Strategy Sep 2, 2014
Getting the Growth Strategy Right
In industries ripe for supercompetitors, adopting the right growth strategy is key.
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Say you’re a company looking to grow. You do not just want to be big. You want to dominate your industry. You are not just looking to compete. You are looking to be a supercompetitor. What does it take to make that leap?
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In a recent article on the evolution of supercompetitors across various industries, three Kellogg School professors—Thomas Hubbard, also Senior Associate Dean of Strategic Initiatives, Paul Leinwand, a senior partner with Strategy&, and Cesare Mainardi, CEO of Strategy&—argue that becoming (and competing with) a supercompetitor requires new ways of thinking about strategy. Firms must adopt a laser-like focus on their capabilities, or the specified outcomes relevant to their business that they can consistently deliver.
“One of the first lessons is orienting your business around the set of key capabilities that you have.”
“It’s a different internal and external analysis than people have done in the past,” says Hubbard. The new analysis requires forming a distinct identity, staying coherent, seeing industry-wide, and finding enduring advantages.
1. Know Thyself
“For too long, the strategy question has been, ‘where should we grow?’ as opposed to ‘who are we going to be?’” says Mainardi. Too many companies today simply try to “benchmark the broad market—they look at what others do and then they replicate or try to match those benchmarks,” he argues. This strategy tends to put too much emphasis on things that are important to other companies and not enough on a company’s own unique strengths. “But if you know what you do incredibly well, if you have a strong sense of identity as a company, then you can look at these different market opportunities and get it right in terms of where you will attack. Everything you do day in and day out will align with that strategic intent.”
Thus, any analysis should begin with capabilities blueprinting to provide a clear-eyed assessment of the company’s most vital systemic strengths. “We’re not talking about a list of fifty capabilities, but of three to six put together into a capabilities system” where they operate in a distinctive, powerful, and mutually reinforcing way, Mainardi says. The resulting self-knowledge comes in especially handy during periods of disruption—the regulatory shift, the new game-changing technology.
“Everybody’s talking about dynamic strategy, agility, and chasing opportunity,” Mainardi says. “That’s all well and good. But if you aren’t operating from a base of who you are, you will likely not realize what the real risks you’re facing are because you aren’t focused on your core strengths, and therefore you will be less clear-minded about how best to respond.”
2. Stay Coherent
The flip side of being clear about what you do well is recognizing what you do not do exceptionally well, cannot do well, or should not be doing at all.
Hubbard describes traditional growth strategies as akin to “letting a thousand flowers bloom” on the front end and then cultivating what succeeds while attempting to clean up what does not on the back end. With this mindset, it is no wonder companies become incoherent fast.
“Having well-honed, scalable capabilities provides for the growth potential of the business,” Hubbard says. “So one of the first lessons is orienting your business around the set of key capabilities that you have.” This means making some difficult decisions, even around profitable aspects of the business.
“You might have a profitable business that is not aligned with your capabilities,” Hubbard says. “You might look at selling it off to another firm whose capabilities are a better fit. You’re probably going to get more in that sales price from the business than the profit stream from that business looking forward.”
Consider supercompetitor General Electric. GE has had great success with businesses that fit most clearly into their capabilities systems. These include include businesses—such as engineered products—that are heavily reliant on management techniques including Six Sigma and Lean. “When GE started to be great was when they divested a whole bunch of businesses that didn’t fit with their mantra of being number one or number two in all these different markets,” Mainardi says. “That’s the magic of an internal view combined with a market view.”
3. Look Outward
Once an internal analysis gives a company a clearer look in the mirror, the firm should survey the industry to gain a better picture of its competitive makeup and opportunities. It is this analysis that determines to what extent the industry’s competitive logic encourages competition on highly scalable capabilities, making it ripe for supercompetitors.
So which companies—in which industries—will make the leap?
“If a firm has a set of key, well-developed capabilities that create value, it is beneficial for the firm to orient its strategy around those capabilities, focus on businesses where those capabilities create value, and essentially narrow its focus to that,” Hubbard says. “Its growth potential is limited by the extent to which the company develops those capabilities and the extent to which those capabilities are scalable.”
Some industries are going to have an inherently difficult time offering scalable capabilities or making scale relevant. Take the dry cleaning industry. Even if a dry cleaner knows what it does well, the industry’s technology is readily available and affordable to many small shops, so local businesses can effectively compete. “No amount of investment is going to allow you to be a global dry cleaner,” says Mainardi.
At least for now. “What’s interesting is when the situation in an industry changes,” Hubbard says. “This is a situation where circumstances present a growth imperative and the best companies are able to recognize it, react, develop, and compete.” This is often where supercompetitors arise.
In industries where capabilities are, or are on the verge of becoming, easily scalable, growth can be fostered internally—via investment that directly builds capabilities systems—and externally through investment in mergers and acquisitions that will thrive in those systems. Strategy& has found that acquisitions narrowly focused on capabilities outperform non-capabilities-related M&A in total shareholder returns by about 12 percentage points over two years. “That means that over time, companies that are coherent and consistent this way will have a leg up over everyone else just by acquiring what fits in their portfolio,” Mainardi says.
4. Find Enduring Advantages
Finally, firms need to stay focused. Once a company has identified and refined their critical scalable capabilities, it must build capacity by directing capital investment toward those capabilities.
In a Capabilities-Driven Strategy, a firm should first consider its own core. What would happen, companies should ask, if we doubled-down on what we do well? Walmart is an example of this “sharpening the pencil” strategy, having achieved significant growth by improving both in-store assortment and making a famously lean supply chain even leaner.
Next, companies should identify where the capabilities systems will reward them in their markets and dedicate resources there. Apple, for instance, gauges consumer need and brings easy-to-use products to consumers through its marketing prowess.
Third, companies can consider international expansion: How do a company’s capabilities play across geographic markets? Frito-Lay used its capability to operate highly responsive product-feedback systems to become essentially unbeatable in the salty-snack market in the United States; it then used that capability to foray into Mexico.
Building a capabilities-based strategy differs from executing a short-term growth strategy in that capabilities systems are slow moving, and they outlast the industries that they serve. They are also very complex. “It’s not an easy thing to do,” says Mainardi. “It’s this messy, complicated combination of people, processes, systems, know-how, and tools all coming together. You can’t just go buy that. You have to build it and that takes time. The good news is that once you’ve built it it’s a true advantage, because nobody else can go buy it. It’s at the heart of real differentiation.”
Fred Schmalz is a writer and editor for Kellogg Insight.
Hubbard, Thomas, Paul Leinwand, and Cesare Mainardi, “The New Supercompetitors,” strategy+business, August 8, 2014, 76.
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