How CEOs Can Get It Right

In partnership with long-time friend Roger Martin, Dean of the University of Toronto’s Rotman School of Management, A.G. (Alan George) Lafley, 65, advances his best thinking on a subject both familiar and misunderstood by business leaders. In Playing to Win: How Strategy Really Works, the former CEO of Procter & Gamble and 2006 Chief Executive of the Year, argues that too many firms confuse strategy with having a vision or plan, when it should be about identifying choices for how to win. Further, Lafley and Martin say attention to strategy is more crucial now that many built-in advantages for American competitiveness have largely dissipated.

Under Lafley’s leadership P&G’s sales doubled, profits quadrupled and its market value increased by more than $100 billion. In addition, its portfolio of billion-dollar brands, such as Tide, Pampers, Olay and Gillette, grew from 10 to 24 as a result of the strategic choices he and his team made. Not that everything he touched turned to gold—in his previous book, The Game Changer, which he co-authored with Ram Charan, Lafley cited no fewer than 11 innovation “failures,” which ranged from Fit Fruit and Vegetable Wash to a Vidal Sassoon Hair Care product that flopped due to inadequate consumer testing.

A special advisor at Clayton, Dubilier & Rice, a private equity partnership, and director at General Electric and Legendary Pictures, Lafley draws on his rich experience as well as the ideas of Warren Buffett, Michael Porter, and even Wolfgang Puck in demystifying his subject. Recently he spoke with Chief Executive in New York.

Larry Bossidy made a great impact in management thinking with his book Execution. Some argue that strategy is all well and good; but unless you execute, you’re nowhere.
Bossidy’s is a great book. The part where we’re in violent agreement is [that] the only strategy the market, your customers [and] your competitors ever see is what you execute. But we say explicitly in the first chapter of the book that, without choices, any execution won’t do in the sense that it won’t deliver as consistent, as reliable and as sustainable performance and results. So, yes, in the end, nothing happens until execution. But strategy guides and enables execution. Strategy allocates capital and it allocates people. You make choices about where to play, how to win, what your core capabilities will be and how you’re going to manage and measure these.

Strategy is conceptually simple. It’s about positioning your company, your product line or service offering preferentially with customers. It’s about gaining competitive advantage. It’s about creating value. Bossidy talks about some of the hows and those get into how you connect it to your operating plan. We talk about strategy deployment through an OGSM: objectives, goals, strategies and measures [approach]. Larry talks about putting your talent against your strategic choices. So, I would argue we’re not that far off.

Who should be doing strategy? The CEO? The CEO with the team? The CEO with the board? The strategy consultants?
At the company level, the buck stops with the CEO; and increasingly, the buck stops with the CEO and his or her board because beyond governance, risk management and succession, it’s the fourth major responsibility of the board. For example, who’s at fault at JCPenney? Are you going to lay it all off on the CEO, Ron Johnson, or does the board own some of this because, for whatever reason, they didn’t take the time to think through critical elements of strategy?

The CEO and his or her team may selectively use outside resources, but they need to be brought in to do very specific things. For example, analysis of an industry that you’re contemplating entering will be useful—but only because it’s not your core businesses. You never want to delegate the choice making, the decision making and the strategy to the consultants. That’s a huge mistake.

In your experience, when does it make sense for the CEO and perhaps his team to go offsite, leave headquarters and go off to some retreat to drill down on strategy?
Don’t think of this as an event. Think of it as part of the work that you do every day. So, when you do go offsite, it’s part of an ongoing process. Getting away and shutting down the day-to-day, turning off these things [points to his iPhone and Blackberry], can help you get started. Take a big company like GE or P&G; we always had a few fix-it-ups. There are always one or two or three businesses that are struggling. And we had start-ups. We either had acquired businesses that we were integrating and starting up, or we had businesses that we were creating and starting up.

When you’re starting something up, it makes sense to go off somewhere, where you at least get away from the day-to-day for two or three days. The longest offsite I ever did was one week with the team. I wanted them to look ahead five to 10 years and hypothesize two or three really big choices we were going to have to make in order to position ourselves in a stronger place a decade from now. Most of the time, the strategy horizon for us was three to five years. I work with a lot of smaller companies, private companies now and I think it’s the same for them.

How should smaller, simpler firms—a maker of industrial valves, say, or an auto parts supplier—approach strategy when they don’t have the abundant resources or in-depth talent of a P&G?
In these kinds of businesses, the simple questions matter a lot. Often, they’re not really crystal clear on what “winning” means. For example, we buy a lot of businesses that are just priced wrong. They price off cost. It’s a common mistake. Then, when they face inflation, their input costs become volatile. Suddenly, pricing becomes more strategic. Should you price to a market or price to a customer’s want or need? In every market, there’s a commodity end of the market and there’s a value-added segment of the market. The first thing we look at, when eyeing a business, is their revenue strategy and their pricing strategy. Many times, the two are inconsistent, which we find baffling.

So, what is winning? Is it growing with the market? Is winning growing 1 percent or 2 percent faster than the market? Is winning growing my volume market share, or growing my revenue share or is it growing my share of the value that’s created in the market? Lots of people get confused by that. They chase volume. They may or may not do as well with a revenue share. Lots of times, they’ll chase volume, lose revenue share and lose share of value creation. That’s sort of what happened to Dell. They were the volume leader in PCs; but because they sold their PCs at a lower price on average and because everybody had duplicated their fast, flexible, low-cost supply chain by outsourcing to basically the same or similar suppliers in Asia, they ended up with a cost base that was way too similar to their competitors and they ended up with pricing that was less than their competitors.

The biggest mistake is thinking that winning is improved short-term financial results. Warren Buffett will tell you [that] it’s long-term cash flow. But Warren will also tell you it’s the ability to create a strategic position. He likes businesses that have what he calls moats around them. That’s called positioning yourself in a preferred position. But the first question that most companies should ask on where to play is, who? Who is my best customer? Who should be my best customer? [This is] because the customer you have today—take the valves guy, take the auto industry guys—may just yank [you] on price every chance they get. That’s why it’s important to know who your best customers are.

Define best.
Best, in my view, is whether they are more loyal to you. Are they willing to pay a premium for your product or for some bundle of service and products that you provide? If [they] were willing to buy Tide when it was on sale and [they] were also willing to buy it when it was at regular price. [They] pretty much decided that [they] weren’t going to compromise on laundry detergent. It’s a good value; [it] performs for me.

What companies have the best castles and moats?
First, no castle lasts forever. There’s an interesting case in play now. I’ll bet the iPod was a success beyond Steve Jobs’ dreams because the Japanese had failed with MP3 players. They had the technology, but they didn’t get the human interface. He got the human interface and I bet he sold a lot more of those than he ever thought he would. But it’s going to be interesting to see what happens. I’m carrying around a Dell computer and a Blackberry, but [I] also have an iPad and an iPhone. I’ll be playing with a Galaxy in about a week because I’ve got to look at it side-by-side. Many of my friends say the Galaxy does everything one needs. It’s a great smartphone. But I’m probably not going to move off of the iPad just yet because I’m comfortable with it. It works. It does everything I need it to do and more.

Walmart has a good moat, although the dollar stores and others have chipped away from underneath. Are they a huge threat to Walmart? No, but they’re probably an irritation. And they cut into Walmart’s primary customers, the people who earn under $40,000 a year.

Let’s stay with retail for a moment. Walgreens and CVS will remain a duopoly; it is a segment that is going to grow because of demographics and healthcare consumption. They have an easier road ahead. Eckerd got bought out. Rite-Aid’s just barely hanging on. Most drug stores have been consolidated out of business. Costco’s got a very good position. Their share of that segment is very strong. There’s a duopoly in DIY with Home Depot and Lowe’s.

Let’s leave retail. Vespa USA has a very strong moat, as does Ferrari and Porsche. Could Porsche sell more cars? Probably. But I’m not sure how many more they want to sell because BMW has become a volume producer of cars, and it’s tougher. When we broke up Ma Bell, the [regional Bell operating companies] (RBOCs) built regional moats, and now it’s come full circle back to Verizon and AT&T. Not to use too many P&G examples, but Gillette built an impressive moat, particularly with its Venus brand aimed at women and its Oral B products. When I worked on the Tide brand early in the 1980s, it had a 20 percent market share in North America. Today, it’s closer to 40 to 50 percent.

Do you reckon your successor has taken any of these ideas on board in sorting out P&G’s recent difficulties?
If you listen to Bob [McDonald] and Jon Moeller [CFO], especially in the last six to nine months, they’ve gotten a lot clearer about the choices that they’re making. And if you cut through it all, they’ve prioritized certain categories in certain geographies and emerging markets and [are] driving productivity alongside innovation. The results have improved over the last six to nine months; they have become clearer about what they were trying to do. Some were anxious that they were maybe trying to do too much. We discuss a classic, flawed strategy in our book: trying to be all things to all people, trying to serve all [of] your customers at the same time [and] trying to take on all your competitors at the same time. That’s risky.

J.P. Donlon: J.P. Donlon is Editor Emeritus of Chief Executive magazine.
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