Thursday, December 13, 2012

Strategic Planning Analogy #479: Playing to Win

Back in the very early days of personal computers (before the IBM PC), there were a lot of small upstart companies that wanted to get into the business.  Most of them said something like the following:

“We may not be big enough or strong enough to become the market leader, but we think we can get about a 15% market share.  And that should be large enough to make a good return on investment.”

The problem with this approach was that:

1)      The leaders would already have about 50% of the market share in personal computers.

2)      There were about a dozen firms who wanted to get about 15% share out of the remaining 50% of share available (that math doesn’t work).

As a result, most of these upstart companies only got about 5% share or less.  This was insufficient for profitability and they quickly went bankrupt.

Later, when IBM entered the market with the first “PC” (and the first software from Microsoft), even most of the market leaders, like Radio Shack and Commodore, had to give up the business.

If you look at the strategy of most of the early entrants to personal computing, they were not playing to win.  Instead, they were playing to exist.  The idea was they did not need to aggressively pursue superiority in positioning or features.  Instead, these companies felt that all they needed to do was “show up”, and the rapidly growing market would have enough space to absorb them at about 15% market share.

That approach was a dismal failure.  By not playing to win, they ended up with nothing.  When IBM entered the market, it was aggressively playing to win—and it was the clear winner for quite awhile.

When designing a strategy, are you approaching the market more like those early entrants (just show up and hope to get sufficient share) or like IBM (go big and play to win)?

The principle here is based on Law #12 of my 22 Laws of Strategy.  This is the Law of Winning, which says, “If you do not play to win, you will lose.”  Playing to win requires:

a)      Designing and Achieving a Winning Position (unique, desirable)

b)      Aggressively Pursuing that Position in the Marketplace

c)      Developing a business model so that you can have superiority in your position and still make money.

This is not what those early personal computer manufacturers did.  They built “me-too” products using similar business models and shipped them out to whomever would buy them.  And by not playing to win, they lost.

IBM played to win.  They developed a superior product.  They installed superior software (MS DOS).  They aggressively advertised the brand (to the point where PC became a generic name for the whole category).  They put the full force of IBM behind it.  And they became a winner.

The Rule of 1.5
If anything, the importance of playing to win is even stronger in today’s economy.  One reason why “playing to exist” no longer works well is due to the rule of 1.5.  Back in the 1980’s it was called the rule of three, which stated that most businesses had 3 strong players:  a leader, a close challenger, and a rebel/innovator.  The prime example used back then was US colas: Leader=Coke; Challenger=Pepsi; Rebel/Innovator=RC.

However, over time, this paradigm has mostly disappeared.  The reason can be found in a 1995 book called the Winner-Take-All Society, by Frank and Cook.  The book showed that in industry after industry, the advantages of leadership were getting stronger and stronger.  Challengers were at an ever greater disadvantage.  Brands were beginning to realize that it made more sense for a challenger to reposition itself as a leader in different market position than to go directly after a leader.

The net result is what I call the rule of 1.5.  Now most markets have a single strong leader with only minor challengers.  Think about US retailing.  Where it used to be Best Buy vs. Circuit City, it is now only Best Buy.  Where it used to be Bed Bath & Beyond and Linens-N-Things, it is now just Bed Bath & Beyond.  And who is the strong challenger to Walmart or Amazon?

Even in colas, Coke has increased its dominance over Pepsi to the point where its greatest challenger is now Diet Coke (which leads in a different position).  And RC cola barely exists anymore (and survives via association with Dr. Pepper, a leader in its own category of beverages).

That is why you need to play to win, because there is no guarantee that there will even be room for a profitable number 2 or 3 or 4.   Take it from me…when I was working at Best Buy and founder Dick Schulze was still running the show, there was no doubt that he was aggressively and passionately playing to win.  And win they did.

Metcalf’s Law
If anything, the digital economy with the internet and social media has accelerated this phenomenon.  It was first described as Metcalf’s law, which states that the value of a network is equal to the square of the number of connections to that network (or U=y2).

The new digital/social/mobile economy is all about building networks.  And the bigger your network, the more powerful you are.  Look at Facebook.  It did not get its high stock valuation due to current profits.  The high value was due to Metcalf’s Law and the millions upon millions upon millions of users in its network.  Linked in and others are also following this principle and building the largest networks of members in their space.

Once you build up a huge network, there are incentives for people to join your network and stay in your network.  It is referred to as “stickiness.” Hence, the networking leaders tend to become even stronger leaders and the challengers become weaker.  Who is the major challenger to Facebook?  Can a new competitor just “show up” and expect to gain a large following in Facebook’s space?

Part of the appeal of Apple is the network of partners and features it puts around its products.  The apps, the app store, the interface connections, the partnership deals and so on make the sum of the network greater than the parts, and makes it harder for any single player to challenge that network.

If you do not play to win in creating the network, you will ultimately lose in this economy.

The disproportionate advantages to being the market leader are huge and getting even stronger.  It is getting to the point where if you are not the leader, you will be hard pressed to even make an adequate profit.  As a result, every business needs a strategy built around leadership—a winning position in desirable space.  In addition, you need to aggressively pursue gaining and maintaining that position.  Others are also out there fighting to win, so if you are not equally fighting to win, they will become the winner instead of you.

Just showing up with a me-too product and hoping that the market is large enough to get you sufficient market share is no longer a viable strategy (if it ever was in the first place).  Those “just showing up” market shares are never as large as you think they should be and rarely lead to a viable business model.  Be aggressive and play to win or don’t play at all.

They say that imitation is the sincerest form of flattery.  That may be true, but imitation is not a very good approach to strategy.  Following the leader positions you as a follower, not a leader.  If you do not have a business model and an aggressiveness to get to a place where you can lead (or win), then all you have is a blueprint for losing.  The world already has a Facebook, Amazon and Walmart.  It doesn’t need an imitation of them.  Instead the world needs new positions to be conquered.  Are you scaling the mountain of imitation or a mountain where you can be first to the top and win? 



  1. Gerald Nanninga,
    A great post as usual as it covers new trends and reformulation of some rules.
    One issue still puzzles me in this post. To explain let me start with an analogy. I prefer small hotels when not on business trips because I find staff friendlier and the atmosphere more relaxing. When on business, I stay in hugely networked hotels where I feel alien. Making big networks make me feel isolated. Small networks provide me with the inner peace and allow for greater mobility. Big networks are rigid and the feeling of belonging dries away.
    Is it better to have a huge network all the time?

    1. Ali Anani;

      A big network does one little good if one is not well connected to it. Large networks like Facebook and Linkedin and not very useful to the person who has only three friends. So it is not only the size of the network, but the quality of the relationships to the network. The quality of your small hotel connections was superior to those at the large hotel, so you got better network effects with the small hotel.