How to develop a strategy that wins in competitive markets

Roger Martin:

So, you asked the most important question in strategy, which is not what is true, but what would have to be true. So, you say of the first option or possibility, as I call it, what would it have to be true about the customer? What would have to be true about our capabilities? What would have to be true about the competition for that to be a great idea?

And you asked that of each of the possibilities. So, you have a list of the important things that would have to be true for that to be the best idea.

Roger Martin:

Not quite, I don’t go because they’re quite —

Roger Martin:

I asked of those things that would have to be true, which are we most worried are not true?

Roger Martin:

And those are the barriers, what I call the barriers to choice, because if there’s something that would have to be true, that you’re saying, I don’t think that’s true, you’re never going to go do that, okay?

Roger Martin:

So, it’s then, after you’ve identified those barriers, you figure out how you can test them.

Roger Martin:

Hey, it’s great to be with you. Thank you for having me.

Roger Martin:

Sure. I define it as choices, making choices, to do some things and not others. And I see it as an integrative set of choices that define “where are you going to play”, and “how are you going to win” where you’ve chosen to play. Why it’s misunderstood, I think is it’s become very much an exercise in planning.

And strategy and planning are two different things, right? You can plan to do a lot of things, and you can have very detailed plans to do a lot of things. And you can do all of those things and it still won’t end up being a winning strategy.

In my view, because planning is something you can be certain that you do right. And as long as you’re dutiful and thorough, you’ll have a plan. But to have a strategy that wins requires creativity. It requires trying to create a future that is better than the present.

And that is not an easily doable thing. And so, most people most of the time default to planning. And so, there’s very little great strategy done in the world.

Roger Martin:

That’s very hard —

Roger Martin:

No, no. I mean, that many entrepreneurs create a new way to play and they win by being the only player on that field. So, that sometimes happens. Now-

Roger Martin:

Not necessarily. I mean, the entrepreneurial beauty is you’re figuring out some need that is not being met that you can meet and… now, what tends to happen is that somebody will enter that space. I mean, if it’s a really stupid idea, and nobody’s buying it, they’ll leave you to it until you run out of money. But if it’s clever, and it turns out that people buy and you make a lot of money, then you can be sure others will enter and it will no longer be a monopoly.

But I would just say it’s not by definition you have a competitor. In essence, when you’re developing something entirely new, right? The competitor is doing without, right? That the very, very first car did not have a direct competitor, but it had to compete with doing without a horse drawn carriage. And what you had to do is convince consumers to forego the current product, the current offering and go with this entirely new thing, which is a challenge.

It’s a slightly different challenge than saying, my car is better than your car. But it still requires you to have a value proposition for the user that causes them to choose it rather than something else.

Roger Martin:

Absolutely. Though, there are many attributes to that market segment, right? You would say it’s this consumer, high-end or low-end consumers, you could say. It’s Australian consumers or American consumers. You could also say your “where to play” is at what stage of the, if you will, the value system you’re in, are you going to be in the downstream part.

So, you’re going to produce in the market and distribute, or maybe you’re going to produce and sell through a different distribution channel, or maybe you’re going to backward integrate into the raw materials. So, there are a bunch of different wear choices that get into it. But your idea of a segment is not at all a bad description.

It’s like we are here on the playing field, the entire possible playing field, are you going to plop yourself down and say, that is where I’m going to concentrate my effort.

Roger Martin:

That’s okay.

Roger Martin:

When it comes to strategy, getting specific like this is important, because it’s, again, as you said, it’s misunderstood and done poorly, generally.

Roger Martin:

The 25.

Roger Martin:

It’s once a week. So, as of Monday, it’ll be 26.

Roger Martin:

Yes, yes. Well, I mean, there’s a general view that strategy is some kind of a cool thing. And so, it’s often used as a modifier to make something sound cool, right? Strategic sourcing, strategic procurement and so, planning sounds boring. So, call it a strategic plan.

And again, as I say, in the piece you referred to, strategy and planning are complements, not substitutes. They’re treated as substitutes. As long as we have a plan that explains the stuff we’re going to do, we’re going to call that our strategic plan. But unless it adds up to, here’s where we’re going to play, and here’s how we’re going to win, then it doesn’t deserve the modifier as strategic, because it isn’t strategy in the sense that I believe the term was coined.

I mean, the term originally came from the world of the military, right? There’s a long rich history from Sun Tzu to von Clausewitz of saying, here’s the techniques for thinking about how to win a battle, and we’re going to call that military strategy. And that eventually got imported to business. As this is our approach, our theory of the case that will enable us to achieve the thing we would like to achieve. And that’s strategy.

Roger Martin:

You got them. See, these are not simple questions that you’re taking.

Roger Martin:

No, that’s giving you credit.

Roger Martin:

Well, I think they’re some family resemblance, but they aren’t the same thing. And, in fact, right, the strategies evolved away from military strategy, because if you think about military strategy, and you ask what mattered in military strategy? What really mattered is us. So, our capabilities versus that of the competitor, and what we were going to do, what they were going to do and how those two things were going to interact.

Now, there’s a consumer, if you will, in the equation only to the extent that if your military strategy is to respond to an attack on your homeland, then you’re just going to assume the consumers, who are the citizens, rather have you repelled the invader than not. You don’t spend a lot of time thinking, well, do you really want and what exactly would you like? No, you just go do it, do it. Or if you are the invading force, it’s because your citizens sometimes said, well, that’s okay if you do that, or we’d like you to do that or parliament, then you’re approved for it.

So, the consumer wasn’t and the customer was not very much in the equation. But it was just assumed that you’re doing something good for them. And the question was, can you beat the enemy? How do you go about doing that overwhelming force? You’re going to be clever, you’re going to flank them, da, da, dad, whatever.

And so, in the world of business, that’s how strategy in many respects started with very little concern for the customer. And it was how would you get, and sometimes the father of modern strategies, Bruce Henderson, the founder of Boston Consulting Group, and his strategy was, you invest ahead of the learning curve, price ahead of the learning curve, below your cost, if necessary, to get the dominant scale, so that your costs will always be lower, and you will win, right? That was it.

The customer wasn’t in that equation at all. It was about you and the competitor, and how you’re going to get ahead of the competitor. As it evolved, it became more interested in the consumer, the customer. And that’s where, in some sense, where to play, or at least in my version in strategy, the “where to play” comes it’s like, oh. In the case of a country, it’s for all citizens and homeland. No, it’s for this set of customers. We want to tussle with the competition for, oh, and then what was the need? How can we serve their needs, et cetera.

Roger Martin:

So, it’s migrated away from military strategy in that sense. The other thing I would say about military strategy is it’s a little more clear that there is an absolute winner and an absolute loser at the end of it. And I see the evolution of business strategy more being, I’m going to head over here, and these are my customers that I’m going to serve better than anybody else. And that’ll cause you to stay away from those customers because serving them does you no good because you serve them less well than I do and so I win.

But you go over there and serve those customers and that’s fine with me. I’m not going to be upset with you. I’m not going to battle you. So, there’s a little more in business strategy of many companies succeeding but in different places and in different ways.

Roger Martin:

Yeah. If people have really clever strategies where you get more equivalent of “death and destruction”, right? People just waste their money on endless battles, whatever is when companies don’t really have a strategy for winning, they just have a strategy for competing. And they compete endlessly bashing each other over the head for no good reason.

Now, great military strategists would say the best military strategies involve not much death and destruction either, because you cleverly outflank your competitor, and they just say, oops, you win, we lose in a way. It’s World War 1 where nobody has a decisive, and you just line up and keep shooting each other, and killing each other for a no particularly useful outcome.

Roger Martin:

Yup.

Roger Martin:

Well, I think you need a lot of understanding of the customer, so that you can figure out what capabilities you can build that would be hard to replicate to serve those customers in a unique way. And that is the essence of the strategy. You have to deploy, build and deploy capabilities that are hard to replicate against a certain meeting a customer need in a particular way. If you can do that, you’ll have a strategy that succeeds.

Roger Martin:

Yeah. It’s at this point, this is the creative act. It’s to say, what does Siri for how I might serve the customer segment better than anybody else? What are they missing, right? Is there something that they longed for that they don’t currently have? Or if they’re getting stuff right now, is it at a cost to them? A price that’s so high, that they buy less than they would otherwise and aren’t particularly thrilled with that, and we could create a different economic structure that would enable us to sell it.

But it is having a theory, a theory of how we could serve them better. And what I’d say is, this I take a page out of the design world, come up with multiple theories, right? Dream up, get a bunch of people to come up with a variety of theories. Don’t just fixate very, very quickly on one but come up with a number that you can then test out the logic of to say, which of these do we think has the best chance of creating win without a customer base?

Roger Martin:

This is why, it’s like not planning, right? Planning, anybody can do. Anybody who’s thorough can do it. Strategy requires you to be creative, to be inventive about how you come up with that theory.

Roger Martin:

Yes.

Roger Martin:

Sure, sure. So, what I say about strategy, strategy is a problem-solving tool. And the way you started is to say, well, what’s the problem we’d like to solve? And a good way to frame that problem is how might we get which is, which comes from the world of design, which is to say, well, here’s the problem, customers are experiencing the following.

How might we make that better for the customers? Or perhaps we used to have those customers absolutely in our pocket, they used to love us and now they seem to be loving somebody else. That’s the problem. How might we regain the position with the customers that we did before?

So, you need that motivating question that imagines a better future that provides, in some sense, the objective function, if you will, so that you can tell whether a theory will actually deliver, has the potential of delivering against your request, and that would then solve problems.

Roger Martin:

Three to five, I think. Unless you have a minimum of three, you probably are not going broadly enough, and there’s probably something that you’re missing. That’s good. I think five is a good number. Typically-

Roger Martin:

I prefer them to be significantly different, because I think… so, let’s imagine you’re five and there’s go east, go west, go north coast, and go-

Roger Martin:

Let’s say four. And I think that as you move through a process of evaluating them and get to the point of westerly looks good, that vector looks good. I think then you can say, oh, it’s a couple degrees northerly or a couple degrees southerly. But if you never had west in the consideration set, you’ll never get there, you’ll settle for north, south or, or east.

So, that’s why I like real variety in terms of really different ways of winning, different ways of solving the problem that you’ve identified.

Roger Martin:

That is correct. That is correct. And it does not have to be the same where to play for each of them.

Roger Martin:

Absolutely. One of the things that I would say identify as getting a great strategy is if there was that flexibility in both. The heart of strategy, I call the heart of strategy, the “where to play”, “how to win” pair of choices. And the worst strategy comes from saying, we’ve decided on our “where to play”, and now let’s see “how can we win” there.

Or we’ve decided on the way to win, where could we play? What that does is sub optimize. It gets you to what people who talk about optimization theory says that a local peak, right? It’s like you get to the top of the 10th tallest mountain in the Himalayas, not Everest.

And if you allow the two to vary together, so that you find, oh, this is a “where to play” that’s perfect for our how to win. This is “how to win” that’s perfect for where to play, then you get a great strategy.

Roger Martin:

Yeah, no, no, it depends on whether the how to win is made stronger or weaker by going after all the segments. So, if there are some similarities across the segments that allow you to invest in capabilities that can be used to serve all seven, then it may be the smartest possible thing to be in all seven. Whereas, if they’re all quite different, then chances are it’s weakening your how to win to play across them.

So, just to give a concrete example, right, Procter & Gamble, a company I’ve worked with for a long period of time, big business in Australia and New Zealand. They are in 10 categories, right? From male shaving to female protection products to baby care to hair care to skincare, et cetera. And I would argue they’re stronger for it. Why? Its because they tend to go through the same distribution channels, right?

Roger Martin:

And so, you can go to your distribution partner and say, “Hey, here’s all the things that we can do for you together. They’re all consumer branded goods. And so, you advertise in the same places, and you can have advertising scale.” So, there’s a number of things that make it sensible for them to be in all of those.

But not too long ago, they divested, they had an ethical pharmaceutical business, right? And FDA-approved drugs.

Roger Martin:

And they thought about a company called Norton, they’ve just paid a couple billion dollars for it, because they thought, “Hey, we can bring all our consumer packaged.” So, there’s branding experience to this. But what they found is it goes through a completely different distribution channel, right? Detailing doctors, hmm, don’t do that, right? We’d have to build our own little sales force for our own little company, and go against the sales forces of Pfizer and Glaxo and all these giants.

And, oh, by the way, there’s this step in the whole process of getting a drug in front of a customer that involves going through the FDA or the equivalent in Australia and Canada and in the EU. And as a little relatively liberal pharma company, we do that once every couple of years. And Pfizer does it once a week, not quite one a week, but is with a, wow, they’re really good at that. Because there’s an art to that, we’re not so good.

So, even though Procter & Gamble had a theory about how this would be a good idea, it wasn’t a strong enough theory. Yes, they had advantage in branding. When they had a product, they were better at branding it than the pharma companies and the like, but on a bunch of other features, they were just not nearly as good. And so, they sold it.

They sold it actually for a profit, right? They made some money on it, because they did a pretty good job with it. But it wasn’t something where they could be number one, which is what they want in each of their categories. They want to be number one in every category in which they compete. That was not going to happen in our lifetime, if ever.

Roger Martin:

So, there would be a case where there is one segment too many.

Roger Martin:

Or one segment that was too different for it to be a good thing.

Roger Martin:

Over time, as I’ve done this for 40 years now, I’m getting more and more convinced that you need to pick a “where” in which you will aspire to be number one in market share. Now, that does not mean that you utilize somebody else’s categorization scheme, right?

So, if somebody else says, whoa, you’re not number one in automobiles. That may not be the right segment. You may be number five in that but in the luxury space of your Mercedes brand, maybe they’re probably just barely top 10 in market share in automobiles. But at the certain luxury space, they are number one.

And now, you can’t have that be fake, it’s like, well, I’m going to call my space this one that’s not really my space. You have to be realistic about it. But I think there is a realistically defined luxury auto space that has its own set of competitors, competitive brands. And Mercedes can be number one in that.

I think you can even say right, that for luxurious luxury automobiles, they are number one. For ultimate driving machines, right, BMW, right, so those segments aren’t exactly the same segment. And in each, I think, it would be fair to say, they have a right to say, no, for those particular customers we’re at.

And that’s what you should strive for in your strategy. That you can identify a set of customers that say, you’re better than others. Would we never ever in a million years by the other? No. If it was cheap enough or whatever, but given our preference, we buy you. You want to be able to say that for a big enough group of customers to make your business model work.

Roger Martin:

That’s exactly right. And it is a really, really important part of strategy, because you have to have that aspiration, I think. So, part of the way I think about strategies, you’ve got to have a winning aspiration that helps you pick a where to play, and how to win to give that team and then you build the capabilities necessary to win where you’ve chosen to play, to meet your winning aspiration.

And you develop a set of management systems that build and maintain those capabilities to win where you’ve chosen the player to meet your winning aspiration. So, a big part of strategy is just figuring out how you are going to follow through on an aspiration not to just participate but to win.

Roger Martin:

But you see, this relates back to what I said about business strategy being a little bit different than military strategy. You’re not trying to kill the competition. You’re trying to convince the competition to compete elsewhere. That’s what you want more than anything else to have your competition say, I’m going to be the ultimate driving machine for people who really, really care about that style of performance.

Roger Martin:

…leave to us this more luxurious, luxury German engineering for this ultimate luxury. If you leave that alone, we’ll leave you alone. We’ll both coexist happily. We both make money. Everything’s good.

Roger Martin:

And the good thing, right, is it’s great for customers, right?

Roger Martin:

They have what? They have real choice. This is not the Soviet Union. This is not you will get this and it’ll all look the same. This is you will have a real choice. That’s why strategy, in my view, is and should be a positive force for humanity.

Roger Martin:

Strategy should be a positive force in helping customers get served well, right, and have resources deployed to create things that customers love, that earn enough for shareholders to keep wanting to invest in that. And that creates jobs, right? And which creates people with money to economically grow.

Roger Martin:

That strategy where everybody converges on doing the same thing. And you get this destructive competition, commoditization, whatever, is bad for the world.

Roger Martin:

Sure. So, you asked the most important question in strategy, which is not what is true, but what would have to be true. So, you say of the first option or possibility, as I call it, what would have to be true about the customer? What would have to be true about our capabilities? What would have to be true about the competition for that to be a great idea?

And you asked that of each of the possibilities. So, you have a list of the important things that would have to be true for that to be the best idea.

Roger Martin:

Not quite, I don’t go because they’re quite–

Roger Martin:

I asked of the things that would have to be true. Which are we most worried are not true?

Roger Martin:

And those are the barriers, what I call the barriers, to choice because if there’s something that would have to be true, that you’re saying, I don’t think that’s true, you’re never going to go that, right?

Roger Martin:

So, it’s then after you’ve identified those barriers, you figure out how you can test them? How can you test them? How can you do some market research? Can you do some competitive analysis? Can you do some analysis of your capabilities? And the like, you create some kind of a test that would enable you to assess. Can you overcome that barrier, right? Is actually, now that you’ve checked a tab, that is okay, or now that you’ve checked it, you think you could take this set of actions that would make that barrier go away.

And when you’ve done that for all the possibilities, you do choose the one that you feel most confident, you can make true the things that would need to be true for that to be the best idea. It’s your choice.

Roger Martin:

It depends on how much testing you want to do. So, coming up with where to play, how to win possibilities is not terribly time-consuming. There’s no good reason why you couldn’t go and do an off-site for a couple or three days and come up with those, and to reverse engineer them to ask what would have to be true and identify what are the things that would have to be true, or we was worried about might not be true. That doesn’t take long.

You can do that in a matter of days, or at most weeks. Then the question is, how much time money resources, et cetera, do you want to spend on testing? See, if it’s just you and your buddy in a garage, dreaming up a new business, you may say, what the hell, we think this is a good enough chance of succeeding, we’re just going to go do it, right?

If you’re a large public company, Telstra or something with a board of directors and all these shareholders, they will probably say, we’d like you to do a bunch of consumer research. Oh, and that will take six months or nine months, or we’d like you to do this big modeling exercise on what competitors might do and what we might be able to do. Or we’d like you to build a prototype or something.

So, what I try to do is take the process of creating a strategy and divide it into two parts. The logic part, that’s what the problem you want to solve, what are possibilities for solving it? What would have to be true? What are the barriers? That’s the logical structure?

Roger Martin:

And I try to separate that from the analytical part, so that the company in question can say, depending on how much demonstration we need, how much testing we need, that’ll determine how long we’re willing to take on this and how much we’re willing to spend on it. And companies have got different attitudes towards that.

Roger Martin:

Yeah, those would all be factors. I wouldn’t say there’s any one. So, yes.

Roger Martin:

The bigger the risk, but depends on what you mean by risk. So, what I often say is, there’s a difference between something that’s below the waterline or above the waterline. So, I will always ask the question, well, if this fails, if we try possibilities, see and it fails, did we just take a torpedo below the waterline, or did we take one above the waterline and we can limp back to port and fix it up and go back out to the sea? So, that is a measure of risk.

Part of it is how much is it all or nothing, right? Could you test in small ways that wouldn’t be terribly expensive, and then prototype it, try it out one market segment? And then learn from that. So, a lot about it is trying to figure out ways of getting answers to your questions. So, this is where, again, I like the practice of design, iterative prototyping.

Just like you go out with a prototype and test it in the market, get feedback, improve it, improve it, so that by the time you have to launch in full, you have much more data and insight into how customers are going to react to it. So, lots of that, to me is a skill at figuring out how you enable the world to be de-risked for you.

Roger Martin:

And I think that’s what clever entrepreneurs do. Incredibly wild-eyed people who jump off tall buildings with maybe a parachute, maybe it was just a knapsack, right? And that’s not my experience at all.

I helped a guy, he’s passed away now, Ted Rogers is Canada’s greatest tech entrepreneur in history. And has built the, not like Telstra, right? He’s built the competitor, the Bell Canada, that’s now bigger than Bell Canada, who just did a $28 billion merger to become the biggest.

Roger Martin:

So, he’s an entrepreneur and the situation was… there was going to be national cellular licenses to be handed out. That was in the early 1980s, ’82, as I recall, but it might have been ’83. And one was given to Bell Canada, the historic monopoly, and then the other was up for grabs.

And so, here’s Ted Rogers… He brought FM radio to Canada, made a mint cable TV, made a mint. So, he was already rich. I’m not sure if he’s a billionaire yet, but it’s probably pretty close. And it was going to take about a million dollars in cash outlay to go through the process, to put together all the studies that were required and whatever, million dollars.

What did Ted Rogers do? Went to two other wealthy families in Canada and split it three ways, right. And you’re saying, let me get this straight, this guy who’s at least a cent a millionaire, and maybe a billionaire and can’t risk a million dollars on getting this national cellular license for a G7 country? Nope. Took it down to 333. They were not favored, but they won the bid. What did Ted Rogers do then? Turned around Ameritech, which is one of the seven baby Bells, they’ve all been known in the U.S. gigantic, enormous company, and sold 10% of the new license for $10 million.

And I remember saying to Ted at the time, I said, “Ted, if this really takes off, you’re going to have to buy that pack. And I shudder to think what you’re going to have to buy that pack for.” He’s like, “Roger,” like, “Roger, you moron.” The implied tone of it is like, “Hey, man, I’m not just playing with that money, man. I pay this all back and that $10 million is going to pay for the build out to the initial and network build out and everything. I got nothing. No skin left in this game, and I have 30% share.”

Roger Martin:

Third of 90%. And sure enough, I think he had a buyback from Ameritech for I think $700 million to what down the line.

Roger Martin:

But Rogers just made a $28 billion acquisition of the third biggest player in the country. So, I don’t know what Rogers is worth, $28 or 30 million and this cellular license is probably worth two-thirds of that. But did Ted Rogers act like an entrepreneur? Absolutely not. He acted more like a grandmother than an entrepreneur.

But I’ve seen that more often than not, they figure out how to de-risk the things they’re doing, so that they don’t experience all of the downside and get enough of the upside that everything is just fine.

Roger Martin:

Yeah, absolutely. A strategy is an exercise in shortening your odds, right? If you just randomly went on and did something, let’s say there would be 20 to one chance that you succeed, if you do strategy, well, it’s let’s say it’s seven to four. But is it going to succeed? Nobody knows the future. Nobody. And so, there’s always a risk that the future will not take shape the way you hoped it, would you thought it would.

But if you can shrink those odds against you, then if you do it enough times, you will succeed. And that’s what Ted Rogers did. Shrunk the odds against them enough, and he died with a net worth of 10 billion or 15 billion or something, and his family is now probably worth 20 million.

Roger Martin:

Yeah. I would agree that most big public companies with a board would have exactly this, the same structure that you’ve described. What they have to understand is it does leave them exposed, right? It leaves them exposed to somebody who says, what the hell, I’m going to go try this.

And that is what it’s changed about business. If people ask me, I started strategy consulting in 1981, a few years ago.

Roger Martin:

And in that era, if you ask most CEOs of big companies, Dow Jones 30, Fortune 500 companies, they will be most worried about the competitor who looked like them across the street coming up with something really clever to outflank them. And that will keep them up at night. Now, I don’t see that at all. They are most worried about two kids in a garage, dreaming up something that is going to totally disrupt their industry.

Now, the problem isn’t two kids in a garage. The problem is two kids each in 100 garages. Because if 99 of them have got really dumb ideas and go belly up, lose all their money, who cares? It’s the one that was doing the same thing the other 99 were doing, but hit on the right idea that will then disrupt you and can kill the big guy, right? That could be Google, that takes all of the advertising that used to go to whatever, Time Warner or the New York Times or whatever.

And so, what’s happened with the startup culture, and the greater amount of financing available for this is there just more troops just keep coming. So, you’ve got the big castle and you got a moat around it, because you’re a big company.

Roger Martin:

But they just keep coming in, and eventually the moat full of dead bodies, and they walk over the moat, and then they start scaling the walls, and there are just too many of them. And so, that’s the tricky thing that I think is created more of a necessity for companies, big companies to say, this may make us nervous. But if we don’t do it, one of these little guys is going to do it. And by the time we figure out that they’re succeeding, it may be too late.

And so, I think that’s a tension in big business now, because Boards of Directors don’t like taking big bets, right? But if there are going to be 1000 Fintech companies coming up after JPMorgan Chase, then some of them are going to figure out the answer. And JPMorgan Chase isn’t going to be able to buy him for a couple billion dollars by the time it’s successful, because at that point, they’ll say no, you can buy us for $50 billion, not $2 billion.

And then, the Board of Directors of JPMorgan Chase will say, well, we can’t afford $50 billion. But then, that could be their death now. So, it’s a tricky time for big companies these days.

Roger Martin:

But they’ll also not to be underestimated. The huge pools of capital that are now available for those people. So, it’s the combination of those two things. There’s a synergy between those two things that are making being a big established player, I think more dangerous than it’s been in the past.

Roger Martin:

I think it’s a way to do it. I mean, you’re essentially giving as you probably know, the sadly, late Clay Christensen’s argument of a skunkworks. Have a skunkworks that’s protected from all those tendencies of the big company to, whoa, that’s dangerous, that’s worrisome, you do it off in a skunkworks. I think that can work. I don’t think it’s the only way, though.

I mean, I think the mainstream of a company can just obey some different rules than they have historically. I think you can do it both ways. I mean, I think it’s up to the CEO to ask the question, can he or she create a set of procedures, rules, ways of operating, that enable the mainstream businesses to do that disrupt their innovation? Or is that just a bridge too far, and so we have to set up some form of skunkworks?

Whether that is our own skunkworks, or we make to see the investments in a bunch of these players. Have a seat on the board, get to see what’s going on, get early looks, if not a right of first refusal to buy them. There are different ways I think of dealing with the challenge of small disruptors.

Roger Martin:

Yeah.

Roger Martin:

Yes.

Roger Martin:

Yeah, I think it’s the deploy, what you said you’re going to do. And then, watch and adjust. So, what I say is, is that at that point, you should take that little what would have to be a true chart that you made.

Roger Martin:

So, let’s say it’s option three.

Roger Martin:

And you go back and take that thing. That would have to be true. You stick a tack board in front of your desk, and every morning come to work and ask, are the things that would have to be true still looking like they’re true? And if the answer is yes, just keep plowing ahead. And if the answer is not really, then you better go through that whole process again.

So, strategy, you should be comparing what the logic of your strategy holds must be true to what is actually happening. And assessing the degree to which there’s a match. And you should always do that. And that’s why you shouldn’t do strategy on an annual basis. They, oh, it’s September, so we do strategy. That’s no, you think about strategy every day.

And you assess the degree to which there’s a fit between your strategy and what’s going on the market, so that you can get at it, get changing it sooner, because the biggest problem with strategy tends to be that you get locked into it, and then you ignore all the signals that say, it’s not working the way you thought it was working until it’s too late to do anything about that.

Roger Martin:

Yeah. And that’s where planning comes in, right?

Roger Martin:

Yeah, yeah.

Roger Martin:

If you are confident you can build the capabilities, confident enough to say we’re going to invest in a strategy for which we do not have all the capabilities now, we’ve got a bunch, but we’ve got a few that we have to build, and we think we can build them fast enough, that’s when you need to have a plan that says, okay, here’s what we’re going to do. Here’s how much money we’re going to spend. Here’s who’s going to do what. Here’s how long it’s going to take. Here’s KPIs for that.

You create a plan to build the capabilities necessary to win the way you’ve chosen to win, where you’ve chosen to play to meet the-

Roger Martin:

And some of those things will be internal, and some of it will be external. What would have to be true is customers will respond this way to the offering we’re making, that’s an external thing. We can build the capabilities necessary to have this product or service, that’s an internal thing.

So, some of them are external, some of them are internal. But you have to be checking on those things, because there’s a logical structure to the strategy that has to be confirmed by the world as it evolves, right? Or you’ve got a strategy problem, you’ve got a fit problem, which is in theory that doesn’t fit with the way the world is evolving.

Roger Martin:

Yeah. The first step I would take in that case is to ask, is there a minor alteration to this strategy that we could imagine that would take into account this evolution of the world that is in a different way than we thought.

Roger Martin:

So, I would start there, but if the answer is not very ready… yeah, yeah, no, we could make this adjustment and things will be fine. Then I would very much go back to, okay, we got to go back to square one and ask, okay, what’s the problem now that we’ve got to solve?

Roger Martin:

This is a problem of a mismatch. Okay, what would be possibilities? What “where to play”? “How to Win”? Change could we make, da, da, da of that, next to the same thing.

Roger Martin:

Measure twice, cut once, right? That’s what a tailor would say?

Roger Martin:

Sure. And maybe-

Roger Martin:

Yeah, sure. Maybe I’ll just give an example. So, we all know the Four Seasons Hotel chain, right? The world’s biggest and most successful luxury hotel chain. So, it has a strategy of giving a different form of service. So, many people don’t realize this, but Four Seasons founder, Isadore Sharp, came to the conclusion that people staying in luxury hotels would rather not be there, or would they rather be, number one at home with their loved ones, number two at the office where they can be productive, and number three in a luxury hotel.

And so, what he said is we’re going to have a form of service that makes up for what you left at home or the office. Our competitors, former services, grand architecture and decor and more obsequious service, all of which makes you feel less at home from it. Funnily and funnily enough, for that we need to have frontline workers be able to adjust on the fly and be able to deliver this very customized service to our guests. That’s the capability we need.

Here’s the problem. The problem is there’s a 70% turnover in the worldwide hotel industry, 70% annual turnover. That means the average person that you meet in a hotel is on their way to a 16-month career in that hotel chain. So, the turnover is just extraordinary.

Roger Martin:

So, Isadore Sharp says, we can’t deliver this service we want that would earn us this great price premium and loyalty that our strategy needs doing that. So, we’ll have a management system that is different or management systems that are different from our competitors. When we hire, the only way you can get a job at a Four Seasons is to complete three successful in-person interviews, the last of which is with the General Manager of the hotel in-question.

Inviolate, if a General Manager ever hired somebody without interviewing them, bellhop, and anybody and anything Four Seasons, they just be fired on the spot, gone, that’s the management system. And when Four Seasons opens a hotel, because there’s such great employers, they have on average 400 jobs to fill in an average hotel, obviously, there’s bigger and smaller, 400.

They get 40,000 applicants on average, and they in-person interview 4000 of them to find the 400. So, how on earth can you spend that much time and effort, your management system says, you have to spend that much time and effort and then they have another management system that is career planning, so that everybody knows exactly where they’re going in their career in Four Seasons, and they get the training for that and all of that, all of that stuff. Another management system.

Well, if you got 70% turnover, how can you invest like that? It would be insane. Just think about it, if the competitor hotels have 400 people per year, 400 full time positions, 70% turnover, that means they got to hire 280 per year, the General Manager, and let’s say have to interview two or three people using a Four Season system to get each one of their 280, a General Manager will be doing nothing but interviewing employees their entire year.

So, how on earth do you do that? Well, the answer is Four Seasons turnover is about 5%. So, right, that means 20 new hires per year in that hotel. That’s no problem.

Roger Martin:

That’s easy. And all that investment that you made to figure out what the 400 workers is totally worth it. Because they’re on their way to what, 5% turnover equals 20-year career. They’re worth investing in. And the competitors are very daunted by this, right? How long would it take us to treat people like Four Seasons treats them and pay them like Four Seasons pays them and have a track record of having great long careers for us to get it from 70 to five, so that we can afford those unbelievably expensive management systems?

But they aren’t so terribly expensive for Four Seasons, because during that amount of interviewing for a 20-year employee who’s going to give awesome service, that’s not a big deal. That’s a set of management systems that builds a distinctive capability that enables them to win where they’ve chosen to play, and meet their winning aspiration to be the gold standard in the hotel business worldwide.

And there’s this whole theory and strategy. There’s all sorts of crazy, stupid ass theories in strategy. One is the end of competitive advantage. There’s no competitive advantage anymore. It’s fleeting, it comes and goes easily. This has been the Four Seasons strategy since the mid-80s.

Roger Martin:

It’s a 40-year old strategy, 40-year old strategy that has produced the most successful and the largest luxury hotel chain in the world. Wouldn’t you think, if there’s the end of competitive advantage, you can’t keep it anymore, it changes so fast that somebody would have knocked them off?

Roger Martin:

In four decades? No. And somebody would have knocked off Head & Shoulders in less than 50 years or, I mean, it’s just a stupid ass argument about competitive advantages cannot be long-lived. Competitive advantage can be long-lived if there are unique management systems that build unique capabilities that enable them to win in a particular way in a particular place. Nothing about the world has made those advantages fleeting or short. Anyway, enough on rant…

Roger Martin:

Arguments that have no basis in fact.

Roger Martin:

Yup. And not only is it perhaps the hardest part, it’s the most boring part.

Roger Martin:

It really is.

Roger Martin:

It is like the plumbing. But you’re very perceptive, right? Which is that, yes, it’s that it’s boring plumbing that often is absolutely at the heart of competitive advantage. And Four Seasons is a good case in point. And you think, right, you’d think that somebody would be able to say, oh, no, we can do that, too. But it’s quite daunting. It’s quite daunting, because in part of, again, what you said, once again, perceptive, it’s by the time they figure it out, in some sense, you’ve moved a long way.

So, by the time competitors figured out, wow, Four Seasons just has this built-in service advantage. Their guests just like their service way more. And, oh, it’s because it’s not obsequious and a great army backed by a great army, it’s this field of customization and hominess plus the efficiency of being at the office. And so, we have to get employees like that, too.

Oh, dear. Four Seasons has now got a track record of having these long-lived employees who have these long and productive careers and work up through this system. And so, we’d have to go out and convince people that even though we’re not Four Seasons, and we have no track record whatsoever at this, we are going to be able to treat you just like Four Seasons does.

And then, the person just says, “Well, I could speculate with you or get the real thing at Four Seasons. Do I have “idiot” written across my face?”

Roger Martin:

Four Seasons is no longer where they were when they started, they’re 20 years down the path of having that system work and produce these outputs. And so, the company that’s going after them does not have a fair start.

Roger Martin:

They’re literally running a race where they start 20 years behind you when they —

Roger Martin:

Absolutely, absolutely.

Roger Martin:

Which is a good example of how you can… you’ve always got to be watching for other kinds of competition, right? When you’re the market leader like Four Seasons, you’re probably, as long as you don’t get lazy and arrogant, it’s going to be hard for somebody who’s like you to catch up. But what you have to be worried about is somebody who’s got a very different way of delivering a customer need.

Now, the customer that the Four Seasons meets, first and foremost, is the busy, high-end business traveler. And they’re not going to be your Airbnb people.

Roger Martin:

Now, of course, Four Seasons has all sorts of resorts and hotels and resorts. But the people who stay at those resorts tend to be the same time travelers who already love Four Seasons. So, they’re a little more insulated from Airbnb than Hilton or Marriott, or whatever, I would argue. But your point is a good one, which is competition. Competition comes in all forms.

And as long as they want your customer, the fact that they aren’t like you does not mean that they can’t make your customers happy in a different way than you’ve made them.

Roger Martin:

I’ll answer this slightly elliptically, right. The first box in my choice cascade is what’s your winning aspiration? So, what I say is, in that box, you’ve got to say what your aspiration is, and have that aspiration translated into goals that you will measure yourself by.

Now, there are good goals and bad goals. The good goals are goals that are consistent with the strategy, right? So, if you are Four Seasons, and your strategy means giving the guests an experience that makes up for what they left at home or at the office, you better have a goal to have customers love your experience and have high customer satisfaction. If that isn’t a way you’re measuring yourself, then you’re probably just fooling yourself on that being your whim.

So, you got to figure out what the strategy requires and have goals that are consistent with that. That having been said, there’s not a particular this goal or that goal is great, other than I do believe, as I said before, that where you’ve chosen to play, you don’t want to be second, right? You want to be more prominent than any of your competitors where you’ve chosen to play.

But if I step back and just ask, what do I think makes for a successful business long-term? Why is Southwest Airlines successful, very long-term, 50 years of success? Why is Procter & Gamble successful for so long? Why is Four Seasons successful for?

I believe that it’s because they have human friendly systems? By that, I mean, there are no people in their system that are being exploited, so that they’re succeeding by exploiting someone. Costco would be another example of a long-term, whatever. They treat their customers with respect, their employees with care, their suppliers with a relationship aspect, the environment, with respect.

Those are all things that I think make a business strategy more resilient over the long-term. Because there’s nobody out there, other than their competitors, who would last after their position, who say, I’d like to take those people down, right? Their employees aren’t saying, I wish this company would start failing, because they’re treating me like crap.

Four Seasons, they’re crazy. Their voices are like, I love my company. This is great. It’s a wonderful, wonderful place. Their suppliers say the same things. The places in which they operate say the same thing. The people who own the hotels Four Seasons just manage them. The people who own them make a lot of money, because they treat them with respect.

That’s a feature of strategy that I think gets underplayed. And so, people will say, oh, we’re going to measure it by how much shareholder value we create. Good luck to you on that. Let’s get back to Aristotle, one of my favorites, Peter Drucker and Aristotle are probably my favorite two thinkers in the history of the world.

And Aristotle way back 2400 years ago, he said that if a… no, in those days, they only talked about men, this would apply to women as well. But he said, if a man sets out in life to be happy, he’s not likely to end up happy. If instead a man sets out to lead a good life by which he meant a life of servitude to his fellow citizens, he’s likely to end up happy.

That’s what I believe about companies. Companies that are trying to make the world a better place by being good to the rest of humanity, I think are more likely to create shareholder value than the companies that say our job is to create shareholder value. Because who jumps out of bed, who leaps out of bed in the morning?

I’m going to work to create shareholder value. No way. What customer wants to be supplied by somebody who they know, their only interest in life is creating shareholder value. This is not motivational, this does not help the company succeed, being a great company, being Costco, right? A retailer in the United States, who for whom minimum wage is completely irrelevant, right?

The lowest paid people at Costco make over 20 bucks an hour, but $22 an hour when minimum wage in some of their jurisdictions is $9 or 10 an hour. And you could say, how can you possibly… and there is a club store right there in the low-price tier. How can you get, like twice as much for all the people? How can this possibly be?

Yeah, James Sinegal, founder of Costco would say, easy, easy, right? I want my workers to not be worried about putting food on the table, paying their mortgage. I want them to come to work excited by life, excited by the possibilities, that’s by the way why I don’t hire any outsiders into management, they all come up from within. So, anybody who starts with 22 bucks an hour can end up being the CEO of the company.

Roger Martin:

He’s got a view of how to make the whole system work for everybody. And guess what, right? He’s the most, one of the very most successful retailers in the entire country doing things that people would say can’t be done. You cannot pay twice for your employees what it costs everybody. This is retailing, guys, this is people with clerks, checkout, cashiers, you cannot do that. Yes, I can. Yes, I can. And in fact, I’ve been only been doing it for about 30 years and meeting all of you.

So, having that more expansive view of how to have a system work for everybody, I think is a key to having a great strategy.

Roger Martin:

How about three things? If you’re interested in the subject, I did read a book with A.G. Lafley, the then CEO of P&G, called Playing to Win. I think that’s a worthwhile book.

Roger Martin:

Yes, yes.

Roger Martin:

Thank you.

Roger Martin:

So, do that. If you’re a real nerd, and after that, you want more of my Medium series, so I am writing a series. I’m on my 26th straight week writing a medium piece called Playing to Win Practitioners Insights that are supposed to be for practitioners. Some insights on strategy and just go on medium and look for Playing to Win, and you’ll see it all. There are all linked back to that.

And if you want still more, just go to my website, which is www.rogerlmartin, my middle initial is L, .com. And there’s a whole section on strategy there with a probably, oh, geez, there’ll be over 100 articles I’ve written on strategy there. And you can just certainly through them and see what strikes your fancy.

So, those would be the things that I would say are nice follow up to this.

Roger Martin:

Hey, it really was a pleasure. You really know a lot about strategy, and it was fun to have the conversation anytime.

Roger Martin:

Not at all, take care.