essential advantage minibook

8/8/2019 Essential Advantage Minibook

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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?

Has Your Company Earned theas Your Company Earned theRight to Win?ight to Win?

OR …



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 getthere.

The result is often disappointing:

They don’t have what it takes to

succeed, and the “blue ocean”

they were aiming for turns out tobe unswimmable. These

companies are paying an

incoherence penalty.

Do You Try to Compete in Marketso You Try to Compete in Marketsfor Which You’re Not Equipped?or Which You’re Not Equipped?



Coherentoherent companies start from the opposite direction.companies start from the opposite direction.

They figure out what they’re really good at and thenhey figure out what they’re really good at and then

develop those capabilities until they’re best-in-class.evelop those capabilities until they’re best-in-class.

For them, strategy is a matter of aligning their distinctiveor them, strategy is a matter of aligning their distinctive

capabilities with the right marketplace opportunities.apabilities with the right marketplace opportunities.

Incoherent companies pay too much attention to

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.



In many companies,

every business line

wants to expand its

market share; every

division aspires

to world-class

capabilities; everyproduct initiative

claims to be critical;

every R&D effort

demands funding;

every competitive

action needs to befought back.

The result:

Resources are

spread thin, and

companies don’thave the critical

mass to do anything

really well.

Do You Have Too Manyo You Have Too ManyConflicting Priorities?onflicting Priorities?



Incoherent companies get tangled up in too many

priorities that are often conflicting. They chase lots

of incremental gains in an uncoordinated way, and

progress in key areas often slows to a crawl.

Coherentoherent companies have clearly defined whatcompanies have clearly defined what

their distinctive capabilities are and only reach for heir distinctive capabilities are and only reach for

what is supported by those capabilities. This focushat is supported by those capabilities. This focus

allows them to stay firmly planted in marketsllows them to stay firmly planted in marketswhere they have earned the right to win.here they have earned the right to win.

5



Many companies are

weighed down by their own

legacy. Whether through

unfocused M&A or decadesof undisciplined organic

growth, many companies find

themselves saddled with too

many business lines and

too broad a product portfolio.

All these business lines are

competing for attention and

resources. But the company

has no chance to be truly

great at any of them.

Are You Carrying Toore You Carrying TooMuch Baggage?uch Baggage?



Coherentoherent companies are vigilant about limitingcompanies are vigilant about limiting

themselves to a set of three to six capabilities thathemselves to a set of three to six capabilities that

drive all of their businesses. They prune their rive all of their businesses. They prune their

business lines and product portfolios so that growthusiness lines and product portfolios so that growth

doesn’t threaten their hard-won coherence.oesn’t threaten their hard-won coherence.

Incoherent companies are trying to support more

capabilities than they can be truly great at or reasonably

invest in.



The result is obvious: cost

explosion, suboptimal service

delivery, and unhappy customers.

But instead of blaming the lackof prioritization, the head of

IT is given a hard time.

Are Functions Over-Stretched byre Functions Over-Stretched byToo Many Incompatible Requests?oo Many Incompatible Requests?

IT, for instance, may have to put

in place new CRM systems,

support large product launches

and change significant architec-

ture components, all while

switching to a more globaloperating model.

In many companies, functional

departments are asked to fulfill

a large number of unprioritized,often conflicting demands.



In incoherent companies, functions respond to

many unprioritized and conflicting business unit

requests. Costs are increasing, customer satisfaction

is decreasing.

Inn coherentoherent companies, functions have a clear ompanies, functions have a clear

way for prioritizing or even turning down businessay for prioritizing or even turning down business

unit requests. They don’t try to be good at everynit requests. They don’t try to be good at every-

thing, but they are great where it really matters andhing, but they are great where it really matters and

minimize support to the rest.inimize support to the rest.



Is Your Company Trapped in a Races Your Company Trapped in a Raceto the Bottom?o the Bottom?

Many companies

believe their only chance to beat

competition is to reduce prices. They

get trapped in a race to the bottom

because they aren’t focused on

differentiation.

In the 1980s, Kimberly-Clark and

Procter & Gamble were in such asituation; the “diaper wars” only

ended when they adopted distinct ways

to play – KC focusing on sizing

and fit, P&G on absorption – and

directed R&D toward specialized

capabilities.



Coherentoherent companies pick a specific approach to thecompanies pick a specific approach to the

market – a way to play – supported by their own uniquearket – a way to play – supported by their own unique

capabilities system that competitors can’t beat. Theseapabilities system that competitors can’t beat. Thesecapabilities allow the company to set the terms of theapabilities allow the company to set the terms of the

competition, and, rather than race to the bottom,ompetition, and, rather than race to the bottom,

coherent companies leap ahead.oherent companies leap ahead.

Incoherent companies fight competition on the

“other guy’s” turf. They rely too much on benchmarking

and imitate what others do.



Are You Finding It Harder andre You Finding It Harder andHarder to Grow?arder to Grow?

Many companies in mature industries feel

like they’re stranded without viable growth

strategies.

Southwest Airlines, Ryanair, and Singapore

Airlines show that profitable growth is possible,even in highly mature markets, if

companies adopt a unique way of

adding value.

2



Coherentoherent companies use a well-defined set of companies use a well-defined set of

distinctive capabilities to offer something different toistinctive capabilities to offer something different to

the market, add new value, and break out of the pack.he market, add new value, and break out of the pack.

Incoherent companies imitate what others do

without looking for the unexpected opportunities for

strategic success that come from differentiation.



Many companies judge new opportunities based on“externalities” like growth rates or profitability levels,and end up lured into markets where they can’tcompete.

They get caught in the adjacency trap: They enter a

market that looks roughly similar to what they’redoing but turns out to require totally differentcapabilities.

This happened to Anheuser-Busch when itexpanded from beer into snacks; it ended up

failing and selling the business to archrivalFrito-Lay, and the debacle knocked $500 million off shareholder value.

Do You Jump into theo You Jump into theWrong Markets?rong Markets?



Coherentoherent companies know what they’re good at andcompanies know what they’re good at and

only pursue market opportunities that leverage thosenly pursue market opportunities that leverage those

capabilities. They enter new markets primed toapabilities. They enter new markets primed to

compete and armed with skills that give them theompete and armed with skills that give them the

right to win.ight to win.

Incoherent companies judge market opportunitiesbased only on external factors and run a high risk of falling into the adjacency trap.



Is Your M&A Strategy Puttings Your M&A Strategy PuttingTogether the Wrong Combinations?ogether the Wrong Combinations?

6

Many companies pursue growth at all costs,

sometimes even at the cost of their own survival.

An M&A strategy without focus on internal

capabilities can end up putting together explosive

combinations, like AOL and Time Warner – two very

different businesses, supported by two very differentcapabilities systems.



Incoherent companies judge M&A opportunities

by the wrong criteria because they overemphasize

the attractiveness to the market and underestimate

the capabilities fit of the two companies.

Coherentoherent companies know what they’re great at andcompanies know what they’re great at and

look for M&A candidates that strengthen capabilities.ook for M&A candidates that strengthen capabilities.

Those are the deals that bring lasting value to customershose are the deals that bring lasting value to customers

and shareholders alike.nd shareholders alike.



Are You Cutting Costs in there You Cutting Costs in theWrong Way?rong Way?

Many companies avoid the toughdecisions and cut costs across

the board.

By doing this, they weaken their

distinctive capabilities (if they

have any) without fully eliminating

unnecessary and non-

differentiating waste that

further funds incoherence.



Coherentoherent companies make cost cutting a strategiccompanies make cost cutting a strategic

effort. All spending is investment, and cost cutting isffort. All spending is investment, and cost cutting is

just another way of being disciplined in how theyust another way of being disciplined in how they

invest: They build capabilities that add to competitivenvest: They build capabilities that add to competitive

advantage and stop investing in things that don’t.dvantage and stop investing in things that don’t.

Incoherent companies consider cost cutting a

necessary evil and become weaker and more limited

because of the exercise.



Coherent Companies Are on aoherent Companies Are on aPath to Successath to Success

Coherentoherent companies...companies...

… start from what they do better than anyone else and

align their distinctive capabilities with the right

marketplace opportunities.

… are focused on a single and distinctive way to

create value.

… build on a few distinctive capabilities that work

together in a system and that no competitor can beat.

… give executives a common basis for day-to-day

decisions.

… break away from the pack and stand out from the

competition.

They earn a coherence premium, a measurableprofitability uplift.



… pay too much attention to external positioning.

… are distracted by too many disparate and often

conflicting priorities.… support too many capabilities without any of them being

truly differentiating.

… can’t get their management team aligned.

… end up stalled out and fall behind the

competition.

They face an incoherence penalty, as evidenced by

below-average performance.

Incoherent companies...



Coherence Makes Sense,oherence Makes Sense,and Pays a Premiumnd Pays a Premium

• Greater effectiveness,Greater effectiveness, by creating a winning capabilitiesby creating a winning capabilities

system that competitors can’t copy and by continuouslysystem that competitors can’t copy and by continuously

improving the capabilities that matter.improving the capabilities that matter.

• Better alignment,Better alignment, by gathering the organization behind ay gathering the organization behind a

unifying strategy and by attracting talent to theunifying strategy and by attracting talent to the

organization that values what it does.organization that values what it does.

What are we going tosell in this market and

to whom?

Companies with products

and services that fit

with their capabilities

system have

superior returns.

W a y To P l a y

C a p

a b i l i t i e s S y s

t e m P r

o d u c t &

S e r v

i c e

F i t

C o here n c e

Right To

Win

How are we going to

create value for our

customers

in this market?

What do we need to do

well to deliver that valueproposition?

The engine of value creation

is a system of three to six

capabilities.

Coherence leads to …oherence leads to …



• Increased efficiency,Increased efficiency, by gaining scale when applyingby gaining scale when applying

the capabilities system to all parts of the business andthe capabilities system to all parts of the business and

by spending less on the capabilities that areby spending less on the capabilities that are

non-differentiating.non-differentiating.

• Focused investment,Focused investment, by directing capital andby directing capital and

resources to the things that really matter.resources to the things that really matter.

Companies that focus on a coherent approach to the market are

more successful, and they enjoy a measurable performancepremium, in terms of higher EBIT, ROI, and shareholder return.

The coherence premium in consumer packaged goods, 2003 – 2007.he coherence premium in consumer packaged goods, 2003 – 2007.

An in-depth analysis of the consumer packaged-goods industry shows a clear

correlation between coherence and financial performance. The size of the circles

indicate relative 12-month revenue at the time of the study.

ConAgra

Sara Lee

General Mills

Clorox

Campbell Soup Company

Coca Cola

Wrigley

PepsiCo

Kimberly-Clark

H.J.Heinz

Kraftraft

Unilever nilever

P&G&G

Nestleestle

EBIT Margin, 2003 – 2007BIT Margin, 2003 – 2007

Capabilities Coherence Scoreapabilities Coherence Score

Source: Adapted from Paul Leinwand and Cesare Mainardi,“The Coherence Premium,” Harvard Business Review, June 2010, 91.



Successful companies

have a single way to

face the market, a single

way to play. They have a

clear and well-defined

answer to the question:

How do I add value?

The Way to Playhe Way to PlayPick ONE Clear Way to Add Value in the Marketick ONE Clear Way to Add Value in the Market

They know precisely what

they want to offer, to what

kind of customer, and

what capabilities are

necessary to differentiate

themselves and attract

the target customer.

Every company needs to

choose a differentiated

way to play if it wants to

earn a right to win in the

marketplace.



AMPHICAR!

25

N E W !

Incoherent

Coherent

S o u r

c e : C a d b u r y A m p h i c a r g i v e - a - w a y

c o n t e s t



Big box provider of every-

thing at “always low

prices,” largely without

special sales or discounts,with focus on price-

sensitive shoppers and

“brand aspirationals.”

Case Studyase Study

6

Focuses on suburban

and rural markets;

avoids upscale markets

where it can’t compete

on price alone.

Offers lowest cost and

avoids product categories

(e.g., appliances) where itcannot compete on price

or cannot offer the

required service.

Has sophisticated in-store

merchandising anddesign geared toward

price-conscious customers.

CoherentThe retail sector provides some excellentstudies in coherence.Walmart and Target arequintessentially coherentcompanies, while Kmartlacks focus in how itapproaches the market.

The Way to Playhe Way to PlayCase Studyase Study



Focuses on urban and

suburban markets with

an emphasis on style

and design at reasonableprices.

Offers low-cost products

in basic categories; adds

higher-priced, higher-

value items that appeal tomore affluent, fashion-

conscious shoppers.

Tailors advertising,

product selection, and

merchandising all toward(sub)urban fashion-

conscious customers.

Mass merchandising

company that offers cus-

tomers quality products

through a portfolio of exclusive brands and

labels.

27

Saves customers money

while providing fashion-

forward merchandise (e.g.,

apparel, home furnishings)for image-conscious

consumers.

Does not focus on a

clearly definable

customer segment.

Has a portfolio with no

cohesiveness and no

clear target shopper.

Offers in-store merchan-

dising and design with nocoherent look or feel;

provides little consistency

in sales experience.

Has generic advertising

and merchandisingwithout differentiated

message.

Coherent Incoherent



Coherent

Incoherent

29



Inditex, the Spanish fashion manufacturer and retailer, isbetter known by its main retail brand name Zara. Thecompany’s success depends on combining seeminglyunrelated capabilities in customer insight, rapid-responsemanufacturing innovation, logistics, and nimble fashiondesign. These come together in a very specific way to

give Zara a distinct marketplace advantage.

The Capabilities Systemhe Capabilities SystemCase Studyase Study

30

+Capabilities Systems Add Up to More Than the Sum of Their Parts

=



Zara’s capabilities system has been built, refined, and

reinforced over many years. It’s one that’s almostimpossible to copy. It includes:

• Customer insight and feedback: Zara analyzes a

wealth of store data, right down to what shoppers try on,

what they ask for, and any problems with size or fit.

• Rapid-response manufacturing: High-value, trend

items are manufactured in Zara’s own facilities in Europefor faster turnaround, while some classic garments that

change infrequently are produced in low-wage

manufacturing hubs in Asia.

• Strong logistical operations: It ensures that

products are on the shelf rapidly.

• Nimble fashion design: Zara can respond to trends

and produce new lines within a matter of weeks basedon frontline intelligence on buyer preferences.

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. And because Zara doesn’t

need to discount, it can offer fashion-forward clothes often at

15 percent below the full prices of specialty competitors. In

addition, Zara’s capabilities system is

reinforced and refined as consumers keep coming back

looking for the next iteration of style.

So, whereas other clothing manufacturers and retailers have

struggled with shrinking profit margins, Zara has reportedconsistent growth in earnings.

31



Coherent organizations avoidproducts or services that

would require building a whole

new set of capabilities, which

would drain resources and

attention from their core

strategic mission.

When the product and service

portfolio is well matched to the

capabilities system, the com-

pany can use this system over

and over again, getting

maximum value from its

investment. It also helps the

company refine and improve

those capabilities over time,

creating more value in its

chosen markets.

2

Product Portfolioroduct PortfolioAlign with Your Way to Play and Capabilities Systemlign with Your Way to Play and Capabilities System

Successful companiesonly pursue those

product initiatives that

can be supported by

their capabilities, and

that match their

chosen way to play.



Coherent

Incoherent



This highly innovativecompany generated almosthalf of 2009 net sales fromnew or improved products.

But although some productlines were first in marketshare in their categories,others struggled.

To avoid ongoing losses,the company needed to:

• Focus on the businessesin the portfolio that hadthe most potential.

• Improve operations.

• Potentially add other businesses that mademore strategic sense.

From Incoherence...Ahlstrom, a $1.6 billionFinnish manufacturer of specialty papers,processed woods, andfiber-based products,was also in the

business of makingturbine blades, boathulls, and sausagecasings. They had notsettled on “the reasonfor being one

company.”

Product Portfolioroduct PortfolioCase Studyase Study

34



First Ahlstrom defined20 product groupsthat reflected the wayproducts were used.

It surveyed customersin 50 countries aboutpurchasing criteria, thusidentifying capabilitiesmost relevant to eachproduct group.

Based on this analysis,executives concluded thatthe company naturallydivided into two categories,each with its own

capabilities system andway to play:

• The value-addedbusinesses withstrong need for technical support.

• The value businesseswhere price is theprimary considerationfor most purchasers.

Ahlstrom went down itslist of products andservices and divided theminto those two categories.

All decisions aroundinvestment, capabilitydevelopment, and organiza-tional design could bemade more simply, with a

clear underlying rationale.

• Value-added businesseswere tagged for growthand expansion.

• Value businessesneeded to focus on

improving operationalexcellence.

...to Coherence

O r i g a m i B o a

t I n s t . - S c h o l a s t i c



Take the Coherence Testake the Coherence Test

Do we have a right to win in our

chosen market?

Do all of our decisions add to our

coherence, or do some of them

push us toward incoherence?

Are we investing in the

capabilities that really matter

to our 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?

Do all our businesses draw on

this superior capabilities

system?

Do our organizational structure

and operating model support

and leverage it?

Does our performance manage-

ment system reinforce it?

Have we specified our product

and service “sweet spot”?

Do we understand how to

leverage the capabilities

system in new or unexpected

arenas?

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 toplay and capabilities system?

Can everyone in the

organization articulate our

dif ferentiating capabilities?

Is our company’s leader-

ship reinforcing these

capabilities?

Source: Adapted from Paul Leinwand and Cesare Mainardi,“The Coherence Premium,” Harvard Business Review, June 2010, 90.

Way to playay to play

Capabilities systemapabilities system

Product and service fitroduct and service fit

Coherenceoherence

Can we state it?an we state it? Do we live it?o we live it?



“The Essential Advantage should The Essential Advantage should

be ‘essential’ reading. Leinwand’se ‘essential’ reading. Leinwand’sand Mainardi’s unique approachnd Mainardi’s unique approach

of assessing internal strengths first f assessing internal strengths first

– then one’s product or servicesthen one’s product or services

portfolio – is a fresh way forward ortfolio – is a fresh way forward

that should be part of every CEO’shat should be part of every CEO’s

and business leader’snd business leader’s

playbook.”laybook.”

Eric Spiegel, President & CEO,ric Spiegel, President & CEO,

Siemens Corporationiemens Corporation

The Essential Advantagehe Essential Advantage

Discover your company’s essential advantage.The conventional

wisdom about strategy may be leading your company astray. In

The Essential Advantage, Booz & Company’s Paul Leinwand andCesare 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.

Achieving coherence requires a sharpness of focus that fewcompanies have mastered. 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.

Based on extensive research and providing a wealth of exercises,

The Essential Advantage helps you construct a strategically

coherent company in which the pieces reinforce each other instead

of working at cross-purposes.

The Essential Advantage is published by Harvard Business

Review Press, December 2010.



About Booz & Companybout Booz & Company

Booz & Companyooz & Company is a leading global management

consulting firm, helping the world’s top businesses, govern-ments and organizations. Our founder, Edwin Booz, defined

the profession when he established the first management

consulting firm in 1914.

Today, with more than 3,300 people in 61 offices around the

world, we bring foresight and knowledge, deep functional

expertise, and a practical approach to building capabilities and

delivering real impact. We work closely with our clients tocreate and deliver essential advantage. The independent

White Space report ranked Booz & Company #1 among

consulting firms for “the best thought leadership” in 2010.

Visit www.booz.com to learn more about Booz & Company.isit www.booz.com to learn more about Booz & Company.

For our management magazineor our management magazine strategy+businesstrategy+business, visitvisit

www.strategy-business.com.ww.strategy-business.com.



About the Authorsbout the Authors

For additional information, visitor additional information, visit

www.theessentialadvantage.comww.theessentialadvantage.com

Paul Leinwandaul Leinwand is a Partner in Booz & Company’s

global consumer, media, and retail practice. Heserves as an advisor to clients on the topics of

strategy and capability building and has authored a

number of pieces on the subject, including the book

Cut Costs, Grow Stronger (Harvard Business

Review Press, 2009) and “The Coherence

Premium,” which appeared in Harvard Business

Review. In addition, he serves as chair of the firm’s

Knowledge and Marketing Advisory Council. Mr.

Leinwand earned a master’s degree in management

with distinction from the Kellogg Graduate School

of Management.

Cesare R. Mainardiesare R. Mainardi is Managing Director of Booz &

Company’s North American business and is a

member of the firm’s Executive Committee. Since joining the firm in 1986, he has worked with large,

global companies to help them achieve major

business transformations, typically through multiyear,

strategy-based efforts spanning most functions and

geographies. Mr. Mainardi coauthored the book Cut

Costs, Grow Stronger and several articles on

business strategy published in Harvard Business

Review and strategy+business. He holds a master’s

degree in management from the Kellogg Graduate

School of Management and a master’s in manufac-

turing engineering from Northwestern University.

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