Capabilities are the fundamental elements of business. Indeed, if there were a business equivalent of Mendeleev’s Periodic Table of the Elements, it would be populated by capabilities.
In business, a capability is the ability to get something done, to accomplish a highly specific task, in a repeatable fashion. Despite their importance, companies sometimes overlook capabilities that are hidden within other assets or processes. Tapping into these underexploited capabilities can be critical to the strategic renewal of many businesses, and can also provide the launching pad for strategic incursions on less capable rivals.
The typical business is made up of 80-200 significant capabilities, of which only a few—maybe 5-10—are truly core. When companies combine capabilities in new ways, they can create new sources of profitable growth and sometimes even redefine their core strategies. Some companies have actually developed a capability around reshuffling these building blocks into new combinations, often adding new capabilities to deepen and extend their competitive advantage. Google, for instance, understands that its essential software capabilities are at the core of its success. It continually scours the landscape for new venues and media for extending and mixing these capabilities. One result of this process: Google’s acquisition of YouTube for $1.65 billion (approx. Rs6,500 crore at today’s rate) in 2006. In 2007, Google has bought a number of companies—ranging from a video conferencing provider to a parallel processing company. Most of these acquisitions, such as DoubleClick, a leader in online advertising software, bring with them not just a core business but some uniquely strong and deep capabilities that can be used by Google in its own core.
Whether Google will create economic value across all of these new platforms remains to be seen. But, managers everywhere seem to be increasingly aware of the inherent economic power packed within capabilities. In our recent survey, an amazing 98% of global executives said it was important or extremely important to create a new core capability to reach their growth targets. Indeed, in our new work on how successful companies periodically redefine their strategy, we found that the acquisition of a new capability was central in about two-thirds of our case studies. Indian firms, too, are looking for ways to add to their capabilities.
Wockhardt Ltd, the pharmaceutical and biotechnology company, bought France’s Negma Laboratories for $265 million this year in the Mumbai-based firm’s largest takeover. The acquisition of the French pharmaceutical group, with its strong research focus and 172 patents, has provided Wockhardt with a new capability in the patented drugs business, as well as a vehicle to enter the European generics market.
Yet, despite the key role of capabilities, few management teams hold focused discussions on their company’s most differentiating capabilities— much less on the critical ones they will need to develop or acquire in the next five years. Why?
Perhaps it’s tougher to see, feel and touch capabilities than a customer database, a business unit or a product line. Or, perhaps in complex organizations no one is responsible for a capability that cuts across product lines. Yet, the addition of key new capabilities has helped any number of companies magnify the power oftheir cores, rejuvenate flagging growth models, and push into previouslyunattainable areas.
GE Capital is just one example of the detection of an internal building block that helped generate a new future. In this case, GE’s financing arm was picked up by Jack Welch and his team because, though small, it was highly profitable. Other capabilities, of course, have to be acquired externally. That’s what happened when Roche initially bought 60% of Genentech and key assets of Cetus Corp. to position itself astride the crossroads of pharmaceutical science and biotechnology.
What’s the state of your capabilities? In some businesses, it is almost as if the organization, and its ability to add capabilities, is the strategy itself, or the ultimate source of lasting competitive advantage. Are you spending enough time taking inventory of your existing capabilities? Do you know which are the most critical to differentiation, how they currently stack up, and which need to be added? Some companies have made the effort to find out. British grocery chains Tesco and Sainsbury’s were once in almost identical market positions. Today, Tesco is the clear winner, with 31% market share and a superior economic model, while Sainsbury’s has dropped to No.3 in the marketplace behind Wal-Mart-owned ASDA.
The key factor? Capabilities. Early in the game, Tesco recognized the competitive advantage of superior logistics and replenishment. As a result, Tesco began to ‘outinvest’ its competitors by a wide margin in these capabilities.
As businesses look to capabilities to push growth and take on competitors, they should remember: When all else fails, retreat to simplicity. Find out whether you have agreement to this question: “What are we best at, what have we been the best at in the past, and why?” Then, see where that leads.
(Chris Zook is a partner with Bain Co. in Amsterdam and co-leader of Bain’s global strategypractice. Ashish Singh is managing director of Bain Co. India.)
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