Capabilities-Driven Strategy: Gain the right to win

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.

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Capabilities-Driven Strategy: Gain the right to win
Many executives across industries and regions are struggling with developing and executing strategies successfully

More than half

don’t think they have a winning strategy.

4 5
out of

2 3
out of

admit their overall strategy isn’t well understood… within their own company!

are frustrated because they have too many conflicting priorities.

9out of 10 2 3
out of

concede they are missing major opportunities in the market.

admit they don’t have the capabilities needed to create value.

The problem is that generations of executives have been asking the wrong questions. Instead of asking “Where should we go to grow?” they should be asking “Who are we? How do we create value in ways that others cannot?”

Source: Strategy& survey of 3,000+ senior executives, Fit for Growth* survey of 500+ senior executives * Fit for Growth is a registered service mark of PwC Strategy& Inc. in the United States.

We can learn from winning companies – they are coherent and use their distinctive capabilities to drive their identity and success
Way to play: Be clear about how you create value in the marketplace. Capabilities system: Focus on developing your system of 3–6 distinctive capabilities that allows you to provide value in line with your way to play. Product and service fit: Specify your product and service “sweet spot” and sell only what fits.

Right to win

Coherent companies pursue CapabilitiesDriven Strategies. They align their strategic direction to the capabilities that make them unique. They make hard choices about di erentiation and stick to them.
Coherent companies turn traditional strategy on its head and pursue a Capabilities-Driven Strategy
∙ They look inside first and figure out what they do best. ∙ They then develop those 3–6 capabilities until they’re best-in-class and reinforce one another in a powerful system. ∙ They align what they do well with the right marketplace opportunities.

The market rewards them with sustained superior returns
Effectiveness from focusing on what matters most day in and day out Efficiency from applying your distinctive capabilities throughout the entire company Focused investments from concentrating your resources on what drives advantage Alignment among managers who know what is most important for your success

Applying a capabilities lens changes how executives make important strategic decisions
Managerial situations What most companies do
∙ Look for promising opportunities and conclude that these are so great that “we’ll figure out how to pursue them” ∙ Buy companies that look financially attractive or that fill a hole in their portfolio ∙ Focus on the products that perform above a certain threshold

What coherent companies do
∙ Look for those profitable growth opportunities that leverage their distinctive capabilities. ∙ Be very clear about what capabilities the strategy requires and develop a capabilities agenda ∙ Acquire companies that leverage capabilities they have or that fill a hole in their capabilities system ∙ Acquire or keep products that leverage their distinctive capabilities (and fix bad performance, if required) ∙ Divest products that need different capabilities (even if they are doing well) ∙ Cut costs in areas that are non-differentiating ∙ Reinvest in strengthening differentiating capabilities that fuel growth

Growth

Mergers and acquisitions Portfolio management

Cost cutting

∙ Slash costs across the board

Pursuing a Capabilities-Driven Strategy pays o
Coherent companies tend to have superior profitability Acquisitions that leverage or enhance capabilities, on average, perform better than deals with limited capabilities fit
Annual return to shareholders (compared with market index)

32% EBIT (2003–2007)

The Coca-Cola Company

3.9%

P&G Clorox General Mills Kraft Unilever ConAgra Sara Lee Heinz Nestle Campbell’s Wrigley’s PepsiCo Kimberly Clark Limited fit 0.4% Enhancement Leverage

12% points
Capabilities coherence score 100 variance -9.1%

4% Size of Bubble = Revenue 0

Source: “The Coherence Premium,” Harvard Business Review, June 2010; “The Capabilities Premium in M&A,” strategy+business, Spring 2012

Capabilities-Driven Strategy is recognized as a distinctive and powerful idea by academics and business leaders alike
“Just because a company can doesn’t mean it should....” Michael Roberts, former President and COO, McDonald’s Corporation

“Long-term success must stem from the marriage of carefully considered, unique capabilities and appropriate market opportunities.…” Gary Loveman, Chairman, CEO, and President, Caesars Entertainment Corporation

“The framework…is clear; it makes sense; it’s practical; and, I know from experience; it works.” Saud Al Daweesh, former Group CEO of Saudi Telecom

How to get started?
For more information or to contact us, check strategyand.pwc.com/cds

Take the coherence test
Can we state it? ∙ Are we clear about how we choose to create value in the marketplace? Way to play ∙ Can we articulate the 3–6 capabilities ∙ Do all our businesses draw on this superior that describe what we uniquely do capabilities system? better than anyone else? ∙ Do our organizational structure and ∙ Have we defined how they work operating model support and leverage it? Capabilities together in a system? ∙ Does our performance management system system ∙ Do our strategy documents reflect this? reinforce it? ∙ Have we specified our product and service “sweet spot”? ∙ Do we understand how to leverage the capabilities system in new or Product and unexpected arenas? service fit ∙ Do most of the products and services we sell fit with our capabilities system? ∙ Are new products and acquisitions evaluated on the basis of their fit with the way to play and capabilities system? Do we live it? ∙ Are we investing in the capabilities that really matter to our way to play?

∙ Can everyone in the organization ∙ Do we have a right to win in our chosen articulate our differentiating market? capabilities? ∙ Do all of our decisions add to our coherence, ∙ Is our company’s leadership reinforcing or do some of them push us toward Coherence these capabilities? incoherence?

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