Wednesday, April 12, 2017

Coherence Premium Review

I was reading this week’s articles and came across an interesting idea by Paul Leinwand and Cesare Mainardi titled “The Coherence Premium” urging companies “to have the discipline to focus intensely on what they do best”. The central notion of the authors is that “sustainable, superior returns accrue to companies that focus on what they do best”.

For a company, coherence premium can be obtained by aligning their internal capabilities with the right external market position. In a coherent company, the right lineup of products and services naturally resulted from conscious choices about the capabilities needed for a deliberate way to play.

I came across a test called Coherence Profiler designed by Leinwand, Mainardi and a Booz & Company team to accomplish two major objectives.

First, the test provided real-time diagnostic and identified a relative coherence level of the company. This gave them their own company’s strategic capabilities along with their competitor’s coherence level. Particularly, it helped in identifying whether their business is coherent or incoherent compared to others in their sector.

Second, companies acquired enormous data about different companies’ strategic choices by collecting information. Though the Coherence Profiler was focused on the performance of individual companies, the results also helped in testing a hypothesis about the evolution of industries.

Overall, companies should identify what’s most important to them and which capabilities can be applied on their various product offerings. Also, they should identify which capabilities can be deployed on a larger scale across their product and service offerings. By doing this, it helped companies understand their own strategies and simplified the way they took everyday decisions.

Examples of market leaders which had leveraged on coherence premium include Apple Inc., it identified that there are certain capabilities like labor costs are very cheap in china compared to the rest of the world and hence started manufacturing all its iPhones abroad. This strategy worked well with the company and generated massive profits overall with each model launch. 

Walmart achieves maximum efficiency in integrating four capabilities: aggressive vendor management, expert point-of-sale data analytics, superior logistics and rigorous working-capital management. Coca-Cola stood out because of its intense focus on beverage creation, brand proposition, and global customer insight.

On the other hand, ConAgra Foods resulted in poor corporate performance from 2002 – 2007 because they created incoherence by wrongly acquiring different companies that do not fit in their capability sets. Similarly, Anheuser-Busch faced poor corporate performance when they launched the Eagle snacks as they assumed both beer and snacks complement each other. But, as they relied on different distribution capabilities, Anheuser-Busch did not have right strengths to compete in the latter market.

For sure, organizations should be careful about what they acquire or what business they go into so that they do not bite off more than they can chew. However, focusing too much on finding their own internal capabilities may result in discarding fresh opportunities that are ready to be seized.

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