The 7 Steps for Creating an Effective Business Strategy

This article is an excerpt from the Shortform book guide to "Playing To Win" by AG Lafley. Shortform has the world's best summaries and analyses of books you should be reading.

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What makes a winning business strategy? What factors should you take into account when designing a big-picture strategy for your business? 

It’s one thing to set goals for your company, but it’s another thing to know how to reach those goals. The path towards your goals is your strategy. An effective business strategy is one that is built from the ground up.

Here’s a seven-step process for creating a strategy for success.

Form a Leadership Team

An effective way to make group decisions is to ask what needs to be true for a particular strategy to be successful. This approach allows people to think creatively and work as a team to figure out how to meet those needs. Lafley and Martin urge you to figure out—as a team—how to create the ideal market situation for your strategy. If creating that situation isn’t feasible, then neither is the strategy.  

Most organizations aren’t good at bettering their odds in this way. A team often comes up with a single strategy, which they analyze to show that their strategy will work and is cost-effective based on current market trends. The problem is that this type of analysis only reflects what’s true at the moment.

Lafley and Martin offer a seven-part process for deciding on an effective business strategy by determining the necessary conditions for its success:

Part 1: Lay the Groundwork for a Choice

Lafley and Martin say you should begin by identifying the problem you’re trying to solve and boiling your options down to a clear either/or choice—for example, if you need to reduce overhead, perhaps your options are to either fire employees or cut down on distribution to an expensive place. Next, ask what information you need to figure out which solution is best. Note that you’re not making a decision yet; you’re figuring out what groundwork you’ll need to make that decision. 

Part 2: Imagine Potential Strategies

Laying the groundwork required you to have two options to consider. Now that you have those two logical options, think about every possible strategy for solving a problem, no matter how off-the-wall it seems. Lafley and Martin suggest that, during these sessions, you don’t put the ideas through any sort of vetting process—just let solutions fly and imagine the positive outcomes of each. Commit to being open to new ideas, no matter how unusual. 

(Shortform note: In Purple Cow, Seth Godin suggests that you use these brainstorming sessions to intentionally come up with the most extreme, over-the-top options you can imagine. Godin reasons that to create an exceptional product, you should start by finding the outer limits of possibility. Then determine which of those extreme options will get you the kind of customer attention that you want, and figure out how to implement it.)

Part 3: Determine the Conditions for Success

After you’ve written down all of your potential solutions, the authors tell you to move on to figuring out what market conditions would be necessary for each of those possibilities to succeed. Doing so requires a sort of reverse engineering—start with the assumption that each potential solution is a good one, and work backward to what conditions would make that so. 

In other words, don’t ask whether strategies would be successful based on current conditions; that might lead you to throw away potentially strong strategies simply because they wouldn’t be successful now. Instead, ask what conditions each strategy would need for success. This approach acknowledges that even strategies that wouldn’t work now may work in different conditions, thus encouraging people to think about them more thoroughly.

Consider what would need to be true in each of the areas that we’ve previously discussed:

• Industry structure: What would need to be true about the industry you’re hoping to compete in, and the particular segment of that industry you’re targeting? For example, maybe there would have to be a particular niche for your business to fill. 
• Customer values: What would need to be true about what your customers want and value? For example, people would need to buy the product or service you’re hoping to sell. 
• Competitiveness: What would need to be true about your position within your industry, relative to your competitors? For example, as we discussed earlier, your business strategy might hinge on you being the best at manufacturing, or being able to sell your product at the lowest price.
• Competitor responses: What would need to be true about your competitors’ actions in response to your strategy? For example, it would need to be true that your competitors can’t outperform you in your own core competency—or, at least, would require significant time and resource investments to do so.

(Shortform note: In Purple Cow, Godin talks about how digital cameras were able to compete with—and eventually dominate—the photography market by taking this approach. In brief, the camera manufacturers realized that in order for their product to see widespread success, they needed two things to be true: Digital cameras had to be as easy to use as film cameras, and people needed to understand the advantages that digital cameras offered (such as not needing to get film developed). Once they created those two conditions, digital cameras became enormously popular and quickly dominated the market.)

Part 4: Find Potential Barriers

Lafley and Martin’s fourth step is the opposite of Step 3—Figure out every potential problem with each strategy. Encourage the members of the team who are most skeptical about each idea to explain their skepticism. Do this for each of your potential solutions. 

(Shortform note: Sometimes, the most successful people are those who manage to turn problems into opportunities—and that begins with recognizing your problems, as Lafley and Martin suggest. For example, boxing great Muhammad Ali won the famous Rumble in the Jungle match against George Foreman by using a strategy he called the rope-a-dope—leaning against the ropes to absorb the shock of his opponents’ strikes, while Foreman tired himself out with powerful yet ineffective punches. Then, in the eighth round, Ali struck back against the exhausted Foreman and scored an easy knockout. In other words, Foreman’s strength was a barrier that Ali couldn’t overcome, so instead he used a strategy to turn that barrier into an advantage.)

Part 5: Create Tests

Next, Lafley and Martin suggest you design tests—approved by the group—that can gauge the potential success conditions and the potential barriers to each strategy. These can be qualitative (like speaking to customers in a focus group) or quantitative (like conducting large-scale price-point tests). If your company can’t afford these sorts of tests, Lafley and Martin recommend using publicly available data instead. 

As in Part 4, having a skeptic in the group is useful. Everyone needs to believe that the tests will give meaningful results, and skeptics will have the highest standards for those tests. 

(Shortform note: At this stage, it helps to recognize when formalized testing is feasible and when it isn’t. Generally speaking, formal testing is appropriate for implementing a strategy but not for creating a strategy. For example, if you’re considering a new logo for your company, you can test it on a small scale and see how your customers respond. However, if you’re facing a major strategic decision like a merger or choosing a manufacturer, there’s no way to run a meaningful test—you’ll have to make the best decision possible based on the information you already have.)

Part 6: Administer Tests

After you’ve designed your tests, conduct them. At this point, your group should have an inkling of which ideas are more and less likely to be successful. First, test the ideas about which you feel the least confident. If these possibilities fail your tests, you can eliminate them right away and move on to testing ideas that you think have a better chance of success. 

The authors recommend testing one strategy at a time. Companies often try to analyze every potential solution at once, which is more expensive and can cause confusion when tests and strategies overlap.

(Shortform note: You may be tempted to create tests that you believe your ideas will pass, to prove that your idea is workable. However, it’s often more effective to do what philosopher Karl Popper calls negative verification: Design tests that you think the strategy will fail in order to show that it’s fatally flawed. Negative verification allows you to quickly and efficiently weed out the ideas that won’t work. It also gives you greater confidence in whichever choice you settle on—you’ll know that it’s a strong enough strategy to withstand your best efforts to make it fail.)

Part 7: Make Your Choice

The final step of Lafley and Martin’s process is to choose an effective business strategy. If you’ve done the first six parts correctly, you should feel confident that the data from your tests are pointing you in the right direction. Whichever potential solution tests best is the one you should choose. 

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• Why the cascade strategy will help you become victorious in your chosen field of play
• Why you should make every choice with the purpose of not just competing, but winning
• How to develop a system of decision-making for your company

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