In business, growth is valued above virtually everything else. That's not inherently problematic but the growth imperative frequently pushes chief executives to venture into new markets, launch products and services, or acquire competitors.
For some companies this is exactly the wrong strategy, as their expansion is based on processes, activities or functions far from what they've established as their critical capabilities. In fact, companies can best grow by identifying the few things they are really good at and applying laser-like focus to ensuring they use those capabilities to drive all of their strategic decisions.
This concept, called "capabilities-driven strategy", sounds simple but it's extremely difficult to apply. Chief executives understandably tend to compare their company's position with that of their competitors, and they allow market signals and other external measures to have too much influence on their strategy. Ideas for growth flow from outside the organisation to the boardroom and soon become strategic goals.
But companies with the discipline to reverse that process and look internally for expansion perform better over time. Booz & Company has assembled a growing body of evidence that capabilities-driven strategy leads to superior, sustainable returns. This is particularly true in mature, post-consolidation markets.
Think of it as a coherence premium; the added value a company garners for sticking to its true strengths and not being tempted to chase opportunities that seem initially promising but ultimately prove to be distractions.
GCC companies have succumbed all too frequently to such temptations and the problem has only been exacerbated in recent years. In pursuit of top-line growth, many companies in the region have ventured into a range of different businesses.
A review of leading GCC conglomerates recently found most were involved in three or more completely unrelated sectors. It is likely that most of these businesses were not complementary or coherent with their traditional capabilities. The management and shareholders of these companies were taken in by an abundance of market opportunities. They looked to enter new markets instead of scaling their existing business lines to identify and improve their core strengths.
A capability is more than an activity or a function. It's the alignment of a company's talent, knowledge, IT, tools and processes around something that it can consistently do better than its competitors. This could be demonstrably better customer service, or the ability to get products on shelves faster, or superlative analytics in tracking consumer behaviour.
Once a company identifies its three to six differentiating capabilities, it then works to improve them until they become best in class and interlocking. All products and services leverage that system of capabilities to create value for customers.
For an example of textbook capabilities-driven strategy, consider Wal-Mart. Most people attribute the chain's success to its logistics systems or its firm hand with vendors. But having one or two superior capabilities is not enough. The true root of Wal-Mart's success is its ability to bring several capabilities together: aggressive vendor management, expert point-of-sale data analytics, superior logistics and rigorous working-capital management.
The whole capabilities system is based on superior information. Wal-Mart's world-class point-of-sale analytics allow the company to tailor its product assortment to local consumption trends and give vendors deep customer insight. That, in turn, increases the company's leverage with suppliers and allows it to manage inventory and working capital better than any of its competitors.
These capabilities are integrated with each other to support the company's strategic purpose - providing "everyday low prices" to customers.
The GCC offers its own examples of companies that have found their coherence premium. One large food manufacturer in the region had established control over several key phases of production, including manufacturing, distribution, branding and retail. Most critically, it had the ability to refine agriculture-based products in each of its geographic markets.
But in its quest for growth the company expanded rapidly into new territories where it would have needed to work with agricultural raw materials, thus moving into new capabilities in agribusiness. This shift outside of its core capabilities prevented the company from establishing a dominant market position in those countries.
It recently divested those operations, opting instead to focus on areas where it had a clear, differentiated market position and could out-execute its competitors.
Capabilities-driven strategy drives value in a few clear ways. First, it forces a company to articulate its competitive position. What do we do? And how do we do that better than our competitors? Only companies with clear and differentiated answers to these questions have earned the right to win in a given market.
Second, this strategy provides a framework for considering expansion opportunities, whether organic or inorganic. Anything that doesn't clearly support current capabilities isn't worth an investment of time or money. At the same time, the growth opportunities that do pass this test lead to greater efficiencies of scale, because a company's strengths will be applied to a wider universe of products and services.
Finally, focusing on capabilities provides a bridge between the strategic thinking of the boardroom (which often can be abstract) and the barrage of day-to-day operational decisions an executive must make. Every decision gets filtered through the lens of capabilities, which clarifies options in a sometimes messy world.
Concentrating on capabilities requires an internal focus and discipline that some executives and chief executives have not shown lately. It also requires a long-term approach, which can be difficult when investors often have a hard time looking beyond the next quarterly earnings report.
But the companies willing to take these steps will be rewarded with a clear market position, a set of differentiated strengths they can use to provide value for consumers, and stronger, more sustainable profits.
Cesare Mainardi is a senior partner and Paul Leinwand and Ahmed Youssef are partners at Booz & Company
