The Essential Advantage Harvard Business Review Press Why is it that - - PowerPoint PPT Presentation

The Essential Advantage

Harvard Business Review Press

February 2012 Presentation for XPEG

Booz & Company

Booz & Company

1

Why is it that with so many available strategy frameworks many companies still struggle with sustained value creation?

Evolution of Strategy

Source: The Right to Win, by Cesare Mainardi and Art Kleiner, published in strategy+business (issue 61)

Future Present Few Many

Adaptation

Act quickly and creatively in response to events (organizational warning)

Position

Exploit the high ground: create and hold a distinctive position (market-back strategy)

Concentration

Focus on your current core business (private equity)

Execution

Align people and processes for operational excellence (the quality movement)

• W. Edwards Deming

Out of the Crisis 1986

Henry Mintzberg

The Rise and Fall of Strategic Planning 1994

Chris Zook

Profit from the Core 2001

Gary Hamel & C.K. Prahalad

Competing for the Future 1994

Tom Peters & Robert Waterman

In Search of Excellence 1982

Michael Hammer & James Champy

Reengineering the Corporation 1993

Ram Charan & Larry Bossidy

Execution 2002

William Abernathy & Robert Hayes

“Managing Our way to Economic Decline” 1980

Michael Porter

Competitive Strategy 1980

Bruce Henderson

Essays 1966

Kenneth Andrews

The Concept of Corporate Strategy 1971

• W. Chan Kim &

Renée Mauborgne

Blue Ocean Strategy 2005

Booz & Company

2

Why are companies drowning in blue oceans pursuing markets that look appealing … but are unreachable?

Note: Illustration from “The Coherence Premium,” by Paul Leinwand and Cesare Mainardi, published in Harvard Business Review (June 2010)

• Our recent survey of 1800 senior executives identified the

problem: – More than half of the respondents don’t think that they have a winning strategy – 2 out of 3 companies admit that they don’t have the capabilities needed to create value in the marketplace – Only 1 in 5 are fully confident they have a right to win – And, the vast majority agree that they’re chasing far too many opportunities

• We see many companies struggling to grow despite heavy

investment. – They grab hastily for what seems like the next answer to growth – They don’t have a solid framework to decide which

• pportunities will lead to sustained success

– They end up stretched thin

Booz & Company

3

Companies are not asking the right question: They ask “Where do we want to grow?” and “What do we want to do?” They should be asking: “Who do we want to be?” In other words: “How should we be different to create value?”

Booz & Company

4

Resolving who we want to be entails making three strategic choices; when all three are in synch a company is coherent

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 value proposition?  What are we going to sell in this market and to whom? Winning companies align their strategic direction to the capabilities that make them unique… they make hard choices about differentiation and stick to them.

Booz & Company

5

Coherent companies consistently outperform their competitors - a

Coherence Premium

8 32 28 24 20 16 12 Portfolio Coherence Score 80 60 40 20 100 P&G Nestle Campbell’s ConAgra General Mills Kraft Unilever PepsiCo Clorox Sara Lee Heinz Kimberly Clark Wrigley’s The Coca Cola Company

Consumer Packaged Goods

4 Sources: Booz & Company; Capital IQ; Bloomberg; Automotive analysis based on 2003-2007 financial data

Degree to which a company leverages a common set of capabilities across its different businesses

EBIT % Size of Bubble: Revenue

• 10
• 8
• 6
• 4
• 2

2 4 6 8 10 12 14 16 18 20 22 Portfolio Coherence Score 90 80 70 60 50 40 30 20 100

GM Toyota Porsche Nissan Mitsubishi Mazda Hyundai Honda Ford BMW

Passenger Auto

VW Size of Bubble: Revenue EBIT %

Link between Coherence and Performance

Booz & Company

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• Alignment of strategic intent and day-to-day decision making thanks to capabilities

lens

• Organization moving in lockstep and executing faster and with more force
• Talent attraction to organizations that clearly value what they do
• Highlighting of what is non-essential through clarity on way to play
• Less spend on those capabilities that are non-differentiating
• Capability scale through focus and often ability to deploy more broadly
• Provision of objective for the enterprise – the value behind the portfolio
• Direction of capital and attention to those opportunities that extend a capabilities lead
• Guide for both organic growth and M&A decisions
• Focus and dedication on creating a winning capabilities system in your way to play
• Barriers for competitors who are less coherent, with less effective capabilities
• Ongoing improvement engine for the few capabilities that matter

Why do coherent choices create value?

Effectiveness Efficiency Focused Investment Alignment

Booz & Company

7

How would you prioritize growth choices?

Grow with a Capabilities Lens

Grow Core

• Sell more of existing products to

existing customers with existing capabilities system

• Acquire new customers in same

market segment

• Enhance depth of current offering

Extend Capabilities System

• Leverage capabilities system to

expand into new, complementary products and services Expand Geographic Footprint

• Take offerings, capabilities system, and

way to play to new geographies where they can thrive Acquire New Capabilities

• Adjust capabilities system - only if

fundamentals of sales and profitability are changing

• Parsimoniously select new capabilities

and fill capability gaps, if large “de novo” opportunities require to do so

… and exceptionally …

Cor Core

Booz & Company

8

Should M&A choices be viewed through a capabilities lens?

Sources: Capital IQ; Booz & Company analysis of 340 Healthcare sector mergers and acquisitions from 1995 - 2008, classified into four archetype strategies (scale/consolidation, capability building, diversification, and focus

Capabilities-based M&A Creates Value

Winners and Losers in Healthcare Sector M&As

• 140%
• 70%

0% 70% 140% 210% 1 Year Excess Return # of Deals Winners N=169 Losers N=169

• Capability building has been the most

successful strategy – 38% more likely to be a winner than a loser, despite having paid the highest multiples for targets

• Capability-building deals accounted for

22% of deal volume and 38% of deal value

• Focus-oriented divestitures were 15%

more likely to be winners than losers Empirically, diversification deals fare the worst, ~40% more likely to be a loser than a winner

It’s all about being better, not bigger

Booz & Company

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What does this imply for a portfolio strategy?

Define the Boundaries of Your Portfolio

Improve Performance

Grow and Expand Align and Grow Selectively Divest Leverage Coherence or Divest Manage to Divest/Discontinue Financial potential Above Par Below Par High Coherence with capabilities system Low

Grow or acquire products and services that leverage your distinctive capabilities

Booz & Company

10

Can you Cut Costs and Grow Stronger?

Booz & Company “Lights-On” Cost and Discretionary Investment Perspective

Not Required Essential Capabilities

• Non-essential

capabilities

• 3–6 differentiating

capabilities that build sustainable advantage  Eliminate or be parsimonious  May spend more than competitors “Lights-On” Table Stakes

• Activities required to

“keep the lights

• n”/operate (e.g.,

legal requirements, etc.)

• Activities required to

compete in a given sector  Aim for best-in-class cost levels  Aim for best-in-class cost levels

30-50% 10-20% 20-30% 20-30%

Taking costs

• ut is a

strategic

• pportunity

to make clear focus decisions

Starting Cost Base Breakdown

Booz & Company

11 Can We State It? Do We Live It? Way to Play

• Are we clear about how we choose to create value in the

marketplace?

• Are we investing in the capabilities that really matter to
• ur way to play?

Capabilities System

• 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 management system reinforce it?

Product & Service Fit

• 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 to play and capabilities system? Coherence

• Can everyone in the organization articulate our

differentiating capabilities?

• Is our company’s leadership reinforcing these

capabilities?

• 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?

The Coherence Test

A starting point: Is your strategy coherent?