Expand or Prune the Portfolio Below to Enhance Competitiveness...

While the first job of each aggregation level is to develop capabilities that support those levels below, the second job is to expand and prune the lower- level portfolio on the basis of fit to broader capabilities. With respect to enhancing the portfolio, consider the organizational reinforcing rods—the capabilities that run through and create advantage in the whole of your organization—and determine whether the portfolio can be expanded into other businesses that would benefit competitively from those reinforcing rods...

Equally important is pruning of the portfolio below when the benefits of the reinforcing rods cannot match the financial and administrative costs of aggregation. These are businesses that would be better off in another company’s portfolio or as independent operations. P&G aggressively pruned businesses for which its five corporate capabilities couldn’t assist substantially in generating competitive advantage, divesting about fifteen businesses a year for ten years, between 2000 and 2009. Big, profitable brands such as Folgers and

Pringles had to go because they were not going to benefit from company reinforcement enough to sustain competitive advantage over the long term. Both had built strong brands, but had limited opportunity for product innovation within P&G’s mass channels of

distribution.

Armed with a map of the playing field and an analysis of the structural attractiveness of the individual segments, the strategist can move to the second major category in this framework: an analysis of customer value. Regardless of whether a firm wishes to be a cost leader or a differentiator, it needs to understand precisely what customers (its own and its competitors’ customers) value. This means understanding underlying needs, like recognizing, with Gain, that a sizable group of consumers cared deeply about the sensory experience of doing laundry, valuing the scent of the detergent in the box, in the wash, and in the drawer or closet. Only once this need was understood was it possible to position and differentiate Gain along this dimension.

For Stewart Resnick, and now for me, a competitive advantage is interesting when one has insights into ways to increase its value. That means there must be things you can do, on your own, to increase its value.

In particular, increasing value requires a strategy for progress on at least one of four different fronts:

• deepening advantages,

• broadening the extent of advantages,

• creating higher demand for advantaged products or services, or

• strengthening the isolating mechanisms that block easy replication and imitation by competitors.

Step 2: MonetizeYour Strengths

In addition to looking at your largest cost drivers, ask yourselves, "What can we do better than anyone else?" That is, beyond the rhetoric of annual reports and marketing collateral, what makes you really and truly superior? Start here, and think about a value-added service that allows you to benefit operationally from your excellence — bonus if you can make your competition uncomfortable along the way…

Interestingly, the obstacle to innovation at this company was its confidence that it was already capitalizing on its strengths. As soon as its managers had the courage to acknowledge the gap between chatter and truth — between what they were vaguely promising and what they were explicitly delivering — we were able to make progress in relatively short order. The security company is not alone in this. We often find the obstacle to innovation is an unwillingness to acknowledge reality, including the hard truth that you're not creating the value you claim to be creating. Once we establish that there's more to be done, the brainstorming is often fast and furious. Without that acknowledgment, however, organizations can retreat to a defensive and reluctant crouch.