Our approach

Gain sustainable competitive advantage using a Capabilities-Driven Strategy

External market positioning or internal capabilities are not enough to give companies a right to win. A coherent strategy that aligns them at every level is essential. Only a coherent company — one that pursues a clear strategic direction, builds a system of differentiating capabilities consistent with that direction, and sells products and services that thrive within that system — can reliably and sustainably outpace competitors.

We at Strategy& have come to understand that most strategies fail to give sufficient attention and weight to capabilities and disregard how these capabilities should fit together to form a mutually reinforcing system. Because this blind spot is so common in corporate strategy, the rewards are all the more immense for the companies that do manage to create an aligned set of key capabilities.

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Our approach

  • Way to play
  • Capabilities system
  • Product and service fit
  • Right to win
Way to play

A company’s way to play is an approach to creating value for its customers. A well-defined way to play is broad enough to allow flexibility and growth, but narrow enough to focus strategy and decision making.

It may involve being an innovator, a value player, an experience provider, and so forth. More than any other single factor, the way to play distinguishes a company from its competitors.

For instance, Walmart, the largest retail chain in the world, has taken its leading position with a precise and inspiring way to play: being a big-box provider of everything from groceries to electronics to houseplants at “everyday low prices,” without special sales or discounts.

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Capabilities system

A company’s primary source of advantage is a system of three to six mutually reinforcing capabilities that together allow it to fulfill its way to play. A capability is a key strength of your business that customers value and competitors can’t beat. It’s not a generic activity, but a specific intersection of people, knowledge, IT, tools, and processes where your organization consistently out-performs competitors and that delivers a central aspect of your way to play.

Walmart’s capabilities system includes:

  • Efficient supply chain management, aggressive vendor management, expert point-of-sale data analytics, superior logistics and working-capital management
  • Mastery of real estate selection and acquisition
  • Sophisticated retail conception and design
Product and service fit

A company’s products and services are its most visible activities, both to its customers and to the outside world. However, too few companies create a product and service portfolio that aligns with their strategy.

Instead, most companies compose portfolios based on short-term financial performance and shoehorn a strategy to fit around that portfolio.

Every product and service that Walmart sells aligns with its way to play. Walmart does not sell big-ticket items like large furniture and appliances, where it has no cost advantage, nor does it sell items such as recorded music with explicit lyrics that run counter to its customers’ values.

Right to win

The right to win is a company’s ability to enter or compete with the confidence to succeed and create value. It belongs to coherent companies, those that focus on what they do best in making every decision across every business and that align their way to play with their capabilities system and their product and service fit.

Walmart’s right to win is obvious: it has a well-defined way to play, an unbeatable system of capabilities that reinforce one another, and a portfolio of products and services that thrive within that system. Moreover, its success story is well known: It has been the largest retail chain in the world for many years. It has more than 4,500 stores, more than 300 product categories on its shelves, more than two million employees, and about a third of the U.S. population visits its stores each week. This scale famously allows it to dictate terms to just about any of its suppliers.

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Capabilities-Driven Strategy explained

Video 1:
What is a capability?

A few differentiating capabilities drive a company's identity and success. But what do we really mean by a capability?

In this video we define what a capability is — the combination of processes, tools, skills and behaviors, and organization that delivers a specified outcome — and show how differentiating capabilities create unparalleled value for a company. We use Frito-Lay and its direct-store delivery capability as an example to illustrate this powerful concept.

Video 2:
What is a capabilities system?

For capabilities to deploy their full potential they need to work in a system. Such a self-reinforcing system of capabilities is stronger than the sum of its parts and it is almost impossible for competitors to copy.

In this video we define what a capabilities system is by looking at Frito-Lay. We show how Frito-Lay combines its three differentiating capabilities of direct-store delivery, continuous innovation of new products, and consumer marketing into a powerful system that is at the heart of the company's success.

Video 3:
How does capabilities coherence create value?

This video captures our philosophy and research on how companies create and capture value over time through capabilities coherence — that is, the mutually reinforcing alignment of a deliberate way to play, a supportive capabilities system, and a relevant portfolio of products and services.

We've found that most companies do not believe they have a winning strategy and two-thirds lack the capabilities to create value. The vast majority are navigating too many conflicting priorities, and only one in five believe they have a right to win in the marketplace. Our research in various industries consistently demonstrates the direct correlation between capabilities coherence and superior performance over time.

Our research

PwC’s Strategy& has conducted several studies to better understand how companies create sustained value. Here is what we found:

Business strategy is broken in many companies

According to Strategy&’s survey of 2,800 executives from companies of various sizes, geographies, and industries:

  • Most executives don’t feel their company’s strategy will lead to success,
  • Two out of three respondents admit their company’s capabilities don’t fully support their strategy,
  • Only one in five are fully confident they have a right to win,
  • The majority say their company has too many conflicting priorities.

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Coherent companies outperform others in terms of growth and profitability

The same study has revealed that coherent companies are 3 times as likely to grow faster than the market as incoherent companies. And they’re 2.5 times as likely to say they’re more profitable than the market, compared to incoherent companies.

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The most successful companies owe their success to their differentiating capabilities and coherence

In another survey of more than 700 executives, Strategy& asked executives to indicate what drives the success of the largest companies in their industry. Is it capabilities or assets, coherence or diverse portfolios? The result: Capabilities-driven companies — those that are seen to owe their success to having a truly distinctive way of providing value, a powerful set of capabilities, and coherence between their strategy and capabilities — on average have higher Total Shareholder Return than others. By contrast, companies that compete on the basis of economies of scale, lucrative assets, or diversification fare less well. The survey also finds that companies with a clear identity — standing for something unique and consistent over time — tend to perform better than others, and that a capabilities-driven approach helps them develop that identity.

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Capabilities-driven M&A deals generate higher returns than deals with other rationales in mind

In examining 540 major global deals in 9 industries announced between 2001 and 2012, we found that deals that leveraged the buyer’s key capabilities or helped it acquire new ones produced significantly better results, on average, than deals done for other reasons, like diversification deals.

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Key publications

Strategy That Works
Winning companies don’t follow conventional wisdom. They apply five acts of unconventional leadership that allow them to close the strategy-to-execution gap.
The Coherence Premium
Harvard Business Review
Sustainable, superior returns accrue to companies that focus on what they do best. Companies that align their differentiating capabilities with the right external market position enjoy a coherence premium.
The Essential Advantage
Based on extensive research, The Essential Advantage helps you construct a strategically coherent company in which the pieces reinforce one another instead of working at cross-purposes.
The New Supercompetitors
Companies that realize the power of their capabilities can shape how industries evolve.