Tuesday, October 19, 2010

Coherence Premium

Interesting article by Paul Leinwand and Cesare Mainardi, The Coherence Premium. HBR June 2010 http://www.booz.com/media/uploads/HBR_Coherence_Premium.pdf

The authors define the "coherent company" as one that "has aligned its differentiating internal capabilities with the right external market position". They claim that most companies lack coherence because they pay too much attention to the external and not enough to the internal. "We are suggesting that companies start from the opposite direction, figuring out what they're really good at and then developing those capabilities (three to six at most) until they're best in class and interlocking. From there, strategy becomes a matter of aligning that distinctive capabilities system with the right marketplace opportunities."

We may observe in passing that enterprise architects are often criticized for the opposite tendency - paying too much attention to internal structure without knowing how to align this to external demand. 

The authors offer two examples of enterprise models that could be expressed as an interconnected set of capabilities, although the detail of the interconnections are not described in the paper.

Retail (based on Wal-Mart)

  • vendor management
  • point-of-sale data analytics
  • logistics
  • working capital management
Consumer healthcare (based on Pfizer)
  • Science-based innovation (I interpret this to be "technology" rather than "product")
  • Influencing regulation and government policy
  • New product development (including licensing and acquisition)
  • Claims-based marketing (in other words, giving the consumer verifiable and relevant chunks of knowledge)
  • Channel management
  • Portfolio management

The authors claim to have a procedure for quantifying something they call "Coherence Premium" for a company.
  1. Define the segments the company serves
  2. Identify the capabilities that drive value for the company in each segment
  3. Determine the number of common capabilities across all the segments the company serves.
They have calculated the coherence premium for a number of large companies including Campbell's, Clorox, Coca-Cola, ConAgra, General Mills, Heinz, Kimberly-Clark, Kraft, Nestlé, PepsiCo, Procter&Gamble, Sara Lee, Unilever and Wrigley's. These are then mapped against EBIT margin%, showing a very rough correlation.

Unfortunately, however, this graph doesn't show the two companies that they examined in greatest detail earlier in the paper, namely Wal-Mart and Pfizer. This may be because these companies face complex multi-sided markets, and this would cause difficulties for their simple procedure. It would seem that the kind of coherence they praised in these two companies would not be adequately represented by their simplistic "coherence premium" metric.

There have been many previous attempts to address the issues raised by Leinwand and Cesare Mainardi. In her blogpost Coherence - the new alignment, commenting on a Booz presentation of their concepts, Naomi Stanford recalls an earlier book on The Power of Alignment by George Labovitz and Victor Rosansky. Also see the discussion of cohesion costing in Nicholas Whittall and Philip Boxer, Agility and Value for Defence (pdf).

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