One day Alice came to a fork in the road and saw a Cheshire cat in a tree. ‘Which road do I take?’ she asked. ‘Where do you want to go?’ was his response. ‘I don’t know,’ Alice answered. ‘Then,’ said the cat, ‘it doesn’t matter.’ “– Lewis Carroll
Boards and organisations are operating in a world where uncertainty and volatility seem to be the only certainties. Virtually every organisation is trying to work out how to gain competitive advantage in the face of disruptive conditions like regulatory shifts, massive changes in consumer behaviour and the digitisation of everything.
I recently met Paul Leinwand at a PWC sponsored event. Paul is the co-author of The Essential Advantage1, an excellent book promoting the concept of strategy being driven by capabilities. Paul is a senior partner in Strategy&’s global consumer and retail practice. Strategy& was formerly known as Booz and Company and in March 2014 joined the PwC global network of firms. It has conducted extensive research into the subject and found in a recent global survey of almost 4,000 senior executives that more than half don’t believe their organisation’s strategy will actually succeed. If anything this number is growing. Two thirds say they don’t have the capabilities to win. 90% say they miss market opportunities. And 80% say their strategy is not well understood within the firm.
Paul took us through a history of strategy. For hundreds of years it was largely based on military strategy. Then in the 1950s the first gurus of business strategy emerged with Peter Drucker, William Edwards Deming and later Michael Porter. They were followed by Peters and Waterman, Hamel and Prahalad, Collins and Porras, Kim and Mauborgne, and a host of others all trying to find a distinctive analysis that would sell books and win consulting contracts. New buzzwords were invented such as 'best practice', 'process reengineering', 'blue ocean strategy' and so on.2 Strategy is not just about where to go or where to grow. It’s first and foremost about who you are. A winning company starts by identifying the three to six capabilities that distinguish it and determine its identity. Then they develop a strategy that focuses on what they do best and they apply a capabilities lens to all their strategic decisions.
Apple had to remember who Apple was. If it was a zero sum game for Apple to win, Microsoft had to lose. But in that case Apple was sure to lose. Therefore Steve Jobs decided to double investment in things people liked. He hired fashion deciders and told them to design products he would want to lick like an ice cream. Extensive research has shown that coherent companies – those that have a unique value proposition, a differentiating capabilities system that enables their ‘way to play’, and a tightly aligned product and service portfolio – are almost twice as likely to report that their profitability and revenue growth are above average.
AG Laffley, the highly successful CEO of my old alma mater, Procter & Gamble, sold off products like Pringles. They may have been star products but they did not fit with the P&G capabilities system. IKEA identified its way to play as bringing furniture to everyone. Therefore the product design had to be very sensitive to cost. Even sustainability in such a strategy was key, not to be politically correct, but because your product range depends on forestry. For Walmart its capability system is its supply chain. Haier found their refrigerators weren’t working properly so they threw them out and broke them up.
Paul explained that there is a correlation between the coherence of the strategy and return on
investment. He calls this the Coherence Premium. When Strategy& analysed a number of mergers and acquisitions they found significant evidence of the Coherence Premium. In deals where there was limited fit between the two parties the result was a loss of 9.1% of shareholder value. Where there was some enhancement there was a modest gain of 0.4%. But where there was strong leverage of compatible capabilities the gains averaged 3.4%.
Before the development of the automobile carriage builders were local to their market. Most said that these new automobiles would never take off. The idea of placing containers of inflammable liquids so close to the passengers was mad. But a few said “we know about vehicles and suspension. We can get into this new business.”
A powerful capabilities system is essential for unlocking good growth. First you must understand your core capabilities. Then you can expand. Then you can start to disrupt your competitors. This understanding has led major forms to unbundle their previously incompatible business streams.
Kraft split from Mondalez after years of trying to reconcile cheese and chocolate. Sara Lee has gone after the battle of fashion versus frozen cakes. Of 686 business leaders who were interviewed only 8% rated their own efforts as highly effective in keeping the company on track in executing its strategy and in asking fundamental questions on strategy and identity. For example, the top management of Lego constantly ask themselves ‘Why do you exist?’
Once you’re ahead, how do you stay ahead? Ikea management are always nervous that they won’t stay ahead. So you must look at your management and question if they are constantly trying to stay ahead with capabilities that give you an advantage. This way you can change the world rather than waiting for the world to change you. Paul also questioned how top management could ever develop a coherent strategy when the average tenure of a CEO was less than four years.
In summary ask yourself:
Are we clear about how we choose to create value in the marketplace?
Can we articulate the three to six capabilities that describe what we do uniquely better than anyone else?
Do most of the products and services we sell fit with this capabilities system?
Do we have a right to win in our chosen market?
The Essential Advantage - How to win with a capabilities-driven strategy Paul Leinwand & Cesare Mainardi Harvard Business Review Press 2011
I think this analysis is flawed. Wharton Business School was founded in 1881 and Harvard Business School followed in 1908. It promoted the idea that managers should be trained to think strategically and not just act as functionaries. Alfred P Sloan, the architect of General Motors based his company’s strategy on what he perceived to be Ford’s weaknesses.