Making capabilities strategic
In
a recent exchange with
a thoughtful group of corporate strategists, academics, and McKinsey
strategy leaders, several of us debated the importance of
capabilities. Some participants felt that management writing about
them had devolved into theoretical gibberish.
I
agree there is some gibberish written, but my experience is that
capabilities are practical and actionable, and a critical part of
strategy. Strong ones create new growth options. Capabilities are
also the conduit between strategy and execution, and a failure to
assess capabilities objectively is often at the root of execution
problems. What, in retrospect, is ascribed to poor execution instead
has its roots in an unexpectedly large gap between a company’s
capabilities and the ones needed to deliver the strategy
successfully.
This
gap exists, in part, because of another mismatch: between the rigor
of tools and methods for assessing market attractiveness (which are
fairly robust, thanks to the contributions of Michael Porter and
others) and those for assessing internal skills and capabilities.
Frustrated, many organizations make only a cursory attempt to clarify
and actively manage their capabilities. In this article, I offer a
few suggestions for doing better.
Inventorying internal resources
Resources
come in two forms—assets and capabilities—and it’s important
not to confuse them. Understanding assets is not that hard. At my
former employer, Clorox, brand equities are a huge asset, as are
protected technologies, the manufacturing network, and efficient
access to retail distribution. A significant portion of Clorox’s
value is derived from monetizing those assets in both current and new
markets. People-based skills and capabilities can be even larger
sources of value, but they are much harder to assess. Three
approaches can help:
Get objective inputs
Capabilities
are relative, so an external lens is critical. Formal benchmarking is
one obvious method. Another is to get honest input on strengths and
liabilities from people who know both your company and others well.
Customers, suppliers, and industry experts are good sources, as are
experienced hires who join from the outside and former employees now
working in businesses that don’t compete with yours.
Most
companies tend to believe their capabilities are stronger and more
distinctive than they really are, but that is not always the case. At
Clorox we found a couple of operational areas particularly difficult,
leading us to believe we were not that good—but we learned that
they were even tougher for others. Excelling was still a challenge,
but the outsiders made us realize we had a greater advantage than we
had thought. The inverse was true in other areas: capabilities we
thought were superior turned out to be just table stakes.
Uncover the logic that separates past successes from failure
Another
way to get a more objective view of capabilities is to look back at
your company’s most significant successes and failures over, say, a
10- to 15-year period. Write the facts (not the outcomes) of each
case on an index card and then try to identify threads of underlying
logic that would help people not familiar with the company predict
success or failure. With the logic—your capabilities—in hand,
people should be able to sort the cards with at least 70 percent
accuracy. It’s not a perfect science, but it can help increase
objectivity. It’s also a way to see how capabilities change over
time.
The
output from these two exercises should be not only a robust list of
capabilities but also an objective assessment of areas where the
organization is not very skilled. If skills in those areas are
required to execute a new strategy, realistic plans must be put in
place to acquire them.
Go beyond isolated capabilities, to integrated competencies
I
define a competency as an integrated set of individual capabilities.
In large multibusiness firms, competencies usually exist at the
enterprise level. Getting an enterprise view is difficult, though,
for two reasons.
The
first is that while it’s relatively easy to rise above the
business-unit structure, enterprise-level competencies tend to be
viewed as areas of functional expertise as opposed to being defined
from the customer’s perspective. Customers don’t see
functions—they see benefits.
The
second reason is that because competencies are complex, it’s hard
to be sure you have a real advantage relative to competitors. Some
competitors are more capable in one area, while others are more
capable in a different one, so you end up with a mixed bag.
Interestingly, though, the very complexity that makes it hard to
identify competencies is what makes them very hard for others to
replicate.
Clorox,
for example, has strong capabilities in market segmentation and
consumer insights, in retail execution, and in product and packaging
innovation. Are any of those world-class in a competitive set that
includes P&G and other premier global players? Probably not.
However, the combined set—consciously integrated with
processes—does give Clorox a clear edge in midsized consumer-goods
categories; together, the integrated set forms a competency Clorox
called brand building. That competency is superior only in certain
contexts, but it did open up opportunities beyond the current
portfolio.
Prioritizing and enhancing capabilities
Understanding
your capabilities and competencies is important, but it’s not
enough. You have to match them to market opportunities and close the
gaps.
Use strategy to identify and prioritize capability gaps
In
the current businesses, gaps are often fairly obvious, though you
need to consider them at both the business-unit and enterprise level.
At Clorox, one enterprise gap was how to build consumer desire in a
very fragmented media environment quite different from the
environment when most of the major brands were built. Filling that
gap was a major undertaking. You also have to identify new
capabilities that will be needed down the road, in both current
markets and new markets the company is considering.
Close gaps with a portfolio approach
The
unstated default option to close gaps in large companies is internal
development, and that probably is best when long-term proprietary
advantage is needed. But it is not the only option—partnerships and
acquisitions should be considered as well.
When
Clorox added capabilities to make products from natural
ingredients—part of a sustainability strategy—it used all three
options. Internal development and partnerships played important roles
in the development of Green
Works natural
cleaners, and Clorox acquired capabilities in the formulation of
natural personal-care products when it bought Burt’s Bees.
Partnerships have become such an important part of Clorox that the
company made a conscious choice to develop an internal capability in
partnership management.
Make conscious choices on where to disinvest
Reducing
investment in capabilities that are no longer as critical to the
future is a controversial but often necessary call. Resources for new
capabilities need to come from somewhere, and hanging on to outdated
capabilities can hamper future performance.
Strategy
choices and the capability agenda must match.
The sooner and more certainly a new capability will be needed and the
larger the gap, the more aggressive you have to be in filling it. If
the gap is too large, you probably need to alter the strategy to
match a more realistic capability-development plan.
Clarifying
and actively managing people-based capabilities is much more
complicated and nuanced than this short article implies. But I firmly
believe that a robust capability-development agenda isn’t just
another corporate priority; it must be inextricably linked with the
crafting of strategy.
Dan
Simpson
http://www.mckinsey.com/Insights/Strategy/Synthesis_capabilities_and_overlooked_insights?cid=mckq50-eml-alt-mip-mck-oth-1411
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