4 Reasons Why Your Small Business Should Embrace “Coherence”
Posted by Matt Krautstrunk on March 29, 2011 in Business Management, Business Start Up Advice [ 5 Comments ]
Ask yourself, what are my company’s core capabilities? If your answer is simply, restating the product you sell, you are most likely incoherent. The coherence premium is a high level strategy used by some of the largest (and most profitable) corporations in America. Companies that are “coherent” can define 3-6 capabilities internally that differentiate them within their industry, build a deep workable strategy focused on “winning,” and develop product portfolio based around their capabilities.
What makes the coherence premium such an interesting topic? The fact that companies who are “coherent” are healthier, more profitable and better set up for long-term growth. Coca-Cola, a poster child for coherence, (almost 100 on the Coherence Capabilities Score) sees on average 20% higher earnings before interest and taxes than profiled companies with a Coherence Capabilities Score of less than 20.
Take Wal-Mart for instance, they’ve aligned all of their capabilities:
- Aggressive vendor management
- Expert point-of-sale data analytics
- Superior logistics
- Rigorous working capital management
Simple, but to the point, Wal-Mart understands their internal capabilities, which stretch from logistics all the way to IT. Capabilities should be specific enough that they exact a point of where you stop competing and start excelling your industry. A more thorough example of a capability would be, “A company’s ability to use customer-data mining to develop new products.”
- Strengthens a Companies Competitive Advantage
- Companies are Better Prepared For The Future
- Produces Efficiencies of Scale
- Aligns Strategic Intent and Day-To-Day Decision Making
1. Ways to Play– learn how your company provides value and the way you will face the market.
- Are we investing capabilities that matter to the way we play?
- Are we clear about the way we choose to create value in the marketplace?
2. Capabilities System –determine your 3-6 core capabilities.
- Have we defined how these capabilities work with our system?
- Do all of our businesses draw upon this superior system?
3. Build a Strategy For a Balanced Portfolio – Build your future growth and product initiates to maximize your core capabilities.
- Have we found our product and service “sweet spot”
- Are new products and acquisitions determined on the way the fit within our capabilities system?
Understanding your core capabilities and becoming coherent is not necessarily the easiest thing to do. Your capabilities should be assessed with a healthy mix of both internal and external information and careful thought. All of this is worth the hassle; coherent companies consistently reap more profits, are better prepped for the future and place themselves atop their industries by innovating.