Wednesday, April 8, 2015

The Coherence Premium

Blog Post 3
Responding to The Coherence Premium by Paul Leinwand and Cesare Mainardi - HBR

“A capability is something you well that customers value and competitors can’t beat.” Many companies that have mastered a capability, then seek to take advantage of the ‘Long Tail’ by leveraging that capability rather than mastering a set of new capabilities. It is a delicate balance to be sure, but the reading emphasizes that firms are too often eager to expand their products and services rather than mastering new capabilities that become interlocking. Companies that can establish a core of capabilities achieve what Leinwand and Mainardi call “coherence” – which occurs only when a capabilities system is consciously chosen and implemented to support a focused strategic purpose. The state of coherence can be evaluated by answering the following questions:

How are we going to face the market?

Answering the question of value creation is not an exercise reserved only for new startups looking to define themselves. Understanding value should be a recurring query at every level of organizational strategy planning. Customer decisions are value based propositions weighed against budgetary constraints with the aim of maximizing utility. Businesses would do well focus on the underlying assumption upon which all of their decisions revolve: How am I creating value for my customers?

As an example, prestigious universities frequently face criticism from Alumni whenever they look to expand their student base or branch out. This is because the customers (students in this case) sometimes associate as much value to the exclusivity of the institution as they do the education. Loyal customers often feel part ownership in the brands they care about. When businesses make decisions that threaten the base, the outcome is almost always negative.

What capabilities do we need?

This question helps to establish between three and six main areas of focus. Capabilities could be something like “Expert Point of Sale Analytics” or “Unrivaled Customer Service”. Defining which capabilities to focus on takes some introspection and a clear understanding of how value is created for customers. For a grocery store, this could be the difference between striving for “Freshest Produce” as opposed to “Largest selection of wine”. Adopting too many capabilities will muddy the water and take funding and focus away from those that are most important.

What are we going to sell, and to whom?

The ‘to whom’ of this question cannot be emphasized enough. Understanding the target market will shape marketing, design, implementation, and measurement. Successfully narrowing in on the right demographic will determine which capabilities to master and how. Knowing ‘what’ to offer can be easily answered by looking at questions 1 and 2. Combining the right demographic with the value proposition of the company will answer this question.

Finally, deciding what to prune can be a difficult task. When faced with these enormous decisions, the following rule of thumb can help break a tie: If the company is no longer willing to invest in a capability, it needs to divest in those products, or risk strategic incoherence.

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