When companies ask themselves how they are going to grow—especially in a sputtering economy like this—the answer they come up with usually has to do with something external: an acquisition or expansion into an emerging market.
But companies really should be looking inward to answer this question. In particular, they should be looking at their unique capabilities—usually the best source of growth. Growth has more to with who you are and what you do well than with what you sell to whom.
To make growth decisions based on a capabilities self-assessment is a sign of “coherence,” a state in which a company’s capabilities systems, market strategy and product and service portfolio all align with, and reinforce, each other. Coherent companies tend to have higher growth because they don’t fritter away resources on activities that don’t matter.
Instead, they focus—making clear choices about what they need to do to be differentiated, and what they don’t. In the area of capabilities, for instance, coherent companies seek to be great at turning only a handful—three to six at most—into an interconnected, mutually reinforcing, winning system. (That’s the maximum number of capabilities most companies can manage, and the maximum they need.) In their market strategies or ways to play, coherent companies are equally focused—having evolved to a single identity (as the market innovator, price leader, or integrator, say—but not all three). In their product portfolios, coherent companies nurture what’s in the core and are unsentimental about discarding what lies outside of it. Their catalogues fit who they are.
This focus is like a network of precision pipes that diverts capital and expense investment to the right places. Without it, just about anything can sound as if it fits a company’s strategy.
Let’s apply the coherence idea to a couple of real examples to illustrate its relationship to growth. While we were writing this article, Apple (a company that hit the $65 billion sales mark in 2010, meaning it was already dealing with the problem of big numbers) reported a 70 percent jump in quarterly revenue. We’ll repeat that: Seventy-percent growth.
Most people would say that Apple has the magic touch. But Apple’s achievements have less to do with magic than with coherence.
This is a company that never veers from its way to play—innovating to produce what its founder, Steve Jobs, calls “the coolest products on the planet.” It concentrates on only a handful of capabilities, including technology design and an understanding of human interface issues, and accepts the fact that it may be merely adequate in other capability areas (such as manufacturing, which it outsources, or b2b marketing, which it more or less ignores). It does occasionally add ancillary capabilities, but only to the extent needed to support growth in its product portfolio. That product portfolio is one of the tightest you’ll find, with every major piece of it (the Macintosh, iPhone, iPod and iPad) bearing the stamp of the company’s differentiated capabilities system.
To be sure, Apple is in a class by itself, probably because Jobs himself (now on his third medical leave, we’re sorry to say) has such rare leadership skills. There are very few companies that achieve the level of coherence Apple has on an enterprise-wide basis. And Apple has been rewarded for this, with a growth rate more typical of a technology company in its third year of existence than its 35th.
Fortunately, coherence doesn’t need to be an absolute, Apple-level accomplishment, in order for it to help with growth. You can get a lot of benefit by creating pockets of coherence—or by becoming more coherent than you were before.
One of our favorite examples of coherence on a smaller scale is the Kingsford charcoal briquettes business of the Clorox Company. Briquettes had become very low growth—a strictly seasonal product. Clorox was running the business with its usual mix of advertising, sales, supply chain and R&D spending.
When it set out to revitalize its growth, Kingsford didn’t turn to M&A or a major geographic expansion plan, but thought about how it could get more business from existing customers. When such growth is in an area that is already core to a company, it is called headroom.
Management realized grilling was an experience its customers enjoyed and which they could be persuaded to do more often, and at other times than during the summer. That was their headroom.
It was an insight with implications for the business’ capabilities system. Major product innovation and traditional marketing ceased to be seen as difference-makers and were de-emphasized. In their place, the business invested in its merchandising and sales capabilities by creating the right in-store consumer events and promotions, sometimes with the help of food and beverage partners, and by fine-tuning the marketing messages it placed in the retail stores themselves. The switch in emphasis with respect to capabilities increased the unit’s coherence and turned a stagnant product category into a business with a growth rate twice the CPG average for the next four years.
Kingsford underscores a crucial point about coherence—it is less an end state than a journey. To be sure, being able to spot a growth opportunity is always important. After that, it’s all about making sure your organization is fine-tuning its capabilities system, way to play and product portfolio to seize the opportunity. Coherence is a framework for helping you hew to this exacting requirement. It should be the destination, whether you get all the way there or not.
Paul Leinwand is a partner at the consulting firm Booz & Company. Cesare Mainardi is the managing director of Booz & Company’s North American business. Their book, “The Essential Advantage: How to Win with a Capabilities-Driven Strategy,” (www.theessentialadvantage.com) was published in December 2010 by Harvard Business School Press.