Sustainable, superior returns accrue to companies that focus on what they do best. It is that simple. Yet it is incredibly hard to internalize. It is a rare company that focuses on what we do better than anyone in making every operating decision across every business unit and product line. Rarer still is the company that has aligned its differentiating internal capabilities with the right external market position.
These companies are called coherent.
Most companies do not pass the coherence test because they succumb to intense pressure for top-line growth. They chase business in markets where they do not have the capabilities to sustain success. Being coherent allows our companies to establish our differentiated capabilities to achieve greater profitability and market leadership.
Coherence is achieved when a capabilities system supports a focused strategic purpose, otherwise known as a Capabilities-Driven Strategy (CDS).
Capabilities Coherence Framework
Any company in any market must carefully consider its external market positioning and its internal capabilities (i.e. Core Competencies). However, for the company to maximize its chances of success, it must have in place a “coherent” set of Business Capabilities.
- Value Creation. Are we clear about how we choose to create value in the market place?
- Capabilities System. Have we articulated those capabilities that we do uniquely better than anyone else?
- Product Fit. Do most of the products and services we sell fit with our capabilities system?
Understanding our Value Creation, Capabilities System, and Product Fit requires our company to go through a simple diagnostic that will determine whether our company is going off the rails.
The Pfizer Case Study: A Showcase of Coherence in Action
The consumer health care business of Pfizer is a good example of capabilities coherence. After its back to back acquisitions of Warner-Lambert and Pharmacia in the early 2000s, the pharmaceutical giant owned several leading consumer products: Listerine, Benadryl, Sudafed, Nicorette, and Rogaine.
In 2002, Pfizer set the goal of becoming a leader in global consumer health care. A capabilities lens was applied to the business. Let us look at the market conditions that prompted Pfizer to take on this strategic direction.
Pfizer was faced with a market that was highly fragmented and no player enjoyed more than 5% share globally. Competition was stiff as there were mass retailers enjoying alternatives to brand name drugs. Country by country regulations were tight pulling the overall growth to a very low level.
To gain headway in the market and remain in the lead where competition is stiff, Pfizer realized the need to take the giant step to coherence guided by the 3 Principles of Value Creation, Capabilities System, and Product Fit. When coherence in capabilities was achieved, breakthroughs were reached leading Pfizer to greater profitability.
By 2006, Pfizer was able to grow its Consumer Healthcare to nearly $4 billion in annual sales. The company redeemed the value by selling the business to Johnson & Johnson 20x EBITDA. This is a basic example of coherent companies that gain superior financial performance. Beyond the result is the approach. Pfizer was able to take on the high road to achieving Business Capabilities Coherence in the road called Competition.
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