By Guest Authors from Booz & Company: Partner, Paul Leinwand and Managing Director, Cesare Mainardi
Too many business leaders are preoccupied with the next answer to growth and find themselves stretched thin – trying to play in too many disparate markets and pursuing multiple strategies and directions that undermine rather than reinforce each other. As a result, they forgo the right to win in any market.
Winners, on the other hand, define the fundamental identity of the company by developing a clear idea of what they do best and how they create value for customers. They then hone a distinctive system of capabilities – one competitors can’t match – that will enable the company to deliver on its value promise and sustain lasting competitive advantage.
In our recent book The Essential Advantage: How to Win with a Capabilities-Driven Strategy, we argue that many leaders need to reset the way they develop strategy: adopting a capabilities-driven strategy that starts inside the company, with what it already does best, can lead to a measurable performance premium in terms of higher EBIT, ROI and shareholder return. Capabilities-driven companies like Amazon.com, Walmart, or Inditex (Zara) play to win and, therefore, grow – while most companies simply play to grow, and therefore never really win in any market.
The true source of competitive strength is what the company does, rather than what it sells. Leaders just have to be clear about identifying the company’s differentiating capabilities, and building a strategy around those. Many successful companies, like Procter & Gamble and The Coca-Cola Company, develop a clearly defined…
- Way to play: They make a deliberate choice about how to add value in the market – e.g., as a value player, an experience provider, an aggregator, etc.
- Capabilities System: They build a set of three to six best-in-class capabilities – e.g., customer insight, rapid-cycle manufacturing, nimble fashion design – that work together as a system and enable them to deliver on their way to play.
- Product and Service Portfolio: They choose products and services that leverage their distinctive capabilities, and are optimally suited to their target customers. They avoid adding markets, products, or services that require new or disparate capabilities.
We call companies that have mastered this three-part balancing act “coherent”. Coherent companies pursue a clear strategic direction (way to play), build a system of differentiating capabilities consistent with that direction, and sell products and services that thrive within that system. As a consequence, they gain differentiation, distinct market advantage and a “right to win.” This all leads to earning a “coherence premium”: better overall performance, e.g., more robust EBIT margins.
Incoherent companies, on the other hand, chase opportunities outside their core areas of advantage. They usually find growth isn’t sustainable and they’re hit by what we call the ‘incoherence penalty,’ which is significant and damaging. Among the problematic symptoms and by-products of incoherence – of paying too much attention to external positioning and succumbing to pressure for excessive short-term growth – companies are often:
- Being faced with too many options and conflicting directions, with no clear framework for evaluating them.
- Falling into the “adjacent market trap,” i.e., expanding into markets that are seemingly related but for which the company doesn’t have the capabilities to compete effectively.
- Emulating competitors and pursuing industry benchmarks rather than seeking differentiation.
- Hedging bets with multiple options, which reinforces complexity and raises costs.
- Bringing on more fixed assets, instead of building market-leading capabilities.
- Indiscriminately cutting costs, which can make the company weaker rather than stronger and more coherent.
Leaders must compel the organization to choose. Though the pulls of incoherence can be appealing in the short term, they must value the benefit of saying “no” so that the organization can benefit from the focus of coherence. They must teach others to choose in a coherent way, and provide avenues for making better choices, and working more effectively, on an ongoing basis.
Leading a company towards coherence is not an easy task – it requires relentless focus and a clear view of the company’s identity and unique capabilities – but companies that accomplish this task reap the benefits of superior effectiveness, advantaged economics, focused strategic investment, and organizational alignment, which together generate immense, sustaining value.
How coherent is your company? Take this short survey and diagnose how well your organization is positioned for success.
Paul Leinwand: The Essential Advantage: How to Win with a Capabilities-Driven Strategy