Playing To Win
Strategy in Highly Fragmented Industries
Is it OK to Play-to-Play?
I frequently get challenged by leaders of companies in highly fragmented industries as to why I am I so obsessed about them winning. They argue that they don’t need to think about winning over every other player. They just need to do a good job serving their customers. I thought I would explore the issue more in this Playing to Win/Practitioner Insights piece Strategy in Highly Fragmented Industries: Is it OK to Play-to-Play?
The Background
The company that raised this question most recently with me was an investment management firm in the family office space. There are numerous small players in its industry and there is no evidence that being big is currently a requirement in the industry. A family office investment manager just has to serve its loyal customers well — doesn’t it? Despite that logic, I pushed them to have a ‘How-to-Win’ not ‘How-to-Play’ strategy, which they said they would explore further. But I don’t think I made a good enough case for why. So, I wanted to explore the question further.
Behind My Obsession
I suspect that I feel as passionately about this issue because I was once seduced by a highly fragmented industry — and felt the sting. However, the benefit was that I learned a life-changing lesson. The highly fragmented industry in question was high school basketball. Basketball was absolutely my passion in high school. At high school, I spent every spare minute in the gym shooting hoops and when I got home, I shot more on our driveway. In my tiny piece of the highly fragmented industry, I was quite accomplished. I was basketball player of the year at my high school, Elmira District Secondary School (EDSS) and I was a first-team all-star in District 11, the six-team league in which we played.
I broke convention for a rural Ontario boy and went to Harvard College for my undergraduate studies. Of course, when I arrived, I tried out for the basketball team because, after all, I was an accomplished player! I lasted one practice. I was utterly embarrassingly outclassed. The others played the game at a much faster pace than I was used to. They rebounded more ferociously. They protected the ball on their dribble much more carefully. They were stronger by far.
And bear in mind, Harvard men’s basketball was way, way worse in those days than today and in the final NCAA ranking for 2024, Harvard ranked a lowly 200th in the nation. So, it is not as though I had gone to Kentucky or Duke or UCLA. I was completely outclassed at a genuinely mediocre basketball college.
That was the case because playing in my highly fragmented market taught me how to play at a level of competitiveness that was completely inadequate for the world outside my little market. I got used to getting my shot off at a leisurely pace that got me results at EDSS/District 11 but was routinely blocked at that first Harvard practice. I learned to dribble in a way that made it easy to steal the ball from me. (It is painful to write this almost fifty years later!) When I suddenly needed to play in a faster, stronger game, it was far too late to adjust. I couldn’t change in my brief trial in tryouts what had taken me five years of high school ball to ensconce.
I was crushed. I was despondent. My self-image was trashed.
But I had the fortitude to try out for my second favorite sport, volleyball. And miraculously, I made the team. It turns out that in that era, there was almost no high-level men’s volleyball played in the US except in Southern California and Hawaii (thanks to beach volleyball) — where it was outstanding (it wasn’t until 1994 that a non-SoCal team won the NCAAs). And it turned out, entirely by accident, that Canadian volleyball was quite competitive. So, my skills had been honed at a high enough level in my home milieu. I ended up being a four-year starter and co-Captain of the team for two years — which took some of the sting out of the basketball fiasco.
(BTW, things have changed a lot. The quality of Canadian basketball has improved monumentally. There were zero Canadian players in the NBA then and now there are league all-stars like Shai Gilgeous-Alexander, Jamal Murray, and Andrew Wiggins. And the quality of non-SoCal/Hawaii volleyball has improved dramatically. Currently, half of the top 20-rated men’s volleyball teams are not from SoCal/Hawaii.)
The basketball fiasco stung for a long time. But I learned an extremely valuable competitive strategy lesson. Never let yourself get caught investing time and energy in playing a slow game.
In What Way is it Not OK to Play-to-Play?
Fragmented industries don’t stay fragmented forever. The New York City taxi business used to be a highly fragmented business with over 13 thousand individual medallion owners plying their trade. For many years, owning one of the medallions was a license to print money. Rich families would collect them like Fabergé eggs. By 2014, the value of a single medallion hit $1 million meaning that the NYC taxi industry was worth $13 billion — amazing! That is despite the fact that from a customer standpoint, its performance sucked. The cars were rundown. They didn’t come when promised. And they were never available when you needed them most.
There was no reason to Play-to-Win. You just had to be acceptable to earn a nice return on your $1 million investment. Then something happened: Uber. It Played-to-Win and by May 2021, NYC taxi medallions were trading at $79K — 8% of their peak value (they have since recovered somewhat).
That is disruption at its finest and most extreme: the destruction of value of the fragmented players. As I always used to say to my late friend, the great Clay Christensen, disruption isn’t random. It strikes industries that don’t attempt to win, that don’t make the investments necessary to pursue better ways of competing. Playing-to-Play becomes a way of life. NYC taxicabs were dirty and unreliable because that is all that was necessary.
But, if those inside the industry aren’t making the investments that produce a better way of serving customers, somebody else outside the industry will. And the best targets are fragmented industries in which no single player thinks that it needs to invest to Play-to-Win. Huge dollars of private equity flow into fragmented industries that they roll-up, eliminating all the small competitors.
Many, many fragmented industries are no longer fragmented, from video rental stores, trash collection, banking, law, pharmaceuticals, and so on. These industries invite disruption by not relentlessly investing in serving customer needs better. And I doubt that family office investment management will be immune.
In What Way is it OK to Play-to-Play?
Typically, industries are fragmented because there aren’t obvious scale economies and there are diseconomies to scale. For example, there are just under 1 million hair salons in the US. Over the past several decades, chains have emerged in the business, but the very biggest, Great Clips, has only 4,400 salons — which is four-tenths of 1% share. Great Clips is a franchise system, and it is unclear that it has managed to confer enough advantages to its franchisees to dramatically shift competitive dynamics. So, that industry is pretty stubbornly fragmented.
In fragmented industries of this sort, a Play-to-Play that that mitigates some of the competitive danger is to Play-to-Win against proximate competitors without attempting to win broadly against every single player in your fragmented industry. In the hair salon business, your salon is not competing with every salon in America. It is probably only competing with those within a five-miles radius or so (maybe ten). Playing-to-Play within that radius is doomed mediocre performance and eventual death.
But Playing-to-Win within that radius is not an unreasonable approach. It will force you to innovate on behalf of your customer in ways that keep you on top of the competition. And that act of continuously innovating will make you less likely to be the target of disruptor attention because you will leave less space for a superior offering.
But the key is in the boundaries — and in particular, the degree to which the boundary of your proximate area is or is not permeable. For the most part, the latter seems to be the case in hair salons. The national franchise chains haven’t been able to bring anything meaningful to bear that impinges on the ability of an individual hair salon to prosper.
It appears to be a different story for the 130,000 dental practices in America. Aspen Dental has become the 800-pound gorilla of the industry, bringing economies of scale in back office, procurement, technology, training, and manufacturing to bear on this currently-fragmented industry.
And it certainly was a different story in waste collection where being the best waste disposal company in a given metro area didn’t help such a company when Waste Management came to town and either blew out that exemplary local competitor or intimated it into selling out.
Play-to-Play vis-à-vis the broadest competition while you Play-to-Win with proximate competitors is OK if you have a definable proximate competitive box. But it is never a wonderful long-term idea.
Practitioner Insights
A highly fragmented industry is a seductive thing. It lulls you into a false sense of security. It convinces you that are doing enough, even when you aren’t.
The best approach is to figure out what the fastest game out there is — and play that one. The game will teach you what you need to do to win at the highest level. And you will never experience someone from a faster game jumping into your slower game and crushing you, long before you have any chance of adjusting.
Thanks in large part to the sting of abject defeat at the Harvard basketball tryouts, I dedicated the rest of my life to Playing-to-Win. That happened in three highly fragmented industries — strategy consulting (which was highly fragmented at the time), business education, and professional tennis.
At Monitor, we were a miniscule startup but I always (with the support of most of my fellow directors) insisted that our competitors would be McKinsey, BCG, and Bain — not the second-tier competitors. We were going to play in the fastest game in the world and Play-to-Win. And we did, though in the period following my departure for Rotman in 1998, the firm arguably lost its strategic way.
At Rotman School of Management, I refused to set our sights on overtaking the number one school in Canada — much to the chagrin of many in the faculty. I insisted that our goal was to become one of the world’s consequential business schools — and known for a unique curriculum and intellectual property.
At Tennis Canada, we set our sights on becoming a leading tennis nation, competing for men’s and women’s (check) Grand Slam championships, Davis Cup (check) and BJK Cup (check) wins.
That dedication to Play-to-Win not Playing-to-Play was instrumental to the successes of all three institutions.
Be very careful about Playing-to-Play because it appears you can get away with it. You can — until you can’t, and by then, it will be too late. Start with small steps to build your courage and deepen your commitment to winning not playing. Set out on a journey by which you build the Must-Have Capabilities and Enabling Management Systems of a winner. It will be harder, but more rewarding.
