- Too Few Companies Recognize that Sustained Growth Comes from Focusing on What the Company Does Exceptionally Well
- Too Many Rely on “Shotgun” Strategies that Chase Unrelated Markets and Opportunities, Say Authors of The Essential Advantage
New York (February 8, 2011) — A recent Booz & Company survey of over 1,800 executives confirms the importance of — and difficulty with — growth. For 41% of executives, growth is the most significant challenge their company faces. But less than half of executives (48%) actually believe their strategy will lead to success. In fact, executives concur that they’re chasing too many conflicting opportunities (64%) and that growth efforts lead to waste (81%).
“Too many companies pursue growth via acquisitions, or adjacent markets, or expansion into emerging markets. They look everywhere but inside the company. The companies that do grow sustainably do so because they invest in a few differentiating capabilities and leverage what is uniquely strong about the company to grow where they will win,” said Booz & Company Partner Paul Leinwand, co-author of the just released The Essential Advantage: How to Win With a Capabilities-Driven Strategy (Harvard Business Review Press 2010) (www.theessentialadvantage.com).
“In fact, companies and their leaders feel caught between delivering the required growth performance and building a strategy focused around the company’s unique strengths. In actuality, doubling down on what the company’s great at is the best enabler for the growth they need,” he added.
Said co-author and Booz & Company Managing Director Cesare Mainardi, “Growth must not be the first objective; when it is, companies chase any opportunity that has short-term revenue potential, independent of whether they can profitably and sustainably win in that market. Building a coherent company, one differentiated through what it does better than anyone else, should be the prime objective; that approach leads directly to growth and performance.”
Among the insights about growth that Leinwand and Mainardi advance in The Essential Advantage and that are supported by the executive survey findings…
No company can sustain growth without a differentiated approach to adding value for customers — its unique “way to play.”
Said Mainardi: “You might be Walmart and Target. Or Coke and Pepsi. You might be seeking some of the same customers in the same business. But each company is going to play the game a little bit differently. One might be high end; one might be low end. One may be the innovator; one may be the experience provider. Each will have some sort of distinctive approach, in addition to a well-refined system of capabilities to support it.”
Every company needs to build a well-defined set of capabilities that supports its way to play and ensures growth through sustained competitive advantage.
Capabilities, according to the authors, are the interconnected people, knowledge, systems, tools, and processes that create value for customers. Companies should build a system of three to six key capabilities. More than that are not necessary for competitive advantage, and organizations actually get distracted when they try to accomplish too many things. When the handful of capabilities operate in a system and thus reinforce each other, capital flows, operational decision-making, strategic planning, and other success drivers are especially effective.
A company’s top priority should be growth from the core: doubling down on core capabilities, and capturing headroom in the market it already serves.
Example: Walmart’s capabilities in advanced data and analytics allowed the company to better customize merchandising strategies to local market demand. In suburban locations, the electronics department de-emphasized computers, because Walmart could not compete with big box computer retailers. Instead they emphasized price-sensitive home electronics. However, in rural areas where there was little to no local competition, Walmart kept computer equipment on the shelves. Using existing capabilities in analytics to customize inventory to local markets helped jump-start sales growth.
The imperative for extending into new markets is that they must fit the company’s capabilities system, or they will be a drag on financial and operational performance.
Example: Apple’s capabilities system (e.g., understanding of how people work, play and learn; stable computing platforms; easy-to-use interface design; stylish and ergonomically well-designed hardware; and branding) allowed the company to move from computers into the adjacent markets of music storage (iPod) and telephones (iPhone). Apple saw markets where its capabilities could offer something unique from what anyone else was offering.
By contrast, Anheuser-Busch fell into an “adjacency trap” when the company tried to expand from the beer into the snack food business with its Eagle Snacks brand. In reality, snack foods required capabilities that Anheuser-Busch did not have, in manufacturing, merchandising, and rapid-cycle product development. The effort failed and cost shareholders dearly.
Successful geographic expansion depends on having capabilities valued by the local market.
Example: Gruma is a Latin American baked goods company famous for its low-cost, superior ways of producing and distributing flatbread. This allowed it to go global, e.g., by expanding into UK and Indian markets with a high demand for naan. The company is growing rapidly based on a differentiated capabilities system, and continually refining that system to offer value in local markets around the world.
Leinwand and Mainardi believe the following are imperatives for corporate leaders who need to find growth in a slow economic environment:
- An effective growth strategy has to start inside the company: Executives can’t just look outside the company at where the money is, or where the perceived market opportunity is. Executives have to ask whether the company actually has a right to get it. Do they have the capabilities to win?
- Good leadership means building a company that's competitively advantaged: “They need to dedicate resources to build up the capabilities that really matter. Because companies with distinctive capabilities will create value — in good times and in bad times,” said Leinwand.
- Leaders must force their organizations to be focused and disciplined: “It’s very difficult within a company to commit to a few things that make a difference, and then tell everybody else that they're just not integral to the success of the firm over time,” said Mainardi. “But that’s what has to happen if companies are to gain focus and achieve strong top-line growth.”
About the Executive Survey
Booz & Company conducted a survey of more than 1,800 executives (including more than 480 C-suite respondents) from companies of various sizes and from around the globe and from a full range of industries. The online survey asked 21 questions on the topics of strategy development, decision making and priority setting, capabilities, growth, and cost cutting. Respondents were asked to rank their company’s profitability and revenue growth relative to their industry, which was used to establish a link between reported performance (profitability and revenue growth) and attributes of and drivers of coherence. The survey can be found at www.strategyand.pwc.com/coherence-profiler.