Decoding the Strategy Choice Cascade
Author Answers to Reader Questions
by Roger Martin, 8 min read, published Feb 20, 2023
Source: Roger L. Martin, 2023
This piece was spurred by a reader question about the order of the boxes in the Strategy Choice Cascade. It is one of many great questions I get about the structure and functioning of the five boxes in the Cascade that deserve answers. Hence, I am dedicating my 11th Year III Playing to Win Practitioner Insights (PTW/PI) piece to Decoding the Strategy Choice Cascade: Author Answers to Reader Questions. You can find the previous 121 PTW/PI here.
The Range of Questions
I get three kinds of questions about the Strategy Choice Cascade:
First are questions about the number of boxes. Why are there five boxes? Isn’t strategy the first three (Winning Aspiration (WA), Where-to-Play (WTP) and How-to-Win (HTW) and execution the last two (Must-Have Capabilities (MHC) and Enabling Management Systems (EMS))?
Second are questions about the order of the boxes. In particular, why is WTP before HTW and not the other way around?
Third, are questions about the shape of the diagram. Why is it a downward stair-step? Why not a circle? From some Agile aficionados, isn’t this the strategy equivalent of the dreaded waterfall approach in software?
They are all good questions that deserve answers!
Number of Boxes
Mine is a minority view on this front. In the field of strategy, the leading market share goes to people who see strategy as limited to the first three boxes — WA, WTP, and HTW. Second is people who see strategy essentially as one box — as the organization’s vision, mission, purpose, or aspiration, whichever term they like most. My view is trailing in current usage, but thankfully has been growing share ever since the publication of Playing to Win ten years ago!
Strategy as a single box is popular with folks who have a romantic view of strategy. All you need to do is specify your vision, mission, purpose, or aspiration, and everything else will take care of itself. That would, of course, be lovely. But I am afraid that the world isn’t quite that friendly or simple, and that is why most ‘strategies’ generated aren’t worth the paper on which they are printed. As my friend AG Lafley often says: Hope is not a strategy!
Strategy as three boxes — WA, WTP, and HTW — is the most popular and I think the popularity stems from its attractive capacity to let strategy people — many of whom have an intellectual superiority complex — off the hook. They can always blame ‘bad execution’ for their unrealistic strategies if they only have to think about the first three boxes.
I agree that the first three boxes are very important. In fact, I call the combination of WTP & HTW the ‘heart of strategy’ and argue that you can’t have a great strategy without a great heart thereof. But for me, ever the practical guy, the last two boxes are the essential ‘reality check’ for strategy. Those two boxes are the moral equivalent of the ‘check number’ the credit card companies add as the last digit of your card number (based on the Luhn Algorithm). It enables merchants to automatically ascertain whether the card number presented to them is or is not legitimate.
My view is that the first three boxes of strategy comprise merely a draft until you determine two additional things. First, your MHC passes the ‘can’t/won’t test’ — i.e., that competitors either can’t match your key capabilities required to win where you have chosen to play, or they won’t because doing so would hurt them in other ways. If instead, your MHC are identical to those of key competitors, it will be a mediocre strategy in action. That is because if your first three boxes turn out to be profound, then as soon as your competitors see that is the case, they will match your WTP/HTW combination and eliminate any advantage you have. Second, you can demonstrate that you can put in place the EMS that will enable you to build and maintain those MHC.
That is why I think of one-box strategy as delusional and three-box strategy as lazy, and why I think that if you want a strategy that will guide you to real advantage in the marketplace, you need all five boxes.
Order of Boxes
The order of the boxes in Strategy Choice Cascade is driven by two considerations.
First, I ordered the Cascade based on level of abstraction running from the upper left to the lower right. The thinking and content of WA is the most abstract: what is the overarching motivation for the organization? The thinking and content of EMS is most concrete: what management systems do we need to put in place to support our MHC?
Second, and driven in part by the first, the order I chose makes the Cascade logically tractable. If you don’t have a draft WA, it is hard to even begin to think about WTP/HTW. The WTP/HTW choice would be completely unbounded, and strategy is an exercise of picking the choice that is most attractive from the universe of choices that are possible. That requires progressive bounding of your potential choices as you go. Likewise, without a draft WTP/HTW, you don’t have any frame to guide your MHC choice. And, since the job of the EMS is to build and maintain the MHC, you can’t think usefully about EMS until you have a draft MHC.
Hence the order runs from higher abstraction to lower abstraction in a way that enables sensible logical nesting.
A specific question that I get concerns the ordering of WTP and HTW: Shouldn’t HTW be before WTP? I assume that the question comes from readers who have sworn allegiance to the ‘resource-based view of the firm’ because they were taught it at business school. RBV (as it is called) arose out of the business academy in the mid-1980s in response to the frustration of academics with the success of Mike Porter’s view of strategy. Jealousy is the most powerful driver in the academic world! Because Porter was so annoyingly successful, strategy academics closed ranks on an anti-Porterian view, so much so that now it is virtually impossible to get a tenure stream appointment in the strategy department of a top 50 North American business school without pledging full allegiance to RBV. So much for ‘academic freedom.’ It is the same freedom that Henry Ford offered: you can have your car in any color as long as it is black.
In RBV, strategy radiates out from capabilities. The theory argues that strategy involves accumulating resources that are valuable, rare, inimitable, and non-substitutable (termed VRIN). These VRIN resources enable you to win.
Even though it has been around for almost 40 years and strategy academics love it, RBV just hasn’t broken through into the world of practice. Since I began strategy consulting in 1981, I have been consulting on strategy the entire time that RBV has been around as a concept, and I have only seen it mentioned once in those 40 decades by one client — and that one, a low-level manager in a strategy department, not a CSO or CEO. To me, that is stunning, especially for a theory that has absolutely dominated the teaching of strategy over the past quarter century.
The problem for the theory is that a resource is only a resource in a specific place behind a specific strategy. Hence you need a theory for where to focus your resources so that you know what resources to build for that particular place. RBV provides no help for that question, so while theoretically titillating for strategy academics, it isn’t useful for strategy practitioners (which, of course, doesn’t deter strategy academics one bit — they keep teaching it to unsuspecting students). The need to tailor your HTW to the needs of a particular WTP is why that WTP comes before HTW in the Cascade, and similarly why HTW comes before MHC.
That having been said, WTP and HTW need to be a matched pair. A WTP choice is useless without a HTW for that WTP. Likewise, a HTW is useless without a WTP on which to focus. The single biggest problem with people using the Playing to Win toolbox is that they tend to make lists of WTPs, then choose and lock-and-load on what seems to be an attractive one, and only then start to think about HTW. That approach only rarely generates a useful strategy.
And that leads to the final set of questions…
Shape of the Diagram
The core structure of the diagram is an upper left-to-lower right flow illustrated by the solid arrows and a flow back in the opposite direction illustrated by the dashed arrows. The people who want a circle generally object to the directionality of the Cascade. The argument that they make is since you have to toggle back and forth shouldn’t it be a circle in which each of the five elements is equal, not subordinate or dominant? And shouldn’t you be able to start anywhere?
No, they are not logically equal, as I have discussed above. They are logically nested, even if they must be considered as a system. That is a fundamental tension in strategy — it is holistic, but it has parts. Both need to be embraced.
And it matters where you start. That is the problem with RBV. It starts in an unproductive place — capabilities. There is a logical nesting of the exploration that must be carried out and the cascade provides that guidance.
That does lead to the question of whether that directionality makes it a waterfall process, analogous to the waterfall approach in software, against which the Agile movement was a reaction. Is, therefore, the cascade anti-Agile? I don’t think so — because of the dashed arrows. As with Agile, the Cascade calls for iteratively revisiting assumptions and logic as more information becomes available, not locking and loading on one element at a time (which would be the case if the Cascade only included the downward solid arrows).
Practitioner Insights
Take each of the five boxes very seriously. Don’t spend disproportionate time on first three boxes. That is a classic strategy mistake. You need to perform the reality check for yours to be a lasting and effective strategy.
Toggle back and forth among the five boxes. The heart is the WTP/HTW combination, so don’t give it short shrift. Don’t spend disproportionate time and energy up front on WA. See it as simply guiding you in a general vector. As you explore WTP/HTW possibilities, toggle back to refine your WA so that there is fit among the first three elements.
Then toggle down to the reality check to see whether your WTP/HTW can be put into action, whether it is strong and will last. Check whether your MHC and EMS are truly distinctive from those of competitors in your WTP. If not, toggle back up to the heart of strategy to explore possibilities that might be stronger. And then up to the WA and back down to the reality check until all five elements fit together and reinforce one another.
That is how to use the Strategy Choice Cascade and why it has the five boxes it has, in the specific order, with the particular shape.
Playing to Win & Agile
How to Make the Most of the Combination
by Roger Martin, 6 min read, published Jun 21, 2021
I am frequently asked a consistent genre of question: How, if at all, does concept x or framework y fit with Playing to Win. For instance, how about Integrative Thinking, Design Thinking, Pay for Performance or Agile? I have already written on the first three in the Playing to Win/Practitioner Insights (PTW/PI) series. So, I have decided to make my 38th PTW/PI on Playing to Win & Agile. (Links for the rest of the PTW/PI series can be found here.)
What is Agile?
For the those who aren’t already aficionados, Agile is software development doctrine that dates from the release of The Agile Manifesto in 2001. The Manifesto espouses four values:
1) Individuals and interactions > processes and tools
2) Working software > comprehensive documentation
3) Customer collaboration > contract negotiation
4) Responding to change > following a plan
These in turn are reflected in the 12 Principles of Agile pictured above.
Agile was a reaction to the standard ‘waterfall’ approach to software development at the time. The Agile founders saw waterfall as an unhelpfully linear, inflexible, and internally centered way to develop software, and in response developed an iterative, flexible and user centered alternative.
As is evident from the wording of the Principles, Agile was an approach targeted specifically at software development (i.e., #1, #3 and #7 all mention software specifically). However, in large part through the work of the Scrum Alliance, the Agile approach has been applied more generally to project management of all sorts.
Sometimes Frosty
Sometimes Agile enthusiasts can be quite frosty about strategy. To some Agile/Scrum folks, strategy is representative of the great enemy, waterfall, which Agile seeks to slay. I must say, their concerns are not entirely misplaced. They focus on software development’s analog, which is strategic plan development. Their criticism is consistent with my criticism of most strategic planning as too linear, too process focused, too internally oriented, and too impervious to adjustments as learning occurs along the way. So, I understand the frostiness: it is largely deserved by the standard approach to strategic plan development. I argue for a very different approach to strategy across this Playing to Win/Practitioner Insights series. But it is not the normal practice, so the Agile frostiness is understandable.
My Frostiness
But I have my own frostiness when it comes to Agile and strategy. The Agile aficionados who see Scrum/Agile as a broadly applicable project management tool can wander into the territory of viewing Agile as a de facto strategy development process. That is, great strategy will emerge naturally if you simply listen to customers, expose them frequently to iterations of the offering, adjust repeatedly to take account of new learning from the client, and work in well-functioning, face-to-face teams.
That is where I part company, as I also do with many of the Design Thinking folks. No amount of listening to customers, short cycle iteration, self-organization/emergence, face-to-face working teams, and reflectiveness is, on its own, going to produce a robust strategy. That is despite my belief that strategy does have to start with customers, and that I am a fan of iterative prototyping and flexible processes that change with new information. But even with those things, you ignore the principles of strategy at your peril.
All those features are positive contributors to a better rather than worse strategy. But strategy requires understanding of the economic viability of your choice and the sustainability of advantage relative to current and potential competitors. I have seen far too many of both user-centered Design Thinking processes and Agile processes that have no concept of economic viability or sustainability relative to competitors, despite producing products/services or software that users like. Good strategies are always a subset of the range of possibilities that would make users happy. The ones you want are those that make users deliriously happy in a way by which you can deliver distinctively.
The fundamental strategy limitation of Agile is that the opposites of its basic premises are stupid on their face. (And the same holds as well for Design Thinking.) The core rule of strategy is that if the opposite of your choice is stupid on its face, it isn’t a strategic choice. Not listening to customers is stupid on its face. Not changing when change is required is stupid in its face.
If the opposite is stupid on its face, in due course everyone will do the smart thing. Reputedly, 90% of the Fortune 500 uses an SAP Enterprise Resource Planning (ERP) system. It has come to the point whereby not having an ERP system is stupid on its face. Having one is not a competitive advantage — since 90% of your competitors are likely to have one. It is just dumb not to do it. That is the trouble with winning. When a choice becomes obvious and it is doable for everyone, everyone does it. In contrast, strategy is the act of making choices whereby the opposite is not stupid on its face. That is what can lead to distinctive advantage.
I assume that in some industries, no competitor is doing Agile and by being Agile, you will have obvious advantage because everyone else is inflexibly ignoring the customer. So, do it while it lasts. But that is not the long-term answer.
The Long-Term Answer
The long-term answer is to combine the principles of Agile and Playing to Win. It is to do strategy in an Agile way. Start with the customer. But don’t just aim to serve the customer. Aim to do so in a way that enables you to be distinctive. Iterate with different ideas and approaches as you learn new things from the customer’s experiences with your prototypes. Keep working and working to build a unique solution that creates economics that work for your model and is difficult for competitors (existing or potential) to follow. If it is an idea that customers love — ordering pet food online — great, but you have to be able to make a case for why twenty other sites won’t pop up to sell pet food online (and they did!) in order for your customer insights to generate a useful economic model. Don’t assume that being Agile (or using Design Thinking) alone will provide you a competitive advantage that is worth having because it most likely won’t!
Practitioner Insights
If you are an Agile (and/or Scrum) aficionado, I encourage you to use the Agile Principles to enhance the customer-centric, iterative, and flexible nature of your strategy development. By doing so, you can make strategy development much more effective. However, be very careful to avoid getting seduced by the idea that meeting a newly discovered customer need will provide you with competitive advantage. It only will if you can build Must-Have Capabilities and Enabling Management Systems that competitors either can’t or won’t replicate. A strategy that doesn’t pass the can’t/won’t test isn’t really a strategy at all.
If you are a Playing to Win aficionado, pay attention to how to integrate the most valuable aspects of Agile into your strategy development process. Agile features including customer focus, responsiveness to changing findings and needs, iteration, business and technology people working together in a collaborative and sustainable manner, all contribute to better strategy development. Any strategy aficionado would be remiss in not taking advantage of applying these insights from the world of Agile to strategy development.
In the end it is a classic situation in which the right choice is to get the best of both rather than accepting a false choice of either being Agile or doing strategy. The answer is to integrate both for a superior outcome.
The Strategic Choice Structuring Process
Theory & Practice
by Roger Martin, 8 min read, publishedOct 14, 2024
Source: Roger L. Martin, 2024
I received a reader question recently: “You write a lot about the Strategy Choice Cascade in the Playing to Win/Practitioner Insights (PTW/PI) series, but not about Strategic Choice Structuring Process (SCSP). Do you talk about SCSP in Playing to Win?” It is a bit of a lazy question. A quick glance at the book would reveal that SCSP is the entire subject of Chapter Eight. But it got me thinking about making SCSP a little more prominent, which I do in this PTW/PI called The Strategic Choice Structuring Process: Theory & Practice. All previous PTW/PI can be found here.
Where is SCSP in PTW/PI?
The Strategy Choice Cascade is about the content of strategy — i.e., what the result of a strategy exercise should look like — while the SCSP is the process for creating a strategy. And while it isn’t true that it is missing from PTW/PI, I haven’t talked about it much, especially lately. I have discussed it just six times in the nearly 200 original PTW/PI pieces. Five of the six were in Year 1, and most of those weren’t about SCSP itself but rather the linkage between it and Design Thinking, Integrative Thinking, Scenario Planning, SWOT Analysis, and Boards of Directors, respectively. I skipped SCSP entirely in Year 2, I mention it in passing in the Year 3 piece on Business Model Generation, and nothing yet in Year 4. I have advanced SCSP a lot since the publication of Playing to Win 11 years ago, so it makes good sense to delve directly into the theory of practice of the overall tool and of each individual step.
Overall SCSP
Theory
Effective strategy choice requires a process that helps a company’s leadership — i.e., senior management plus the board — explore the logic of its existing strategy enough to compel itself to make a set of choices that solve its most pressing problems and take advantage of its best opportunities. It is ineffective for strategists (whether internal or external) to attempt to convince leadership to make a different set of choices. Leadership must convince itself for change — i.e., different actions — to truly happen.
Practice
SCSP is completely flexible in terms of required time. The first five steps can be done in a day if there is high pressure for action. The time required for Step 6 (Testing & Transformation) is entirely dependent on the risk profile of the company. If it is a venture-funded start-up with high risk tolerance, the step can be skipped entirely. If the company has lower tolerance, as with most big public companies, the time for testing can be adjusted accordingly.
1) Problem Definition
Theory
The place to start is with your biggest problem, the biggest gap between what you wish was happening and the actual outcome. Note, that can be a disappointing existing outcome, or an opportunity not seized. The current outcome is a product of all prior choices interacting with competitive environment. Hence, unless you want to depend entirely on luck — and hope is not a strategy — a better outcome requires a different set of choices.
This is a practical approach to development of strategy. Don’t start in some esoteric place like ‘we need a bold new strategy.’ Start with your biggest problems — and work on making them go away. That is the most powerful approach to strategy.
Practice
Remember, the purpose of strategy is to compel desired customer action. Hence, it is important to define the motivating problem from the customer perspective. “Our margins are falling” is defined from the company’s perspective. A better definition is: “Customers are no longer willing to pay prices that enable us to meet our margin goals.” That problem definition will help you determine what different choices you need to make to cause customers to act differently.
Don’t proceed further without checking with colleagues above and below if this is the problem they want solved. For example, if you are the CEO/Executive Management Team, check with the board the extent to which it believes this is the most important problem to solve — and modify if necessary. Also, check with your direct reports to see whether it resonates with them as well. There is no use working on a problem that only you think is important!
2) How Might We Question
Theory
For longtime readers, I have changed this from Frame a Choice — which seemed to confuse people — to create a How Might We Question. I borrowed this from the world of design with the intent of pivoting from the negative of ‘problem’ to the positive of ‘solution.’ It creates an objective function for the subsequent generation of possibilities. For example, in the above case, the question could be: “How might we engage with customers in a way that causes them to value our offering more highly.”
Practice
Remember to focus on the customer. It is not about our margins; it is about compelling different behavior from them. Yes, that might include cutting our costs — but not independent of causing the customer to take the actions we need. For example, if we cut our costs by the entire amount of the margin gap, customers would need to still behave the same way while we are spending less to serve them.
3) Possibilities Generation
Theory
To compel desired customer action, we need to generate multiple different ways in which we could make the problem go away, framed as different sets of choices on the Strategy Choice Cascade, and choose the most compelling one. I call them ‘possibilities’ not ‘options’ because the latter sounds too serious. At this point we want to generate the maximum breadth and creativity of possibilities for making the problem go away.
Practice
At this point, there should be no bad possibilities. When facilitating, don’t let anyone question whether we should include a possibility that someone has raised. Vetting of possibilities comes later. For this reason, the proponent of the possibility doesn’t need to supply supporting data, just the logic. Data comes later.
Each possibility must be fleshed out into a full cascade of choices. They can be rudimentary at this point (e.g. Enabling Management Systems), but they need to be expressed as a full set of strategy choices.
Finally, make sure that each possibility is connected back to the problem. It must be an approach that promises to solve the specified problem — not something else!
4) What Would Have to be True (WWHTBT)
Theory
Teams tend to disagree intensely on what is true, and when the focus is on that disagreement, strategy discussions tend to grind to an unproductive halt. In contrast, they almost always can come to agreement on WWHTBT. The reason is that asking WWHTBT instead of what is true separates the logic of a possibility from the data associated with the logic. If a team can agree on WWHTBT, it can focus productively during the next step of determining what data it requires to make a choice.
Practice
It is important in this step to show no interest in what people think is true because that will just create unproductive conflict. The focus needs to be on getting agreement on WWHTBT. Whether those features will or will not be declared true comes later. But if the team cannot agree on WWHTBT, it will never make a strategy choice to improve the status quo.
Be open to any WWHTBT — and put it up on the chart. But after you have sourced all the WWHTBT elements, ask for each of them: “If this single WWHTBT was shown to be not true, would you reject the associated possibility?” If they wouldn’t reject, then it is a nice to have not a need to have and should be removed as a WWHTBT.
5) Barriers to Choice
Theory
The thing that stops commitment and action are the elements that would have to be true that the team is not confident are true. These are the Barriers to Choice (BtC). To have the chance of moving forward with a possibility, the team needs to agree on the BtC so that it can work on addressing them. Unaddressed, the BtC will stop action being taken on any possibility — regardless of what team members say to appear agreeable in strategy meetings.
Practice
Focus on the BtC that are most widely felt. Usually, it is three (+/- one) that a meaningful number of team members see as BtC. But if only one team member feels very strongly that a given one is important, keep it on the list of BtC that must be submitted to testing.
6) Testing & Transformation
Theory
To commit to and take action on a possibility, the team needs to perform tests to determine whether each BtC is in fact are currently true or if there is a plausible transformation path to making it true. Both are positive outcomes. For some strategy choices, the WWHTBT are indeed true. But for many great strategies, the things that needed to be true were not true at the time, but the company took the steps necessary to make them true. For example, as of the time of the iPhone launch, it was not true that users were comfortable typing on glass because only a tiny fraction (early tablet users) had ever done so. However, Apple was successful in providing a great enough offering that users got used to it and have come to believe that is the only way to use a smartphone.
Practice
In sequencing the tests, work on the most concerning BtC first (and then the next and next in descending order). That way, if the most concerning BtC can’t be overcome, no work needs to be done on the remaining BtC. It is the most efficient approach to strategy.
Put design of the test in the hands of the most skeptical member of the team. If others design the test, their standards of proof may not be as high as that of the most skeptical member — and the test won’t necessarily be compelling to that member. If the BtC is passes the most skeptical member’s test, it will have cleared the bar of everyone else.
The goal of the work is to achieve confidence in possibilities — either confidence that each possibility in question should be dismissed or confidence that it should be enacted.
7) Choice
Theory
If you consider strategy choices using this process, you will translate problem into choice and choice into action. The keys are: framing a motivating problem, thinking expansively about possibilities, working on logic and data sequentially, and focusing on building confidence across the process.
Practice
Keep reminding the team of the journey. Action is the goal but that takes seven steps, which can be performed more slowly or quickly depending on the mindset of the team and the external environment. But they have to be taken by the team together without leaving anyone feeling left out or left behind.
Practitioner Insights
The status quo has a deathly grip on every company — and it kills many of them. The process for developing strategy must respect that grip — otherwise the status quo will win. The SCSP is designed to help the management team gain sufficient confidence to overcome the status quo to make change that is needed for continued prosperity.
It is an all-purpose tool for tackling any gap between actual and desired outcomes. It is completely flexible with respect to time. A team can run the process in a day if it wishes. But that will generate longer odds of success because you have to bet that the BtC can be overcome without having done any testing or creation of a plausible transformation path. As a team, you should take as much time and spend as many resources on testing and transformation as to shorten the odds to a level you find satisfactory. Though always remember that strategy can’t guarantee success — the best it can do is shorten your odds.
The Role of Management Systems in Strategy
They are Critical to Making Sure Your Win is Really a Win
by Roger Martin, 8 min read, published Oct 5, 2020
Source: Roger L. Martin
I have frequently been asked by Playing to Win aficionados for more clarity on the Management Systems, the last box of the five-box strategy choice cascade. So, I thought it would make sense to provide more detail and clarity on my thinking on this important box in what will be the 1st piece in my Playing to Win/Practitioner Insights series. (Links for the rest of the PTW/PI series can be found here.)
While many observers don’t actually see the choice of management systems as part of strategy itself but rather a lesser choice, I see management systems choice otherwise, as integral to the practice of high-quality strategy. It is positioned at the bottom of the cascade only because the logic starts from the upper left and flows to the lower right. However, the flow goes both ways so no box is really at the start or finish. Great management system choices help confirm that the logic also flows from management systems back up to winning aspiration.
In this way it is an important reality check on the distinctiveness of strategy. A company needs management systems that build and maintain the distinctive capabilities that underpin a unique how to win in the chosen where to play that meets its winning aspiration. If a strategy does not have specific management systems that serve the purpose of building and maintaining distinctive capabilities, then those capabilities either won’t get built in the first place or will deteriorate because they are not systematically maintained. Additionally, if the capabilities and management systems of an organization are entirely or nearly identical to those of competitors, its where-to-play and how-to-win choices will be replicated as soon as shown to be successful. Hence distinctiveness is a key attribute to management systems. Sameness in management systems is typically matched with sameness in capabilities which delivers competitive parity not competitive advantage.
That having been said, every company has numerous management systems. It has an order-entry system, a system for putting together its regulatory filings, a system for announcing new executive appointments, a capital appropriations system, etc. For that reason, simply creating a list of all of a company’s management systems is not a useful part of a strategy exercise. The key is to make and enumerate management systems choices that are disproportionate, novel and notable compared to competitors and linked to building distinctive capabilities for the company. However, since the key distinctive capabilities of a given company’s strategy vary widely across companies and their strategies over time, it is not possible or sensible to specify which are generically good management systems. The key to great management systems is their individual match with the distinctive capability.
The two pieces of useful guidance I can provide, therefore, on management systems, are a categorization framework and a range of examples of each. I have found that management systems that provide competitive advantage by building and maintaining distinctive capabilities fit into three categories: they drive disproportionate resource investment, they specify novel allocation of decision rights and/or obligations, or they mandate unusual measurement or tracking of information.
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I provide a number of examples of each below.
Management Systems that Drive Disproportionate Resource Investment
The first category contains the management systems that drive the disproportionate resource investment that is required to build and maintain a distinctive capability, which is critical to winning.
Four Seasons Hotels & Resorts seeks to win with a kind of service that is unique and that needs to be carried out by experienced Four Seasons hotel staff (as opposed to hotel staff experienced at other hotels), but in an industry that experiences 60–70% annual turnover. To get this kind of experienced hotel staff, Four Seasons has a management system that drives disproportionately huge investment in recruiting/hiring. To be hired, a recruit needs to have three successful in-person interviews, the last of which is with the hotel manager. This would be an unthinkably large expenditure of resources for other hotels, but sensible and necessary for Four Seasons desired capability. This management system is rigorously enforced and adhered to. In addition, its career development system is disproportionately invested in because after recruiting the very best, Four Seasons wants and needs to keep them for a long career, which it does with turnover below 10%.
Progressive Insurance seeks to win, in part, by getting settlements to its customers so quickly that lawyers don’t get into the middle of the process because Progressive knows that on average when a lawyer is involved, it costs Progressive more and the customer gets less due to the high fees charged by the lawyer. In order to be in a financial position to pay claims quickly, Progressive has a management system for its investment portfolio that invests disproportionately in short-term liquidity at the cost of earning higher investment returns.
Southwest Airlines seeks to win by having an extremely efficient cost structure while providing outstanding customer service. A key aspect of its cost efficiency is a uniquely high level of flexibility in what employees can do in a specific situation. They are cross-trained and can surge to where they are needed, which makes for much more efficient staff utilization than experienced by its competitors. But this means that its management system for labor negotiations entails not negotiating hard on salary but rather investing in high salaries in order to gain — as a negotiating trade-off — the much more important — and unique — labor flexibility.
WestRock, the paper packaging giant, follows a differentiation strategy of being the premier partner and unrivaled provider of winning packaging solutions. That means, among other things, having a management system that compensates its salesforce disproportionately highly for selling differentiated packaging solutions, not just generic volume of packaging.
The Mabin School, a uniquely differentiated elementary school, illustrates disproportionate investment in a non-profit context. Its philosophy holds that it admits a family, not just the child. Hence, it invests heavily in family engagement in order to succeed with its unique approach to elementary education. That means having a system in place that guides teachers and administrators in making a disproportionate investment of time with parents during the admissions process, the entire educational process and the process of gaining placement into the next educational level.
Management Systems that Specify Novel Allocation of Decision Rights and/or Obligations
The second category contains the management systems that specify novel allocations of both decision rights and decision obligations that are required to build and maintain a distinctive capability that is critical to winning.
Four Seasons Hotels & Resorts, as mentioned above, differentiates on the basis of a consistently high level of service in an environment in which there are millions of touch-points per year between staff and guests. Because quick resolution of guest problems as they occur is a key to high-quality service, the company has a management system that pushes down the decision rights on fixing customer service problems directly to frontline workers. If staff members see a path to resolution that they think will work, they don’t have to check with a supervisor before taking action.
Progressive Insurance, as described above, differentiates itself, in part, by getting more cash to customers by cutting out the lawyer as ‘middle man.’ That entails having a management system that empowers mobile Progressive claims-people to make settlement decisions and cut checks for customers at accident sites rather than having to go through a time-consuming head-office claims processing ritual.
Procter & Gamble seeks to differentiate on the basis of technologically superior products backed by compelling brand building. To ensure this comes to fruition, P&G enforces a decision-making obligation on its managers to perform and win in a statistically-robust blind test for potential new products before they are approved for any launch decision. In addition, it enforces a decision-making obligation to perform similarly robust advertising copy testing before releasing it for public use. For both product blind tests and advertising copy testing, there is a clear and formal management system to be followed.
Procter & Gamble (Hair Care) sought, beginning in 2016, to reestablish unquestioned global leadership in the hair care category. A challenge for the category at the time was a bias toward making decisions entirely based on quantitative data. Since the category has many non-technical consumer needs (emotional/phycological) that are difficult to measure quantitatively, the Beauty Care President mandated a decision-making obligation to incorporate both quantitative and qualitative data and insights into every hair care strategy decision.
Management Systems that Mandate Non-Standard Measurement/Tracking of Information
The third category contains the management systems that mandate non-standard measurement and tracking of information.
Four Seasons Hotels & Resorts, as mentioned above, seeks to further its service differentiation by quickly and thoroughly resolving all guest service problems before the guest checks out of the property. In order to ensure this is the case, it mandates that every hotel in the chain thoroughly deploys its ‘glitch reporting & service recovery system.’ The system provides encouragement and reward for all staff members to report any guest service glitch that they observe — even if they were the cause of it. All such glitches are captured on the ‘glitch report,’ which is reviewed each morning by the hotel staff. The group then creates an individualized service recovery plan to make sure that all guests who experienced service glitches feel as good or better about Four Seasons service when they check out as when they checked in.
Progressive Insurance, in addition to winning on the basis of getting bigger settlements to customers faster, seeks to win on the basis of more effective underwriting based on a huge database that enables it to create tens of thousands of pricing categories based on many more risk variables than its competitors. To build and maintain that database, it has a management system that mandates the ongoing collection and processing of a volume and breadth of data that exceeds industry practices and standards.
WestRock, which as mentioned above, seeks to differentiate based on providing uniquely-valuable packaging solutions. In order to judge whether it is doing so, or not, WestRock mandates a management system for measuring whether it is helping customers do one or more of the four following value-adding things: lower their total costs, grow their sales, reduce their risk, and/or improve their sustainability.
Procter & Gamble, when CEO AG Lafley took the helm in 2000, switched its basis for determining incentive compensation from market total shareholder return (M-TSR) to operating TSR (O-TSR). M-TSR, which measures performance based primarily based on movements in the company’s stock price, is the standard measure used across public companies. But it has the effect of encouraging management teams to focus on short-term fluctuations in stock price and the drivers thereof rather than on the long-term performance of the company, which O-TSR more closely measures by focusing on sales growth, profitability and cash conversion.
Summary Thoughts
Management Systems may be the fifth and final box on the strategy choice cascade but not because it is unimportant. It is positioned there because that is where it logically belongs. But it is as important to competitive advantage as any other box. The key is that the management systems help the cascade flow back consistently back to the top.
There are no generically superior management systems. Strategically strong management systems are those that help build and maintain the distinctive capabilities that underpin company advantage. Distinctive management systems that are disproportionate, novel and non-standard in the areas of resource allocation, decision rights and measurement are the key to making sure that strategies are real and powerful.