IKEA is the leading home furnishing brand worldwide, tripling revenues between 2001 and 2015. This success is due to its powerful system of capabilities: deep customer understanding, distinctive product design, efficient operations, and customer-focused retail. Together, these allow IKEA to offer unique value: affordable and stylish furniture to people everywhere.
A handful of companies like IKEA compete this way, combining strategy and execution naturally, but most companies struggle to create sustainable value. Their conventional strategic practices lead to incoherence.
More than half of senior executives surveyed by Strategy& said they didn’t think they had a winning strategy and two-thirds didn’t think their company’s capabilities supported its value proposition.1
In our book, Strategy That Works: How Winning Companies Close the Strategy-to-Execution Gap, we examined IKEA and 13 other companies known for competing on their distinctive strengths. These companies,2 we found, all observe five business practices you don’t see often. Yet collectively, these five unconventional acts of leadership enable them to develop and execute a winning strategy.
By putting these principles to work they have found a path to success that any company can follow.
At a glance: Do you know how to get to a strategy that works?
Amazon, Frito-Lay, Starbucks, and other consistently successful companies use these practices to align everything they do around building value:
1. Commit to an identity – Use your capabilities system and offerings to express what your company does exceptionally well and why it matters.
2. Translate the strategic into the everyday – Build a few powerful cross-functional capabilities to deliver on your value proposition and set your company apart from competitors.
3. Put your culture to work – Leverage and enhance shared behaviors and values to execute on your strategy.
4. Cut costs to grow stronger – Manage costs so that you focus investments on the capabilities that matter.
5. Shape your future – Keep reimagining your capabilities, create renewed customer demand, and realign your industry around your company.
Your identity should be the cornerstone of your strategy. Consisting of three interlocking elements—a value proposition, capabilities system, and portfolio of products and services—a truly differentiating identity expresses what your enterprise does exceptionally well and why it matters.
Starbucks is a company with a strong identity. Known globally for the ambience of its cafes, the Seattle-based coffee roaster and retailer has the same unmistakable way of delivering value in all its locations and with all its products.
Defining your value proposition
Your value proposition, or “way to play” in the market, defines how you create value for customers. Most successful companies have a specific way to play that no other company can quite copy. Starbucks, for example, is an experience provider and category leader. Its retail stores provide a “third place,” inviting people to spend time there when they’re not at home or work.
Delineating your capabilities system
A capability is a cross-functional combination of tools, processes, skills, and organizational design that delivers a specified outcome. A distinctive capabilities system consists of three to six interlocking capabilities that allow you to deliver on your value proposition in a way that customers value and competitors can’t beat.
Starbucks supports its value proposition with a system of four differentiating capabilities: stewardship of a globally available consumer experience; distinctive delivery of products and services with close attention to every element of the value chain; design and development of a premium product line; and recruitment and management of dedicated employees.
Determining your product and service mix
It’s critical to select products and services that will fit seamlessly with your value proposition and capabilities system. Companies that align all three closely are “coherent.” Incoherent companies are easily distracted by various opportunities that their strengths are not well suited for. They often fall into the “adjacency trap”—expanding into seemingly similar offerings that actually require very different capabilities. As a result, they spread themselves thin. Good at many things but great at none, they ultimately fail to win in the markets where they play.
Starbucks manages retail stores and sells coffee, tea, and related food and beverages. The company also develops new products for its own stores as well as for grocery stores.
As you think about your company’s identity, focus on what you do and who you are—not on what you sell or what industry you’re in, because these things may change.
After committing to an identity, you need to build the few complex capabilities that will drive your company’s success. Although you’ll soon start seeing a payoff from your investments, it will probably take some time to realize the full benefit. But that also means they’ll be difficult for competitors to copy.
Frito-Lay, PepsiCo’s snack division, put in place a powerful system of four distinctive capabilities: flavor innovation, manufacturing quality, direct store delivery (DSD), and local consumer marketing. These capabilities have made Frito-Lay the category leader, with billion-dollar brands like Fritos and Doritos.
To develop powerful capabilities like these, you need to do what the snack maker did: create a blueprint of the capabilities system, build the capabilities, and scale them.
Blueprinting your capabilities system
The first step is to create a blueprint that articulates the design of the various capabilities in your system. Determine how the capabilities would add value, what they’d look like in action, how they’d interact, and what would be needed to make them work.
At Frito-Lay, a cross-functional team mapped out a detailed blueprint for its broad-based DSD capability that links shelf-by-shelf sales data with strategic decision-making. This involves far more than IT; Frito-Lay can rapidly deliver a snack assortment tailored to every store.
Building distinctive capabilities
Multiple methods may be needed to build a differentiating capabilities system. Focused interventions can sharpen the capabilities you already have, while capability innovation can help create new practices that set you apart from competitors. Mergers and acquisition can fill in the gaps.
Frito-Lay’s delivery initiative required focused interventions, such as the revamping of back-office processes. It also required innovation. The company invented the handheld device, which conveyed sales and inventory data to the home office. The result: real-time sales forecasts and an in-depth view of consumer preferences in every locale, even for rivals’ products – an extremely valuable competitive advantage.
Scaling up your capabilities system
To build out distinctive capabilities, transcend the limits of functional boundaries by setting up capability-based teams. Also be sure to take the tacit knowledge that makes your capabilities distinctive and make it explicit. That way you can scale up what’s distinctive about your capabilities.
Scaling up Frito-Lay’s direct-store delivery capability requires IT, innovation, marketing, logistics, distribution, and financial analysis. People with these skills work together rather than handing projects off to each other.
Putting your culture to work
Your culture can be a powerful asset for building your capabilities system. Coherent companies all have bespoke behaviors that reinforce their distinctive capabilities. Yet they also share the following attributes:
Apple uses its idiosyncratic culture to support and enhance its capabilities system. People want to work there because they know they will be among the best people in the field. Employees can be relied upon to pull their weight. And the presence of many high-caliber individuals allows for skillful collaboration and decision making.
Cutting costs to grow stronger
Developing truly differentiated capabilities requires an extremely disciplined approach to cost management. Coherent companies spend more than competitors on differentiating capabilities and less elsewhere.4
Danaher, a conglomerate of more than 40 science and technology companies, does not spend money on lavish office furnishings. It does, however, invest heavily in onboarding new leaders and familiarizing them with the Danaher Business System, a key capability.
Challenges don’t end once you’ve developed a strategy that works. To be prepared for potential disruption as well as for new growth opportunities, it’s crucial to continually innovate your capabilities, gain privileged access to customers to create demand for your offerings, and realign your industry around your company’s strengths.
Recharging your capabilities systems
Even the most coherent company needs to guard against complacency. Your value proposition is never fully achieved; There are always reasons to advance and improve your capabilities—but stay true to your identity.
Haier, for example, has pursued global growth by extending the reach of its value proposition— most recently, to digitally driven innovation and services—and by expanding its capabilities along with it. The global giant transformed itself into an internet company, opening up product innovation to collaborators worldwide.
Mature companies don’t limit their product development efforts to what the customer is asking for. They use their privileged access to customers to learn as much as possible about their potential needs. This approach allows these companies to come up with offerings that they are uniquely suited to provide.
Mexican cement company CEMEX used its privileged access to customers to offer building solutions to municipal clients across Latin America. Instead of seeking market share as a commodity producer, CEMEX created new demand that it was uniquely positioned to capture.
Realigning your industry
Coherent companies are in a strong position to acquire businesses that fit their value proposition and capabilities system, and to divest those that don’t. This approach allows them to become supercompetitors, able to realign their industry around their strengths and gain an advantage that seems unstoppable. Apple, Amazon, Frito- Lay, and Starbucks are all supercompetitors. Some industries—including consumer packaged goods, aerospace and defense, health care and technology, have evolved to an equilibrium with a few supercompetitors, each dominating its own “capabilities cluster.”
Asking the tough questions
Ultimately, coherence cannot exist without great leadership. People in leadership roles need to ask the tough strategic questions. They also need to be very close to the day-to-day execution, making sure the differentiating capabilities are built and evolved to support the strategy in the long run.
1. The global survey was conducted between 2010 and 2015.
2. Amazon, Apple, CEMEX, Danaher, Frit0-Lay, Haier, IKEA, Inditex, the JCI Automotive Systems Group, Lego, Natura, Pfizer Consumer Health, Qualcomm, and Starbucks.
3. Jon R. Katzenbach and Douglas K. Smith, The Wisdom of Teams: Creating the High-Performance Organization (Harvard Business Review Press, 2015).
4. See “Reimagining operations: Insight from PwC’s Global Operations Survey,” 2015. See http://www.strategyand.pwc.com/fitforgrowth.
See our ideas in practice
Visit the website: http://www.strategythatworks.com
Learn more about what this means for your own organization, watch Strategy That Works: Combining aspiration and execution to create lasting advantage
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