PwC’s Strategy& surveyed more than 700 executives and found that a capabilities-driven approach to value creation leads to higher returns, on average, than other ways of doing strategy.
Capabilities-driven companies owe their success to having a truly distinctive way of providing value, a powerful set of capabilities, and coherence between their strategy and capabilities. 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.
Companies have widely
divergent views about how
to chase success
Companies competing with a
have a clearer identity
Companies with a clear
Companies competing with a
are more successful
Strategists’ biggest problems
are having too many
We asked survey participants to identify the most important drivers of success for the three companies they know best among the 15 largest in their industry. We found that no approach is clearly dominant.
Pursuing economies of scale was perceived to be the most important success driver (score of 2.0), followed by powerful capabilities (1.8) and lucrative assets (1.6).
Companies with a clear identity compete based on the same three capabilities-related factors that drive success in general: a truly distinctive way of providing value, powerful capabilities, and coherence
Companies that base their success on assets, scale, and diversification are perceived to have a weaker identity.
We asked survey participants to tell us how clear an identity the various companies in their industry have — that is, how clearly those companies are perceived to stand for something unique and consistent over time.
Their responses helped to demonstrate that a clear identity correlates with performance—the stronger the identity, the higher the company’s three-year TSR growth. The effect is significant: Companies whose identity is perceived to be clearer than the average have a three-year TSR growth that is more than 3 percentage points higher than that of their peers.
The more a company’s success is perceived to be capabilities-driven—based on a clear way to play, powerful capabilities, and coherence—the more successful the company tends to be (as measured by TSR growth over three years).
Companies that are seen as most consistently following such a capabilities-driven approach include Apple, Caterpillar, Honda, Petro China, SAP, Standard Chartered, Toyota, and Volkswagen.
Companies that are seen as competing on the basis of assets, scale, and diversification have significantly lower TSR growth, on average, than companies that follow a capabilities-driven approach.
Two issues emerged as the most problematic when we asked survey respondents to rate the significance of strategic issues: having too many strategic initiatives that are disconnected and focusing too much on short-term performance. In other words, companies aren’t addressing the fundamental questions of strategy that will allow them to create long-term success.
Contrary to common belief, insufficient market focus does not appear to be the problem — only 7 percent of respondents consider “ignoring external market forces” to be the most significant issue.
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.