A Conversation with Paul Leinwand and Cesare Mainardi, co-authors of The Essential Advantage

Paul Leinwand

Here is an excerpt from another in a series of conversations sponsored by Booz & Company. In this instance, with Paul Leinwand and Cesare Mainardi, co-authors of The Essential Advantage: How to Win with a Capabilities-Driven Strategy, published by Harvard Business Review Press (2011). In this interview, they point out that in this unpredictable economy, traditional approaches to strategy are a luxury most companies cannot afford. Instead they need to follow a Capabilities-Driven Strategy, starting by conducting a clear-eyed assessment of what they as a firm already do exceptionally well, and then doubling down on those differentiating capabilities. Further, they need to limit their focus to, at most, six capabilities, and make those capabilities work together as a mutually reinforcing system that perpetuates competitive advantage.

To download a PDF and read the complete conversation, please click here.

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Cesare Mainardi

Why did you write The Essential Advantage?

Turbulent markets demand focus and discipline. In this unpredictable economy, traditional approaches to strategy are a luxury most companies cannot afford. They cannot chart a future course based on a wide-eyed search for external growth: “There’s an attractive, adjacent market. Let’s go after it.” Rather, they need to conduct a clear-eyed assessment of what they as a firm already do exceptionally well, and then double down on those differentiating capabilities. Further, they need to limit their focus to, at most, six capabilities, and make those capabilities work together as a mutually reinforcing system that perpetuates competitive advantage.

What is the “coherence premium”?

Coherent companies—those that possess a capabilities system that aligns their strategy with their product/service portfolio—generate superior performance over time, which is what we call the coherence premium. For a company to be described as “coherent,” according to our definition, it must be resolute and clear-minded in three critical ways: in the way the company creates value in the market (its chosen “way to play”); in the system of capabilities it deploys; and in the products and services it provides to its customers. The goal is balance: A coherent company strikes a balance where the right product and service portfolio naturally thrives within a capabilities system consciously chosen and implemented to support a deliberate strategy or way to play. We believe coherence confers a substantial premium, and we’ve measured it. We’ve established a strong correlation between coherence, as we define it, and superior performance over time in a number of industries.

What does it mean to have a “right to win”?

The right to win is the confidence held by a company that its combination of way to play, system of capabilities, and products and services will outdeliver those of its competitors, drive sustained earnings growth, and thus give it an essential advantage in its market. The right to win is the ability to enter or participate in any competitive market with the reasonably justified belief that you will succeed and create value. That belief stems from having chosen a differentiated way to play that is supported by a strong system of mutually reinforcing capabilities. A right to win isn’t a guarantee that things will go your way, but it reflects your relative coherence: the fact that you are better prepared to attract and keep customers than any of your competitors. A right to win can be measured in having share or margin advantage relative to competitors who compete within the same market.

What is “capabilities-driven strategy”?

Capabilities-driven strategy (CDS) is a pragmatic series of choices designed to lead you to increasing levels of coherence and thus to gain an essential advantage for your company over time. CDS starts with what you as a company do best—better than anyone else—and builds from that internal base of strength in making market participation choices. Traditionally, the practice of strategy has moved in the opposite direction. Companies scan the market for attractive expansion opportunities and build capabilities to suit those opportunities. We think they have it backward. It’s much harder to build capabilities than to leverage what you already do exceptionally well in capturing value. Those companies that focus on building a system of three to six best-in-class, interlocking capabilities that support their way to play achieve a right to win in their industries. They exploit their strengths over and over again, becoming even better at what they already excel at.

We’ve established a strong correlation between coherence, as we define it, and superior performance over time in a number of industries.

Can you measure the success of a capabilities-driven strategy?

We have established a strong correlation between capabilities coherence and superior returns over time. In fact, we have devised a way to measure the success of a capabilities-driven strategy and applied it to a number of industries. We call this measure the “coherence premium.” To demonstrate it, we’ve examined a number of industries and mapped the level of capabilities coherence in the portfolio of each of the major players against their operating margins over the past five years. We have confirmed that coherence in capabilities correlates strongly with greater profitability (as measured by EBIT margin over a five-year period). Our approach to scoring coherence is similar across industries and can be distilled into three essential steps. First, we define the segments each company serves. Next, we identify the capabilities that drive value for the company in each segment. Finally, we determine the number of common capabilities across all the segments a company serves. The resulting score is then mapped against EBIT margin to determine the coherence premium. Our research shows that companies that invest mindfully in a capabilities system that supports their way to play and their product and service portfolio outperform the competition in their industry.

In a messy, incoherent world, those companies that can look through a capabilities lens set a straighter and more sustainable course and avoid costly missteps.

Why haven’t more companies adopted capabilities-driven strategy as “the” way to develop strategy?

It’s easier to accommodate incoherence than to fight for coherence.

Companies today operate in a business environment that encourages incoherence. Efforts to improve customer insight, for example, seem laudatory—but they can lead a business unit leader to propose bringing out a product line extension (“Consumers are asking for it”) without considering how it fits with the company’s capabilities system. Or a benchmarking exercise might lead a functional leader to argue for new investment in distribution networks (“Our competitors have them” or “We must be great at this”) without recognizing that your existing distribution network, while it may not be the best, is more than adequate for your way to play, and the investment is better made elsewhere. It’s easier, or certainly less risky, to focus on incremental improvement in specific areas than sweeping change across the board.
What many people don’t realize is that CDS can be implemented at any level—function, business unit, subsidiary, enterprise. The complete coherence we’ve described is an ultimate destination, but there is also value created in the journey, in staking and exploiting “pockets” of coherence. In an incoherent world, the relatively coherent company can prosper. In an incoherent company, the relatively coherent division can grow.

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To download a PDF and read the complete conversation, please click here.

Paul Leinwand is a Booz & Company partner based in Chicago. He works in the consumer, media, and digital practice and focuses on capabilities-driven strategy for consumer products companies.

Cesare Mainardi is managing director of Booz & Company’s North American business and a member of the firm’s executive committee. In his 23 years with the firm, he has worked with global Fortune 500 companies to help them achieve major business transformations.

Resources

Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy, Harvard Business Review Press, December 2010.

Paul Leinwand and Cesare Mainardi, “The Coherence Premium,” Harvard Business Review, June 2010. (Download free copy by clicking here.)

Shumeet Banerji, Paul Leinwand, and Cesare Mainardi, Cut Costs and Grow Stronger

Chevy Runs Deep – Maybe, but Customer Loyalty is Awfully Shallow

The American Code for cars – IDENTITY
When people spoke about the moment when they were allowed to drive for the first time, they made it sound as though their lives began right then.  Conversely, when elderly people spoke of the moment their car keys were taken away, they reported feeling as though their lives were over. 
Clotaire Rapaille:  The Culture Code:  An Ingenious Way To Understand Why People Around The World Buy And Live As They Do

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"See the U.S.A. in your Chevrolet" - 1959 Chevrolet - beautiful! Look at those wings!

Have you see then the Chevy Runs Deep commercials?  I have – and like them.  Not only because I have always been partial to Chevy, but also because the very idea that a brand would run deep feels like just the right kind of nostalgia –a longing for the simpler, more certain days of yesteryear.

In watching the commercial, I tried to chronicle the actual cars that I have ridden in and then driven over the course of my lifetime.  Starting with what I rode in as a boy, and then on to my driving years, here are the cars (I think I have remembered them all – I may have missed one or two), by maker (not by specific car):

A Chevy
A brand new, beautiful! 1959 Chevy
A Ford
A Rambler (handed down from a relative – glad to have it!)
A Chevy
A Mercury
A Chevy
A Ford
A Buick
A Dodge
A Honda
A Ford
A Saturn
A Mercury
A Chevy
A Ford
A Chevy
A Chevy

The latest is a now two-month old Chevy Cruze Eco.  I almost feel like I’ve come home.

So, if Chevy runs deep, what else runs deep?  Maybe not as much as we think.  I’m going to confess something that I view with a touch of sadness.  Except for Chevy, and Apple, I can’t think of any other brand loyalty that I have that runs anywhere close to deep.  I buy the toothpaste that is on sale.  I read lots of books, but could not even tell you the publisher of most of the books I read – and, don’t much care.  I’ve always loved books, but I switched from the local/independent book-store to the big box store in the blink of an eye (even though I did bemoan the loss of the independent book store).  Then, I switched from the big box store to the mouse-click-and-then-home-delivery of Amazon in another blink of an eye.  And, unlike my blogging and First Friday Book Synopsis colleague Karl Krayer, I am just as happy to read a book on my iPad (I do prefer iBooks over Kindle, but I’ll take either) as I am to read a physical book.  I made that switch in yet another blink of an eye.

In fact, if you ask me what I prefer, I think I want two things – assuming quality (bad quality is a deal killer!), I want price and convenience.  And maybe the greatest of these, if it does not cost “too much more,” is convenience.

Convenience!  This may be the magic bullet at the moment.  I bank at the bank just off the freeway exit to my house.  That is the only reason I chose that bank.  My son: he banks where he can deposit checks through his iPhone.  I suspect that is why I like the iBooks experience.  I read a book review on our blog by Bob Morris.  I open my iPad.  I download the sample of the book.  I read the sample, and then decide whether of not to go for the full book.  Getting the sample, and then the book if I decide to purchase it, is all done in under a minute (well under a minute!).  Amazing!

But…  this is not about Chevy, or Apple, or ebooks vs. physical books.  It is about brand and product loyalty.  And I think such loyalty is simply part of that yesteryear we talk about.  It is awfully shallow.  And what we buy/use/prefer today may be gone in the blink of an eye.  (Just remember MySpace!)

So, imagine the pressure that every business feels — how do you keep your customers when someone else can take them away in the blink of an eye?  Now, that’s quite a challenge.

Where Do You Find The Very, Very Best Idea? – Insight from Steve Jobs, from 2004

The first steps of a creative act are like groping in the dark:  random and chaotic, feverish and fearful, a lot of busy-ness with no apparent or definable end in sight.  There is nothing yet to research.  For me, these moments are not pretty.  I look like a desperate woman, tortured by the simple message thumping away in my head:  “You need an idea.” 
You need a tangible idea to get you going.  The idea, however miniscule, is what turns the verb into a noun – paint into a painting, sculpt into sculpture, write into writing, dance into a dance.
Twyla Tharp, The Creative Habit

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Steve Jobs is still Chairman, and may still hold more sway at Apple than any of us know.  (I hope so!)

But the compilations of Jobs’ stories and quotes are everywhere, including on this blog (just scroll through yesterday’s posts).  I found this terrific article at the Poynter site, How Steve Jobs has changed (but not saved) journalism by Jeff Sonderman.  The entire article is worth reading, but here is a key quote, from a 2004 Business Week article:

“Innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea, or because they realized something that shoots holes in how we’ve been thinking about a problem. It’s ad hoc meetings of six people called by someone who thinks he has figured out the coolest new thing ever and who wants to know what other people think of his idea.
And it comes from saying no to 1,000 things to make sure we don’t get on the wrong track or try to do too much. We’re always thinking about new markets we could enter, but it’s only by saying no that you can concentrate on the things that are really important.”

So, where does that very best new idea come from? From an environment that is a swirling hotbed of conversations, ongoing, coming up with lots of ideas, and saying no to all of the good ones until you are left with only the very, very best ONE.

Universal Appeal of The Last Lecture

The appeal of The Last Lecture by Randy Pausch (New York:  Hyperion, 2008) is universal and longstanding.  It was on the bestseller list  for many months and has received great critical acclaim.

Pausch was a computer science professor at Carnegie Mellon.   At the time he gave the lecture that this book was based upon, he had been recently diagnosed with terminal cancer.  The lecture focused on living, not dying.   His preface to the book states, “with thanks to my parents who allowed me to dream, and with hopes for the dreams my children will have.”  The lecture and book discusses achieving your childhood dreams, overcoming obstacles, and how to seize every moment that you have while you are living.  

I am requiring this book in my communication courses this fall.    When students give their persuasive presentation, I want them to imagine that it is their “last lecture,” and deliver their topic with the passion that resontates with this book. 

Think about how you would sound if you were giving your last chance to make an appeal to change someone’s mind or call people to action.  Your last. 

What do you think?

Let’s talk about it this week!

The Network Is Your Customer: A book review by Bob Morris

The Network Is Your Customer: 5 Strategies T\to Thrive in a Digital Age
David L. Rogers
Yale University Press (2010)

Here’s the challenge: our future networks can “make us not only more connected but, let us hope, more human.”

I am grateful to Thomas Kuhn and then to Joel Barker for filling one of my several knowledge gaps, in this instance the dual concepts of paradigm and paradigm shift. They have prepared me well for books such as this one in which David L. Rogers observes, “Today, business needs a new paradigm: the customer network. In customer networks, customers are no longer viewed as isolated individuals but are seen as dynamic and interactive participants in a network…To succeed, businesses, nonprofits, and organizations of all kinds need new strategies that match the behavior of customer networks. But first we need to rethink our image of customers, from individuals to networks. We need to stop thinking about the bees and focus on the hive.”

After identifying and briefly discussing four basic mistakes to avoid (Page 11), he shifts his attention to “Five Customer Network Behaviors” (12-15) and “Five Customer Network Strategies (15-20), then alerts his reader to 10 of the examples customer network strategies that are featured within the remaining narrative.  They include a few of the usual suspects (Apple, Nike, Dell, Cisco, and Ford) but also a few unexpected exemplars such as author Stephanie Meyer (the “Twilight” series) and the 2008 Obama presidential campaign. All this is included in the first chapter (1) and by then, Rogers has begun to generate some momentum that carries him (and his eager reader) through more than 100 mini-case histories in Part II: Five Strategies to Thrive with Customer Networks, previously introduced (Pages 12-15). Briefly:

1. ACCESS: Be faster, easier, everywhere, “and always on.”
2. ENGAGE: Become a source of valued, preferably indispensable “content” [e.g. information, advice, constructive criticism].
3. CUSTOMIZE: Make offering adaptable to various customer needs.
4. CONNECT: Become included during your customer’s most important conversations and considerations.
5. COLLABORATE: Involve your customers at “every stage of your enterprise” [e.g. brainstorming to meet a specific need].

Rogers is dead-on. All of the customer feedback studies I have examined agree that “feeling appreciated” and “easy to do business with” are among the highest rated by respondents. With regard to #5, one of the most neglected opportunities to strengthen a customer relationship is to help each customer to strengthen its relationships with each of its own customers.

In Part III: Leadership and the Customer Network-Focused Organization, Rogers answers two separate but related questions with thorough explanations: “How specifically to plan and then execute a complete customer network strategy?” and “How to create the customer network-focused organization?” By now the reader understands that the five core strategies are appropriate for almost any organization, whatever its size and nature nay be. He introduces the “Five Step Customer Network Planning Process” and patiently guides his reader through each step. In the final chapter, he explains how to complete a transition from a customer focus to a customer network focus. He again stresses the importance of (a) intelligence generation, (b) intelligence dissemination, and (c) responsiveness to intelligence. Rogers then illustrates several key points when discussing Dell, SAP, and the aforementioned Obama campaign in 2008.

No brief commentary such as this can possibly do full justice to a book that contains such an abundance of valuable information, insights, and counsel. However, by now, I hope I have at least suggested the scope and depth of the potential benefits of the new paradigm that Rogers calls for. He expresses dismay (but not astonishment) when acknowledging that “we have not yet seen more customer network-focused organizations.” He suggests a few reasons for that, then concludes the book with still another affirmation of his faith in what needs to occur: a call to defend and strengthen digital access, equal access to knowledge and ideas, “those digital expressions, and our digital freedoms. If we do, then our future networks will continue to make us not only more connected but, let us hope, more human.” Amen.

 

In Pursuit of Happiness: The Economics of Enough

Illustration by Leigh Wells

Here is an excerpt from David K. Hurst’s review of The Economics of Enough, written by Diane Coyle and published by Princeton University Press, 2011. 
To read the complete review and c heck out other resources provided by strategy+business magazine online, please click here.

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Economist Diane Coyle, a visiting professor at the University of Manchester and former advisor to the British government, sees the recent worldwide financial crisis as a valuable opportunity to grapple with fundamental shortcomings in the creation and measurement of economic policy. In The Economics of Enough: How to Run the Economy as if the Future Matters, she identifies and addresses what she regards as the two root causes of the crash of 2008: the failure of macroeconomics to frame and measure policy objectives and the chronic inability of politicians to make policy decisions that are in the best long-term interest of their constituents (i.e., that address the “trilemma” of efficiency, equity, and liberty).

Coyle divides the book into three unequal parts that cover the challenges (about 60 percent of the book) and the obstacles (25 percent) to better economic policy, and a manifesto for achieving it (15 percent). As this proportion suggests, the book is long on problem identification, but rather short on solutions. Nevertheless, it is helpful for the targets it identifies. For instance, Coyle tackles the current monopoly of GDP growth as a measure of collective happiness. Like most economists, she thinks that growth and happiness are causally connected, but cites evidence showing that maximizing growth isn’t always appropriate when the future is taken into account. This is the central dilemma of “enough”: that we need enough growth to make us happy, but not so much as to make future generations unhappy.

Coyle’s adoption of the intangible objective of happiness, with its dependency on multiple, complex phenomena, underlines the inadequacy of GDP as a metric. Measurements of GDP are already seen as deeply flawed in their failure to discriminate among differences in quality and to capture the value of unpaid work, such as parental care and volunteer activities. In addition, GDP’s focus on the flow of value versus its accumulation allows nations to enhance their output at the expense of their balance sheets.

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To read the complete review, please click here.

David K. Hurst is a contributing editor of strategy+business. His writing has also appeared in Harvard Business Review, the Financial Times, and other leading business publications. Hurst is the author of Crisis & Renewal: Meeting the Challenge of Organizational Change (Harvard Business School Press, 2002).