Over the years, capability coherence has been shown to correlate strikingly with corporate performance. For example, Booz & Company tracked the coherence of a variety of consumer products companies. (See Exhibit 3.) We found that companies that focused their portfolio on a few key capabilities delivered higher earnings before interest and taxes (EBIT) margins than those whose portfolios were less coherent. We have found the same sorts of correlations in other industries, such as automobiles and telecommunications. In the end, one of the most critical roles for senior executives is choosing which capabilities to invest in and providing the organization enough specific direction to follow through. This means building capabilities that are unique and synergistic, aligning the portfolio around those capabilities, and enacting an operating model that supports and leverages the capabilities that deserve the most support.
Providing this sort of consistent, reliable focus, is, of course, one of your own most important capabilities. Releasing what isn’t essential in difficult times will give you greater clarity of purpose, and will expand your critical capabilities for use in good times. Every day, that more accurate self-definition will ensure that every investment decision, every portfolio decision, and every operating decision reinforces the coherence of your strategy. Yes, that will help in terms of cutting costs. But it will help even more in overall strategy.
Indeed, just being armed with the clear objective of protecting and growing your company makes the pain of the next cost reduction a bit more palatable. And that will have an effect on people within the company. More of them will feel engaged, because they will recognize what the leadership is trying to do. As the company’s sense of purpose becomes clear, they will become optimistic again, and they may see opportunities where before they merely saw pressure. It won’t hurt that they will see tangible results: Costs come out and stay out, and people are less likely to feel that their work is going to waste. Most important of all, the weight of the organization is now balanced appropriately, propelling forward the capabilities that create your right to win.
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- Shumeet Banerji is chief executive officer of Booz & Company. Prior to that, he was the managing director of its European business. He has served clients in both the public and private sector from offices around the world. Previously, he was a member of the faculty at the University of Chicago Graduate School of Business.
- Paul Leinwand is a partner in Booz & Company’s global consumer, media, and retail practice. Based in Chicago, he serves as chair of the firm’s Marketing Advisory Council. He supports clients undertaking significant strategic opportunities, and in building capability systems in marketing, innovation, and customer management.
- Cesare R. Mainardi is managing director of Booz & Company’s North American business and is a member of the firm’s Executive Committee. Based in Cleveland, he works with Fortune Global 500 companies to help them achieve major business transformations. He has served as global leader of Booz & Company’s functional practices and has led the firm’s global consumer products and health practices.
- Reprinted with permission from Cut Costs, Grow Stronger: A Strategic Approach to What to
Cut and What to Keep, by Shumeet Banerji, Paul Leinwand, and Cesare R. Mainardi, Harvard Press. Copyright © 2009 by Harvard Business Publishing; all rights reserved. This electronic book is available at www.strategy-business.com/ccgs_book and at online booksellers, including a Kindle version at Amazon.