Paul Leinwand is a Partner at Booz & Company based in the firm’s Chicago office. He advises organizations on the topic of strategy, growth, and capability building, with a focus on the consumer product and retail sectors. He also serves as chair of the firm’s Knowledge and Marketing Advisory Council. Paul has coauthored a number of works on capabilities-driven strategy, including the book The Essential Advantage (with Cesare Mainardi, Harvard Business Review Press, 2011), the e-book Cut Costs & Grow Stronger (with Shumeet Banerji and Cesare Mainardi, Harvard Business Press, 2009), as well as the Harvard Business Review article “The Coherence Premium” (with Cesare Mainardi, June 2010) and several articles in strategy+business. Paul earned a bachelor’s degree in political science from Washington University and a master’s degree in management with distinction from the Kellogg Graduate School of Management.
Cesare Mainardi is Chief Operating Officer at Booz & Company, Managing Director of its North American business, and a member of the firm’s Executive Committee. Since joining Booz & Company in 1986, he has worked with large global companies to help them achieve major business transformations, typically through multiyear strategy-based efforts spanning functions and geographies. Consulting magazine named him to its list of the Top 25 Consultants in 2005. Cesare is a coauthor of the books The Essential Advantage (with Paul Leinwand, Harvard Business Review Press, 2011) and Cut Costs & Grow Stronger (with Shumeet Banerji and Paul Leinwand, Harvard Business Press, 2009), and several articles on business strategy published in Harvard Business Review ( “The Coherence Premium,” June 2010) and strategy+business (“The Right to Win,” Winter 2010). He holds a master’s in management from the Kellogg Graduate School of Management and a master’s in manufacturing engineering from Northwestern, where he was awarded a Whirlpool Fellowship in Manufacturing.
Here is an excerpt from my interview of them. To read the complete interview, please click here.
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Morris: To what extent (if any) are the challenges that CEOs now face significantly different from the ones CEOs faced 3-5 years ago? Please explain.
Mainardi: The challenges faced today by CEOs exist in many dimensions – particularly in creating a sustainable path of growth in an environment where either growth has greatly slowed or competition has intensified. Growth often garners the most focus today; while undoubtedly absolutely critical as a metric, it should not be pursued at the expense of answering more fundamental questions that CEOs must address: How will we win? How are we different? What do we want to be?
Morris: To what extent (if any) has Booz & Company significantly changed what it does and how it does it in response to those challenges?
Leinwand: We firmly believe that organizations that follow a capabilities-driven strategy create more value over time – we’ve seen this in our work with clients and in our research of the most successful companies. As a result, we place great emphasis not only on helping our clients identify the most important system of capabilities for their business, but also on working with them to build and integrate these capabilities.
Morris: I will now share three of my favorite quotations and ask you to respond to each. First, from Peter Drucker: “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”
Mainardi: I love that one…. And we have talked quite a bit about this in our book Cut Costs & Grow Stronger. The problem is that many companies are not clear about what is truly essential for their success versus what are “table stakes” activities versus what is not required at all. Very often, they have a list of 20 to 30 things they consider absolutely critical and these things are defined in such a broad way that, in fact, they sometimes describe the entire company with all of its activities. Without a clear statement of the few — say, 3 to 6 — things that the company needs to be really great at, a company won’t be able to determine what it can stop doing or do with much less effort.
Morris: Next, from Michael Porter: “The essence of strategy is choosing what not to do.”
Leinwand: Choosing what not to do is clearly an important outcome of a good strategy. Although most companies intuitively know this, they still wind up with many incoherent paths – in fact, companies regularly report that they are chasing too many different avenues of growth. The essence of strategy must be focused on what you should do – based on the very simple idea of what you do better than anyone else. Too often, organizations look for growth opportunities and find a way to reach them – and neglect to understand the market and what they uniquely bring to the table. This shows the importance of “choosing what not to do” as Porter has put it, but it also highlights how much companies are still struggling with this.
Morris: Finally, from Lao-Tzu:
“Learn from the people
Plan with the people
Begin with what they have
Build on what they know
Of the best leaders
When the task is accomplished
The people will remark
We have done it ourselves.”
Mainardi: There’s a lot of truth in this one. What resonates with me is to leverage what people know, what they are good at, and build the direction forward on these strengths. What I consider absolutely key, too, is to involve the people in the organization in defining the path ahead and in shaping the transformation journey. Without this involvement, the change program is set for failure. We often say that every individual should come to work each day understanding how he or she contributes to the company’s way of creating value.
However, good strategy also requires solid top-down direction. Unless the company has defined a clear direction, has articulated how it is going to add value, and the few capabilities that it needs to excel at, every unit will optimize for itself, every function will try to be world-class without making sure that its improvement program fits the identity and strategy of the enterprise at large. Good strategy requires focus to become coherent – and that will mean saying no to many areas that might be good or to many creative ideas that individuals have developed but which are not in line with who the company is and needs to become.
Morris: Now please shift your attention to The Essential Advantage. When and why did you decide to write it?
Leinwand: We wrote The Essential Advantage because we saw the result of decades of strategy efforts that did not create value – of a diverse set of rather good ideas in strategy that often addressed specific issues (for example, strengthening market-back thinking when companies were too internally focused), but which did not fundamentally change the value creation potential of an enterprise. At the same time, we were noticing companies that followed a capabilities path; these companies did not just have a capabilities agenda, but they understood that true differentiation comes from what they did (their capabilities) rather than what they had (their products and services). We at Booz & Company had been doing strategy for many years, if not decades, with this philosophy – that strategy needs to start with a company’s differentiating capabilities, with what it is great at and identify market opportunities that leverage those capabilities. We were surprised, again and again, by how many companies were screening the marketplace for attractive opportunities and choosing “blue oceans” without being able to swim.
Mainardi: We had written an article in strategy+business about our views on strategy and the importance of capabilities for value creation and lasting success. This article was shared with Harvard Business Review; their perspective was this was a big idea in strategy, and together we agreed to write a book that articulated the argument and the path to build a capabilities-driven strategy. Given the economic situation in 2009, we first applied the concept to cutting costs and budgeting with a capabilities lens; this led to the publication of Cut Costs & Grow Stronger. Given the success of that book, we then wrote The Essential Advantage, which goes deeper into our approach, applies it to a broader set of managerial situations (including growth, M&A, portfolio choices), and has a wealth of tools that make it a hands-on guide for every manager interested in positioning his or her company for lasting success.
Morris: Were there any head-snapping revelations along the way?
Mainardi: We were continually impressed by how relevant this approach was to executives from all sectors and all parts of the world. Similarly, we were amazed at how confused strategy had become over the years – with conflicting approaches often existing in the same organization. We also were surprised at how often companies avoided some of the toughest – yet most important — questions of strategy: Who should we be? How will we uniquely create value for our customers? What are we great at doing? How should we think about growth, M&A, our portfolio, our investment (cost) through this lens?
Morris: To what extent (if any) does the book in final form differ from the one you had originally envisioned?
Leinwand: The process of writing the book definitely helped to clarify our thinking on many issues. It also provided the impetus to complete some research that had been started on the coherence premium, as we call it: the value that companies that follow this logic create in excess of their market. Given that Harvard books are peer-reviewed, the final product benefited greatly by the comments and contributions of the process itself, as well as the countless members of Booz & Company who helped make the book a reality.
Morris: For those who have not as yet read The Essential Advantage, how does a capabilities-driven strategy differ significantly from other types of strategy?
Mainardi: A capabilities-driven strategy starts from what a company is great at, its differentiating capabilities. These are not people skills, but combinations of processes, tools, knowledge, skills, and organization that allow a company to do something. These are not 10 or 20 things, but a few, usually 3 to 6 very precise things that a company does better than anyone else, and does so in a system (we call this a capabilities system) that is nearly impossible to copy. Companies then set out to identify attractive opportunities that leverage these capabilities. Capabilities-driven strategies are not agnostic to the market – rather, they are incredibly market-focused – but they originate from the perspective of which markets will respond to those capabilities.
Leinwand: This is very different from how strategy is often done. It’s not that companies don’t consider capabilities – they often do. But sometimes these capabilities are considered after the “market-back strategy” has concluded which markets to pursue. Sometimes the capabilities are defined at too generic a level (e.g., “We will be innovative”), which makes execution quite difficult. Sometimes the inherent incoherence of the portfolio makes focusing on a few capabilities challenging.
Morris: What is the “coherence premium” and how does it create value?
Leinwand: Companies that have implemented and sustained a capabilities-driven strategy are coherent. By this, we mean that their way to play (how they create value) and their portfolio of products and services all draw on and benefit from the same capabilities system. Coherence creates value in four ways:
First is an effectiveness benefit, which is realized simply in doing what you’re exceptionally good at over and over, day in and day out. The companies that “sweat” their capabilities continuously improve them and sustainably capture the top-line growth in their industries and, ultimately, market leadership. A coherent, focused, and aligned capabilities system creates not only value but also a lock on value, because it is enormously difficult for competitors to replicate. Second, a coherent system focuses strategic investment on what matters. Coherent companies direct capital, time, and other resources to those activities, products, and businesses that will extend their lead. Third, there is the simple efficiency or scale argument. Organizations that are clear-minded about where and how they participate in a market spend less on those capabilities that are not competitively differentiating. For those capabilities that are important, they are able to lower costs as they amortize large fixed capabilities costs (e.g., hiring talent, major IT processes) across their entire business.
Finally, a capabilities-driven strategy forces alignment between strategic intent and day-to-day decision making. 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. These organizations move in lockstep, because everyone understands what’s important. They execute faster and with more force. And they attract people who excel at the capabilities they wield with such mastery.
Mainardi: We’ve also been able to measure the coherence premium, the uplift in performance that coherent companies generate. We’ve examined a number of industries (e.g., consumer products, utilities, healthcare, media, telecom, automotive, financial services) and mapped the level of capabilities coherence in the portfolio of each of the major players against their operating margins over the past years. We have confirmed that coherence in capabilities correlates strongly with greater profitability (as measured by EBIT margin over the same period) and shareholder value. 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. This, of course, is not surprising given the value created through the four benefits that Paul described.
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To read the complete interview, please click here.
For more information about The Essential Advantage, please click here.
For more information about the CDS business philosophy, please click here.
For more information about Booz & Company and to check out other resources, please click here.