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(originally published by Booz & Company)


Cut Costs, Grow Stronger

The executives identified a number of areas where they needed a step change in capabilities to accomplish this expansion. They needed to learn, for example, how to find and work with raw materials suppliers outside the familiar, but limited, low-cost sources in India. And they needed skills in developing and managing joint ventures — a complex capability involving several different functions, which they built by borrowing, in part, from other companies in the Tata Group. The company leaders deliberately applied these capabilities in ever more complex environments, moving from Thailand to Singapore to China, and ultimately acquiring the Corus Group, a major Anglo-Dutch steelmaker, in early 2007.

Between 1997 and 2008, the company went from producing less than 3 million tons of steel per year (at a single plant in eastern India) to producing almost 20 million tons, making it the fifth-largest steel producer in the world. Several million more tons are expected to come on line soon. One Tata Steel executive, looking back on this evolution, specifically credited the rapid but sustained growth of the company’s capability-driven strategy. Step by step, Tata Steel built skills and systems, moving them from one region to another and, ultimately, around the world.

Capabilities as Strategy

When they hear the word capabilities, many businesspeople think of intangible assets: employees’ skill sets or the quality of work done by a corporate function such as research and development or supply chain management. But we use the term in a more specific way: Capabilities are the defining strengths your company must have to help it compete.

Consider the essential two or three capabilities exhibited by the world’s most successful companies. What makes Frito-Lay a great company? Or Google? Or Nokia? Or any company that you admire? The answer is typically more difficult to discern, and more precise, than it might seem at first glance.

In the case of Frito-Lay (a subsidiary of PepsiCo Inc.), one key capability is the ability to serve the needs of small stores up and down city streets and rural roads on several continents. That’s it. Of course, that is not something that can be described in broad terms as a world-class capability in sales or distribution or marketing. Frito-Lay’s capabilities are more specific than that. The company has fleets of trucks with drivers who are highly motivated to sell, and it gets products to flow appropriately via those trucks with technology support, a good value proposition, and good judgment (and great information) about which products to put in or pull out. These capabilities are hard to replicate, in part because (like all other key capabilities) they’re intricate, interdependent, and cross-functional.

Similarly, Google Inc.’s capabilities include not just maintaining and improving the company’s search engine, but continual innovation of Web-based applications that will attract consumers and the ability to translate those consumer populations into advertising revenue. These capabilities allow the company to boost the value of its online advertising by creating new services and offering them free.

The Nokia Corporation is known for its distinctive capabilities in rapid prototyping, customer-centric design, and global merchandising, all fitting together around products that must consistently stay one step ahead of competitors in both usability and cost. Every company known for its capabilities — Caterpillar, Toyota, HSBC, Procter & Gamble, Nestlé, Tata Group, Johnson & Johnson, Huawei, and many more — has earned this reputation through a series of sustained investments that apply across product lines, functions, and geographies, and that work together to give the company a broad-based edge in the marketplace.

The best definition of capabilities, in our view, reflects this essential quality: Capabilities are the interconnected people, knowledge, systems, tools, and processes that establish a company’s right to win in a given industry or business. The right to win, in turn, is a clear path to sustained profitability, higher market share, or both, supported by the critical set of capabilities that will make a difference in that market.

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  1. Cesare Mainardi, Paul Leinwand, and Steffen Lauster, “How to Win by Changing the Game,” s+b, Winter 2008: An overview of capabilities-driven strategy and its value in setting a company’s path.
  2. Zia Khan and Jon Katzenbach, “Are You Killing Enough Ideas?s+b, Autumn 2009: How to use the informal part of your organization to ensure that even your discontinued efforts aren’t wasted.
  3. DeAnne Aguirre, Laird Post, and Sylvia Ann Hewlett, “The Talent Innovation Imperative,” s+b, Autumn 2009: How to look strategically, not just mechanistically, at human capital and its expenses. 
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