The Essential Advantage

Cesare Mainardi: Well the book is based on years and years of Booz & Company experience and then some recent breakthrough research, and I joined the firm 25 years ago and actually I was originally from Italy, and I joined in the United States and was asked which office did I want to be in, and they all sounded good to me, New York, Chicago, San Francisco, and so I said I would go anywhere and I was sent straight to Cleveland in the great American mid-west. I started to work in Cleveland and I started to learn to be a consultant at Booz & Company, and we kept working on strategies for clients and we would define a course but also the capabilities required to implement that strategy. And we presumed that that's what everybody did, and just a few years ago we wrote an article about a particular case study and received a call from the Harvard Business Press saying that we had hit on something that was really new in terms of business strategy. We ran some research, and what we had hit on was the fact that we believe that companies that are coherent, that had made judgments about how they're going to differentiate and market and what they need to do exceptionally well to perform in that way, would in fact outperform the competition. And we looked at five different industries, consumer, products, automotive, financial services, oil and gas, and health insurers in the United States, and we demonstrated that in every one of those industries, companies that were coherent outperformed competition by as much as 50%.

Rachel Salaman: How surprising was it for you that this was a new idea?

Cesare Mainardi: It was surprising to me because it seems intuitive, if you've made a choice about how you're going to create and capture a valuable market, then of course you should translate it into the few things you should do exceptionally well. But everybody's responding to this in a very positive fashion and actually many of our clients are describing that they're not particularly thinking about value creation and capture in this way. We ran a recent survey of 2000 executives worldwide in most every sector in large companies and small companies, and it was shocking frankly and the result was that the majority of those executives don't have confidence in their strategy, and in fact even those who have confidence in their strategy and across the board, only one out of three executives believe that they have the capabilities required to even implement those strategies, so two out of three do not. And when it comes to right to win, whatever that might mean, only 20% of executives believe they have the right to win in the industries that they've chosen to serve. And if there's one thing that everybody can agree, they're spread thin, and so those are shocking results but if you step back and think about it, certainly as consultants we've seen time and again that companies are chasing growth, they don't have a good filter through which to make those decisions, and they end up being spread thin.

Rachel Salaman: You mention "right to win" there, and that idea does come up again and again in your book, could you just explain what you mean by that.

Cesare Mainardi: By right to win, we mean an ability to serve a market in a chosen way and to be able to do that far better than anybody else, such that consumers or customers will want to come back to the company time and again for those products or services.

Rachel Salaman: And what about strategy, it probably would be a good idea at this point in the interview to hear your definition of what you mean by strategy.

Cesare Mainardi: Well in general strategy is an objective that's been agreed, and then a plan to meet that objective, and in a business context it means the choices made about how a company will create value and capture that value over time.

Rachel Salaman: And as you mentioned you've been working in this area for decades, in your experience what is wrong with most companies' strategies?

Cesare Mainardi: We had to go back and look at a history of strategy to some extent and write an article about it called The Right to Win in Strategy and Business, and what's interesting is that if you look at all strategy writing over time, and in fact how it is that we tended to do strategy or people tended to do strategy, it was all about finding value, where are the profit pools, what are the trends, where is the consumer likely to go, how do we chase the money. And so everybody was answering the question, where do we grow and what do we do, when we realized that the big question in strategy is who should we be, back to that concept of right to win, that if you are clear minded about who you should be, in other words, how is it that we're going to provide a value or a service or a product in the market better than everybody else. It means clear choices about a very specific way in which we're going to play, and the few things, three to six, that really make a difference in delivering that kind of proposition and market, and having parts and services that fit that proposition and market as well. And those are big choices and are conscious choices.

Rachel Salaman: And that ties in with your idea of coherence which is the essential advantage of your book's title. You outline three elements of coherence in the book which you call Way to Play, a Capability System, and Product and Service Fit, which you just mentioned. Could you just talk us through the first one of those, Way to Play?

Cesare Mainardi: The Way to Play is how it is you're going to add value in the market, and the more specific the better, so for example we write in the book about a number of different cases. One was Pfizer Consumer Healthcare and they had a broad array of different consumer brands that span everywhere from confectionery to over the counter drugs, and they had to choose who they were going to be, and their particular choice about way to play was that they were going to out-compete the world in creating products that had a specific claim as to why they were better for you from a medicinal or therapeutic standpoint. And that was a very specific choice about how they would out-compete others, and that's what we mean by way to play, just specifically how is it that we will provide better value than anybody else.

Rachel Salaman: And why is that important, why is it important to define to your company's way to play?

Cesare Mainardi: Because then it informs all the other choices that follow, for example, if you're going to build capabilities in business, if you're going to think about functional investment, capital investment, or you want to build on increasing effectiveness over time, where you can dramatically reduce cost, it's all informed by being clear minded about how it is that we choose to add value in the market. If you can define the way to play then everything else becomes far easier in terms of making decisions day in and day out.

Rachel Salaman: The second element of coherence in the context of your book is Capability System. What do you mean by this exactly?

Cesare Mainardi: What we've hit on in our research and in serving our clients is that there are a few things that make all the difference in the world in terms of serving a market in a chosen way, and so if you go back to that Pfizer Consumer Healthcare example, when they chose to out-compete the world on claims based products, claims based marketing, they realized that there six things that they do infinitely better than anybody else as a self-reinforcing system. So not only did they have to innovate, but they had to innovate specific products they had superior qualities and claims associated with them. Not only did they have to market well but they had to communicate these claims, they can be complicated things, to consumers worldwide. Not only did they have to think about regulatory management, but they had to think about specifically how was it that you could make a claim of that kind in different regulatory environments. They concluded that the majority of growth would come from a few advantaged claimed products, as opposed to just geographic expansion or category dominance. As a result they had to build a new building to allocate resources from lots of different disparate areas into those few products or brands that would really drive growth over time. And so what we mean by capability system is distilling a few things, three to six at most, that working together as a system really will cause a company to fulfill its chosen way to play.

Rachel Salaman: So if a leadership team is assessing its company's capabilities, looking for those three to six things, what kind of level should they be looking at, just the big picture things like key business relationships, or micro elements like the design of a bestselling product?

Cesare Mainardi: It's important to work back from a chosen way to compete in the market, and then that will inform what few things are incredibly important, and they may sound macro or they may sound micro, but they will be awfully specific, and so lists of capabilities that look like we have to market well, innovate well or whatever it might be, it really won't get the job done. What is critical is to solve back from this ideal state to some extent, and we do a lot of work with our clients trying to conceive very differentiate positions and market that we call peer tones, defining the few things that that company would need to do well to take the world by storm in that peer tone, and then comparing to that to where a company is at the moment to understand what a capabilities gap might be. And in generic terms, think of a low cost producer competing against an innovator competing against a solution provider, and they're very, very different kinds of business systems.

Rachel Salaman: Something that comes up in your book is the difference between capabilities and assets. I wonder if you could explain that now.

Cesare Mainardi: A simple comparison would be an asset might be an oil company that has all sorts of different fields that are sitting there in its asset base or brands versus a capability itself which might be the capability to discover those deposits and actually being able to develop those deposits over time. And so we define a capability as a combination of people, process, know how, systems, all that working together to produce a specific outcome.

Rachel Salaman: Now essentially we're talking about coherence today, so how should a capability system link coherently to a company's way to play?

Cesare Mainardi: It's a balance between the chosen way in which to compete and the few things that a company has to be incredibly well, and it has to be a complete alignment and that's what we mean by coherence, and the study that we've done looking at many different industries demonstrates that kind of very strong relationship. For example you will see in the book and in some of the articles that we've lined up companies by performance against the degree of coherence, and take two outstanding companies, one the Coca Cola Company and the other PepsiCo, both great companies, great brands, great talent and a great ability to invest. Within the Coca Cola Company and they've been very focused on a few big brands worldwide and the kind of issue at the management table right might be how do we extend our lead in Sub-Saharan African. When you look at the Pepsi Company, again great performance, but when you look within the Pepsi Company, a large proportion of the value created by the business has actually been the Frito-Lay business, the salty snacks, the crisps business in particular in the United States and Mexico, and when you look at the evolution of that business it was every bit the coherence that we described, it was those who formed the business deciding that they would have sales people on trucks driving up and down the street, putting in racks everywhere they could, the first use of hand-held technology, where they could see what was selling and what was not, and introduce new products and manage what was on the shelf over time and it was an unbeatable coherent capability system around a particular way to play that frankly nobody else has been able to replicate. And still today, that focused coherent capability system creates the lion's share of value within Pepsi.

Rachel Salaman: That links in to the third element of coherence which we haven't talked about yet specifically which is product and service fit. So how common is it that companies' products and services don't fit with their capabilities and approach to market, because you would think that they would?

Cesare Mainardi: You think that they would, but as we described earlier everybody is chasing growth and people become dispersed quite fast and it's hard to give up on a really good idea and whether it's hubris because we're a great company and we can do anything, or whether it's just management chasing growth because they're trying to succeed in a relatively short period of time and it will be somebody else's problem if it doesn't quite come through. There are all sorts of reasons why we tend to let a thousand flowers bloom, unfortunately then we're left with fields of wheat and one example that I like a lot is from that Pfizer case that we write about, they're a very successful company and have transformed performance with this approach to strategy, but in their new product portfolio they had something called the Listerine Pocket Pack that was a little film strip that delivered a dose of mouthwash. It was a tremendous innovation and everybody was extremely excited about it and they launched the product, it grew rapidly into a leading brand, £700m almost, and it was declared by Time Magazine as the innovation of the year, and so it doesn't get any better than that. Well if you think about it though, the product was sold at the front end of the store and the next thing that had to happen was a rapid new flavor introduction, so you launch spearmint and you need cinnamon and you need to communicate that new news to the market, it's a very different capability system that would cause the Listerine Pocket Pack to thrive than that medicinal or therapeutic claims based marketing system that Pfizer had been on. And sure enough they launched, Wrigley had every bit of that confectionery capability system matched with something called Eclipse that frankly wasn't as good as a product and quickly took the world by storm. So here's an example of a great idea that looks really good in any kind of projection that frankly speaking, as great as an idea as it could be, would not thrive in a particular company's capability system. And so it's making those sharp choices around who are we going to be, what do we do exceptionally well, and then what products and services fit, there's the magic in terms of driving performance over time.

Rachel Salaman: In a way it goes against human nature because you can just imagine them seeing the potential of a product like that and really wanting to go for it, even though it didn't fit.

Cesare Mainardi: It absolutely goes against human nature and that's why we think that capabilities screen or lens is incredibly important making those decisions because then you might start to ask different questions, you can still launch a product and be excited about it, but you might conclude well maybe we might want to license to Wrigley.

Rachel Salaman: And among the detailed advice in your book you suggest ways to assess those three elements of coherence, the Way to Play, the Capability System and the Products and Service Fit, what are your main points here?

Cesare Mainardi: We do and actually we suggest just starting with the simple coherence test which is nothing more than asking yourself in a business or the business that you're in or the business that you're investing in, has the business been clear about its way to play, has the business described how it is that they're going to add value in the market differently, has that business communicated clearly, has leadership communicated clearly the three to six capabilities that matter and therefore what doesn't matter, systematically is the business looking at its products and services and comparing them to what their sweet spot is and then making investment choices and portfolio choices as a result. If you can clearly answer those questions, if in fact activity and investment follows those kinds of decisions, you're probably well along the path to coherence. Unfortunately in most companies these questions cannot be answered, and frankly we think it's a call to action for management to begin to make the hard choices that really drive performance creation and capture over time.

Rachel Salaman: You include some great case studies in your book, you've mentioned a couple already, another is Amazon and perhaps you could talk about how that company managed to get these things right.

Cesare Mainardi: Well Amazon I think is a great example, and there are others like Apple as well, but if you look at what Amazon did with the great internet boom and launched into retail when everybody was talking about new business models that were only internet based, they were investing in warehouses and the like, and an entire world leading supply chain, in fact those who saw advertisements, for instance the United States, remember the leader of Amazon sitting on top of the warehouse describing that the company was more than just a website. And so Amazon made a conscious choice about how it was that they were going to play in terms of the world of internet retailing and delivering, and they built a capability system, not just around that front end that is exceptional in terms of you've bought this, you might like this, people who have bought what you like have also enjoyed whatever else it may have been, but they built world leading supply chain capabilities and delivery capabilities and the like, and Amazon has built a big business around this and they've applied it where that business might thrive, and so they've applied it category after category and they didn't just describe themselves as a book retailer over time, and frankly they're starting to leverage their logistics capabilities. Apple is another great example; Apple is at the top of everybody's list as one of the most innovative companies, if not the most innovative company in the world. When you look at what Apple has done, systematically it seems to be the same thing, area by area, and so they identify consumer need, they bring technology to it, in recent years it's not necessarily their technology, they are great at creating a wonderful consumer experience around technology that's intuitive and easy to use, they have an iconic brand, it's an entire Apple capability system that you've seen has worked systematically from the personal computer to music to smart phones and now to the iPad, there's a real Apple way, a real capability system and a way to play, but they've been used and driven growth over time.

Rachel Salaman: Now your book warns about falling into what you call the adjacency trap, could you explain what you mean by adjacencies and advise how people can avoid the risks?

Cesare Mainardi: Absolutely, everybody is looking for growth and typically in business we talk about adjacencies, what's the product next in line, and so if I'm in vegetables now might I go into another food category, if I'm in a piece of consumer electronics might I target another piece of consumer electronics. And so in general historically people looked at trends, they looked at the categories that they were in and then looked nearby and said well could we take some share elsewhere. That's the adjacency trap because it presumes an ability to win in the markets next door as opposed to solving from why is it that we have a right to win and what is it in fact about our capabilities that would cause us to take share. And so we would advise that it's incredibly important not just to look at markets next door but rather think about your capability system and why it's a winning capability system and then ply that to the markets where in fact that gives you a right to win, as we call it, in fact markets where you will be able to capture share because you do something so terribly well compared to other competitors. And that's the Apple example that I gave before, when they looked at adjacencies they looked at them through their Apple capability system lens as opposed to just going to the product line next door, they didn't go from personal computers necessarily into peripherals, they went into very different places where their capability system really afforded them an ability to win.

Rachel Salaman: So the next place you might win might not be the market next door?

Cesare Mainardi: Exactly.

Rachel Salaman: You outline four specific ways in which coherence generates value and these are effectiveness, efficiency, focused investment and alignment. Some of those you've already touched on, but could you talk us through that idea?

Cesare Mainardi: Absolutely, some of these are self-evident, but if you're clear minded about how it is that you're going to win in the market, your way to play, the few things that allow you to in fact add value in that way and the like, then decisions become far more targeted. Of course if we've been able to distill three to six things, working together as a system, that will cause us to outperform competition, now we will continue to focus on those and extend our ability to be effective in that way, we'll be efficient because we'll understand them that we shouldn't spend on things that don't make sense, that yes accounts payable is important but is it really a part of my winning capability system or not. So we'll think differently about cost and expense investment in the business, we'll think differently about capital investment of course, should I spend $100m or $200m on new process technology in plans to reduce cents on the dollar, on the product or not, and what does it mean about my ability to win over time in market in my chosen way to play. Those are self-evident, the one that surprised me the most was alignment, especially doing work for example in Pfizer, that once you've reduced the strategy to a very clear statement, you can get it down to literally four sheets of paper, a little card that might sit on everybody's desk and then everybody clearly understands how is it that we're competing, and they start to challenge each other, and in fact they start to challenge top management and of course many times top management is incredibly capable and also incredibly creative and the teams and people in the business might start to ask how is that on the strategy, should we really be launching this product or service, why are we spending here when in fact the really important capability to go build was this new digital marketing capability. And so the power of alignment that comes from being quite clear about strategic choice is just amazing when we've seen it perform the way it has.

Rachel Salaman: There's a really interesting part in the book that explores whether the coherence led approach that we've been talking about is right for all types of company, and you use the example of the diaper war to illustrate how coherent strategies work in a highly competitive sector. Can you tell us about that?

Cesare Mainardi: I love the diaper war stories, they were one of the big case studies in business schools about two big competitors going head to head, and it was Kimberley Clark, especially with the Huggies brand and Proctor and Gamble in the US Loves brand and I believe it had a global position as well, and they were big companies and they were investing heavily and they were going at it to take share worldwide and try to out-compete each other on technology and low cost production, and these are big complicated things it turns out actually in terms of the product technology and the process technology required to win in diapers. So they had a price war and it wasn't good for any of the companies over time, especially given those huge investments that were required in the business. Well it all sorted itself out when they took very different positions, very different ways to play, and Proctor and Gamble continued to bet on technology advantages, so better performance of the product itself and Kimberley Clark bet on the experience associated with the product, and so was it comfortable for the child, did it fit well and they staked out very different territory in the market, and then suddenly consumers were well served in terms of their choices, and those companies were well served in terms of their ability to make a very good return over time. I think it's a great example about the choice to differentiate which is in essence what we're talking about, that if I can be king for a day of an industry, once it's globalized and consolidated of course I can't do that, but if you can imagine a few different needs on the part of the customers and consumers in the market, when you absolutely want to have extremely focused players out-competing anybody else in terms of meeting those needs for the effectiveness and efficiency and alignment reasons that we described above. And so it's very much thinking through that and thinking about the different territory that companies can stake out and they'd be able to defend that territory because of the managed capability systems, that makes all the difference over time.

Rachel Salaman: And it takes quite a lot of courage to look at how your chief competitor is winning in the market and say they're doing it that way, but actually we believe we can do in another way.

Cesare Mainardi: It does take courage, and sometimes we call that the leap of faith, but we have found that what is incredibly powerful in doing this work is actually studying the competitor's side and studying your own company's side when doing some of the work, and to solve back from peer tones. In other words these extremely differentiated positions because chances are your competitors aren't quite there and chances are you're not quite there if you're all competing in the same way. And thinking about what three or four different peer tones, what new models might there be in a business or an industry over time and which one might be us, and then having the courage to go on that journey, and we have found time and again that when companies really differentiate, not just around what they sell but also what they do, they create a whole lot of value and they capture a whole lot of value over time.

Rachel Salaman: In the book you also talk about large conglomerates which almost by definition resist a coherent approach, what are your tips for them?

Cesare Mainardi: We have had a lot of debate within the firm, having seen the results of this research, and I have to say that in my more religious moments I argue strongly for focus in a business, especially given the results of this analysis. On a practical day we argue that in competition what's incredibly important is that at least every single piece be coherent in the way that we've described, and certainly in the land of the non-coherent, the somewhat coherent win. But we have had a lot of debate around conglomerates and actually the more we think about it, the more we see winning conglomerates actually having a specific way to play as well. Everybody's favorite example is General Electric and there is an incredibly successful conglomerate. If you look at the GE story over time, they started if you recall with the decision to compete only where we can be number one or two, and so even there at the beginning of this story is a decision to focus. Then when you see the GE Capital sign and you look within that business what seems to have done exceptionally well versus what has done well or not so well, they've tended to do exceptionally well on the engineered products, and there was a GE way of management around sigma and lean and workout that lent itself to engineered products more than any other particular area, and of course GE executives are recruited around the globe and those who have gone onto lead other businesses seem to have done particularly well in engineered products, and possibly less well in many other areas over time. So even GE, which is everybody's great example of a successful conglomerate over time, really has succeeded in a particular way to play and particular sort of businesses that seem to do exceptionally well around engineered products.

Rachel Salaman: In one chapter of your book called unlocking growth, you show how the leading retail chain Wal-Mart successfully use some of these techniques, could you talk us through what they did?

Cesare Mainardi: Yes, they hit the wall in terms of growth in 2003 at a mere $250b and you could imagine the discussion within Wal-Mart, probably not too dissimilar from other retailers or other businesses, they needed growth and they start to explore new formats and a different way to compete with the stores that they had, and so they start to migrate away from the core, and in particular they start to promote more and move away from this everyday low price promise that they had. And testament to management there they started to go down that path but then pull back, and they focused on the core again and realizing that they still had room for growth, they decided to sharpen their capability system, which was already a winning capability system. What did they do, well they went back to their roots, back to everyday low price, stopped confusing the consumer with all these different price promotions, stopped spending all sorts of money in the store trying to administer these different price promotions, but they got really good at segmenting stores and they suddenly understood that there was a difference in the best assortment for a store next to sweet water versus salt water, or a store that happened to be next to a retirement community with a golf course that might be different than a rural store or an urban store. Then they started to make better assortment decisions in the stores that they had, they started to think differently about what categories to manage and how, and so for example personal computers, they realized that in an urban environment consumers probably went elsewhere for their computers, but in a rural environment people were very happy to come to Wal-Mart and in fact wanting some assistance in making those choices. So they got much sharper around the capability system required to win in the business that they were already in and it created another sort of growth, and with all that activity they actually took growth avenues that they were working on down from thousands to hundreds to make the difference along the way. And so they could have become dispersed quite fast and arguably if a company could do it, Wal-Mart could do it, for all the usual reasons, but here is an example of a company that chose to double down on their way to play and their capability system and they continued to extend their lead as a result.

Rachel Salaman: So if someone listening to this podcast wanted to introduce a coherent capability driven strategy into their company, what are some first steps that they could do right now?

Cesare Mainardi: I would suggest two things. One maybe take the coherence test and that's available online and it's in the book, it's in some of the articles we've written, but just ask yourself these simple questions, have we declared our way to play, have we defined the three to six capabilities and are we actually investing on them. It's really ten or twelve questions that are a good starting point, ask your colleagues what do you think our way to play is, ask your colleagues what do you think the three to six capabilities are that will really make a difference for us. The chances are that the answers will be different. So I would start there to try to understand whether there is an opportunity or a challenge at hand, and then I would start to launch work and my advice is always to start from these peer tones, let's not have a discussion right now about what our key capabilities are but let's talk about how we might take the world by storm by really differentiating.

Rachel Salaman: Cesare Mainardi talking to me in London. The name of his book again is "The Essential Advantage: How to Win with a Capabilities Driven Strategy." There is more information at www.theessentialadvantage.com where you can also participate in research on this topic if you would like to. I will be back in a few weeks with another Expert Interview, until then, goodbye.