Paul Leinwand, Cesare Mainardi
October 28, 2013
A Strategy& survey shows that companies find it harder to understand their own strengths than to understand their customers. By knowing themselves well and leveraging their distinctive strengths to build a clear identity, companies can outperform their peers. But many companies aren’t basing their strategies on this insight, the study finds. In fact, companies have widely divergent views on how to develop strategy, despite evidence that a capabilities-driven approach delivers the best returns.
We find 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 their capabilities. By contrast, companies that compete on the basis of economies of scale, lucrative assets, or diversification fare less well.
We also see that companies with a clear identity — standing for something unique and consistent over time — tend to perform better than others. But how do they develop that identity? Again, a capabilities-driven approach is the answer.
Finally, the survey shows why many companies find pursuing this kind of success so hard. Their approach to strategy gets in the way: They do strategy at the margins — with a short-term perspective and too many initiatives — instead of pursuing a strategy that promotes long-term success. Contrary to common belief, most companies’ problem with strategy is not insufficient understanding of the market, but rather insufficient knowledge of and reliance on their own distinctive strengths.
Companies that embrace the challenge of building and leveraging this self-knowledge are on their way to creating greater value.
The 10 companies with the clearest identity*
*Identified by survey participants from a list containing the 15 largest public companies (by market capitalization) across regions in each of seven industries.
“Many companies focus too much on the outside when developing their strategy, and don’t combine that market-back perspective with a clear view of what their organization is great at doing. In this survey, as in all the research we’ve done on the topic of value creation, we see that essential advantage lies within. A few differentiating capabilities drive a company’s identity and success.”
Our findings provide critical insights into what drives success, the importance of a clear identity, and the top issues in strategic development.
What drives success?
The survey found that there is no dominant strategy or school of strategy. We asked survey participants to rate the importance of seven drivers of success, and their responses were surprisingly mixed. Economies of scale were rated as the most important driver of success, followed closely by powerful capabilities and lucrative assets.
For the best-performing companies, success — measured in terms of three-year growth of total shareholder return (TSR) — is attributable to what we call a capabilities-driven approach to strategy. These companies’ drivers of success most often include three distinct elements: a truly distinctive way of providing value, powerful capabilities, and coherence between the two.
Companies that owe their success to more asset-driven factors (economies of scale, lucrative assets, or diversification) have measurably lower performance.
Does identity matter?
Companies considered to have a clear identity — standing for something unique and consistent over time — have superior three-year TSR growth compared with companies that lack a clear identity.
In addition to promoting overall success, the three elements of a capabilities-driven strategy also drive a company’s strong identity, according to respondents.
Building a strong identity is very hard to do. The most challenging aspect is defining the identity and determining precisely how the company is going to add value for its customers.
What’s wrong with strategy development?
We asked respondents to rank the most problematic issues companies face in developing strategy. “Having too many strategic initiatives” was ranked as the biggest problem by more respondents (29 percent) than any other issue.
That was closely followed by “focusing too much on short-term performance improvement and too little on what will create long-term success” (27 percent of respondents).
Contrary to common belief, insufficient market focus is not the biggest problem — only 7 percent of respondents consider “ignoring external market forces” to be the most problematic issue.
Overall, only about one out of three respondents (36 percent) indicated that the top leaders of their companies were effective at both strategy development and execution, although both dimensions strongly correlate with company performance.
Strategy& developed this survey to better understand what drives the success of the world’s largest companies. The survey assessed the relationship between companies’ approach to value creation and their performance, and studied the role that a company’s identity plays in its success.
We conducted a Web-based survey between February and August 2013 and invited readers of HBR.org and recipients of strategy+business enews and Strategy& Foresight to participate; 720 executives (including 192 at the C-suite level) completed the survey. Participants were asked to select up to three public companies within their industry (from a list of the 15 largest in each of seven industries) and comment on what drives success for those companies as well as their own company; to identify the main challenges companies face in strategy development; and to assess the role that a strong identity plays in promoting a company’s success.
To determine a company’s score for each of seven predefined success drivers, we allocated three points to the driver selected as most important, two points to the second most important, and one point to the third most important. We then normalized the scores so that the sum for the seven drivers equals 10. To enable a comparison across companies, scores for each driver were averaged over all companies.
Based on the survey responses and the company’s performance (as measured by three-year TSR growth from January 2010 to January 2013), we established a link between companies’ success drivers and their actual success.
Learn more about Strategy&’s full body of work on how companies build their essential advantage through capabilities-driven strategy at strategyand.pwc.com/CDS.