A LOOK INSIDE

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Has Your Company Earned the Right to Win?

Do you have a well-defined way to face the market and create value for your customers? Is your business focused on what your company does best? Do all of your decisions come from and enhance your business’s distinctive capabilities? Can you sustain this advantage over time? Do you have

THE ESSENTIAL ADVANTAGE? OR …

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Do You Try to Compete in Markets for Which You’re Not Equipped?
Many companies continuously screen the market for profitable expansion moves. If an opportunity appears to be promising, they invest in it and mobilize the organization to get there. The result is often disappointing: They don’t have what it takes to succeed, and the “blue ocean” they were aiming for turns out to be unswimmable. These companies are paying an incoherence penalty.

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For them. strategy is a matter of aligning their distinctive capabilities with the right marketplace opportunities. They figure out what they’re really good at and then develop those capabilities until they’re best-in-class.external positioning. They succumb to pressure for top-line growth and chase business in markets where they don’t have the capabilities to sustain success. 3 . Incoherent companies pay too much attention to Coherent companies start from the opposite direction.

every business line wants to expand its market share. 4 . every R&D effort demands funding. every competitive action needs to be fought back. every product initiative claims to be critical.Do You Have Too Many Conflicting Priorities? In many companies. The result: Resources are spread thin. every division aspires to world-class capabilities. and companies don’t have the critical mass to do anything really well.

They chase lots of incremental gains in an uncoordinated way. and progress in key areas often slows to a crawl. 5 Coherent companies have clearly defined what . Incoherent companies get tangled up in too many their distinctive capabilities are and only reach for what is supported by those capabilities. This focus allows them to stay firmly planted in markets where they have earned the right to win.priorities that are often conflicting.

But the company has no chance to be truly great at any of them. All these business lines are competing for attention and resources. many companies find themselves saddled with too many business lines and too broad a product portfolio. 6 . Whether through unfocused M&A or decades of undisciplined organic growth.Are You Carrying Too Much Baggage? Many companies are weighed down by their own legacy.

capabilities than they can be truly great at or reasonably invest in. They prune their business lines and product portfolios so that growth doesn’t threaten their hard-won coherence. Incoherent companies are trying to support more Coherent companies are vigilant about limiting themselves to a set of three to six capabilities that drive all of their businesses. 7 .

and unhappy customers. The result is obvious: cost explosion.Are Functions Over-Stretched by Too Many Incompatible Requests? In many companies. all while switching to a more global operating model. But instead of blaming the lack of prioritization. may have to put in place new CRM systems. often conflicting demands. IT. for instance. the head of IT is given a hard time. functional departments are asked to fulfill a large number of unprioritized. suboptimal service delivery. 8 . support large product launches and change significant architecture components.

In coherent companies. but they are great where it really matters and minimize support to the rest. functions respond to many unprioritized and conflicting business unit requests. functions have a clear way for prioritizing or even turning down business everyunit requests. 9 .In incoherent companies. Costs are increasing. They don’t try to be good at everything. customer satisfaction is decreasing.

Kimberly-Clark and Procter & Gamble were in such a situation.Is Your Company Trapped in a Race to the Bottom? Many companies believe their only chance to beat competition is to reduce prices. P&G on absorption – and directed R&D toward specialized capabilities. They get trapped in a race to the bottom because they aren’t focused on differentiation. In the 1980s. 10 . the “diaper wars” only ended when they adopted distinct ways to play – KC focusing on sizing and fit.

These capabilities allow the company to set the terms of the competition. 11 . and. coherent companies leap ahead. Incoherent companies fight competition on the Coherent companies pick a specific approach to the market – a way to play – supported by their own unique capabilities system that competitors can’t beat.“other guy’s” turf. rather than race to the bottom. They rely too much on benchmarking and imitate what others do.

even in highly mature markets.Are You Finding It Harder and Harder to Grow? Many companies in mature industries feel like they’re stranded without viable growth strategies. Ryanair. Southwest Airlines. 12 . and Singapore Airlines show that profitable growth is possible. if companies adopt a unique way of adding value.

and break out of the pack. add new value. 13 .without looking for the unexpected opportunities for strategic success that come from differentiation. Incoherent companies imitate what others do Coherent companies use a well-defined set of distinctive capabilities to offer something different to the market.

14 .Do You Jump into the Wrong Markets? Many companies judge new opportunities based on “externalities” like growth rates or profitability levels. They get caught in the adjacency trap: They enter a market that looks roughly similar to what they’re doing but turns out to require totally different capabilities. and the debacle knocked $500 million off shareholder value. it ended up failing and selling the business to archrival Frito-Lay. This happened to Anheuser-Busch when it expanded from beer into snacks. and end up lured into markets where they can’t compete.

Coherent companies know what they’re good at and 15 . Incoherent companies judge market opportunities only pursue market opportunities that leverage those capabilities.based only on external factors and run a high risk of falling into the adjacency trap. They enter new markets primed to compete and armed with skills that give them the right to win.

supported by two very different capabilities systems. 16 . like AOL and Time Warner – two very different businesses. An M&A strategy without focus on internal capabilities can end up putting together explosive combinations.Is Your M&A Strategy Putting Together the Wrong Combinations? Many companies pursue growth at all costs. sometimes even at the cost of their own survival.

Coherent companies know what they’re great at and 17 . Those are the deals that bring lasting value to customers and shareholders alike.by the wrong criteria because they overemphasize the attractiveness to the market and underestimate the capabilities fit of the two companies. Incoherent companies judge M&A opportunities look for M&A candidates that strengthen capabilities.

Are You Cutting Costs in the Wrong Way? Many companies avoid the tough decisions and cut costs across the board. 18 . they weaken their distinctive capabilities (if they have any) without fully eliminating unnecessary and nondifferentiating waste that further funds incoherence. By doing this.

Incoherent companies consider cost cutting a necessary evil and become weaker and more limited because of the exercise. 19 . and cost cutting is just another way of being disciplined in how they invest: They build capabilities that add to competitive advantage and stop investing in things that don’t. Coherent companies make cost cutting a strategic effort. All spending is investment.

Coherent Companies Are on a Path to Success Coherent companies. 20 ... … are focused on a single and distinctive way to create value. … give executives a common basis for day-to-day decisions. … break away from the pack and stand out from the competition. a measurable profitability uplift. … build on a few distinctive capabilities that work together in a system and that no competitor can beat. … start from what they do better than anyone else and align their distinctive capabilities with the right marketplace opportunities. They earn a coherence premium.

. … are distracted by too many disparate and often conflicting priorities. They face an incoherence penalty.Incoherent companies. … can’t get their management team aligned. … support too many capabilities without any of them being truly differentiating.. as evidenced by below-average performance. 21 . … end up stalled out and fall behind the competition. … pay too much attention to external positioning.

Coherence Makes Sense. Coherence Coherence leads to … • Greater effectiveness. 22 ct du & What are we going to sell in this market and to whom? Companies with products and services that fit with their capabilities system have superior returns. Ser vic Capabilitie ys sS Right To Win e F it . by gathering the organization behind a unifying strategy and by attracting talent to the organization that values what it does. by creating a winning capabilities system that competitors can’t copy and by continuously improving the capabilities that matter. • Better alignment. and Pays a Premium How are we going to create value for our customers in this market? Way To Play te m Pro What do we need to do well to deliver that value proposition? The engine of value creation is a system of three to six capabilities.

by directing capital and resources to the things that really matter.Companies that focus on a coherent approach to the market are more successful. 2003 – 2007 Coca Cola Campbell Soup Company Clorox General Mills Kraft Unilever P&G Wrigley PepsiCo Kimberly-Clark H.” Harvard Business Review. The coherence premium in consumer packaged goods. • Focused investment. 2003 – 2007. The size of the circles indicate relative 12-month revenue at the time of the study. and shareholder return. by gaining scale when applying the capabilities system to all parts of the business and by spending less on the capabilities that are non-differentiating.J. EBIT Margin. 91. in terms of higher EBIT. 23 . An in-depth analysis of the consumer packaged-goods industry shows a clear correlation between coherence and financial performance. and they enjoy a measurable performance premium. • Increased efficiency. ROI.Heinz ConAgra Sara Lee Nestle Capabilities Coherence Score Source: Adapted from Paul Leinwand and Cesare Mainardi. “The Coherence Premium. June 2010.

24 .The Way to Play Pick ONE Clear Way to Add Value in the Market Successful companies have a single way to face the market. They have a clear and well-defined answer to the question: How do I add value? They know precisely what they want to offer. to what kind of customer. a single way to play. Every company needs to choose a differentiated way to play if it wants to earn a right to win in the marketplace. and what capabilities are necessary to differentiate themselves and attract the target customer.

Coherent Incoherent N EW ! AMPHICAR! Source: Cadbury Amphicar give-a-way contest 25 .

26 .Case Study Case Study The Way to Play Coherent Big box provider of everything at “always low prices. appliances) where it cannot compete on price or cannot offer the required service. Walmart and Target are quintessentially coherent companies. while Kmart lacks focus in how it approaches the market. avoids upscale markets where it can’t compete on price alone.” largely without special sales or discounts. Offers lowest cost and avoids product categories (e.” Focuses on suburban and rural markets. Has sophisticated in-store merchandising and design geared toward price-conscious customers. The retail sector provides some excellent studies in coherence. with focus on pricesensitive shoppers and “brand aspirationals..g.

Focuses on urban and suburban markets with an emphasis on style and design at reasonable prices. Offers low-cost products in basic categories. Incoherent Mass merchandising company that offers customers quality products through a portfolio of exclusive brands and labels. apparel. Offers in-store merchandising and design with no coherent look or feel. adds higher-priced.. fashionconscious shoppers. Does not focus on a clearly definable customer segment. Tailors advertising. Has generic advertising and merchandising without differentiated message. home furnishings) for image-conscious consumers. 27 . product selection.Coherent Saves customers money while providing fashionforward merchandise (e. highervalue items that appeal to more affluent. and merchandising all toward (sub)urban fashionconscious customers. Has a portfolio with no cohesiveness and no clear target shopper. provides little consistency in sales experience.g.

it’s not even the products and services you sell. together.The Capabilities System Build a System of Three to Six Capabilities to Support the Way to Play Leading companies owe their success to their capabilities system. tools. It’s not the assets you have that matter most. Capabilities are the interconnected people. Each of the capabilities within this system is distinctive – representing an extraordinary competence that few others can master. for the customers you serve. systems. When deployed together in a way that’s relevant to the company’s strategy. time and again. It’s what you do. allow them to fulfill their way to play. and processes that create differentiated value for customers. 28 . knowledge. capabilities can enable the organization to consistently outperform rivals. a combination of three to six mutually reinforcing activities that.

Coherent Incoherent 29 .

and nimble fashion design. logistics. The company’s success depends on combining seemingly unrelated capabilities in customer insight.The Capabilities System Case Study Capabilities Systems Add Up to More Than the Sum of Their Parts + = Inditex. These come together in a very specific way to give Zara a distinct marketplace advantage. is better known by its main retail brand name Zara. rapid-response manufacturing innovation. 30 . the Spanish fashion manufacturer and retailer.

These capabilities allow Zara to sell a higher proportion of its clothing at regular prices – and about 20 percent more units per square foot than competitors. So. refined. In addition. trend items are manufactured in Zara’s own facilities in Europe for faster turnaround. and any problems with size or fit. Zara’s capabilities system is reinforced and refined as consumers keep coming back looking for the next iteration of style. what they ask for. it can offer fashion-forward clothes often at 15 percent below the full prices of specialty competitors. It includes: • Customer insight and feedback: Zara analyzes a wealth of store data. And because Zara doesn’t need to discount. while some classic garments that change infrequently are produced in low-wage manufacturing hubs in Asia. 31 . It’s one that’s almost impossible to copy. • Nimble fashion design: Zara can respond to trends and produce new lines within a matter of weeks based on frontline intelligence on buyer preferences. and reinforced over many years. • Strong logistical operations: It ensures that products are on the shelf rapidly. Zara has reported consistent growth in earnings. whereas other clothing manufacturers and retailers have struggled with shrinking profit margins. right down to what shoppers try on. • Rapid-response manufacturing: High-value.Zara’s capabilities system has been built.

When the product and service portfolio is well matched to the capabilities system. which would drain resources and attention from their core strategic mission. getting maximum value from its investment. Coherent organizations avoid products or services that would require building a whole new set of capabilities.Product Portfolio Align with Your Way to Play and Capabilities System Successful companies only pursue those product initiatives that can be supported by their capabilities. and that match their chosen way to play. It also helps the company refine and improve those capabilities over time. creating more value in its chosen markets. 14 32 . the company can use this system over and over again.

Coherent Incoherent 33 .

and This highly innovative fiber-based products.Product Portfolio Case Study Ahlstrom.” To avoid ongoing losses.. a $1. and sausage lines were first in market casings. • Improve operations. processed woods. • Potentially add other businesses that made more strategic sense.6 billion From Incoherence. the company needed to: • Focus on the businesses in the portfolio that had the most potential. settled on “the reason others struggled.. for being one company. They had not share in their categories. turbine blades. boat But although some product hulls. 34 . company generated almost was also in the half of 2009 net sales from business of making new or improved products. Finnish manufacturer of specialty papers.

executives concluded that the company naturally divided into two categories. • Value-added businesses were tagged for growth and expansion. and organizational design could be made more simply. • The value businesses where price is the primary consideration for most purchasers.. Origami Boat Inst. All decisions around investment. • Value businesses needed to focus on improving operational excellence.. .to Coherence First Ahlstrom defined 20 product groups that reflected the way products were used. It surveyed customers in 50 countries about purchasing criteria. capability development. Based on this analysis. Ahlstrom went down its list of products and services and divided them into those two categories..Scholastic 35 . each with its own capabilities system and way to play: • The value-added businesses with strong need for technical support. with a clear underlying rationale. thus identifying capabilities most relevant to each product group.

.Take the Coherence Test Can we state it? Way to play Are we clear about how we choose to create value in the marketplace? Can we articulate the three to six capabilities that describe what we do uniquely better than anyone else? Have we defined how they work together in a system? Do our strategy documents reflect this? Have we specified our product and service “sweet spot”? Do we understand how to leverage the capabilities system in new or unexpected arenas? Do we live it? Are we investing in the capabilities that really matter to our way to play? Do all our businesses draw on this superior capabilities system? Do our organizational structure and operating model support and leverage it? Does our performance management system reinforce it? Do most of the products and services we sell fit with our capabilities system? Are new products and acquisitions evaluated on the basis of their fit with the way to play and capabilities system? Do we have a right to win in our chosen market? Do all of our decisions add to our coherence. “The Coherence Premium. 90.” Harvard Business Review. or do some of them push us toward incoherence? Capabilities system Product and service fit Coherence Can everyone in the organization articulate our differentiating capabilities? Is our company’s leadership reinforcing these capabilities? 36 Source: Adapted from Paul Leinwand and Cesare Mainardi. June 2010.

37 .The Essential Advantage Discover your company’s essential advantage.” Eric Spiegel. The Essential Advantage helps you construct a strategically coherent company in which the pieces reinforce each other instead of working at cross-purposes.The conventional wisdom about strategy may be leading your company astray. “The Essential Advantage should be ‘essential’ reading. Based on extensive research and providing a wealth of exercises. The Essential Advantage is published by Harvard Business Review Press. President & CEO. Leinwand’s and Mainardi’s unique approach of assessing internal strengths first – then one’s product or services portfolio – is a fresh way forward that should be part of every CEO’s and business leader’s playbook. December 2010. Booz & Company’s Paul Leinwand and Cesare Mainardi maintain that success in any market accrues to firms with a coherence premium – a tight match between their strategic direction and the capabilities that make them unique. In The Essential Advantage. This book helps you identify your firm’s distinctive blend of strategic direction and differentiated capabilities that give you the “right to win” in your chosen markets. Siemens Corporation Achieving coherence requires a sharpness of focus that few companies have mastered.

strategy-business. visit strategy+business. and a practical approach to building capabilities and delivering real impact. with more than 3.com. Visit www.About Booz & Company Booz & Company is a leading global management consulting firm. For our management magazine strategy+business.booz. helping the world’s top businesses.300 people in 61 offices around the world.com to learn more about Booz & Company. Edwin Booz. We work closely with our clients to create and deliver essential advantage. 38 . we bring foresight and knowledge. deep functional expertise. www. Today. defined the profession when he established the first management consulting firm in 1914. The independent White Space report ranked Booz & Company #1 among consulting firms for “the best thought leadership” in 2010. Our founder. governments and organizations.

Cesare R. typically through multiyear.theessentialadvantage. Grow Stronger (Harvard Business Review Press. Mainardi is Managing Director of Booz & Company’s North American business and is a member of the firm’s Executive Committee. He holds a master’s degree in management from the Kellogg Graduate School of Management and a master’s in manufacturing engineering from Northwestern University. In addition. 2009) and “The Coherence Premium. he has worked with large. and retail practice. Grow Stronger and several articles on business strategy published in Harvard Business Review and strategy+business. he serves as chair of the firm’s Knowledge and Marketing Advisory Council. strategy-based efforts spanning most functions and geographies. Since joining the firm in 1986. media.com 39 . For additional information. Mr. including the book Cut Costs.About the Authors Paul Leinwand is a Partner in Booz & Company’s global consumer. He serves as an advisor to clients on the topics of strategy and capability building and has authored a number of pieces on the subject. Mainardi coauthored the book Cut Costs. visit www. Mr. Leinwand earned a master’s degree in management with distinction from the Kellogg Graduate School of Management. global companies to help them achieve major business transformations.” which appeared in Harvard Business Review.

and the portfolio. distinctive capabilities. McDonald’s Corpora�on “For at least thirty years people have been trying to figure out how to build corporate strategy around a company's capabilities. Leinwand and Mainardi offer an elegant solution. the steps they recommend at once imaginative and sensible. Their book’s key insight – the idea of coherence – is of par�cular importance as companies face pressure to increase their comparable sales year over year and begin to turn outside of their core business to build revenue. one that demonstrates the power of having all the pieces fit together into a coherent.” Michael Roberts. Executive Director. Gopalakrishnan. This book teaches how to pump water uphill by orchestrating three elements for coherence: the way to play. former President and Chief Opera�ng Officer.“A refreshingly new approach. Water naturally flows downhill – and companies naturally slide into an incoherent strategy.” Walter Kiechel. focused way forward. Tata Sons “Paul Leinwand and Cesare Mainardi have captured a concept that is relevant for all of us in business today: Just because a company can doesn’t mean it should. Their real-world examples are persuasive. The Lords of Strategy . author.” R.

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