strategy is as much about what you don’t do as it is what you do.
: Where to play and how to win?
The book is notable in that it not only presents a coherent strategic framework, but also walks through how it was successfully applied to business problems at P&G. What it lacks, however, is a clear basis for making decisions about where to play and how to win for other businesses, especially ones that aren’t multinational conglomerates.
The Profit Paradox
For many managers, the question of where to play is a simple one: You go where the profits are. Look for high growth, high margin categories and you can’t go wrong. Right?
Wrong. Just because a category is attractive doesn’t mean that you should enter it. After all, if it is attractive to you, it will also likely be attractive to others and, as they rush in, the economics will change, sometimes drastically. That’s the profit paradox.
As Richard Rumelt points out, good strategy brings relative strength to bear against relative weakness (or I would add, opportunity). Retail might not be a fast growth industry (it’s largely constrained by economic growth), but Wal-Mart, Amazon and Apple have been able to build great businesses through capabilities that are hard to match.
So simply seeking out profit is not enough, true opportunities match an enterprise’s capabilities, purpose and mission.
Blue Oceans / Red Oceans
In their book, Blue Ocean Strategy
, W. Chan Kim and Renée Mauborgne of INSEAD argue that the “where to play” question should be answered with respect to competitive activity. They advise managers to seek out “blue oceans” where competition is scarce rather than “red oceans” where things get bloody.
To be honest, this never made any sense to me. Where competition is scarce, so are consumers. Further, even if you are successful in a noncompetitive environment, that’s no guarantee that you will prevail once your success attracts new market entrants.
The truth is that most business oceans are purple – a mix of tough competition and new, emerging areas ripe with opportunity. Ironically, it is usually through the crucible of the former that you build the skills and processes to succeed in the latter.
Simply trying to avoid competition is no way to become a world beating company.
Opportunities For Disruption
Another way to answer the “where to play” question comes from the disruptive opportunities that Clayton Christensen favours. In his view, as technology progresses, customers become over-served by conventional products, opening the door to new market entrants that underperform by traditional standards, but are superior in a new basis of competition.
For example, when digital cameras first came out, they took pretty lousy pictures. Charles Schwab aimed to provide inferior service in the brokerage industry. Minimills like Nucor produced poorer quality steel than the big integrated players. The incumbents basically ignored them because those were the attributes that were considered to be crucial to success.
However, the new upstarts succeeded brilliantly because light or non consumers considered what they offered to be “good enough” and cared more about performance in another area, such as price or convenience. Once they gained a foothold, they were able to migrate upwards and compete for more traditional business.
So another way to answer the “where to play and how to win” question is to look for industries that are getting better and better at what people care about less and less.
The Ultimate Question
Ultimately, where to play and how to win is a secondary question. As I’ve written before, what really matters is how you can create, deliver and capture value. If you can answer that, where to play and how to win mostly take care of themselves.
Your customers don’t care what your strategy is. Nor do they care about how you choose to segment the market or even whether your technology is superior. What they really want is for your product or service to do an important job for them, to be reasonably convenient and available at an attractive price.
And that’s the problem with benchmarking against companies like Proctor & Gamble and Apple. They are fantastic companies, who have built up strong capabilities over a long period of time. Few have comparable resources. They’re admirable, even inspiring, but the strategy that works for them probably won’t work for the rest of us.
Strategy is not, as many would have us believe, a chessboard. Wars are won in the trenches.
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