This article is an excerpt from the Shortform book guide to "Playing To Win" by AG Lafley. Shortform has the world's best summaries and analyses of books you should be reading.
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Is your business part of a competitive market? How can you beat your competitors and become the market leader?
There are two main strategies for winning your chosen market: cost leadership and differentiation. Different companies have different strengths that contribute to their ability to excel in unique ways. For instance, small companies can often provide a more targeted, boutique service (differentiation) while larger companies can often deliver quality products at a more competitive price point (cost leadership).
Let’s take a look at each strategy in more detail.
Winning the Market
How do you succeed in your chosen markets and beat your competitors? You need to create sustainable value for customers.
In their book Playing to Win, Lafley and Martin say that there are two main ways to harness your strengths and find victory in your chosen market: cost leadership (beating your competitors’ prices) and differentiation (offering something your competitors don’t).
(Shortform note: In Purple Cow, Godin makes the case that the only way to succeed is with a remarkable product or service that attracts attention. He uses IKEA as an example of standing out through cost leadership: By selling mass-produced, disassembled furniture in easy-to-stack boxes, the company greatly reduces production and shipping costs. As a result, IKEA can sell furniture much more cheaply than its competitors. Though IKEA is a large company today, originally it was innovation rather than size that allowed it to beat the competition on prices.)
Strategy #1: Cost Leadership
In this approach, you win by selling a similar quality product at a cheaper price than your competitors.
Lafley and Martin say that if three companies have products that are essentially the same, customers will buy the cheapest of the products. Companies that spend less to make their products have more flexibility on pricing. Therefore, the company that can make the product most efficiently can sell it at the lowest price and control the market.
Furthermore, according to Lafley and Martin, the company that makes the product in the cheapest manner can use this advantage in other ways. For example, the company could instead sell its product at the same price as its competitors and use the extra profit to pay for bigger marketing campaigns or more prominent shelves at the store, thereby increasing sales.
(Shortform note: In extreme cases of cost leadership, large retailers will drive their competition out of the market by intentionally setting prices so low that smaller companies can’t possibly match them. The large retailers absorb the temporary profit losses, while smaller companies can’t and go out of business. Then, once the competitors are gone, the large company raises its prices to recoup the losses and increase long-term profit. This particular type of cost leadership is called predatory pricing.)
Strategy #2: Differentiation
Lafley and Martin’s alternative to lower prices is having a product that consumers want more than others because it’s of higher quality or has better branding and more prestige. If it costs two companies the same amount to make similar products, but consumers like one more than the other, they’re willing to pay more for it. This leads to higher margins that companies can then use to increase their advantage through higher-priced marketing campaigns or better placement in stores.
Selling a quality product can also help develop loyalty, which makes a company less vulnerable to the whims of the market: Loyal consumers believe that a particular company adds value to their lives, so they don’t shop around as much.
|The Elements of Brand Loyalty|
Brand loyalty has two main components:
Popularity: People assume that the top-selling brands must be the best quality, and they become loyal to those brands without exploring other options.
Personality: People are attracted to brands when the advertising and presentation matches their personality, or how they see themselves. For example, Red Bull and Monster are two popular brands of energy drink—Red Bull advertises with silly, cartoonish commercials, while Monster presents itself as intense, athletic, and powerful. By using two different approaches, these brands capture different sections of the energy drink market.
Employing These Strategies
Sometimes, Lafley and Martin add, a firm can use cost leadership and differentiation strategies at the same time—driving down the cost of manufacturing and keeping their prices low while still driving up comparative quality. However, this is difficult to pull off unless your company already dominates the market to the point that it can afford to split focus among two different strategies, so most companies have to choose one strategy or the other.
Lafley and Martin point out that companies aiming to be cost leaders must strategize and sacrifice differently than companies that are aiming to be differentiators:
- Cost leaders prioritize cheap production and low prices, so they might alienate customers who are interested in something that’s unique or different.
- Differentiators prioritize building the brand to be customer-friendly, fresh, and attractive. This often results in more expensive products, which drives away customers whose primary concern is cost.
|Counterpoint: Amazon Successfully Pursues Both Strategies|
Amazon is one example of a company that manages to be both a cost leader and a differentiator. In The Everything Store, which tells the story of Amazon from its founding in 1994 to the 2010s, journalist Brad Stone explains that founder Jeff Bezos has an “obsession” with customer service. However, for Bezos, part of serving the customer is pricing the product as low as possible. That’s why, in addition to looking for other ways to boost customer satisfaction, Amazon is always on the lookout for ways to reduce its prices—including (according to Stone) predatory and legally questionable practices to avoid taxes and drive competitors out of the market. While maintaining cost leadership, the company differentiates itself by using technology and continuous innovation to meet customer needs.
Its success as both a cost leader and a differentiator has made Amazon a regular in the Fortune 100, as well as one of Fortune’s “Big Five”—the five most influential tech companies in the US. This example shows that it’s possible (if difficult) to excel at both strategies, but doing so successfully can give you an enormous competitive advantage.
Strategize at Every Level
Lafley and Martin warn that some companies think only workers who are customer-facing need to understand and employ strategy. However, having winning strategies at every level of the organization, both outward-facing (like sales) and inward-facing (like product development), will help any company succeed, regardless of whether you’re trying to be a cost leader or a differentiator. Therefore, every part of your business should consider the “where to play” and “how to win” questions we’ve previously discussed.
For an example of what it looks like to strategize at every level, Netflix CEO Reed Hastings took an exceptional approach to company strategy by encouraging every single Netflix employee to innovate and contribute to the overall plan.
In No Rules Rules, Hastings explains that there were three steps to this process:
1. Hire the right people—at any cost. Hastings’s strategy for Netflix was based on employee independence and autonomy. In order for that strategy to work, he needed to hire trustworthy people who wouldn’t abuse their privileges.
2. Encourage open communication and feedback at every level. Hastings taught his employees how to give and take feedback effectively, then encouraged them to constantly provide feedback to him and to each other.
3. Remove employee restrictions. Hastings removed top-down controls like strict approval processes (while still providing guidelines to prevent abuse). His employees were not only encouraged but expected to take responsibility for themselves and their own projects.
According to Hastings, these three steps—along with a company culture of innovation and accountability—empowered Netflix’s highly skilled employees, which fostered the ingenuity and adaptability that enabled the company to grow into the streaming giant it is today.
Lafley and Martin explain that some companies gain such a significant competitive advantage that they’re able to push their competitors almost entirely out of the arena—consider Google and Amazon, which have no serious competitors in their respective markets.
However, the authors warn that markets change constantly and strangleholds don’t always last. That’s why even ultra-successful companies can’t afford to rest on their laurels; they must constantly create and employ new how-to-win strategies so they don’t get overtaken by new and innovative competitors.
(Shortform note: In contrast to Netflix’s constant innovation at every level, Blockbuster Video is a perfect example of a successful company that grew complacent. In 2000, the then-CEO of Blockbuster had a chance to buy Netflix for $50 million. Thinking that Blockbuster was comfortably at the top of the video rental market, and that Netflix was a harmless novelty, he declined the offer. Just 10 years later, Blockbuster declared bankruptcy—Netflix and similar services forced it out of the market it had once dominated.)
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- Why the cascade strategy will help you become victorious in your chosen field of play
- Why you should make every choice with the purpose of not just competing, but winning
- How to develop a system of decision-making for your company