Monday, April 10, 2017

The Coherence Premium

Companies should identify their strongest internal capabilities, which differentiate them from others and then strengthen these capabilities until they are the best in the industry. After which they can align these capabilities with the right marketplace opportunities. Such companies are known to be “coherent” and they yield very high return ,“coherence premium” from the market. The first company that comes to my mind when I think of coherence is Apple. Unlike Microsoft and Google, which are in the mobile market and also focus more on expanding their products into a variety of domains, Apple has for years restrained itself to limited number of products. Yet it focused on being extremely good at making mobiles and laptops than any other company and there by earning enormous returns from the market.

Capability is something that your company is extremely good at creating value to the customer and which can’t be easily mimicked by your competitor. A successful company has a system of three to six strong differentiating capabilities that when used together give an extremely powerful competitive advantage.

Companies can benefit by asking some simple questions like how do we tend to create value to our customers or what’s the way to play? What key system of capabilities does the company have, to create this value and which differentiate it from its competitors? Which products benefit and which don’t from these capabilities?

The case study of Pfizer shows how companies can benefit by being coherent. It chose to create value to its customers through prescription drugs, identified the capabilities that give it a competitive advantage and used them together as a system in creating sales worth $4 Billion and eventual acquisition by Johnson & Johnson for $16 Billion. One of the key things to observe in Pfizer’s case is decision to identify the products that don’t benefit from its capabilities and selling them. This is a key step at which ConAgra and Sara Lee failed and ended up with huge losses. 

One of the most important learning is the ability of coherence to create value. It creates value in four different ways:
1.      Strengthen the companies competitive advantage
2.      Focusing on strategic investment: acquire and focus on what you need, reduce waste
3.      produces efficiencies of scale: spend wisely and grow easily
4.      creates alignment between strategic intent and day-to-day decision making
Coherence aligns the company at every level and helps employees to make better decisions and        helps to shape the leadership agenda. Coca-Cola and Wrigley are examples of companies that have benefited by huge returns from market by being coherent.

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