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 / Spring 2013 / Issue 70(originally published by Booz & Company)


Think Functionally, Act Strategically

• Differentiating capabilities provide a company with the distinctive advantage needed to outperform competitors. Most of these capabilities are cross-functional; they gain their power from the fact that different functional proficiencies fit together in ways that other companies cannot easily copy. For example, Procter & Gamble’s innovation capability, as chronicled during the years that A.G. Lafley was CEO, was not related solely to its R&D function. Financial reviews, product design and manufacturing, and immersive market research were closely involved. The Swiffer WetJet mop was developed when a launch team, in visit after visit to consumers’ homes, saw them struggling with conventional mops. Truly differentiating capabilities demand (and deserve) a major share of investment and attention from every function that contributes to them.

As a functional leader, you must recognize which capabilities fall into which categories—and balance your resource investments accordingly. All three can be costly to build and maintain, and many functions have gotten used to spending more on competitive necessities and basic business capabilities than they should. Differentiating capabilities get shortchanged as a result, and when that happens a company can easily lose ground.

Being best in class in every process or activity within a given function simply isn’t possible, no matter how professionally satisfying; no function has the funds or organizational stamina to be excellent at everything. Instead, you need a clear sense of which category each activity falls into. There must be some activities in which being merely adequate is appropriate, where “good enough” is actually good enough.

This can be a very difficult path. Many people within your function, and in the business units you serve, will push back on the idea that their day-to-day capabilities need less investment. In the short run, you still need to tailor your approach to the individual priorities of every business, and to your organization’s culture. But in the long run, if you don’t have a clear and consistent idea of the right trade-offs and priorities, you will never muster the capital or attention you need to fulfill your strategic imperative.

Blueprint for an Operating Model

With a more conscious approach to channeling investment, the pressure to execute effectively has increased. A functional blueprint is a plan spelling out how to accomplish this: how you will deliver the most value to the organization as a whole, how you will work together with other functions to ensure the delivery of the greatest value, and how you will continually raise performance.

In developing the blueprint, you should rethink decision rights (who has final approval), processes, and tools. The way you measure performance should also be explicitly defined, both at the functional level and at the level of each function’s specific activities (see “Measuring Functional Performance,” below). The blueprint defines a number of key elements that may have gone unexamined in the past. For example, you may revisit the roles and responsibilities in your organizational structure, along with existing patterns of centralization and decentralization. Differentiating capabilities tend to benefit from having global centers of excellence, or even an organizational structure designed around them (see “Beyond Functions,” by Paul Leinwand and Cesare Mainardi, s+b, Spring 2013). Competitive necessities, which are requisite for every company in an industry, may naturally involve more decentralized operations—or, alternatively, may fit best in shared services. Many basic business capabilities can be outsourced.

Collaborate with business leaders and your counterparts in other functions to make these decisions. For example, a distinctive product development capability may require setting up common activities across IT, R&D, marketing, and sales. The marketing and sales functions will need to improve their market-sensing capabilities to understand what the customer wants, and R&D and product management will need to draw upon those insights in designing new features. IT will be called on to provide an underlying infrastructure to support knowledge transfer and collaboration. What conversations do you need to arrange, among which individuals, to ensure that these new systems and structures are in place?

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