Roger Martin: How five questions reveal a winning strategy

1. 0:00 – 2:27

   Roger’s background

   1. LRLenny Rachitsky0:00

      Why are so many people bad at strategy?

   2. RMRoger Martin0:02

      What's taught now in business schools generally sucks. People aren't prepared educationally and they sure don't get prepared for it in companies. It's intellectually challenging and it's emotionally intimidating.

   3. LRLenny Rachitsky0:15

      You have something you call the Strategy Choice Cascade.

   4. RMRoger Martin0:18

      You have to have answers to five questions: What's your winning aspiration? Where to play? How can you win? What capabilities do you have to have that your competitors don't? And then, what enabling management systems do you have to put in place? For the most part, in the leading business schools, it's illegal to teach that.

   5. LRLenny Rachitsky0:35

      Playing to Win. You talked about there's kind of these two routes.

   6. RMRoger Martin0:38

      You have to be either differentiated or low cost. There's no way to protect yourself if you're not one of those two.

   7. LRLenny Rachitsky0:44

      Is there anything else you wanted to just leave listeners with?

   8. RMRoger Martin0:46

      I have never met this mythical beast called a great natural strategist. Great strategists have all one thing in common: They just practice.

   9. LRLenny Rachitsky0:56

      (instrumental music) Today, my guest is Roger Martin. Roger is one of the world's most trusted strategy advisors. He's Professor Emeritus at the Rotman School of Management at the University of Toronto, where he served as dean for five years. In 2013, he was named Global Dean of the Year, and in 2017, he was named the World's Number One Management Thinker by Thinkers 50. He's also the author of what many listeners consider their favorite book on strategy called Playing To Win. I've gotten a lot of requests to get Roger on this podcast, and I can now see why. This is the most tactical and fascinating conversation I've had on this podcast about developing a strategy, and that is a really high bar. We delve into the five questions that you need to answer to help you craft your strategy, how Hamilton Helmer, Michael Porter and Richard Rumelt's work fits into his framework and worldview, what people most often get wrong when they're developing their own strategy, the two options you have for how to win with your strategy, a very tactical and simple trick for getting started thinking through your strategy, and so much more. This episode is for anyone who is trying to build their strategic thinking muscle. If you enjoy this podcast, don't forget to subscribe and follow it in your favorite podcasting app or YouTube. It's the best way to avoid missing future episodes, and it helps the podcast tremendously. With that, I bring you Roger Martin. Roger, thank you so much for being here and welcome to the podcast.

   10. RMRoger Martin2:24

       It's great to be here, Lenny. Thanks for having me.

2. 2:27 – 7:03

   The importance of strategy

   1. LRLenny Rachitsky2:27

      What I want to try to do with our time together is to help people that are on the ground at a company, say like the product manager, designer, engineer, data scientists, folks that aren't necessarily the CEO or the founder executive of a company, get better at product strategy, at crafting a strategy, evaluating a strategy, developing a strategy. Because it feels like there's always tons of advice for, like, the leaders of a company, but less for people on the ground doing the thing, and I feel like-

   2. RMRoger Martin2:50

      Yes.

   3. LRLenny Rachitsky2:51

      ... luckily, your stuff applies to everyone. Um, so how does that sound as a lens for-

   4. RMRoger Martin2:54

      That sounds great. And can I tell us a little story to that end?

   5. LRLenny Rachitsky2:58

      Please.

   6. RMRoger Martin2:58

      So, recently, there was a, uh, a newspaper article saying that, uh, pointing out that 10% of the S&P 500 CEOs, 10%, are ex-Procter & Gamble people. It's an amazing number, like a stunningly high, high number. Why would that possibly be? I believe it's because, at Procter & Gamble, there is a view that people way down the organization, like let's just say the Head & Shoulders brand franchise leader, right, who reports to the head of shampoos and conditioners, who reports to the head of beauty care, who reports to the CEO, so at least four levels down in the organization, in the guts of the organization. Proctor understands that that individual, not the CEO, not the global president of beauty care, not the, uh, head of sh- of, uh, hair care, not the head of shampoos and conditioners, the brand manager makes super important strategic choices, and if they don't make them well, the brand does terribly. Uh, and so, so I believe... And not many companies have enough of that attitude. So, I'm a big believer that people down the organization have to make really important strategic choices or bad things are gonna happen. Uh, if they make really great ones, good things are gonna happen and they get trained to be a CEO s- uh, someday. So, I'm with your, I'm with your, your, uh, your thesis, but yours is co- counter what I would say is normal. What is most normal is people at the top do strategy and people down below do something, and it's usually called execution, and I hate that, I hate that term of art for what it's worth. Uh, and so I think you and I are singing from a bit of the same, uh, songbook, even if it's a minority songbook.

   7. LRLenny Rachitsky4:57

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   9. LRLenny Rachitsky7:01

      I just wanna ask this broad

3. 7:03 – 8:30

   Challenges in developing strategy

   1. LRLenny Rachitsky7:03

      question about strategy. Why is, why is strategy so hard? Why are so many people bad at strategy?

   2. RMRoger Martin7:09

      Perhaps the thing that, that makes it sort of intellectually hardest is that it is an integrative activity. You've gotta, uh, answers to a bunch of questions that have to fit together and reinforce one another, so that just makes it a little more, uh, more complicated. It's not like saying, uh, kind of, "Lenny, what do you want for lunch?" It's, it's saying, "Lenny, what kinda diet do you want that'll keep you healthy?" And that includes breakfast, lunch, dinners, snacks, you know, a whole bunch of other, other things that you gotta kind of fit together. So, so it, it makes, it makes that harder, uh, to do intellectually. Another aspect of it is it is intimidating. Strategy involves making choices to do some things and not other things. Uh, and it is often intimidating to say, you know, "Oh, dear. I have to, I, I, I have to cut these things off and not do them and actually make a decision that I'll, that I'll be held accountable for potentially, or I'll even hold myself accountable, uh, for." So, so, uh, so that's a second thing. It's harder sort of emotionally, not harder, uh, uh, intellectually.

4. 8:30 – 17:40

   Critique of modern strategy education

   1. RMRoger Martin8:30

      And then there's sort of the training aspect of it, the knowledge aspect of it, which is, which is what's taught now in strategy in, uh, business schools generally sucks. It's gone on a, on a crazy theoretical bent. Uh, the Strategy Academy as a whole has fallen in love with a theory called the Resource-Based Theory of the Firm that is, that is silly and nobody uses it out in the world. And so students are no longer trained on useful, uh, strategy. And the other feeder into people learning strategy were the strategy consulting firms, but the strategy consulting firms, the so-called strategy consulting firms, do almost no strategy anymore 'cause it's a little business compared to post-merger integration, digital transformation, and a bunch of other, other, uh, other things. So, people aren't prepared educationally for it. And if they're not prepared educationally for it, then they sure don't get prepared for it in companies. Uh, it's intellectually challenging and it's emotionally, uh, intimidating.

   2. LRLenny Rachitsky9:40

      On this point you made about how, uh, schools are teaching strategy wrong, how do you describe what's the wrong approach?

   3. RMRoger Martin9:46

      It's a theory that's sort of taken over called the Resource-Based View of the Firm that sa- that was, you know, like in the world of... (laughs) Academics is a weird place, uh, where the number one emotion is jealousy. And people were massively jealous of Mike Porter, who sort of created many of the most important, uh, concepts of the strategy when he wrote a book, Competitive Strategy, in 1980. And so they needed to sort of counter him because they just didn't like the fact that he was so prominent and they decided they would say he was about positioning, so they called his the Positioning School that... And they character- caricatured what he said, whi- which he never did, but they said, he said, "It's all about finding a place that is structurally attractive and then milking it for everything you can." We, at the resource-based view of the firm, think that, that strategy is all about building resources, uh, and if you build resources, it's almost like if, if you build it, they will come. And that's what you should pay attention to. Now, the problem is a- any resource, right, that may be useful somewhere is not necessarily useful elsewhere. So it sort of begs the question, um, how would you think through what resources to invest in building? What would be a way of doing that, uh, investing here versus here versus here? It's silent on that because it's kind of a dumb theory and, and it doe- doesn't have anything useful to say in my, in my, uh, in my view, uh, ab- about that. And so when the students go out and say th- their, their company, "I'm gonna do a V, VRIO analysis or a VRIN," some, uh, people just roll their eyes at them, and so it doesn't get used. I've only seen it used... I've been in consulting companies for 42 years and I've seen it used once.

   4. LRLenny Rachitsky11:51

      Hmm.

   5. RMRoger Martin11:52

      And the truth, as is usually the case, is, is that it's, it's both, and, and that's, that's why the model I use for, for strategies, uh, says, says, uh...... a lot about where you play is important, that's one of the key questions, and your capabilities are important, and you've got to link those things, things together. Um, but, that's for the most part in, uh, leading business schools, it's illegal to teach that.

   6. LRLenny Rachitsky12:20

      Illegal to teach...

   7. RMRoger Martin12:21

      Uh...

   8. LRLenny Rachitsky12:22

      ... your approach?

   9. RMRoger Martin12:23

      Yes. I couldn't teach my approach at my own business school.

   10. LRLenny Rachitsky12:26

       What?

   11. RMRoger Martin12:26

       So when I was dean, the most powerful person at the, the, the, the, uh, departments or areas as we call, like stra- strategic management is an area, they have 100% control over what's taught in strategic management, finance, in finance, et cetera. The dean may be the most powerful person in the school and I was, uh, I happened to be a super successful dean, so if anything, I was a super powerful, uh, uh, powerful dean. Uh, and students would beg me, they'd say, "R- you know, Roger, you're this, you, you have this, you know, 20 years of experience, you're sort of a famous consultant, uh, in strategy, uh, and you've got these theories, uh, please teach a course in it." Nope. I, I, I did, I did do extracurricular stuff where I t- I did, I, I, I had practice of, you know, one Saturday a year teaching everything I knew to anybody who wanted to show up, but for credit, I was not allowed. And if you don't, if you try to get a job at any busi- the only exception might be Harvard Business School, maybe, but if, if you took the oth- the 49 other top business schools in America and, and if asked the question, "Do you swear allegiance to the resource-based view of the firm?" If you don't answer an enthusiastic yes, you have no chance of being hired. Zero.

   12. LRLenny Rachitsky13:50

       Wow. Hmm, this academia drama, I had no idea.

   13. RMRoger Martin13:53

       It's the loyalty test.

   14. LRLenny Rachitsky13:55

       This is unreal. Makes me even more excited to dive into your world-

   15. RMRoger Martin13:58

       (laughs)

   16. LRLenny Rachitsky13:59

       ... and your ways of seeing things. Before we do that, just, we've had a few other strategy people on the podcast. It-

   17. RMRoger Martin14:05

       Yes.

   18. LRLenny Rachitsky14:05

       ... it might be helpful to frame ou- where they fit in the spectrum that you're describing. So if-

   19. RMRoger Martin14:09

       Okay. I may know, I may not know all of them but give, give me, yeah, sure.

   20. LRLenny Rachitsky14:12

       I imagine you do. So we've had, uh, uh, Hamilton Helmer on the podcast.

   21. RMRoger Martin14:16

       Yes.

   22. LRLenny Rachitsky14:16

       And then, uh, Richard Rumelt on the podcast. How do they relate just for people to get a little into your stuff versus this dogma?

   23. RMRoger Martin14:25

       So one of them is an, one of them is sort of an, uh, an a- academic and one of them is an, is a, is a quasi-academic or non-academic like me. Like, I, I was a tenured professor for many years but don't consider myself an a- an academic. I don't think Hamilton does-

   24. LRLenny Rachitsky14:39

       Right.

   25. RMRoger Martin14:39

       ... though, though I've never asked him that He's an investor now. ... as far as I know. Yeah. So he's, he's wrote, written a, a very, I think, useful book that would in some sense fit into my how to win box. Right? I say-

   26. LRLenny Rachitsky14:54

       Awesome.

   27. RMRoger Martin14:55

       ... I say strategy is about how to win and he, he, he has a catego- what I call a categorical model. Here are categories of things that you should think about. If you're trying to win, here are seven ways of, uh, of winning. Uh, and, and I categorize him as a, as a non-academic practical strategy guy. Richard Rumelt is, is, um, a now retired Tuck, uh, professor and he, and he has a, a kind of this hyper competition thing that, that, uh, that he, he does. He, he also is of the, of the I'm jealous of Mike Porter, uh, kind of thing, so I've got to say Mike Porter is wrong and here's how I am so right, and competition doesn't take place in the way Mike says where it's really stable and, and whatever, it's really hyper competition. Mike Porter never in his entire life has said competition is stable. He's repeatedly said the opposite. But in order to say, "I'm not like Mike Porter, uh, and in fact, I distinguish myself by saying he's wrong and I'm right." And so, uh, so I, I, I don't know. He see- he seems like a, a fine, a fine guy. Um, I don't think that he, like most business academics, he doesn't know much about business, right? Uh, like he, he d- hasn't gone out and practiced a, a lot. He came to our school and, and gave a lecture because people loved hyper competition because he, because he would blast Mike Porter and he gave a example of Procter & Gamble. I've been consulting at Procter & Gamble and know everything about Procter & Gamble basically. (laughs) Uh, and what he said ha- about Procter & Gamble had zero to do with reality. Like, zero. It was just completely, utterly, absolutely wrong. And I sort of asked him afterwards, just sort of like, "Why do you say that?" And he said, "Well, I think that's the way it worked." Are you kidding me? So I'm, I'm not, I'm not a, I'm not a fan, uh, of, of, of that piece of work. I would say it's, it's, it doesn't fit nicely into (laughs) ... research based view of the firm versus, versus Mike Porter. It's sort of like, "Here's another, here's another lens to take on, on the world and, and, um, I'm gonna take that lens. Everything's hyper competitive and, and here's how you think about hyper competition."

   28. LRLenny Rachitsky17:32

       This is fascinating. Hmm. I love that we're spending some time on this. This is really helpful to hear sh-

   29. RMRoger Martin17:36

       (laughs) Good.

   30. LRLenny Rachitsky17:37

       ... hear the landscape of, of strategy minds.

5. 17:40 – 23:20

   Defining strategy and the choice cascade

   1. LRLenny Rachitsky17:40

      Okay, let's dive into, into your worldview, and maybe the simplest-

   2. RMRoger Martin17:44

      Sure.

   3. LRLenny Rachitsky17:44

      ... way is just, like, how do you define strategy? What is a strategy?

   4. RMRoger Martin17:48

      Strategy is an integrated set of choices that compels desired customer action. So the way I think about it is, there's a whole bunch of things a company controls, right? How many factories to build, how much R&D to do in what areas and how much advertising to do, how many people to hire, what to pay them, blah, blah, blah. Those are all the things under our control. What, Lenny, is the thing we have almost no control over?... what? If we're a company-

   5. LRLenny Rachitsky18:19

      What the customers do.

   6. RMRoger Martin18:21

      Yeah. Like, we would like them to take some of these out of their pocket and give them to us. Can we make them? No, we can't. So essentially, the job of strategy, right, is to make decisions on the things we do control that will compel, right? We can't force, but it'll compel them. It'll s- they'll say, "Gosh, I should take my hard-earned cash," and whether it's a company or an individual, "I should take my hard-earned cash and give it to you," rather than give it to nobody if there's no product now or give it to a competitive, uh, product. So, the important pieces of it are, is integrated, right? It's the whole set of choices that has that one outcome, that it compels desired customer action.

   7. LRLenny Rachitsky19:11

      Amazing. Okay. And, hmm, to help people define their strategy, you have something you call the strategy choice cascade, which is-

   8. RMRoger Martin19:19

      Yeah.

   9. LRLenny Rachitsky19:19

      ... basically five questions that you need to answer to help you think of your strategy. Can you talk through this?

   10. RMRoger Martin19:23

       Yeah. And, and this, and this is, yeah, this is sort of the f- the fruits of many, many years of, of doing strategy work and trying to figure out like, like how do you do this thing? 'Cause the fun, the fun thing was I was in the era, like I started in the, in strategy, uh, in 1981, and that was early in the era. It, it, strategy was born in 1963 with the founding of Boston Consulting Group by Bruce Henderson, who was the father of strategy, in my view, of practical commercial strategy. Um, so it was still in the early days. And, and, you know, Bruce Henderson had a theory of how strategy should, what result it should produce for you. Mike Porter then came along in 1980. So '63, uh, uh, uh, Bruce Henderson and '80, Porter, the two most important figures in the history of, of strategy, came along and said, "A strategy has to look like this." Right? "It ha- ha- has to have this as its output." But neither of them was very good on, because again, it was early, they can't do everything right away, of, well, how would you get one of those? So Mike Porter says you have to be either differentiated or low-cost. Good. And if you, if you look through competitive strategy, his landmark seminal book, to say, "How would you do that?" There is no answer, right? And so, so... And because Monitor Company, the, the firm I was one of the leaders of, uh, for, for a decade and a half, was founded essentially to commercialize Mike Porter's work. Customers would ask us, they'd say, "Well, we like Mike Porter and we'd like to have one of those." Y- you know, w- w- we can look at ourselves under his framework and, and we can say we're stuck in the middle. And he said that's bad. And he said, "Good is this or this." How do we think through creating one of those? We didn't actually have an answer. Uh, and, and it turned out, because I'm, I'm, I was sort of the most, I don't, I don't know, intellectually engaged on this and didn't mind the hard work of product development from about 1987 when we sort of discovered we really didn't know that and clients really wanted us to tell them that. Between 1987 and 1990 or '95, I did all this work on, well, how, how, how could you develop a process for getting yourself one of those, right? One of those excellent strategies. And I came to the view that you have to have answers to five questions. You have to have an answer to the question of, what's your winning aspiration? Like, what are you trying to accomplish? 'Cause it'll help contextualize the kinds of choices you could make. Then there's a where to play, on what playing field, or if you're like military stuff, battlefield, are you gonna plop yourself down on? You're not gonna play everywhere in every product at every vertical stage around the world. You're gonna pick some place. And in that place, how can you be either better than competitors in terms of creating customer value or lower cost than tho- those competitors? To win there, where you've chosen to play to meet your winning aspirations, what capabilities do you have to have that your competitors don't that would enable you to win that way? And then what management systems, enabling management systems, do you have to put in place to make sure you build and maintain those must-have capabilities to win where you've chosen to play to meet your winning aspiration? And so I came to the conclusion, actually it was in 1995, the end of an eight-year journey, I, I came to the conclusion those were the, that, those were the five and you had to do them together, and that is the essence of producing a strategy that compels desired customer

6. 23:20 – 24:57

   Playing to win vs. playing to play

   1. RMRoger Martin23:20

      action.

   2. LRLenny Rachitsky23:20

      I wanna go through an example of, of a company. But before we do that, something I, I think that's important to talk about is, your book is called Playing to Win. You talked about this idea you f- you need to play to win, and you kind of argue that a lot of people are just playing to play. They're playing to play the game. I'm guessing most people listening and most people developing a strategy don't think they're doing that. They don't think they're just playing to play the game. They, they think they're playing to win. I'm curious what are signs that you're just n- you're not actually playing to win?

   3. RMRoger Martin23:49

      It would be mainly signs given to you by customers. So if you say, "We're the most innovative company in our industry," uh, and customers, and l- let's say even the industry distributes through a given, a given channel, and customers come into that, uh, channel, uh, and, and they look at the, the two products and say, "Eh, I could flip a coin on this one." Right? You are not effectively playing to win. Maybe you thought you were winning, but, but customers don't think you're, uh, you're, uh, better.... or if your competitor lowers their price compared to, compared to your price, and you say to yourself, "Oh my god, if we lowered our price, we would make no money," but your competitor keeps on pricing there, you may think you have the low-cost position, but they do. Uh, and you have to give them whatever share they, they desire at that lower price because you can't compete there. So,

7. 24:57 – 31:04

   Examples of strategic success

   1. RMRoger Martin24:57

      you, you'll know you're playing to play if you're not aiming to and accomplishing having either an offer where Lenny walks into the store, whatever kind of store it is, and says, uh, says to the person in the store, "I want that brand." Right? Th- this... A- an example, Lego, one of the companies I've worked with for a long time, great company. It turns out that if you do market research on kids, a store that purports to be a toy store, but that doesn't have Lego, is not a toy store. They would define it as not a toy store. "Mom, why are we here? I wanted to go to a toy store." And she said, "But th- this is just, it says toys on here." And the, and the kid says, "Uh-uh."

   2. LRLenny Rachitsky25:48

      That's an insane brand.

   3. RMRoger Martin25:50

      That's an insane, insane, insane brand. Uh, and, you know, it's, it has a price premium for anything, uh, over any of its competitors by, by a long shot. It keeps growing. It, it actually, for most years in the last decade, it has had 80% or 90% of the entire category growth (laughs) is Lego. And so, they're playing to win, to be distinctive in the minds of consumers. But, you know, Vanguard, uh, h- h- you know, has got nine trillion dollars of assets under management last time I, last time I checked. Uh, does it do anything distinctive? Not really, the customer bought. Do they have the lowest cost position so they can charge the lowest, uh, A- AUMs? Abs- absolutely. Uh, and so there's different kinds of ways, but you'd know, you'd know by the actions that customers, uh, take.

   4. LRLenny Rachitsky26:48

      So essentially, to mirror back what you're saying, hm, to win, there's kind of these two routes you talk about. One is, you're the lowest cost option. The second is you're differentiated, you have a differentiated brand, where it's not a coin flip. It's like, "Oh, I really need that for this reason."

   5. RMRoger Martin27:01

      Yes. Yeah, you got it.

   6. LRLenny Rachitsky27:03

      And if you don't, uh, can't do that, then the advice you share is, go find a different playing field.

   7. RMRoger Martin27:11

      Well, or get out of business (laughs) or whatever. Like y- y- you know, it's only a matter of time till you're dead-

   8. LRLenny Rachitsky27:16

      Mm-hmm.

   9. RMRoger Martin27:17

      ... right? Is, is the, is the sad, uh, kind of truth of the matter. Which is, which is the, the competitors in your industry who are either low cost or differentiated can essentially jerk you around as much as they want. It's like Southwest Airlines, right? Like, Southwest Airlines was just a tiny little airline that flew Austin, Houston, Dallas. And now it's number one in passenger seat miles, uh, in, in America, and the only airline that's earned its cost of capital over the last half, half century. All the rest are losing money for their shareholders over, over time. They have good cycles and bad cycles. How did that happen? Well, it's, it's just the other airlines had to step aside. Whenever, uh, Southwest came into a r- a route, the other airlines just had to say, "Well, I guess you're gonna get your 30 share or 35 share of passengers on this route. You know, welcome to town." That's all they can do. They, they just have to cede position, and that's what happens. If you play to play, you will end up just being, uh... I mean, it's literally like having a bully who can just, uh, you know, y- y- shove you, and you take one step back. Then they shove you, and you take another step back. And they shove you, and you take another step back. Uh, there's, there's no way to protect yourself if you're not one of, uh, uh, those two. You cannot bully Vanguard. You cannot bully Southwest. You cannot bully Procter & Gamble. You cannot bully Lego. Um, that's, that's the way the business world works.

   10. LRLenny Rachitsky28:54

       And in the case of Southwest, the reason, hm, they couldn't be bullied is they were the low-cost provider, and the c- other airlines couldn't meet their prices.

   11. RMRoger Martin29:02

       Right.

   12. LRLenny Rachitsky29:02

       So they're like, "All right, there's nothing we can do."

   13. RMRoger Martin29:03

       Yeah, yep.

   14. LRLenny Rachitsky29:04

       Awesome.

   15. RMRoger Martin29:04

       Right? So when, so, so they... While I was in, living in Boston, they entered the Boston to Chicago route, which was a duopoly of American and United at the, uh, at the time. And the price was about, uh, in those days, like, 1,000 bucks for a round, round trip 'cause it was a nice duopoly. Uh, when Southwest come in, they say, "We're gonna fly Providence to Midway, not Logan to O'Hare, and it's gonna be 200 bucks." And they had great advertising. I always loved the advertising that they had when they entered the... They did maps of Boston and s- and said, "If you live in either, any of these places, kind of the south, the west of Boston, it takes you less time to get from your house to the gate than it does for, uh, uh, to go to, uh, to Logan." Because at Logan, right, you're gotta park in a parking garage and then walk a half an hour, and then when you get through security, you still have to walk 20 min- 20 minutes, blah, blah, blah. And at Providence, if you've ever flown out of Providence, uh, you can park about (laughs) 100 yards from the gates. And so, they just had to say, "We, we can't stop that. Not everybody's gonna do it, but a whole bunch of people are, and we... there's nothing we can do to stop that."

   16. LRLenny Rachitsky30:23

       What I love is we're already diving into these five questions. So we've been mostly talking about how we will win. Basically, here's your options to win, low-cost provider or be differentiated or find a different place to win. Let me summarize the five again. What is our winning aspiration?... where-

   17. RMRoger Martin30:36

       Yeah.

   18. LRLenny Rachitsky30:36

       ... will we play, how will we win, what capabilities must we have in place to win, and what management systems are required to make sure the capabilities are in place, right?

   19. RMRoger Martin30:45

       You got it.

   20. LRLenny Rachitsky30:45

       Okay, cool.

   21. RMRoger Martin30:45

       You're a very quick, quick study, my friend.

   22. LRLenny Rachitsky30:48

       All right. I got, I got some notes here. (laughs) So coming back to the how will we win, 'cause I think everyone who's listening to this are like, "Okay, cool. We got two ways to win. We're gonna be the cheapest or we're going to differentiate." Okay. Okay, how do we differentiate? Uh, do you have c- is there like a taxonomy of options that you think about or tell people, like what are the ways and options for exploring, "Here's how we will

8. 31:04 – 40:23

   Exploring differentiation and moats

   1. LRLenny Rachitsky31:04

      be different"?

   2. RMRoger Martin31:04

      It is mainly understanding customers kind of, uh, as well as you can-

   3. LRLenny Rachitsky31:10

      Mm-hmm.

   4. RMRoger Martin31:10

      ... and thens, and then saying, "H- is there a way to be distinctive, uh, uh, aga- against that?" And there are, there are lots of ways, uh, uh, uh, to do it, but it's tied very closely to the capabilities, right, which is, which is if you have a way of winning, right, you say, you say, "Oh, my where to play is I'm gonna sell pet food on the internet and my how to win is I'm gonna, I'm gonna d- kind of be the best," but it turns out that anybody who can build a website can sell pet food on the internet, uh, and in fact, you know, 20 of them do it, uh, almost immediately and they all go, and they all go bust, uh, you don't have the capability. So you've gotta ask yourself the question, "Can I serve a particular customer need with a set of capabilities that are gonna be hard to replicate, uh, by my, by my competitors?" They either can't do it or they won't do it, and-

   5. LRLenny Rachitsky32:13

      Mm-hmm.

   6. RMRoger Martin32:13

      ... and both are important questions because sometimes it's won't, right? Like do you really think Walmart couldn't have built as good a website as, as Amazon and at massive scale? I, I think they could've, right?

   7. LRLenny Rachitsky32:30

      Yeah, probably.

   8. RMRoger Martin32:32

      Did they?

   9. LRLenny Rachitsky32:33

      I don't know.

   10. RMRoger Martin32:33

       They didn't. They said, "I hope this online thing doesn't really take off 'cause that would be a pisser because we've got 5,000 stores across America and, and, and we've got all that," and that would be really, that, that would be a bummer. And so they don't do anything for 10 years, giving Amazon the scale, so that Amazon then has this huge scale advantage, uh, kind of on this and network effects, and voila. Uh, you've, uh, you know, you've got a competitive advantage that you, that you didn't necessarily kind of completely deserve. It- you needed the help of the player who stood to lose the most to hope that it wasn't gonna happen. Same with Tesla. Tesla got a 10-year head start not because the OEMs couldn't. They could've. And of course, GM did many, many years ago create a f- uh, a fully functioning electric vehicle, but they couldn't, uh, they couldn't figure out how t- how the hell you make, make a buck on it, and so they didn't. Uh, they didn't do it, giving Tesla the ability to establish a brand that, that people associate with that electric vehicle equals, uh, a Tesla and get them, uh, uh, uh, you know, allow them to jump way ahead and then have the scale that is hard to, hard, uh, for others to match.

   11. LRLenny Rachitsky33:54

       You said something that's really interesting that I think is also really important, which is you said that just being the best or better is not, not a solution. Y- you could have a better pet food. You implied that's not gonna get you there. Can you talk a bit about that?

   12. RMRoger Martin34:06

       Yeah. Y- you have to answer a second question, I guess, which is, which is here's the way I'm gonna be better and here's the way somebody else isn't gonna be able to simply replicate that, uh, quickly, right? Like one of my, one of my f- one of my favorite businesses, uh, 'cause I was on the board of, I was o- I was on the board of Thomson Reuters for 14 years It was Thomson first and then they bought Reuters, so Thomson Reuters. Best business is a business called Westlaw, uh, and it's the i- the dominant provider of online legal searches. So if you're a litigator and you're, you're trying to, y- you're getting ready for a case and you need to know what are the, what are the important precedents for this case, you go onto Westlaw and, and, uh, and, and put in some search terms using a Westlaw keyword, uh, uh, system to, to help, help with it, and, um, you, you, uh, get the five cases that really matter. You can Google it and do the same thing and you'll get the 500 cases that might matter.

   13. LRLenny Rachitsky35:09

       Mm-hmm.

   14. RMRoger Martin35:10

       Right? So how does Westlaw do that? Well, for now over 100 years, they've taken every case that's come out of the, the US legal system, had a lawyer, a w- a Westlaw lawyer write a headnote that summarizes what's in the case using these key words so that they were searchable, and today, to do 2024, uh, takes 1,500 full-time lawyers.

   15. LRLenny Rachitsky35:41

       Hmm.

   16. RMRoger Martin35:42

       Right? So if somebody else said, "You know, this Westlaw business is incredibly profitable and it keeps growing and it's, you know, it's awesome. I'd like to be in that business," all they'd have to do is hire 150,000 lawyers full time and you'd have to create a numbering system and a keyword system that's different than Westlaw's, and then you'd have to do what Westlaw has done for the past 50 years which is give it free to law schools so that they teach their students before they even get out how to use Westlaw and all... You know, no probs. (laughs) That'll be easy, right? You know, nobody's even tried. Why bother? Life's too short. And that's the kind of, the kind of capabilities you need to be able to say we'll win by having the searches that make the lawyers' job the most effective, and if it saves them time, it saves them money, right, and, and you don't need a huge law library.Like, law firms used to have these huge law libraries, right? You don't need one. You need a terminal, or actually now it's on everybody's PC, and you don't need a bunch of librarians to go and find the cases that, that you need. They pop up on, on your screen. That's a great case of competitive advantage.

   17. LRLenny Rachitsky37:02

       Today's episode is brought to you by Cycle, the AI-powered feedback platform for product teams. Is your customer feedback a tangled mess of Slack threads, survey responses, and overflowing inboxes? Wish that you could know what your customers really need? Cycle unifies all of your customer interactions from support chats, to user research, gong calls, and app store reviews into one neat collaborative space. Cycle's AI then extracts actionable insights on autopilot. Cycle will learn what you're building so that it can label incoming feedback automatically. That means you'll get a full voice of customer report without manually triaging feedback. Then simply use Cycle Ask to dig deeper into any topic and generate custom AI-generated summaries across your entire feedback repository. What makes Cycle different is the way that it lets you close feedback loops in each release. Feedback is not used just as a way to prioritize what to build but also as a tool that creates trust with all stakeholders. Sign up for a free Cycle trial today at cycle.app/lenny and put your feedback on autopilot. That's C-Y-C-L-E dot app slash Lenny. So essentially, we're talking about moats. What are some moat that you can create where people can't just copy what you're doing?

   18. RMRoger Martin38:18

       Warren Buffett likes, uh, that terminology, right? Th- That's what he says. He invests, uh, uh, he invests in moats.

   19. LRLenny Rachitsky38:25

       Yeah.

   20. RMRoger Martin38:25

       Yes, yes.

   21. LRLenny Rachitsky38:25

       I'll find the quote. We used, we used it in a recent podcast episode. But he's like-

   22. RMRoger Martin38:28

       Yes.

   23. LRLenny Rachitsky38:29

       ... "castles with moats." O- And maybe along those lines, is there, is there kind of a way, a way you think about types of barriers to recreate capabilities as like, here's the options we have? Is it like, like essentially the seven powers I think talks about this.

   24. RMRoger Martin38:43

       Yeah, yeah. I mean, tha- that, that's how, that's why I kinda like Helmer.

   25. LRLenny Rachitsky38:46

       Mm-hmm.

   26. RMRoger Martin38:46

       I like because he, he categorizes them. And, and I've gotta, and I've gotta look into, look into it, uh, some more 'cause I ha- I, I mean, I haven't, uh, studied it to, to say whether I would, whether I would concur that there are just seven-

   27. LRLenny Rachitsky39:00

       Mm-hmm.

   28. RMRoger Martin39:00

       ... or, or there are more. My suspicion might be that there are more, but there may, there may not be. They may be all clustered. There may be variants that cluster, uh, uh, behind those. But I don't myself have a categorization scheme that says, "Here's how you search for, uh, the, uh, the moat."

   29. LRLenny Rachitsky39:20

       Great. Uh, that would be nice. So here's the quote from Buffett, by the way. "I look for economic castles protected by unbreachable moats."

   30. RMRoger Martin39:27

       Yes.
9. 40:23 – 43:39

   Applying strategy to real-world scenarios

   1. RMRoger Martin40:23

   2. LRLenny Rachitsky40:23

      Let's go back to the five, uh, questions again 'cause that's so-

   3. RMRoger Martin40:26

      Yeah. Sure.

   4. LRLenny Rachitsky40:26

      ... core to the way you think about strategy. What do you think about using, say, this FigJam as an example, as a hypothetical, just to think through questions that they might ask to think about strategy? And I can describe what FigJam is so you

   5. RMRoger Martin40:37

      Sure, sure. I do not know that product.

   6. LRLenny Rachitsky40:39

      Okay, cool. Uh, it's basically a visual whiteboard collaboration tool where people can put in sticky notes and put little mocks and kinda play around-

   7. RMRoger Martin40:46

      Oh.

   8. LRLenny Rachitsky40:46

      ... with cursors.

   9. RMRoger Martin40:47

      Okay.

   10. LRLenny Rachitsky40:47

       And so it's for, like, brainstorming and ideation-

   11. RMRoger Martin40:50

       Yeah.

   12. LRLenny Rachitsky40:50

       ... things like that and laying out concept.

   13. RMRoger Martin40:52

       Gotcha. Okay. That would make sense for, for Figma.

   14. LRLenny Rachitsky40:54

       Yeah, exactly. (laughs)

   15. RMRoger Martin40:55

       Yeah, yeah. Right. Okay. So, so you, you'd, you'd ask the question sort of, kind of, what are we trying to accomplish, right? Uh, are we, are we attempting to create something where nothing sort of digital exists, people do this in pen and paper, or are we, uh, and so we're trying to invent a category and then, and then, you know, be transformative by making the, the user experience better? Is that, is that what we're trying to do? Or are we, or there are players already doing this and they're just not doing it very well? You know, you'd want to sort of say, "Well, what are we trying to accomplish?" And, and I don't spend a whole lot of time on that because you gotta toggle back and forth between, bet- between those, those five questions. But you have to have a reason for searching in a given space for where to play, how to win. And so, so what do you, what do you think their, their reason for Fig, for thinking FigJam is worth investing in is? What do you think it is? Is it, is it, is, is it white space or is it, is it crummy, crummy, uh, offerings in the, in the market currently?

   16. LRLenny Rachitsky42:03

       Like if I had to get to it, I think it's they're trying to expand their market and they have a, a stronghold in design tooling. And there's this adjacent market for product teams broadly to be using Figma more. And there are existing tools similar to that that are-

   17. RMRoger Martin42:19

       Okay.

   18. LRLenny Rachitsky42:19

       ... pretty good.

   19. RMRoger Martin42:21

       So I don't love it to start.

   20. LRLenny Rachitsky42:25

       (laughs) Say more.

   21. RMRoger Martin42:26

       So there's a, there's a big market over there, we'd like to get some is a terrible reason-

   22. LRLenny Rachitsky42:31

       Mm-hmm.

   23. RMRoger Martin42:31

       ... uh, of, uh, in my, in my, in my, in my view. The reason should be, uh, customers are bereft. Customers are lacking something that we can provide.This is why I hate most, a- an- and most entries by foreign companies into China. They, they get their faces shot off. Uh, and the reason is, the rationale is, it's big, we could get some of that. So, so I don't lo- I don't love it for, for, uh, for, uh, starters. N- and I'm not saying that that will guarantee failure but, it's, it's, it's... If somebody gave me a review with a pitch deck for that, I would, I would not invest.

   24. LRLenny Rachitsky43:13

       Well, I imagine you can also frame it in other terms, like, "Our customers are, uh, demanding, uh, more ways to work within Figma with their teams," and there's these-

   25. RMRoger Martin43:22

       Yeah.

   26. LRLenny Rachitsky43:22

       ... lacking."

   27. RMRoger Martin43:22

       Yeah. Tha- tha- tha- so tha- so that would be, that would be a b- a better one. And w- you're speculating. I- I've asked you-

   28. LRLenny Rachitsky43:28

       Yeah, yeah, yeah.

   29. RMRoger Martin43:28

       ... to speculate, so we don't know, but, uh, I like that one better.

   30. LRLenny Rachitsky43:30

       Okay.
10. 43:39 – 44:06

    Customer-centric strategy

    1. RMRoger Martin43:39

       that, uh, that if we could broaden that for them, uh, into this market, our, our customers would be very happy.

    2. LRLenny Rachitsky43:47

       That is really cool. And so you wanna frame it in the words of, well, how customers would benefit, essentially.

    3. RMRoger Martin43:52

       I just think those are, tend to be s- tend to be stronger, uh, uh, strongest if, i- if there's a link because remember, what is strategy about? Compelling desired customer action, right?

    4. LRLenny Rachitsky44:02

       Mm-hmm.

    5. RMRoger Martin44:02

       So, everything sort of ties back, uh, to that.

11. 44:06 – 45:31

    Defining the market and product

    1. RMRoger Martin44:06

       So then the where to play would be, you, you just wanna, wanna say, "Okay. What customers are we talking about or what parts of our current customers that we don't serve are we, are we attempting to serve with that, and what, and with, w- kind of what product? Is it, you know, is it a finished product? Is it a component of, uh, you know, kind of product? Through what distribution channel? What w- would we sell this?" This is another self-serve type, uh, product 'cause I think Figma is mainly self-serve.

    2. LRLenny Rachitsky44:31

       Mm-hmm.

    3. RMRoger Martin44:31

       Right? Yeah. Um, and, uh, and so you choose a, choose that where, and then say, "How can we solve the pro-"

    4. LRLenny Rachitsky44:42

       Before we get to that, before we get to that real quick.

    5. RMRoger Martin44:44

       Sorry. Oh, yeah, yeah, yeah. Please, please.

    6. LRLenny Rachitsky44:45

       So, the things you mentioned there is like, who specifically are the customers? So in this case it'd be like, product managers, engineers and other functions. And then-

    7. RMRoger Martin44:52

       Yup.

    8. LRLenny Rachitsky44:53

       ... there's the distribution channels, like how we'd actually get to them.

    9. RMRoger Martin44:56

       Get to them, yeah.

    10. LRLenny Rachitsky44:56

        And then what else was, what others, uh, questions are there within this where we will play?

    11. RMRoger Martin45:00

        Y- i- it is-

    12. LRLenny Rachitsky45:01

        Uh-huh.

    13. RMRoger Martin45:01

        ... sort of, to what extent is it a finished product or a component?

    14. LRLenny Rachitsky45:04

        Mm.

    15. RMRoger Martin45:04

        'Cause, uh, sometimes it, it could be a c- a, you know, we'd, we'd like to supply this component that could be integrated into other, other people's, uh, products. I mean, that's what Apple apps are, right?

    16. LRLenny Rachitsky45:16

        Got it. So-

    17. RMRoger Martin45:16

        We don't sell them an iPhone. We sell them a, a component of-

    18. LRLenny Rachitsky45:20

        Within the iPhone.

    19. RMRoger Martin45:21

        ... the customer's, uh, iPhone. Is that, is that what, is that what we're doing here? Because then you have to ask questions about, uh, "Well, how does it fit, fit in with, uh, th- uh, the,

12. 45:31 – 50:34

    Value chain and distribution

    1. RMRoger Martin45:31

       the rest?"

    2. LRLenny Rachitsky45:31

       So the where im- also implies, hmm, like where in the product it kind of lives, like where?

    3. RMRoger Martin45:36

       Sort of at what vertical stage? I- is it like, is it an integrated product where it's the whole thing from soup to nuts? Is it some upstream pieces that some people downstream? Do we take s- pieces from other people and assemble them so we're the, we're the integrator? Those are all, those are all important where to play choices from, from, uh, from my view because those, those make a, you know, kind of a big, uh, a big difference. Like, Four Seasons chose a, Four Seasons the hotel c- uh, uh, company, luxury hotel chain, chose a completely different choice on the, on the vertical stage where to play. Uh, back in the '80s they said, uh, "We're gonna get out of real estate development, so buying land and getting a zone for hotels. We're gonna get out of construction, building hotels. We're even gonna get out of the business of owning the land or the hotel, so that we can be awesome at hotel management. Rich people like, you know, Michael Dell and David Thomson and Bill Gates will own the hotels as an, as an investment, and they will be happy to have Four Seasons brand on their, on their hotel, and we will charge a management fee." That is a where to play choice. Right? Even though somebody, somebody could say, "Well, you're just, you're a luxury hotel. You're like the other luxury hotels who serve luxury customers at a high, high price." Oh, no, no, no, no. No. They h- do it with a stack this thick, we do it with a stack this thin.

    4. LRLenny Rachitsky47:07

       So it's like a value chain question.

    5. RMRoger Martin47:09

       So, er-

    6. LRLenny Rachitsky47:09

       Like, where in the value chain-

    7. RMRoger Martin47:09

       Value chain.

    8. LRLenny Rachitsky47:10

       ... are you gonna play?

    9. RMRoger Martin47:11

       Yeah. Where in the value chain. That, that's exactly, that's exactly right. And everybody has value chain, uh, questions. They often complain, uh, afterwe- after the fact, like, all the apps complain about what cut Apple is taking. But they made a choice, a value chain choice, "We are going to design something that will appear on an iPhone, or an Android, Android device if it's a- that case," and then good luck to you. You can complain like crazy that they're taking so much of it and this is unfair and they've got a duopoly. Yeah, but you guys, you guys cooperated 100% in building that. 100%. Never complained about it until you wanted a bigger piece of the, uh, piece of the pie. But that was it. Vertical stage, uh, value ch- uh, chain stage, that you chose willingly. Nobody f- nobody forced you to do it.

    10. LRLenny Rachitsky48:06

        And Apple's not, not playing, not playing ball, giving it back-

    11. RMRoger Martin48:09

        No.

    12. LRLenny Rachitsky48:09

        ... too, too easily.

    13. RMRoger Martin48:10

        No. And, and do I love the, love just how controlling and everything Apple is? Do I? Uh, no, no. But would I, would I say, "Oh, those poor apps," right? Yeah. No. Get your own distribution channel, buddy.

    14. LRLenny Rachitsky48:26

        Cold-blooded.

    15. RMRoger Martin48:27

        Yeah.

    16. LRLenny Rachitsky48:27

        (laughs) Okay. So, we've talked about the winning aspiration, so for FigJam it'd be satisfy customers that are trying to work with their team in these different ways and making sure they are staying, make sure they get what they need out of Figma versus going maybe to other tools. And then where will we play? Let's say engineers, product managers, just trying to, uh, g- target them, distribution through the existing product. And, and so it's like a feature of the existing product.

    17. RMRoger Martin48:54

        ... yep.

    18. LRLenny Rachitsky48:54

        And then, it's how will we win? How do you think about that?

    19. RMRoger Martin48:57

        Yeah, yeah. Well, you, you, you ask the question, how can we solve... Well, how can we either solve that problem at a, at a much lower cost so we can always be a sharper price, uh, point than, than them. So if it exists there are solutions, but they cost 50,000, uh, a user, because their costs are 30,000 a user. If we can do this for 15 bucks a user, and so we can, we can charge 100 bucks per seat and, and absolutely annihilate the competitor by figuring out a, a, a less costly way to do it. Or there are other, uh, selections, but they make the cut- the, the, the user do all these things and it's ponderous and it takes a long time. We have shortcuts. We use AI to just say a few words, and they say, "Oh, yeah, I know what you mean." And, and, and here, here it goes in the, in the, in the workflow or, or we're more integrated, like at Thomson Reuters, the, the company I was on the board of. You know, our advantage was we were better integrated into the workflow. You didn't have to sort of get out of your workflow to go use this product and then you get back in. We just said, "What's your workflow?" Oh, we'll integrate it. Is it better integrated into their work- workflow that makes, makes their life, uh, easier? It would be... There'd be questions, uh, you know, possibilities like, like that that I, that I would be, uh, asking. Essentially, you've got to have a theory there of how you're gonna be, how you're gonna be better or lower

13. 50:34 – 53:16

    Cost leadership vs. differentiation

    1. RMRoger Martin50:34

       cost.

    2. LRLenny Rachitsky50:34

       On the lower cost front, I think, generally, the advice is you don't want to go that route. That's a very difficult route. Do you... What's your thinking of just like when to go that route that you might actually win at lowest, lower cost?

    3. RMRoger Martin50:45

       That's not advice I give.

    4. LRLenny Rachitsky50:47

       Mm.

    5. RMRoger Martin50:47

       But I, I, I s- I think they're both completely legitimate-

    6. LRLenny Rachitsky50:53

       Mm.

    7. RMRoger Martin50:53

       ... uh, uh, strategies. They have implications, right? So if you want to be the cost leader, it is rare that you can be the cost leader without having dominant scale in the territory in which you're operating. So if you want to be a niche cost leader, you know, good luck to you. That's almost never gonna happen. So Vanguard had to make a race to, you know, we're gonna do index mutual funds, uh, and it doesn't exist now. We're gonna do it and we're gonna get gigantic, and we can't let anybody get close to us in size, uh, because we want to have the lowest cost position. And so they are the, the world's biggest mutual fund, uh, uh, company. Um, and you sort of have to do that, and same with Southwest. To really make that model work, they had to keep expanding and expanding to get, uh, a bigger M&M Mars. It takes an enormous amount of commitment to say we're gonna go and we're just gonna keep charging ahead on, on this. Whereas, in differentiation, I think you can differentiate sometimes at lower scale and build yourself slowly towards higher scale. But the world, uh, the business world is just getting so much more scale sensitive. Like, when you, when you think about the costs of differentiation, it's often spending on branding, spending on R&D, R&D sort of innovation. Those, those two are of the most scale-sensitive elements of anybody's cost structure, right? You, you know, and, and so being a niche differentiator, uh, is getting harder and harder in my view.

    8. LRLenny Rachitsky52:35

       I think it's also important to say, mm, either path is very hard. Like, it's very hard to build a business that makes money and is profitable and survives, just broadly.

    9. RMRoger Martin52:43

       Yes, yes, I agree.

    10. LRLenny Rachitsky52:44

        You're not gonna have this formula of like how to win. Okay, ba, ba, ba, we got it. We got a big business.

    11. RMRoger Martin52:49

        I agree. I agree. And that, and, and that's why, you know, if, if I, if I looked at 100 strategies of major companies, I'd, I'd say I didn't like 90 of them-

    12. LRLenny Rachitsky52:59

        Mm-hmm.

    13. RMRoger Martin52:59

        ... very much.

    14. LRLenny Rachitsky53:01

        And then, like the other nine out of 10 probably s- look good, but also don't work out.

    15. RMRoger Martin53:06

        Yes. No, that's true. There's lots of, lots of spaghetti thrown at lots of walls in the world of business. (laughs)

    16. LRLenny Rachitsky53:14

        Yeah. Capitalism.

14. 53:16 – 57:37

    Capabilities and management systems

    1. LRLenny Rachitsky53:16

    2. RMRoger Martin53:16

       Yes.

    3. LRLenny Rachitsky53:16

       Okay, so now we're at the capability step of trying to figure out what capabilities you need to win. Can you talk about, say, with FigJam, how do you- what are the sorts of things you think about here?

    4. RMRoger Martin53:26

       Well, I, I guess I'd ask myself a question l- kind of like do- is there, is there kind of a learning curve to this where we could have better capabilities because we started earlier than anybody else?

    5. LRLenny Rachitsky53:43

       Mm-hmm.

    6. RMRoger Martin53:44

       Right? And have more essentially cumulative experience. Is there kind of a way that we've figured out how to serve customers that make them feel tended to better by, by us? So we've got, we've got helpline. We figured out how to do sort of the help line 'cause if it's sort of self-serve and, and that's how they get the product and then they've got, they've got issues with how to use it, they feel that we're, that we're just better, we're the best of, of all their providers at, at, at that. How to win is a theory of how customers are gonna perceive us better if we're a diff- differentiator. Uh, and then it's what capabilities would have to, would we have to have to make that theory come true rather than just be, just be a kind of a, a, a wish? So if we want them to feel like we're the easiest to deal with, we have to have capabilities, uh, uh, to do that. And just like, again, Four Seasons said, the reason they're, they're there, by far and away the most successful, profitable, best in all fronts, luxury hotel chain in the world, biggest, best, most profitable...... best employee, uh, rankings, best guest, uh, guest rankings, all of those. Well, their how to win was they said, "People, if you talk to people who are in luxury hotels, they'd rather not be there." You'd say, "Wow, they're in the lap of luxury, why would that be?" Where do you think they'd prefer to be, Lenny?

    7. LRLenny Rachitsky55:19

       At home.

    8. RMRoger Martin55:21

       Yeah. Dominantly at home, for their segment, which was high-end business travelers. They've traveled, they've stayed in one luxury hotel too many 20 years ago. And so we're going to have luxury defined as not grand architecture and decor and obsequious service, but rather, uh, we're gonna define it as a service that makes up for what you left at home or at the office, 'cause people would rather be, if they c- have to not be at home, they'd rather be at the office than in a hotel 'cause they can be more productive. And so, so we need capabilities, we need staff, right, that, that can deliver on that, uh, capability. What's the problem for that? The problem is turnover in the ho- hotel industry globally is 80% a year, which means that the average person you meet, the average staff person you meet in the average hotel is on their way to a 16-month career at that hotel chain.

    9. LRLenny Rachitsky56:16

       Mm-hmm.

    10. RMRoger Martin56:16

        So how do you deliver that really cool, special kind of service with that? The answer is an a- eh, is, and now I'm skipping ahead to enabling management systems. You have to have a different way of recruiting, a different way of onboarding, a different way of career development, and if- i- if you do all of those things, you end up with a 10% turnover rate so that your people are there 10 years, on average, and you can then get them trained up to deliver that kind of service. So that's the capability that you build in the people to be able to take more decision-making at a lower level and treat the guests in a customized way that makes them feel that this wasn't by-the-book, some rule book, uh, that this person just said, "No, this is a good solution for my, for my guest."

    11. LRLenny Rachitsky57:01

        It's interesting that these capabilities and even the management systems, which is step five, uh, relate to, um, your moat, which is sometime- is the thing you need to achieve, also ideally is the thing that other people, it'll make it hard for them to do.

    12. RMRoger Martin57:15

        So the, you're exactly right. You can call, if you want, how to win moat, right?

    13. LRLenny Rachitsky57:18

        Ah, mm-hmm.

    14. RMRoger Martin57:18

        Definition of your moat, and so capabilities and management systems are what, what both build and maintain the moat, right?

    15. LRLenny Rachitsky57:26

        Mm-hmm.

    16. RMRoger Martin57:26

        And, and the maintaining is an important part, because if you are the most successful, people are gonna say, "I wanna do that, too." But here's where

15. 57:37 – 1:06:10

    Competitive advantage and market positioning

    1. RMRoger Martin57:37

       there's this modern sort of, unfortunately, bullshitty thing that says, "Oh, oh, competitive advantage is fleeting in this modern hyper-competitive world and you can't have long-term advantage anymore." And I, and I just say, "Oh, oh, I see." So Four Seasons, I guess, yeah, I guess that isn't very long term. That has only been 45 years now since they ... No, 35 years, I should say, don't exaggerate, since they went to that strat. Oh, and Tide, so 77 years isn't that long time, I guess, either because they've been the number one detergent for 77 consecutive years. I guess you're right, it's fleeting.

    2. LRLenny Rachitsky58:15

       (laughs)

    3. RMRoger Martin58:16

       It's not, but what makes it fleeting is when you have one thing and one thing only. So let's say you build the biggest polyethylene plant in the world near a good f- a good feedstock source and you have a low-cost position. What's somebody else gonna do when they see how much money you make doing that?

    4. LRLenny Rachitsky58:38

       Mm-hmm.

    5. RMRoger Martin58:38

       Build a, build a f- polyethylene plant beside yours twice the size and then, then you're toast. Why? Because the competitive advantage was too simple. But at Four Seasons, you gotta sell off all your hotels, uh, you gotta fire all the people involved in hotel devel- development and everything, and actually there are people, uh, in the business like doing that. You have to essentially get rid of your entire staff, start from scratch, paying them more than you do now by far, uh, giving them more career security, uh, giving them more training, giving them better uniforms, whatever, spending 10 times as much, uh, hiring them with the hopes that maybe someday you'll be able to produce the kinda services Four Seasons does. Competitors basically say, "Life's too short." Do they give up and die? No. There are other great chains, Mandarin Oriental. My wife li- loves staying in Mandarin Oriental even more than Four Seasons often, and, and, but they've not said, "We will replicate Four Seasons." They've said, "We'll pick a different where and a different how," and that's, in the end, what you want, is rather than complete overlap, right, where you've got concentric circles of people picking the same where, you, you convince people to pick different wheres. That's why people sorta say, "Roger, h- how to win, that's so, so im- im- impolitic, you know, 'cause that you're producing losers and, and, and then there's victims and be, you know, all that." You know, the oppressor and opress- it, it, it fits in the, in the modern dialogue. And, and I say, "No, I, I, what I wanna do is encourage them to find some place else to prosper rather than smack on top of us." And so if you have completely different manage, uh, capabilities and management systems, it'll encourage people to choose a different where to play, how to win. If your capabilities and management systems are very similar to your competitors and you're succeeding with your chosen where to play, how to win, what are they gonna do? (imitates car revving) They're gonna drive straight to your where to play and, and try to win exactly the same place and, and wreck your market for bo- for both of you. That's what you, you don't want. And the more sort of complicated, in some sense, not com- I shouldn't use complicated.... the more nuanced that you are and, and, and multifaceted your capabilities and management systems are, the more likely they're gonna say life's too short. Right? That's what everybody says about Southwest. So if you're the only airline in the United States that's earning its cost of capital for 50 years, wouldn't you kind of say, "Gee, I'd love to be like that." But what does it mean? Well, it means selling off most of your aircraft so that you can have only one kind of aircraft, 737s, tearing up your entire route structure, your entire hub and spoke structure and make it point-to-point, kind of changing your complete labor relations strategy from fighting the unions to paying them, paying them a lot as long as they're highly flexible. People think Southwest is non-union, it's not as unionized as it, but they do different... You have to essentially fire all your travel agents and convince your customers to book, uh, book, uh, online by themselves to save, to save more money. Life's too short. Life's t- it's just too short. So they try things like, uh, Continental Light or TED that do half the things that, uh, that Southwest does, and then you're what? A crappy Southwest. You know, uh, so that's the, to me, that's the ultimate. The ultimate is, it's like the ultimate weapon is the one you never use. The ultimate way to compete to win is to never actually be forced to compete.

    6. LRLenny Rachitsky1:02:38

       Wow. Hmm, that's a great quote. This story about Southwest, uh, makes me think about, uh, Hamilton Helmer's, uh, Power of Counter Positioning. I don't know if you've heard that term, but basically, uh, you position yourself in a way where the competitor can't do the thing that you're doing because of the way their business is already structured. And that's-

    7. RMRoger Martin1:02:58

       Right. Sounds right, that's the CAN'T. Uh, the, the-

    8. LRLenny Rachitsky1:03:00

       Yeah. Yeah.

    9. RMRoger Martin1:03:00

       ... CAN'T thing, right?

    10. LRLenny Rachitsky1:03:01

        Awesome.

    11. RMRoger Martin1:03:01

        Yeah. And, and, and Mike, and Mike Porter, and he probably, he may quote Mike, Mike on that. Mike was very big on that. He said it's fault lines. So you're trying to find the fault line where, where it is so painful for your competitor to come across that fault line into your, your side. And so a great example of that would be Olay when, when at P&G, it's, and it's in the, in the, in the book, when, when we did the repositioning of, uh, of, of that, the competitor that could have killed us, absolutely killed us, was Estee Lauder with Clinique. If they would've brought Clinique into the mass channels, because we were doing a Clinique kind of thing in the mass channels rather than the prestige. Prestige is like the first floor of the department stores, right, which is all, which all... Or Sephora or Ulta. If, if Estee Lauder would've taken their Clinique brand and brought it into mass, they, uh, they, they would've, they would've killed what we were doing. Simple as that. And in fact, Clinique was the biggest brand in all of skincare. We became the biggest brand in all of skincare, and they didn't do it. Why? Are they idiots? No, they're not. Estee Lauder is super smart, but Estee Lauder also has Bobbi Brown and MAC and, and the Estee Lauder, uh, it's all branded and, and a half a dozen more all in prestige. And the prestige channel, if they'd have taken Clinique and taken it over into mass, would have done what? Shot them in the face.

    12. LRLenny Rachitsky1:04:41

        Mm-hmm.

    13. RMRoger Martin1:04:42

        Killed them, right? Uh, li- they would've been just apoplectic. Uh, and so Estee Lauder had to stay, if that's counter positioning by, by, uh, Helmer's, uh, terms, they had to stay there. Was that stupid? No. They're still, they're still, with all of their brands combined, the biggest in skincare, but Clinique has, you know, lost leadership to, you know, our brand that they would have considered kind of nothing. Oil of Olay became Olay, Olay Pro-V, uh, well, uh, Regenerist, all of these higher priced products than they could ever imagine being sold in the mass channel. But our biggest friend was is su- in some sense, uh, their distribution channel, which would have killed them if we... Literally, they would have just punished them so, so, so bad, uh, that, that they didn't do it.

    14. LRLenny Rachitsky1:05:38

        I love that I'm learning all this informa- all this strategic thinking about makeup and skincare. I also love just the idea of you leading strategy for skincare and makeup brands.

    15. RMRoger Martin1:05:46

        Yeah. No, I got Procter & Gamble into, uh, color cosmetics.

    16. LRLenny Rachitsky1:05:50

        So funny.

    17. RMRoger Martin1:05:51

        Cover, cover-

    18. LRLenny Rachitsky1:05:51

        I love that. Hmm, I don't know if you're following the AI Google stuff that's happening where there's, uh, search engines competing with Google by just answering the question versus giving you a bunch of blue links. And-

    19. RMRoger Martin1:06:03

        Yes.

    20. LRLenny Rachitsky1:06:03

        ... there's this question of will Google shift because people seem to really like it versus they're making trillions of dollars running ads when they share blue links,

16. 1:06:10 – 1:14:32

    Adapting to market changes

    1. LRLenny Rachitsky1:06:10

       and it's this like super innovator's dilemma position they're in.

    2. RMRoger Martin1:06:14

       Yeah. No, no, I, I, yeah, I'm, I'm very interested in, (laughs) in, in what's going on in, uh, in AI and I'm writing some stuff on-

    3. LRLenny Rachitsky1:06:22

       Hmm.

    4. RMRoger Martin1:06:23

       ... on, on that, but I mean, it's hard. Like I've seen, I've seen the inside of this for many of my, my clients. It is super hard when the, the guts of how you make money is under th- is under threat, um, and you, you just don't want that thing to go away. You know, the big o- auto OEMs make money selling cars with ICE engines, that, it's simple as that. And then there's no surprise they've been doing it for 100 years, they're way down the learning curve, they have scale, blah, blah, blah, blah, blah, and so these damn electric vehicles are no, uh, kind of no fun. And so the G- the Google situation you've described, I think it's similar, but my general, my general advice is always the same, which is, you know-... it, it can take a while, but in the end, the customers will triumph. And A.G. Lafley, my friend who I co-wrote the book with, gr- great, great CEO, was very good on this and, and, uh, one of his big customers, big ass customers came to him and said, "If you don't stop cooperating with Amazon, we're gonna de-list all your products." Big threat, right? Big threat. And A.G. just said, "If customers wanna shop there, we can't, we just can't not be where our customers wanna shop. And so, if you feel you need to do that, y- you're usually gonna have to because customers wanna shop there and we are not, we're not doing that. But what are you offended by that we're doing there?" And they, e- e- and they said, "Well, you're allowing them to ship products to their customers from your, from your distribution centers." And A.G. just said, "Um, yeah? Do you wanna too?" And they were like, "Mm-mm." And he just said, "W- w- we, we don't do anything special for them that we wouldn't do for you. They ask for things that you don't ask for because of their, their business model, but, but we're, you know, if you come to us with ideas of how we can help you serve our joint customers better, we're, we're all in, but we're not, we're, we're not boycotting a place that customers have shown they wanna shop." Mm. As long as they're of an honest, like, you know, you know, if, if Amazon was sleazy and dishonest or qui- whatever. But, you know, an honest, upstanding place where customers can get our, our products. And so, I'm, that's, that's where I'm at, which is, which is, you, you may have to scramble like hell. Uh, you may have to suffer, uh, f- from, kind of, economic downturn. But if you think you can, you can, uh ... Like I, I always think of it, like, we, I, I don't know if you did this as a kid, Lenny, but when we went to the beach on family trips, you know, we would, w- there are four brothers, we would build ... Plus then a baby girl later. But th- we would build sandcastles and try to, try to, a- and hold back the tide. Like, this would be in Florida or California, we'd dr- try and hold back the tide and we'd come the next morning to see if our castle is- Mm. And it was always gone. Like, 'cause it's like gone. But we keep trying doing it, and it's sort of like, you can't hold back the tide. Maybe it can for a while, but you can't, you can't forever. So, so you just have to figure out where are the customers going, right? And if they're going some place ... And Vanguard did this, right? Um, Jack Bogle, the late Jack Bogle, he's dead, de- he died now, uh, a couple years ago now, he did not like ETFs. He said, "ETFs are not as good for customers as mutual funds." And he had a, he had, uh, all sorts of good reasons, uh, uh, for that. But the, the index ETF business started to kind of grow like crazy and, and, i- and Jack had to relent and say, "I don't think it's good for them, but they want it." And so, you know, they went whole hog into it and, and are the leading index ETF provider, as well as the index mutual fund provider. But for a while they weren't. But he realized it was the tide, and he was attempting to hold back the tide. So, good luck, good luck to you in that. Mm. So, to me, if Google thinks they can, because of their, their power and the fact they're, we got a multi-trillion dollar market cap and they've got a m- near monopoly position on, on something they can hold back the tide, you see, the, the, the, (laughs) the water finds a way to flow, right? Like, think about Microsoft and its monopoly on PC operating systems, or its near-monopoly on P- PC operating systems, and I would argue that they abuse that, uh, kind of monopoly, right? Like, I af- I often ask people, "When's the last Windows update that got you as a customer excited?" Yeah. Windows 95, I think. The answer I think is really clear. Windows 95. Right? Yeah. 'Cause that's when the, took the graphical user interface that he bought rights to from Steve Jobs and put it on so he didn't have to do backslash, backslash to- Yeah. ... you know, you could actually point and click. That's a long time ago. Last time I checked, that's now almost 30 years. Oh, yeah. Right? Right. And so, they just abused their, their cust- H- is there their share of PC operating systems much lower than it was then? No. But that's not the right measure of share. The right measure of share in my view in that, in that industry is your share of minutes spent staring at a smart screen. Hm. Right? Like, that, that, that's what the share of operating systems that you should care about. And so, what kind of smart screens do people now stare at most? (laughs) Right? Yeah. Right? Most. Mm. And what other one do they, do a lot of people stare at who really like them? Pads. Mm-hmm. Right? Um, and so if you added up all those and then said, "What do you think ... So what's their share of, of, uh, smartphone operating systems, Microsoft?" Last time I checked it was .4 of 1%. Yeah. So, effectively zero. How about pads? Apparently it's 4%, uh, there. So their share of people staring at a smart screen has plummeted-... plummeted. Why? Because water finds its own level. People said, "There are these other ways of getting around, uh, th- uh, this and I'm gonna take those, uh, take those, uh, ways." And I think the degree to which people use their smartphone for more things as a function of that smartphone has advanced so much faster than, than your PC operating system, because more people are using it. So, that's what I'd say to, that's what I'd say to Google.

    5. LRLenny Rachitsky1:13:44

       (laughs)

    6. RMRoger Martin1:13:44

       I don't care how painful it is, it is. Water, water flows downhill. The tide comes in and, you know, you cannot stop that even if you're one of the most powerful three firms on the face of the planet.

    7. LRLenny Rachitsky1:13:59

       And it may take time, but eventually-

    8. RMRoger Martin1:14:01

       Yeah.

    9. LRLenny Rachitsky1:14:01

       ... the customer tide pools. That's a, I think that's a really important advice.

    10. RMRoger Martin1:14:04

        Yeah, but start now.

    11. LRLenny Rachitsky1:14:05

        Yeah.

    12. RMRoger Martin1:14:06

        Right?

    13. LRLenny Rachitsky1:14:07

        Yeah.

    14. RMRoger Martin1:14:07

        If you're, if you don't start now, it's too late.

    15. LRLenny Rachitsky1:14:11

        Yeah. I wanna end with one very tactical question for people that may feel overwhelmed. There's like, "Oh, my God. I don't s- I don't know what we're gonna do. This is so hard, all this strategy stuff." Um, you have this really cool idea of, called betterment. I think you wrote a media post about it, thinking betterment over perfection, and it gives you kind of like a first step of like, okay, here's a way to move forward. Can you just talk about that

17. 1:14:32 – 1:18:44

    Practical strategy tips

    1. LRLenny Rachitsky1:14:32

       approach?

    2. RMRoger Martin1:14:32

       So for me, strategy, this thing called strategy with, yeah, with w- people go, "Oh, my God. Oh, my God. How am I gonna do strategy?" Whatever.

    3. LRLenny Rachitsky1:14:39

       Mm-hmm.

    4. RMRoger Martin1:14:39

       I, I, I, I just think of it as a problem-solving tool, right? And what problem should you attempt to solve? You should attempt to solve something where your current outcomes that you're getting are lower than the outcomes you wish you were getting. That's what I call a gap. There's a gap between those two, and you should just conceptualize it as your current outcomes are a natural result of all the choices you've made interacting with the competitive environment, right? And so, you should reasonably assume that probably those outcomes aren't gonna get a whole lot better, because they've, they've sort of, they are the way they are for a good reason, right? So, you're gonna need to make a different set of choices to make that gap go away. That's what I would work on. I would just ask the question, what is the single most painful gap currently that I'm facing? Customers used to do this and they're doing this. Uh, I can't find this kind of, kind of, uh, resources. Our distribution channel has abandoned us. And w- I, you know, whatever, whatever is the most painful thing, and then just tackle that and say, what different choices could I make? And I'd say, use my cascade. What, what... Could I change where I'm playing? Could I change how I'm winning? Could I change here my capabilities? Could I change my management systems in order to achieve a different, a different aspiration? And so, don't try to solve the problems of the world, or even all the problems at your company. That's perfection. Betterment is making that gap go away. And guess what happens if you make that gap g- go away. You can turn your attention to the next gap, and the next gap, and the next gap. And if you do that all the time, right, y- you're always working on the next gap, the next, they'll get smaller and smaller over time. And man, I don't know if this is a great analogy, but, you know, I was dean of a business school for 15 years, the guy who won the Professor of the Year award more times than anybody else, and did it sort of teaching tough courses, often executive MBA courses and, and the like, had a simple formula for doing it, right? Which is, which is he, he, eh, he taught se- uh, second year courses, and second year courses happen to be 13 two-hour kind of lectures, or sessions of one sort or another. He just polled the students, uh, on what they thought of each session as they went along, and regardless of the reason, regardless of anything else, simply chopped number 13 every year, right? Because in some sense it's the biggest gap, the gap between what, what, what, uh, the customers, students, wished for and were getting. Um, and he would just replace it with something. He would try something else and replace it with that. And you'd say, "And that gets you, like, Professor of the Year every year?" And the answer is yes, betterment.

    5. LRLenny Rachitsky1:17:51

       Mm.

    6. RMRoger Martin1:17:51

       Because if you're teaching for 25 years, right? (laughs) And you just keep doing that every year, every year, the course keeps getting better and better and better and better and better and better. So, betterment, you know, it doesn't make purists feel awesome, but I'm not here to make pure- purists feel awesome. I'm here to help, help people get better.

    7. LRLenny Rachitsky1:18:21

       This is making me think about your water metaphor, too, of just water f- eventually finding a way through, little bit-

    8. RMRoger Martin1:18:25

       Yeah.

    9. LRLenny Rachitsky1:18:25

       ... by little iterating, making things better.

    10. RMRoger Martin1:18:27

        Yeah, yeah. Yeah, lots of what I think about in strategy is sort of natural, if you will. I, I, I, I try to ask, how does the world generally operate? And is what we're doing kinda consistent with the way the world generally operates, or not? Mm-hmm.

    11. LRLenny Rachitsky1:18:42

        Roger, this was so much

18. 1:18:44 – 1:22:02

    Final thoughts on strategy

    1. LRLenny Rachitsky1:18:44

       fun. Uh, we covered everything I was hoping we'd get through. I think we're gonna help a lot of people with the way they think about strategy. Is there anything else you wanted to just leave listeners with, or say, or before we wrap up and, and let you go? And we did a, we covered a lot, so there may not be anything left.

    2. RMRoger Martin1:18:58

       Well, on strategy-

    3. LRLenny Rachitsky1:18:59

       Yeah.

    4. RMRoger Martin1:19:00

       ... I'll d- there's, there's one piece of advice I'd say. People often ask me about, about, a- about people who are natural strategists, or they say, "I'm not naturally good at that. I'm more of an operational guy or gal." And what I tell them is, "I have never met this mythical beast called a great natural strategist."And they often throw back in my face, "Laffley," they say, "Look, Laffley, he was, he was known as a strategy genius," right? And I say, "Yeah." Um, but when I interviewed him in-depth about his background for, for a, a, a paper I was, I was, I was writing, what I discovered was when he was in the Navy as a whatever, I don't know, probably 25-year-old in the Navy, he had a job where he had to think about strategy and was testing things out and doing things and the like. And then I realized that he had been practicing strategy for decades before he became the CEO. Decades. Uh, and so he just had more reps when he became CEO than almost anybody else that, that, uh, that I've ever met. There's another guy, Jørgen Vig Knudstorp, CEO or ex-CEO, now he's, uh, gone on to a higher level, uh, LEGO Brand Group, uh, would be s- would be similar. So great strategists that I have met have all one thing in common. They just practice. And anybody, there's no such sort of, uh, thing as a person who is willing to practice strategy who will end up saying, "I'm kind of operational. I don't, I don't do strategy well." Which links to our pr- uh, our last thing about betterment. Just, just work on making different choices to solve problems. Not problems that I say. I'm not gonna define your gap. It's one that you feel in your heart, "I wish this were better." Work on it, and if you do that, you'll be a great strategist. So be encouraged. Uh, don't be, don't be discouraged, and the worst thing to do is to wait. People say, "Well, I've got all these operational concerns right now and then I'll get to strategy later." Eh, you'll never amount to anything. Nobody who says that ever amounts to anything.

    5. LRLenny Rachitsky1:21:22

       Wow. I love this. I love how empowering it is. I love the real talk.

    6. RMRoger Martin1:21:25

       (laughs)

    7. LRLenny Rachitsky1:21:26

       (clears throat) Roger, you're awesome. Thank you so much for being here.

    8. RMRoger Martin1:21:29

       You're most welcome. Thank you for making it a, a fun journey for me.

    9. LRLenny Rachitsky1:21:32

       I learned a ton and that's always a good sign and it was all a lot of, a lot of fun as well. Thanks, Roger.

    10. RMRoger Martin1:21:36

        Good.

    11. LRLenny Rachitsky1:21:37

        All right. Bye, everyone. (instrumental music) Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. Also, please consider giving us a rating or leaving a review, as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at lennyspodcast.com. See you in the next episode.

Episode duration: 1:22:02