How chewy cookies altered P&G’s destiny

February 13, 2013, 2:34 PM UTC

FORTUNE — Until now, the role of chewy cookies in A.G. Lafley’s standout success as Procter & Gamble’s CEO from 2000 to 2009 has not been disclosed. Yet if not for the Duncan Hines packaged chocolate chip cookie, Lafley’s life story, the wealth of P&G shareholders, and even our understanding of corporate strategy might have been very different.

P&G shook the cookie trade in the mid-’80s by introducing products with a crispy outside and a chewy inside. Major competitors — Nabisco, Keebler, Frito-Lay — immediately flooded the market with copies and crushed P&G’s (PG) early dominance of the category. Whether those competitors knew they were violating P&G’s chewy-cookie technology patents has never been established, but they eventually paid $125 million, a record at the time, to settle a P&G patent-infringement lawsuit.

Victory for P&G? Not exactly. Chewy cookies were not the next big thing. P&G’s cookie business crumbled (for many reasons). The company wrote down its value and eventually sold it, while those competitors are still giants in the industry.

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P&G clearly needed help with competitive strategy. “John Smale [CEO at the time] got so frustrated that he called in Michael Porter,” Lafley recalls. Porter was, and is, a Harvard Business School professor and the world’s top expert on the subject. Smale hired him to teach it to P&G executives. And Lafley, then a 39-year-old manager in laundry products, was in Porter’s first class.

Lafley learned from the master what is still the most rigorous and deeply grounded approach to corporate strategy, and he never forgot it. He also got to know Porter’s consulting firm, Monitor Group, and one of its stars, Roger Martin, and never forgot him either. They formed a business relationship that continued through Lafley’s time as CEO, even after Martin left Monitor to become dean of the University of Toronto’s Rotman School of Business.

The Porter-Monitor approach to strategy “didn’t take” at P&G, Lafley says, but it took with him. He brought it back 14 years later when he was suddenly made CEO after Durk Jager got fired, with the company’s stock in free fall. Lafley’s groundbreaking redirection of P&G’s strategy was critical to the company’s success during his tenure; market cap doubled in a decade during which the S&P declined.

Now, Lafley and Martin have written Playing to Win: How Strategy Really Works. Managers everywhere should be grateful. Martin says he wanted to write it because he was “perplexed that people say, ‘Oh, no, we’ve got to do a strategy exercise — it’s so complicated, so much work, and we’re not sure what we’ll get.’ But it can be simple, fun, and effective.” Lafley adds: “I’m surprised by how few people can say what strategy is. So we tried to create a do-it-yourself book for managers and leaders.”

Lafley touches the heart of the problem. Every manager thinks strategy is important, but few understand what it means. “Strategy” has become a sadly debased term used by mentally lax managers trying to ennoble various trendy or half-baked notions. Lafley and Martin call them out. Specifically:

  • Strategy isn’t a vision. A vision tells you nothing about how to achieve your goals.
  • Strategy isn’t a plan. That’s just a set of tactics. A recent blog post by Martin called “Don’t Let Strategy Become Planning” has gone viral in managerial circles.
  • Strategy isn’t optimizing the status quo. Getting more efficient is always good, but it’s a far cry from a strategy.
  • Strategy isn’t following best practices. Some managers think getting really good at what the best players are already doing is a strategy. No, say Lafley and Martin: “It is a recipe for mediocrity.”

Lafley and Martin are equally blunt about what strategy is: “Strategy = choice.” It’s a set of choices on five issues: the business’s winning aspiration; where to play; how to win; needed capabilities; needed management systems. That may seem simple on paper but it’s extraordinarily difficult in real life because most people absolutely hate making clear, firm choices. Making a true choice means giving up options, which the average person simply cannot abide. So, who’s our market? Everybody. How will we win? By doing everything better. No such strategy ever succeeded.

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Battling that powerful tendency was “the hardest thing I had to do,” Lafley says. He proposed giant new choices about which businesses P&G should and shouldn’t be in (getting out of pharmaceuticals, for example), and they weren’t an easy sell: “The company was $40 billion in revenue, and I was asking to get rid of five, six, seven billion. I had a very hard time.” Of course he also proposed new choices about how to grow. Revenues at P&G today: $84 billion.

Playing to Win is valuable because Lafley and Martin have artfully combined two virtues that don’t often mix: rigor and brevity. Winning strategy doesn’t come from inspirational happy-talk; it comes from deeply substantive hard thinking, and they tell us how it’s done, with many examples. But they don’t need 500 pages to do it. The book is short, crisp, a pleasure to read.

The discipline of strategy needs help. So do a lot of businesses. Playing to Win throws a lifeline to both.