• Identify the capabilities you need to build. Start by identifying the drivers of demand in your market — those that will most help you deliver the products and services that people need and want. How engaged are the customers of this category? How diverse are the product or service segments? How large is the potential market, and what is its core interest? For a basic food staple like milk or bread, for example — a highly commoditized product with relatively low consumer engagement — investing in small-scale innovation capabilities will not generate enough returns, but retail placement capabilities could. So could significant innovation capabilities that could break the commodity barrier.
Wrigley has long understood that adults and children respond to different flavors, but the ability to innovate in particular domains (such as sugar-free gum or the use of candy coatings) is important to both audiences. Wrigley wisely built up that capability to meet its customers’ demands. So did Jeep. This division of Chrysler LLC, with highly engaged customers who understand a lot about the special qualities of its vehicles, has kept up its innovation in off-road travel. No matter what other features Jeep offers, every car must be Rubicon Trail–rated: that is, capable of navigating a well-known and difficult off-road vehicle trail near Lake Tahoe, Calif.
Sometimes lack of market demand makes a capability less valuable. Disposable-diaper manufacturers in some emerging countries built their capabilities for low-cost production and product expansion, hoping to lower the price of diapers and thus expand their markets. But gradually they discovered that, for most diaper-purchasing parents, it was cheaper to hire someone to clean up the baby’s messes than to buy a disposable diaper at any price.
Once you have articulated your highest-potential markets, identify the few enterprise-wide capabilities that could, in combination, enable you to satisfy customers in all your key businesses. Focus on capabilities that would characterize your entire company, not just one business unit. General Electric Company, for example, is best known for its approach to leadership development and Six Sigma, not for its approach to turbine manufacturing or television scheduling. Spell out the ways in which these capabilities would distinguish your company. Don’t simply say that you want to develop more innovation or channel expansion capabilities; stipulate precisely what tools or processes will enable superior performance.
On the innovation front, for instance, is your objective to unleash rapid innovation in product attributes (such as food flavors, automobile cupholders, and credit card benefits)? Do you hope to establish more fundamental technological innovation, to lead the next wave of telecommunications or industrial manufacturing? Or are you seeking business model innovation — new ways of cooking, driving, spending — that will influence how customers fundamentally use your product?
Most likely, you already have some of the capabilities you need; otherwise, you wouldn’t be in business. But you are probably not deploying them effectively in every part of your organization, and there are probably other natural opportunities that you are overlooking. For example, if you have a highly skilled procurement and outsourcing function, this might help you begin developing an overseas innovation footprint. (See “Beyond Borders: The Global Innovation 1000,” by Barry Jaruzelski and Kevin Dehoff, s+b, Winter 2008.)
In the early 2000s, leaders in Pfizer Inc.’s consumer health-care unit engaged in the exercise of capabilities identification. At the time, the unit was the producer of Listerine, Nicorette, and several other household-name brands, but it did not have the kind of growth that these brands would suggest. The leaders undertook a capabilities-driven strategy, focused on combining capabilities for clinical testing with deep consumer insight. This allowed them to make the kind of differentiated product claims that would matter most to their customers. For example, Pfizer advertised that Listerine, when added to brushing and flossing, reduced plaque. Backed up by innovations that in turn had been made possible by investments in R&D capability, this approach brought Listerine (and several other Pfizer products) to large new groups of customers.