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

February 2012 Presentation for XPEG Booz & Company The Essential Advantage Harvard Business Review Press

Why is it that with so many available strategy frameworks many companies still struggle with sustained value creation? Evolution of Strategy Adaptation Position Future Act quickly and creatively Exploit the high ground: create in response to events and hold a distinctive position Michael Porter (organizational warning) (market-back strategy) Competitive Strategy 1980 Henry Mintzberg W. Chan Kim & The Rise and Fall of Renée Mauborgne Strategic Planning Blue Ocean Strategy 1994 Bruce Henderson 2005 Essays Tom Peters & 1966 Kenneth Andrews Robert Waterman The Concept of In Search of Excellence Corporate Strategy 1982 1971 Many Few William Abernathy & Gary Hamel & Robert Hayes C.K. Prahalad “Managing Our way to W. Edwards Deming Economic Decline” Competing for the Future Out of the Crisis 1994 1980 1986 Ram Charan & Chris Zook Larry Bossidy Profit from the Core Execution 2001 Michael Hammer & 2002 James Champy Execution Concentration Reengineering the Corporation Align people and processes Focus on your current 1993 for operational excellence core business (the quality movement) Present (private equity) Source: The Right to Win, by Cesare Mainardi and Art Kleiner, published in strategy+business (issue 61) Booz & Company 1

Why are companies drowning in blue oceans pursuing markets that look appealing … but are unreachable?  O ur 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 opportunities will lead to sustained success – They end up stretched thin Note: Illustration from “The Coherence Premium,” by Paul Leinwand and Cesare Mainardi, published in Harvard Business Review (June 2010) Booz & Company 2

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 3

Resolving who we want to be entails making three strategic choices; when all three are in synch a company is coherent  How are we going to create value for our customers in this market? Right to Win  What are we going to sell in this market and to  What do we need to do whom? well to deliver that value proposition? 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 4

Coherent companies consistently outperform their competitors - a Coherence Premium Link between Coherence and Performance Passenger Auto Consumer Packaged Goods 32 22 20 18 28 Porsche The Coca Cola Company 16 Toyota 14 24 Honda BMW 12 Campbell’s 10 Nissan EBIT % EBIT % Clorox 20 8 P&G General Mills 6 Hyundai Wrigley’s 4 16 PepsiCo Heinz Kraft 2 Unilever VW Kimberly Clark Mazda 0 Mitsubishi 12 Ford GM -2 Nestle ConAgra -4 Sara Lee 8 -6 Size of Bubble: Revenue Size of Bubble: Revenue -8 4 -10 20 30 40 50 60 70 80 90 100 0 20 40 60 80 100 Portfolio Coherence Score Portfolio Coherence Score Degree to which a company leverages a common set of capabilities across its different businesses Sources: Booz & Company; Capital IQ; Bloomberg; Automotive analysis based on 2003-2007 financial data Booz & Company 5

Why do coherent choices create value?  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 Effectiveness  Ongoing improvement engine for the few capabilities that matter  Highlighting of what is non-essential through clarity on way to play  Less spend on those capabilities that are non-differentiating Efficiency  Capability scale through focus and often ability to deploy more broadly  Provision of objective for the enterprise – the value behind the portfolio Focused  Direction of capital and attention to those opportunities that extend a capabilities lead Investment  Guide for both organic growth and M&A decisions  Alignment of strategic intent and day-to-day decision making thanks to capabilities lens Alignment  Organization moving in lockstep and executing faster and with more force  Talent attraction to organizations that clearly value what they do Booz & Company 6

How would you prioritize growth choices? Grow with a Capabilities Lens  Sell more of existing products to existing customers with existing capabilities system Grow Core  Acquire new customers in same market segment  Enhance depth of current offering  Leverage capabilities system to Extend Capabilities expand into new, complementary Core Cor System products and services  Take offerings, capabilities system, and Expand Geographic way to play to new geographies where Footprint they can thrive … and exceptionally …  Adjust capabilities system - only if fundamentals of sales and profitability are changing Acquire New Capabilities  Parsimoniously select new capabilities and fill capability gaps, if large “de novo” opportunities require to do so Booz & Company 7

Should M&A choices be viewed through a capabilities lens? Capabilities-based M&A Creates Value Winners and Losers in Healthcare Sector M&As  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 Empirically, diversification deals targets fare the worst, ~40% more likely to be a loser than a  Capability-building deals accounted for It’s all about winner 22% of deal volume and 38% of deal being better, value  Focus-oriented divestitures were 15% not bigger more likely to be winners than losers Winners # of Deals Losers N=169 N=169 -140% -70% 0% 70% 140% 210% 1 Year Excess Return 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 Booz & Company 8

What does this imply for a portfolio strategy? Define the Boundaries of Your Portfolio Improve Performance Above Par Divest Grow or Align Grow acquire and Grow Financial and Expand potential products and Selectively services that leverage your distinctive capabilities Leverage Manage to Divest/Discontinue Coherence or Divest Below Par High Low Coherence with capabilities system Booz & Company 9

Can you Cut Costs and Grow Stronger? Booz & Company “Lights - On” Cost and Discretionary Investment Perspective Starting Cost Base Breakdown Not Required Essential Capabilities  Non-essential  3 – 6 differentiating capabilities capabilities that build Taking costs sustainable advantage 20-30% out is a  Eliminate or be  May spend more than 30-50% strategic parsimonious competitors opportunity to make clear “Lights - On” Table Stakes focus  Activities required to  Activities required to decisions “keep the lights 20-30% compete in a given on”/operate (e.g., sector 10-20% legal requirements, etc.)  Aim for best-in-class  Aim for best-in-class cost levels cost levels Booz & Company 10

A starting point: Is your strategy coherent? The Coherence Test Can We State It? Do We Live It?  Are we clear about how we choose to create value in the  Are we investing in the capabilities that really matter to Way to Play marketplace? our way to play?  Do all our businesses draw on this superior capabilities  Can we articulate the three to six capabilities that system? describe what we do uniquely better than anyone else? Capabilities  Do our organizational structure and operating model  Have we defined how they work together in a system? System support and leverage it?  Do our strategy documents reflect this?  Does our performance management system reinforce it?  Do most of the products and services we sell fit with our  Have we specified our product and service “sweet capabilities system? spot”? Product &  Are new products and acquisitions evaluated on the Service Fit  Do we understand how to leverage the capabilities basis of their fit with the way to play and capabilities system in new or unexpected arenas? system?  Can everyone in the organization articulate our  Do we have a right to win in our chosen market? differentiating capabilities? Coherence  Do all of our decisions add to our coherence, or do  Is our company’s leadership reinforcing these some of them push us toward incoherence? capabilities? Booz & Company 11