Tuesday, November 18, 2014

MANAGEMENT/ STRATEGY SPECIAL.................... Making capabilities strategic

 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

No comments: