Capabilities-driven mergers and acquisitions

“Too big to fail” has proven to be a flawed notion.

Strategy& partners Gerald Adolph, coauthor of Merge Ahead: Mastering the Five Enduring Trends of Artful M&A and Paul Leinwand, coauthor of “The Coherence Premium” and The Essential Advantage, discuss the role of capabilities in M&A and explain why a capabilities-driven M&A strategy produces more successful companies.

The new meaning of scale
Many companies have long pursued strategies that were aimed at making them bigger. But we now know that bigger is not always better. What matters is relevant scale: depth that allows a company to do things better than its competitors, and reach that allows it to carry those superior capabilities to more businesses, products, regions, or customers.

The path to coherence
Coherent companies—those that have a clear way to play, a differentiating system of capabilities that supports their way to play, and a portfolio of products and services that thrive within that capabilities system—perform better. How should companies start to think through narrowing their focus? They need to be clear about what’s at the heart of their success and then identify the businesses that don’t leverage those distinctive capabilities.

Capabilities roadmapping
Growth comes not from chasing opportunities, but from applying distinctive capabilities to businesses that need them. Companies can build the capabilities they require by innovating them on their own, borrowing them via alliances, or acquiring them. By being clear about which capabilities they need in order to win, companies can put together road maps for building powerful capabilities, applying them to new businesses, then building additional capabilities and applying those to new businesses. Such maps allow companies to be much more targeted in their approach to growth.

Integrating capabilities
Acquiring capabilities is often easier than building them from scratch. Nevertheless, capabilities-based deals are tricky. First, companies need to determine how much integration is needed: Should the targeted capability stand alone, or is real integration required? The design of the integration process depends on the answer. In whatever it does, the acquirer must take care not to damage the capability it has set out to buy.

Advantaged capabilities
A few differentiating capabilities drive a company’s success. How are these advantaged capabilities different from core competencies, and how can one identify them?

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