The Essential Advantage

How to Win with a Capabilities-Driven Strategy

Paul Leinwand, Cesare R. Mainardi

• Publisher: Harvard Business Review Press
• Year: 2010
• ISBN:
  9781422172223
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Conventional wisdom on strategy is no longer a reliable guide. In Essential Advantage, Booz & Company's Cesare Mainardi and Paul Leinwand maintain that success in any market accrues to firms with coherence: a tight match between their strategic direction and the capabilities that make them unique.Achieving this clarity takes a sharpness of focus that only exceptional companies have mastered. This book helps you identify your firm's blend of strategic direction and distinctive capabilities that give it the "right to win" in its chosen markets. Based on extensive research and filled with company examples—including Amazon.com, Johnson & Johnson, Tata Sons, and Procter & Gamble— Essential Advantage helps you construct a coherent company in which the pieces reinforce each other instead of working at cross-purposes.The authors reveal:· Why you should focus on a system of a few aligned capabilities· How to identify the "way to play" in your market· How to design a strategy for well-modulated growth· How to align a portfolio of businesses behind your capability system· How your strategy clarifies growth, costs, and people decisionsFew companies achieve a capability-driven "right to win" in their market. This book helps you position your firm to be among them.

I

STRATEGIC COHERENCE

CHAPTER ONE

THE ESSENCE OF ADVANTAGE

It’s 8 a.m. in the executive conference room of a large global manufacturing company. About twenty-five people, most of them heads of businesses or of major functions, are seated around the table. A dozen more leaders are attending by phone, calling in from their respective regions. The occasion is a quarterly review of new growth options, and the head of one of the major business units is making her pitch now. Raised in Delhi, Aadya is a poised, fast-talking, 41-year-old engineer-turned-executive; she has been with the company ten years. Currently based in California, she spent much of this past year in India and other Asian countries, because that’s where she believes the best prospects are for growth in their industry.

At the head of the table is the CEO, Martin—who, as it happens, hired Aadya when he was head of the North American business. He has been CEO for only four years, and already these meetings, which he initiated, have become a signature event in the company. It’s a sign of status to be invited, because everyone knows that this is where the company’s overall strategy is really hammered out.

Aadya is presenting an audacious new idea: an extremely inexpensive adaptation of one of the company’s flagship devices, to be sold in emerging markets. If it works out, it won’t just be mildly successful; hundreds of millions of people will purchase it.

Martin leans forward and asks Aadya a simple question: “Do we have the right to win in this business?”

People in the room have heard him ask this question before. But the calm, direct tone of his voice still makes most of them sit up a little straighter. It means something very specific. What makes Aadya so sure that they can compete effectively with this product? Has she chosen the right game to play? Do they have the right capabilities to deliver?

Martin’s manner is reminiscent of a coach talking to an athlete: “Do you feel ready for this game?” Or a teacher asking a student: “Do you think you can ace this test?” But the stakes are much higher. The company could end up investing millions before anyone finds out whether the venture will succeed. The market could turn out to be much smaller than the company expects. An upstart competitor could knock off the device and underprice the company.

“Yes,” Aadya says simply. She then carefully presents a logical analysis of the consumer market; a view of the competitors from a variety of countries, including India, China, and South Africa; and, most importantly, a detailed, sober, and well-considered view of the company’s capabilities. The company is already skilled at procuring the materials it will need, and it has advanced marketing and distribution capabilities for reaching emerging-market consumers. Its innovation capabilities, on the other hand, would need to be expanded, particularly for creating simpler, lower-cost versions of their devices. Aadya thus proposes a new R&D technical center in Asia, which would find and develop local talent capable of doing this. She also quickly sketches out an acquisition plan that would provide the company with better access to some promising markets where it doesn’t currently have a position. In all of this, she doesn’t come across as trying to sell her idea, but as simply explaining the stakes and what it will take to make the proposal succeed.

When she’s done, Martin leans back and laces his fingertips together thoughtfully. “I’m inclined to think we should do this,” he says.

Aadya resumes breathing. She knows how few proposals ever get this far. But this is still not the full decision; it’s an opening to a discussion. A major question now needs to be answered by everyone: if the company makes this commitment, what will it take? What other capabilities—new and existing—will they need to support it? What investments would be required to bridge the gap? What savings will they need to find elsewhere to fund these investments? Around the table and on the phone, each person speaks in turn: regional leaders, functional directors, and the heads of other businesses, talking about the role they would have to play and the contribution they might make.

The conversation is relatively unforced and free of tension; this team has had many similar meetings, and everyone understands the types of growth ideas that will work and those that won’t, given the company’s capabilities profile. Two hours later, it is clear that the company is ready to stand behind Aadya’s proposal. It will not be sent off to succeed or fail on its own; it will be an inherent part of the overall growth strategy, drawing on every major capability that the company has.

In a small but increasing number of companies, conversations like this are taking place today. They may not take this exact form, but the strategic relevance, the intensity, and the focused perspective on their business are the same. Companies like this are known to be consistently successful—to have an essential advantage that their competitors can’t match. Sure, they make mistakes, sometimes huge ones. But more often than not, they learn from their errors and come back stronger. They focus their efforts on the products and services that succeed for them, and they continually and consciously reinvest in the capabilities that differentiate them the most. For all these reasons, their competitors have difficulty catching up.

These companies succeed, not because of what they own or how big they are or because they are positioned in the right industries. Their advantage lies in what they do and how everything fits together to create value. They succeed because they are coherent.

Why Coherence Matters

Coherence, to many people, means having your act together—acting with uniformity and coordination. In this book, coherence means something much more specific. For a company to be described as coherent, it must be resolutely focused and clear-minded about three critical elements: its market position (its chosen “way to play,” if you will); its most distinctive capabilities, which work together as a system; and its product and service portfolio. In a coherent company, the right lineup of products and services naturally results from conscious choices about the capabilities needed for a deliberate way to play.

Achieving coherence with one, or even two, of these elements is not enough. Only when all three are in sync—with one another and with the right external markets—can a company truly claim the “right to win” in the contests that matter over time. This coherence generates the essential advantage that distinguishes leading companies. It is sustainable and almost impossible to copy—as opposed to being a transitory advantage that allows companies to thrive only for a while.

The essential advantage in business is coherence. Our core insight is that simple. To be sure, companies can enjoy other forms of business advantage—advantages based on products, brands, assets, or positions. But they are all transient. They are vulnerable to technological disruptions, upstart competition, and the shifting global economy. Patents and copyrights expire. Business processes prevail until more proficient competitors appear. Government protection erodes when policies change. Technological monopolies are threatened by new innovations.

At the same time, most organizations are “sticky”: their identities, cultures, and relationships are by nature slow to adapt to changing conditions. You simply cannot adapt as rapidly and as often as the audience and technology around you. But by becoming more coherent, like a boat moving toward a lighthouse at night, you align your organization toward a clear, more visible, more constant goal. You are no longer as vulnerable to external events—or to your own internal fragmentation.

Consider your own struggles with incoherence. How many times have you followed a new strategic direction or pursued a new growth opportunity with an enormous investment of time and effort, but without creating much value? How many initiatives have you started that didn’t fit with anything else in your company and that didn’t achieve their desired results? How many conversations have you had, trying to balance the needs of multiple functions, businesses, and regions—each arrived-at solution reasonable in itself, but contradicting one another and overwhelming the budget and resources available to you?

“We’re searching for the glue,” lamented the CEO of one of the world’s largest consumer products companies not long ago. He is not alone. Few senior executives spend enough time thinking about the enterprise as a whole. Incoherence has been a way of life in business for years. People are used to it. But it can no longer stand in today’s business environment. Many companies are finding themselves forced to change.

To unlock the benefits of coherence, you need to take deliberate steps—to reconsider your current strategy, overcome the conventional separation between your outward-facing and inward-facing activities, and bring your organization into focus. In this book, we will show you how.

A Breakthrough Business in a Mature Market

To see what we mean by coherence, consider the story of the consumer health-care division of the pharmaceutical giant Pfizer, Inc. The division, which was big enough to be a Fortune 500 company in its own right, generated billions of dollars of value between 2002 and 2006. It did this by creating what some say is impossible: a breakthrough business in a largely mature market.

Most people know the division through its widely successful over-the-counter (OTC) pharmaceutical products: Listerine antiseptic mouthwashes, Benadryl and Zyrtec allergy medicines, Zantac heartburn relief aids, Sudafed cold remedies, Nicorette smoking cessation products, and Rogaine hair regrowth medications among them. These products came together under the Pfizer corporate roof through a series of acquisitions—chief among them the 2000 purchase of Warner-Lambert, a company that made a wide variety of medicines, candies, mints, and gums. Pfizer’s main objective in the deal was attaining Lipitor, a prescription medicine for reducing cholesterol. Then, in 2002, Pfizer merged with another loosely configured company, Pharmacia, seeking its anti-arthritis medicine Celebrex and gaining other attractive pharmaceuticals as well.

When the dust cleared, Pfizer had a much greater presence and visibility in over-the-counter products than it had ever had before. Because of these acquisitions, the company’s annual OTC revenue leaped from $560 million to nearly $3 billion, and by merging and streamlining operations, the consumer health-care division successfully cut about $300 million in annual costs. But the leaders of this business faced a major challenge: they were not in the larger company’s mainstream. They needed to convince the rest of Pfizer that nonprescription mouthwashes, pills, and ointments could represent a viable business with robust top-line growth.

Pfizer is a relatively decentralized company; its divisions operate with fairly high autonomy. The parent company has a tough, science-oriented culture, reflecting the medical background of its staff and leadership. Within this culture, Pfizer’s consumer health-care division was a bit of an oddball. Though the head of business development, Tom Booth, had come from the pharmaceutical parent, most of the division’s leaders, including its president, Marc Robinson, had spent their careers in Warner-Lambert, at the rough-and-tumble front lines of consumer product marketing. They all fit in well with the rest of Pfizer in one respect: they were ambitious. By 2002, they had renamed the division Pfizer Consumer Healthcare (PCH) and set out to build a comprehensive strategy for global growth, with the aim of seizing the number one position in consumer health care worldwide.

Robinson, Booth, and the rest of the top management team began by looking closely at the market dynamics in their over-the-counter business. At the time, this was a highly fragmented sector with low overall growth. No player enjoyed more than 5 percent share globally. One key avenue for expansion was the so-called Rx-to-OTC switch: converting prescription drugs (Rx) into less concentrated versions for sale without a prescription on a pharmacy or grocery shelf. But this process would require the ability to manage tight country-by-country health-care regulation. The changing worldwide demographics—aging populations, growing income levels, and faster-paced urban lifestyles—offered another opportunity and meant larger markets for self-medication. But it also meant more competition: mass retailers were gaining clout and introducing more private-label (“drugstore brand”) versions of brand-name products.

Next, the PCH management team looked at what many conventional strategy experts would suggest: high-potential, unfulfilled, “adjacent” categories. Weight-loss products, for instance, had a huge potential market and no dominant over-the-counter offerings. But PCH had no offering, either, and there were many potential entrants with experience in marketing products related to behavioral change. Even if PCH invested heavily in R&D, there was no assurance that the division would find the solution (or that regulators would approve it). The division would have to grow by marketing its existing products more effectively.

The team members compared the growth rates in Pfizer’s over-the-counter products with those of its competitors. To their surprise, in every category, one or two brands stood out from the pack. These included some of their competitors’ products, such as Tylenol analgesics, Bayer aspirin, and Centrum vitamins, as well as Pfizer’s own Listerine and Nicorette. The standouts were invariably the products that based their marketing on demonstrable health benefits. If a company had a better product that made consumers healthier and could make a claim about it—“Benadryl is 54 percent more effective than the leading prescription allergy medicine” or “Zantac works fast, right when you need it, even at night, when heartburn is worst”—it could build a thriving worldwide business even in historically low-growth categories (since the claim itself could attract new customers). The PCH team members thus realized something important: their proposition was less about retail marketing and more about health care than they had realized.

It took some courage to abandon a premise that had been ingrained in their thinking since the Warner-Lambert days: the old belief that in consumer health care, like foods and toiletries, winning the battle for category leadership (otherwise known as the battle for shelf space) determined success. But the president, Marc Robinson, had worked with claims-based advertising at Warner-Lambert; he understood the power of health-related marketing. Tom Booth, the head of business development, kept emphasizing the importance of a single strategy and disciplined choices. The team also had the example of Listerine, which had been sold as a cold and sore throat remedy in the United States until 1976, when the Federal Trade Commission had ruled against the claim...

Table of contents

• Cover
• PRAISE FOR THE ESSENTIAL ADVANTAGE
• Title Page
• COPYRIGHT
• DEDICATION
• ACKNOWLEDGMENTS
• PART I: STRATEGIC COHERENCE
• PART II: ELEMENTS OF A CAPABILITIES-DRIVEN STRATEGY
• PART III: CREATING VALUE
• PART IV: LIVING COHERENCE EVERY DAY
• NOTES
• BIBLIOGRAPHY
• ABOUT THE AUTHORS