Gain sustainable advantage using a capabilities-driven strategy
We know why strategies fail: They fail when companies don’t give sufficient attention and weight to their differentiating capabilities and 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 companies that manage to align their key capabilities.
At Strategy&, we work with our clients to develop a coherent, capabilities-driven strategy that aligns at every level. 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.
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, or an experience provider. More than any other single factor, the way to play distinguishes a company from its competitors.
Example: 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.
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.
Example: 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
Most companies make the mistake of composing product and service portfolios based on short-term financial performance and shoehorn a strategy to fit around that portfolio, rather than create a portfolio that aligns with their strategy. We help clients succeed over the long term by aligning their products and services with their capabilities as part of a sustainable growth strategy.
Example: Walmart knows the importance of aligning every product and service it sells with its way to play. Walmart does not sell big-ticket items like large furniture and appliances, where it has no cost advantage.
A company’s right to win means its ability to compete in a particular area 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.
Example: Walmart 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 11,600 stores worldwide, 2.3 million employees and about 260 million customers visits its stores and e-commerce sites each week. This scale famously allows it to dictate terms to just about any of its suppliers.
Watch Frito-Lay use one of its capabilities, direct store delivery, to provide a defined outcome. By aligning a number of processes, systems and tools, skills, knowledge and behaviors, and organizational structures around direct story delivery, the company connects its firm strategy and execution to create value for customers.
For capabilities to deploy their full potential, they need to work in a reinforcing system. Watch how Frito-Lay combines three of its differentiating capabilities — direct-store delivery, continuous innovation of new products, and consumer marketing — into a successful system.
Watch how companies succeed by mutually reinforcing the alignment of a deliberate way to play, a supportive capabilities system, and a relevant portfolio of products and services.
Strategy& has conducted several studies to better understand how companies create sustained value. Many of the most important findings have been expanded and published as popular articles and top business books including Strategy That Works (Harvard Business Review Press, 2016), which profiles winning companies that have successfully closed the strategy-to-execution gap. Here are a few highlights of our research:
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 admit their company’s capabilities don’t fully support their strategy.
Only one in five respondents is fully confident in the company’s right to win.
The majority say their company has too many conflicting priorities.
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.
Results from our survey of more than 500 executives from around the world whose companies have annual revenues ranging from US$100 million to more than $10 billion found that companies put growth at the top of their agenda, but most executives doubt that current efforts will yield needed results.
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.
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.
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.