May 21, 2021

📚️ Book Notes: Playing to Win

My key takeaway was that all successful strategies fall into two buckets: you can provide a commodity at the lowest price or you can differentiate your offering to charge a premium. Not worth reading the whole book.

Here are my notes from Playing to Win:

1. 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. Don’t dismiss the possibility that you can change the context to fit your choices. Bob Young, cofounder of Red Hat, Inc., knew precisely where he wanted his company to play: he wanted to serve corporate customers with open-source enterprise software. In his view, the how-to-win in that context required scale—Young saw that corporate customers were much more likely to buy from a market leader, especially a dominant market leader. At the time, the Linux market was highly fragmented, with no such clear leader. Young had to change the game—by literally giving his software away via free download—to achieve dominant market share and become credible to corporate information technology (IT) departments. In that case, Young decided where to play and how to win, and then built the rest of his strategy (earning revenue from service rather than software sales) around these two choices. The result was a billion-dollar company with a thriving enterprise business.

2. Many individual considerations need to go into the comprehensive where-to-play choice. And the considerations are the same, no matter the size of the company or type of industry. Think of a small farmer. He must answer a number of questions to get a clear sense of his playing field. Will he sell only locally or to his friends and neighbors, or will he attempt to join a co-op that has a larger geographic footprint? Which fruits and vegetables will he grow? Will he sell organic products or standard ones? Will he sell bushels of fruit unprocessed or process apples into juice before selling them? Will he sell direct to consumers, or through a warehouse middleman? If he does process the fruit into juice, will he do that himself or outsource that phase of production? If he is thoughtful, the farmer will consider where to play in a manner that enables him to choose geographies, segments, products, channels, and production options that work well together (e.g., selling organic veggies locally at farmer’s markets or processing fruit to sell nationally while minimizing spoilage).
   Start-ups, small businesses, regional or national companies, and even huge multinationals all face an analogous set of where-to-play choices. The answers, of course, differ. Small businesses may well have narrower where-to-play choices than larger companies do, largely as a function of capacity and scale. But even the largest companies must make explicit choices to compete in some places, with some products, for some customers (and not in others). A choice to serve everyone, everywhere—or to simply serve all comers—is a losing choice.
   Choosing where to play is also about choosing where not to play. This is more straightforward when you are considering where to expand (or not), but considerably harder when considering if you should stay in the places and segments you currently serve. The status quo—continuing on in the locations and segments you’ve always been—is all too often an implicit, unexamined choice. Simply because you have made a given where-to-play choice in the past is not a reason to stay there. Consider a company like General Electric. A decade ago, it derived considerable revenue from its entertainment holdings (NBC and Universal) and materials businesses (plastic and silicon). Today, it has remade its portfolio to focus much more on infrastructure, energy, and transportation, where its distinctive capabilities can make a real difference to winning. This was an explicit choice about where not to play.

3. In cost leadership, as the name suggests, profit is driven by having a lower cost structure than competitors do. Imagine that companies A, B, and C all produce widgets for which customers will gladly pay $100. The products are comparable, so if one company charges more for its product than the others do, most customers will elect not to buy it in favor of the less expensive versions. Company B and company C have comparable cost structures and produce the widgets for $60, earning a $40 margin. Company A has a lower cost structure for producing essentially the same product and is able to do so for $45, producing a $55 margin. In this instance, company A is the low-cost leader and has a dramatic advantage over its competitors.
   The low-cost player doesn’t necessarily charge the lowest prices. Low-cost players have the option of underpricing competitors, but can also reinvest the margin differential in ways that create competitive advantage. Mars is a great example of this approach. Since the 1980s, it has held a distinct cost advantage over Hershey’s in candy bars. Mars has chosen to structure its range of candy bars such that they can be produced on a single super-high-speed production line. The company also utilizes less-expensive ingredients (by and large). Both of these choices greatly reduce product cost. Hershey’s and other competitors have multiple methods of production and more-expensive ingredients and hence higher cost structures. Rather than selling its bars at a lower price (which is nearly impossible because of the dynamics of the convenience-store trade), Mars has chosen to buy the best shelf space in the candy bar rack in every convenience store in America. Hershey’s can’t effectively counter the Mars initiative; it simply doesn’t have the extra money to spend. On the strength of this investment, Mars moved from a small player to goliath Hershey’s main rival, competing for overall market share leadership.
   Dell Computer took a similar tack early on. In its first decade, Dell enjoyed a substantial low-cost advantage over its competitors in the PC space. Superior supply chain and distribution choices created a cost differential of approximately $300 per computer in Dell’s favor; it simply cost Dell’s competitors more to make, sell, and distribute personal computers. Rather than keeping all of that margin advantage, Dell returned some to consumers, underpricing its competitors for roughly equivalent products. On the strength of these lower prices, Dell gained leading market share in record time, taking a huge bite out of Gateway, HP, Compaq, and IBM in the process. The $300 margin differential gave Dell a massive winning advantage at the time. The company grew from Michael Dell’s dorm-room start-up in 1984 to a company worth $100 billion at its height in 1999.
   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.

4. 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. In the hotel industry, for instance, one consumer would have a much higher willingness to pay for a service-oriented offering, like Four Seasons Hotels and Resorts, while another would more highly value a unique, boutique experience, like the Library Hotel in New York. Differentiation between products is driven by the activities of the firm: product design, product performance, quality, branding, advertising, distribution, and so on. The more a product is differentiated along a dimension consumers care about, the higher price premium it can demand. So, Starbucks can charge $3.50 for a cappuccino, Hermès can charge $10,000 for a Birkin bag, and they can do so largely irrespective of input costs.
   Not all differentiators look the same. While Toyota is sometimes considered a lost-cost player because of its focus on manufacturing effectiveness, it is really a differentiator. Its manufacturing effectiveness is necessary to make up for its production environment (which is heavily weighted to high-cost Japan). However, the automaker is able to earn a price premium of several thousand dollars per vehicle over its competitors in the US car market, while producing vehicles at similar cost. The best-selling Camry and Corolla models have a reputation for superior quality, reliability, and durability, driving the significant price premium. This differentiation advantage means that when it wants to gain market share, Toyota can cut its prices without destroying profitability—and its competitors won’t have the resources to respond. Or Toyota can invest some of the premium to add new, desirable features to its vehicles. In doing so, it can actually reinforce its differentiation advantage.
   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. This is ultimately the goal of any strategy.

5. In a standard strategy discussion, skeptics attack ideas as vigorously as possible to knock options out of contention, and defenders parry the arguments to protect pet options. Tempers rise, statements get more extreme, and relationships are strained. Meanwhile, little new or helpful information emerges. If instead the dialogue is about what would have to be true, then the skeptic can say, “For me to be confident in this possibility, we would have to know that consumers would respond in the following way.” This is a very different sort of statement than “That option will never work! Consumers hate that approach.” Rather than a blanket denunciation of a possibility, skeptics in the reverse-engineering process must specify the exact source of their skepticism. This frame helps the possibility’s proponents understand the reservations and creates a standard of proof to address them.

If you liked the above content, I'd definitely recommend reading the whole book. 💯

Until We Meet Again...
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