How to have a coherent capabilities-driven strategy

A “coherent company” is one that is resolutely focused about its “way to play”, its most distinctive capabilities, and its product and service portfolio, according to The Essential Advantage: How to Win with a Capabilities Driven Strategy by Paul Leinwand and Cesare Mainardi. When all three of these elements are in sync with each other and with the right external markets, the company can claim the “right to win” in the contests that matter over time.

Most companies are not fully coherent because they do not have a clearly defined capabilities-driven strategy. In response to market demands and opportunities, they start offering products and services which are not a good fit with their core capabilities, and this leads to incoherence and ultimately to reduced profitability.

The authors propose a process for an organization to make strategic choices. First, discover the available choices through market investigations; next, assess each “way to play” or market positioning option, and what capabilities are required for each to succeed; then, choose a direction, a single way to play and a capabilities system as the basis of the ongoing strategy; then, set out to transform the organization by building and deploying the necessary capabilities and divesting the unnecessary ones; and finally, evolve into an organization that can stay coherent over time.

The Boston Consulting Group Matrix divides a company’s businesses into stars, cows, dogs and question marks, depending on market share and market growth. However, many companies have not found the BCG recommendations (milk the cows to fund the stars while divesting the dogs) to be entirely realistic. This book proposes that alignment with organizational capabilities is more important than relative market share or even market growth, so that it may sometimes be more profitable to keep dogs and divest stars. Many companies flourish in static markets while many others flounder in growing markets.

The book is well written and easy to read and understand. I found the authors’ ideas quite compelling. I expect that most companies will ignore their advice, but those that do follow the advice may well gain a substantial strategic advantage.

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