External market positioning or internal capabilities are not enough to create a company's 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.
Roll over the image for more information on the key components of Capabilities-Driven Strategy.
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 powerful 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.
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 3,500 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.
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.
As a firm, we at PwC’s 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.
Many executives across industries and regions are struggling with developing and executing strategies successfully. Those that follow a Capabilities-Driven Strategy, however, enable their companies to become more coherent and to gain a right to win in the markets in which they have decided to compete. Applying a capabilities lens changes how executives make important strategic decisions, from growth to M&A to portfolio to cost cutting.
Our leading research on strategy
Our research confirms these findings. We have conducted a survey of 2,800 executives from companies of various sizes, geographies, and industries. According to this survey, most executives don't feel their company's strategy will lead to success, two out of three respondents admit that their company's capabilities don't fully support their strategy, only one in five are fully confident they have a right to win, and the majority say their company has too many conflicting priorities.
Our research also provides insights into what drives a company’s success. A Strategy& survey with more than 700 executives finds that a capabilities-driven approach to value creation leads to higher returns, on average, than other ways of doing strategy. 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.
Our research also helps us understand executives’ concerns about the strategy-execution gap and the role that capabilities play in addressing it. 42% of executives admit they are significantly concerned about at least one barrier to successful strategy and execution and another 54% have some concern; only 4% indicate that they are not concerned about any barrier. Executives who felt comfortable saying their company is currently winning in the market were most likely to attribute that success to great leadership or powerful and distinctive capabilities.
In this three-part SoundBite video series, Strategy& CEO Cesare Mainardi and Strategy& Senior Partner Paul Leinwand provide a practical guide for using capabilities to build your company’s engine for growth.
In this series of three entertaining yet instructional videos we explain what we mean when we talk about capabilities as the key to essential advantage and sustained value creation and capture.
Strategy& Partner Paul Leinwand, co-author of The Essential Advantage, in conversation with Sarah Green from Harvard Business Review: How can companies develop a winning strategy and capture the coherence premium.
Paul Leinwand and Cesare Mainardi speak with with Peter Day, from the BBC's Global Business program, about The Essential Advantage and answer a very pointed question: Do companies really understand what they're doing?
Paul Leinwand, co-author of The Essential Advantage, in conversation with Cindy Babski from INSEAD Knowledge.
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 Coherence Premium” lays out the importance of coherence for sustainable business success and presents that sustainable, superior returns accrue to companies that link capabilities.
The road to sustained success begins with the answer to this simple question: “Who are we?”
Business strategy is at an evolutionary crossroads. It’s time to resolve the long-standing tension between the inherent identity of your organization and the fleeting nature of your competitive advantage.
There is a golden opportunity today for the leaders of HR, IT, finance, operations, R&D, marketing, sales, sourcing, and other corporate functions and shared services.
New HBR article highlighting the need for emerging-market companies to focus on capabilities building from the very beginning.
Advantage is transient, but corporate identity is slow to change. Figure out that paradox, and your company will be primed for success.