Capabilities are the elements of business. If there were a business equivalent of Mendeleev's periodic table of the elements (which describes the building blocks of all matter in the known universe), capabilities would populate the cells of that table. Given energy and time, you can combine capabilities to create new properties and powers.
Like inert elements, some capabilities are irrelevant to each other, but other can be combined in surprising ways. Such combinations can have multiplier effects and create enormous commercial power for change or renewal.
Capabilities are the third, and the most hidden, of the under-exploited assets in our study. Tapping in to them is critical to the strategic renewal of many businesses, as well as for strategic incursions on less capable rivals. In the following examples, difference among a handful of competitors in a few key capabilities render the trajectory of the losers unsustainable, while the winner seems almost unstoppable.
UK grocery chains Tesco and Sainsbury's were once nearly identical. Today, Tesco is the clear winner, with 31 per cent market share and a superior economic model, and Sainbury's has dropped to number 3 in the marketplace behind Wal-Mart-owned ASDA. The key factor? Capabilities. Early in the game, Tesco recognized the competitive importance of superior logistics and replenishment. As a result, Tesco began to outinvest its competitors by a wide margin.
Looking back on this remarkable case of competitive separation, Lord Ian MacLaurin, CEO at Tesco during much of the period, said, "We focused first on distribution capabilities. WE eventually became so good that we could run smaller stores efficiently, where others could not, such as Tesco Metro and Tesco Express formats. In addition, we felt we had a superior level in-stock of key items in our large stores. Through it all, distribution was the thing; many of our competitors still have not gotten their distribution capabilities right even after all of this time."
Or consider the case of package delivery. The capability battle between UPS, FedEx, and the US Postal Service for control over premium letter and parcel delivery is an uneven battle. USPS is constrained in its ability to hire, pay, compete, and invest by legislation governing it as a public entity. By contrast, UPS and FedEx have invested aggressively in sophisticated capabilities in package tracking and IT systems for advanced logistics, spending on average about 8 per cent of sales over the past five years. As a result, UPS and FedEx have grown from less than one-quarter the size of USPS in the 1980s to (combined) nearly the same size as the postal service and are still growing 50 per cent faster.
Many factors come into play; some might argue that USPS can use earnings from its monopoly in letter delivery to subsidize its competition in parcels. But if you talk to people on both sides of this battle, you find that a central element is the growing capability gap that affects the cost of delivery, the speed and frequency of delivery and special features (such as package tracking software). The capability gap with private carriers, and the reinvestment levels required to compete, is one reason many postal services in Europe, such as deutsche Post and TNT, have been privatized. These governments have decided to exit a capability battle that was redefining their competitors faster than themselves.
In the market of Internet searches, Google entered the fray in 1998, behind a range of competitors such as Yahoo!, Excite, and Ask Jeeves (now known as Ask.com). Today, Google has about 50 per cent market share and has expanded from this strong core into a range of related business opportunities. The company now has $6 billion in revenues and a market value of $153 billion, or 77 percent of the value of War-Mart, the number 1 company on the Fortune 500 list.
Central to Google's success are its software design capabilities and the proprietary page-sorting algorithm at its core. Google apparently has recognized that its competitive strength hinges on the search position, Google's unique ecosystem of users and suppliers (for example, it has more than three hundred thousand advertising partners in AdWords), and the capability of its software designers.
Google has intensified the quest for this talent to a new level that has shocked the industry, mirroring the free agent mania that we see in the salaries of sports figures. For instance, Google hired away Microsoft's leading speech-recognition software expert with a pay package reported to be valued at about $10 million. This shouldn't surprise us; a company that realizes it is ultimately competing on capabilities is willing to invest heavily in them.
In our Capability Survey of global executives, 57 percent of respondents said it was "extremely important" to acquire a new core capability in order to reach their growth targets (an amazing 98 percent said it was either important or extremely important). When we asked them to list any "hidden gems already in the business that could fuel growth," the two most frequent responses were forms of unexploited capabilities.
In a separate Bain & Company analysis of more than one hundred strategy studies for clients, project leaders indicated that in 56 percent of the cases the new strategy that had been developed hinged on unexploited and underappreciated capabilities - either on their own or in combination with other capabilities that needed to be acquired or strengthened. In more than half the cases, the missing or inadequate capability was one that would improve a cost position; in another 45 percent it was a capability that was central to speed or product cycle time. These are fundamental needs and dimensions that typically are at the heart of differences in competitive performance.
Reprinted by permission of Harvard Business School Press.
Excerpted from:
Unstoppable by Chris Zook. Copyright 2007 Bain & Company, Inc. Price: $29.95 (Rs 1,294 approximately). All rights reserved.
Chris Zook is the head of Bain & Company's Global Strategy Practice and leads the Bain Growth Project.
