Make Your Strategy Coherent (Harvard Business Blog)

Posted on January 8, 2011 by

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Resolution 2011: Make Your Strategy Coherent

Monday January 3, 2011
by Paul Leinwand and Cesare Mainardi  |

There’s no doubt about it; numbers don’t lie. Companies that demonstrate strategic coherence — think Wal-Mart and Coca-Cola — earn a market premium in terms of higher earnings and greater shareholder value. The big question for many leaders as they look toward 2011 is: “How can my company be one of them?”

Strategic coherence results from your ability to connect what you sell (your products and services) with your unique and differentiating capabilities (what you, as a company, do to be great) — all within the framework of a clear way to play (your way of creating value for your customers).

In trying to “be great,” many of today’s leaders are caught in a trade-off dilemma between focusing on those businesses where the company’s unique strengths matter versus achieving the growth that Wall Street seems to want, regardless of whether that growth will come with long-term financial success.

Leaders need to look past Wall Street-pleasing adjacencies or new businesses, and instead make sure their core strategy will result in long-term success. However, that doesn’t mean restricting growth; in fact, it opens up new doors for growth in unexpected areas that still leverage your differentiating capabilities.

Our research shows that coherent companies earn what we call a coherence premium because strategic coherence provides greater differentiation, enables the right form of scale, focuses limited investments, and has the hugely important benefit of aligning the entire organization around a common and consistent purpose.

Putting Capabilities at the Foundation of Your Competitive Advantage

First, let’s make sure to define capabilities clearly: by capabilities, we mean the interconnected people, knowledge, systems, tools, and processes that create differentiated value for customers. That’s because winning strategies don’t start outside the company. Competitive advantage stems from what the company does better than any other and from using those capabilities over and over again to create value for customers. The first and most important step toward strategic coherence is identifying those unique sources of value.

To lay the right foundation:

  1. Treat strategy, capabilities and cost together: What the company already does best should be driving its strategic direction. Don’t choose a strategic direction and then wonder how you can build the required capabilities. Start from the opposite direction: Find an attractive market that values what you do best! Similarly, think about every item of cost as an investment. Disproportionately allocate your costs to your essential capabilities and streamline the remaining areas – this is what propels your company to greatness.
  2. Focus on capabilities rather than just fixed assets: Fixed assets, including brands, are more difficult to leverage across diverse businesses and tend to expire, become obsolete, or give way to related services. The competitive value of capabilities, however, will only grow as you apply them to your entire portfolio of products, day in and day out.
  3. Identify your differentiating capabilities: Identify what your company does particularly well, what your customers value and your competitors can’t beat. Such capabilities could be rapid-cycle product development, point of sale merchandising, large-scale fabrication, and so on. Make sure to sort out which capabilities are merely table stakes in your markets, versus those capabilities that truly differentiate your company and create a competitive advantage.
  4. Define your way to play: Be specific about how you’re going to approach the market, i.e., your way to play, and base this on what you already do well. Define precisely how your way to play adds value for your chosen customers (e.g., as an innovator, a value player, or an experience provider) and how it differentiates you from your competitors.
  5. Integrate capabilities into a system: Develop capabilities that are mutually reinforcing since such capabilities systems provide stronger support for the company’s chosen way to play and are almost impossible to copy. Frito Lay’s capabilities system, combining direct store delivery, continuous innovation of new products, and a proficiency with local consumer marketing programs that reinforce demand, provides a perfect example.

Earning the right to win is never a cakewalk. But we believe a capabilities-driven strategy is the most direct, efficient, and effective way to get there. With the right capabilities in place – strengthened and refined over time – winning companies are well-positioned for the right kind of growth, and they lead their market by delivering unique value to customers that competitors can’t beat.

Paul Leinwand is a Partner in Booz & Company’s global consumer, media, and retail practice. He serves as chair of the firm’s Knowledge and Marketing Advisory Council. Cesare Mainardi is Managing Director of Booz & Company’s North American business and is a member of the firm’s Executive Committee. They are co-authors of The Essential Advantage: How to Win with a Capabilities-Driven Strategy, published by Harvard Business Review Press. For more information, visit theessentialadvantage.com.

 

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