The Hidden Where-to-Play Element in Strategy
Value System Stage
A client recently asked me a question about developing a royalty line of business as part of its overall portfolio. To me it gave rise to a conceptual question about Where-to-Play (WTP) that I thought worth tackling in this Playing to Win/Practitioner Insights (PTW/PI) piece entitled The Hidden Where-to-Play Element in Strategy: Value System Stage.And as always, you can find all the previous PTW/PI here.
Intuitively Obvious Elements of the WTP Choice
When it comes to thinking about the WTP choice, minds quickly go to the literal — where geographically? Are we going to play globally, nationally, regionally, or locally? Equally intuitive is offering — what product or service are we going to offer? Are we offering shampoo, smartphones, hotel rooms, credit cards, etc.? Then minds move to customer segment — mainstream, luxury, budget, young, avant guard, traditional, etc.?
These are the three most straightforward WTP choice categories — what offering to which customers in what geographies? Management teams can easily conceptualize these three dimensions of WTP. Plus, they are all very important and I stress the criticality of being thoughtful about the strategic choice of WTP.
That trio often represents the entire WTP consideration. But there is a somewhat less intuitive fourth WTP element — through what distribution channel? That is, do we go direct-to-customer or through some distribution channel? These can be famously epochal decisions. It can involve creating a new distribution channel — as with Coca Cola and its bottlers or SAP with Deloitte, Accenture, etc. selling its software for it. Or it can involve subtracting a normal distribution channel — as with Dell going direct to consumers or P&G, early in the 20th century, cutting distributors out of the equation to go directly to retailers. These WTP distribution channel choices were all brave (at the time) and strategically impactful.
The Fifth Element
However, there is a final element of WTP — The Fifth Element (a cheeky reference to one of my favorite Bruce Willis movies) — that is often completely overlooked: value system stage.
In any industry, there is a series of activities in which some set of actors must engage for the offering to make the journey from the basic inputs of which the offering is composed to the final offering in the end-customer’s hands. A given company can choose a WTP that encompasses anything ranging from the entire value system to a single chunk of it, and every breadth in between.
Long ago, big companies used to try to control the entire value system. For example, Ford Motor Company famously once owned rubber plantations, vast timberlands, and plate glass factories in addition to parts manufacturers and giant assembly plants. However, for decades companies have been reducing breadth, outsourcing many activities, whether it is EDS running your data centers or AWS running your cloud, ADP doing your payroll, or Shopify running your e-commerce site.
Over time, breadth generally got scaled back because many aspects of the broad value system WTP choices didn’t have plausible Winning Aspiration/How-to-Win/Must-Have Capabilities/Enabling Management Systems (WA/HTW/MHC/EMS) choices twinned with them. And that is the key to the success of any WTP choice. It needs to fit with and reinforce the remaining four Strategy Choice Cascade choices. Ford couldn’t actually run rubber plantations as well as specialists in that resource. Individual companies couldn’t run their data centers as efficiently as EDS. So, they shrunk the breadth of their value system WTP choices to improve their competitive positions.
But the WTP prerogative isn’t as simple as “go with the modern flow of choosing a narrower slice of your value system.” Some modern companies are succeeding doing exactly the opposite. Apple, by far the most successful player in its competitive set, already had the broadest value system WTP choice in its industry before it decided to up the ante further by making its own chips. The same could be said for Tesla — it is both the most successful and broadest player in its industry — vertically integrated into both battery production and retail distribution, for example. But others famously succeed taking narrower choices — like Alibaba, Shopify, and GitHub.
There are entirely different WTP choices possible on this dimension. They just have to be twinned with consistent WA/HTW/MHC/EMS choices.
Another kneejerk reaction is that in deciding your value system WTP, you should engage yourself only in the activities that are important to your strategy and outsource the activities that are not. But that is far from always the case. For example, branding is a central aspect of P&G’s strategy. But P&G has long outsourced its advertising copy development — itself the most central aspect of branding — to Madison Avenue. It is arguable that P&G outsources one of the very most important activities in its entire value system. Similarly, Herman Miller (MillerKnoll since the 2021 merger with Knoll) is the historic design leader in office furniture. But it outsources its furniture design to industrial designers. Samsung, the second most successful smartphone company, outsources its operating system to Android.
So, if the rules aren’t ‘go narrow’ or ‘focus on doing only the most important activities,’ what are the rules for value system WTP choices?
The Three Value System WTP Rules
If the following three conditions are met, a company should decline to engage in an activity as part of its value system WTP choice:
1) Your Playing to Win strategy improves if an outside party carries out the activity for you.
That is, it is better for your Playing to Win strategy because either a partner can create more value for you or can create the same value at a lower cost.
For example, Herman Miller believed that the best furniture design was not created by furniture designers but rather industrial designers who designed a wide variety of products and could bring that broader design experience to bear on furniture design. In the 20th century, much of its furniture was designed by Charles Eames, voted the #1 industrial designer of the 20th century. But he was never an employee of Herman Miller — the company outsourced furniture design to him. The same was the case for the design of the legendary Aeron Chair, which was outsourced to two designers, Bill Stumpf & Don Chadwick, with their own small firms. Herman Miller believed that if it convinced an industrial designerto come work for the company, that designer would become less innovative at furniture design over time — so it outsourced that activity to create more value, and it has worked.
When companies started to figure out that Accenture, EDS or IBM could run their data centers at far lower costs, they began to outsource data center operations because they got the same value for a lower cost — even though management of their data and data centers was critical to their businesses.
Qualcomm chose to outsource a portion of its potential chipset production, marketing and distribution to others by way of royalty agreements. Seeking a royalty income stream means acting as a supplied input to someone else who will engage in downstream value system activities using your IP. For Qualcomm, it created more value by expanding sales of chips made with its IP faster than it could have done if it had only made its own chips. Fully $5.8B of its estimated $43.8B in 2025 revenues (13.4%) come from licensing its IP to other chipmakers. And because the margins are so high on licensing IP, it accounts for $4.8B and 18.3% of gross profit. This continues to help Qualcomm’s PTW strategy by spreading the cost of its huge R&D expenditures over more volume. So even though chipset manufacture and sales are critical activities, outsourcing part of them in this way makes strategic sense.
2) The outside party can’t hold you up and extract a disproportionate share of the value
Herman Miller outsourced furniture design to tiny firms who were honored to be chosen to work with the furniture giant and valued seeing their designs go into mass production. Herman Miller helped make Eames and Stumpf & Chadwick household names in high-end furniture. There was no danger of being held up.
P&G benefited from the robust competition among the many advertising agencies — actually a low-profit business — which protected it from being held up by the agencies.
Cloud computing was once an industry that had the potential to extract disproportionate value from customers when Amazon Web Services was the dominant player. But that didn’t last long as Microsoft Azure and Google Cloud joined the fray and dramatically reduced the ability to extract disproportionate value from customers.
3) You don’t create a dangerous new competitor
Herman Miller has nothing to fear from the tiny design firms who have no capacity whatsoever to compete with it, and the same with P&G and the advertising agencies. For SAP, companies like Deloitte and Accenture don’t have the capacity to create competitive software, and they greatly expand SAP’s sales capability with hundreds of Deloitte and Accenture partners selling SAP solutions.
In stark contrast, one of the first things Steve Jobs did when he returned to Apple was to cancel all the royalty agreements that allowed other companies to use Apple software in their products. Jobs didn’t want them to compete using his own software. He wanted that uniqueness to be a key part of his strategy — and history has shown that decision to have been very astute.
Practitioner Insights
The fifth element of WTP is the most obscure element and often not considered explicitly. But that doesn’t mean a choice on value system WTP is not made. As with all other strategy choices, strategy is what you do, not what you say. So, every company has a value system WTP. It is reflected in what they do and do not do.
I am a strong proponent of thinking about it, not just letting it happen. As I have argued before, the WTP choice is important and is inseparable from HTW and the other three strategy choices. Don’t let value system WTP happen by default just because it is more obscure than the other four WTP elements. Some of the very best strategies have been conscious and decisive about value system WTP — including Dell, P&G, Apple and Qualcomm.
The best way to initiate strategy — and it applies equally to considering value system WTP — is from where you are. That means reverse-engineering you’re the choices in your current Strategy Choice Cascade. In this specific case, it means focusing on understanding your current value system WTP choice.
Once you have identified your current value system WTP, ask whether there is any activity that you could subtract in a way that would increase your competitive strength. Look at all your value system activities, not just the ones you don’t like or you think aren’t important.
Then do the opposite and ask whether there is any activity that you could add in a way that would make you competitively stronger. Again, look at all activities in the value system that someone else is performing.
Imagine different possibilities of both expansion and contraction of value system WTP. Toggle back and forth with WA, the other four elements of WTP, HTW, MHC and EMS to generate multiple coherent and mutually-reinforcing Strategy Choice Cascades. Then determine which value system WTP choice contributes to the very strongest strategy — and modify your value system WTP accordingly.
I agree Rory (as usual by the way). I think we are fellow thinking travelers. Hope all is well.
One interesting decision with much wider implications is the decision to outsource manufacturing to another company - and usually in another country. Steve Jobs, interestingly, always opposed this, but was overruled.
This decision seems to make sense, until you realise that the great majority of innovations seem to happen bottom-up rather than top-down. And, unlike P&G funding Madison Avenue, you are creating a potential competitor.