In Playing to Win, Roger L. Martin, Dean of the Rotman School of Management, and A. G. Lafley, former Chairman and CEO at Procter & Gamble outline a framework for designing effective strategies. 

Designing a strategy is about playing with intent to win. Winning means providing a better customer value equation than your competitors on a regular basis. 

There are two generic ways to get to a better value equation: cost leadership and differentiation. 

Cost leadership is about having a lower cost structure than competitors. Low-cost players may choose to undercut the competition with lower prices.

Dell Computers grew from a dorm-room startup to a $100 billion company between 1984 and 1999 with cost leadership. They saved $300 per computer relative to the competition with factory-direct sales and a superior supply chain. Dell passed savings on to the consumer by charging lower prices for competitive products.   

Their competition, relying on the retail model and all of the costs associated with that, was unable to compete on price.

Costs leaders may choose instead to reinvest the margin in ways that create competitive advantage. 

Take Mars, the famous candy bar manufacturer. The company uses less-expensive ingredients and produces its various bars on a super-high-speed production line. They can afford to sell their bars at a lower price, but they don’t. Instead, Mars reinvests the margin to buy the best shelf space in candy bar racks across the United States. 

Competitors like Hershey can’t do this because their production costs are higher. 

The alternative to low cost is differentiation. A company can choose to offer products or services that customers determine are more valuable than those of the competition although the cost structure is similar. For instance, a MacBook solves the same problem as an equivalent Dell PC, but the MacBook is priced much higher than the Dell.  

Apple spends its greater margin on research & development. This way, they can continue to deliver to their customers, who are willing to pay a premium for new products that fit their lifestyle. 

Which strategy should you choose to help your organization win? Either way, the point is to widen the gap between cost and value. The resulting profitable margins will allow you to improve, innovate, and grow your business.