Other parts of the company were also guided by this capabilities-driven strategy. For example, professional recommendations often play an important part in consumers’ decisions about over-the-counter products. Pfizer used its scientifically backed claims to gain professional support to include in consumer marketing campaigns. This pursuit also meant developing a capability to license some of its products to health-care practitioners around the world, rapidly screening and prioritizing candidates on the basis of both commercial and technological considerations.
The strategy was dramatically successful. Business expanded fivefold in five years; then, in 2006, Pfizer’s consumer health-care unit was sold to Johnson & Johnson for $16.6 billion (more than 20 times earnings).
• Fill in the gaps. The second step in the process of instituting a capabilities-driven portfolio is to focus on the product development investments and business acquisitions that would give you the capabilities you need most, while complementing the capabilities you already have. Along the way, increase your own capacity to learn and execute.
In the financial-services arena, Bank of America Corporation has spent years building up a massive, omnipresent retail banking footprint throughout the country. Now that it has an extensive capability for attracting retail customers, it is developing a complementary ability to create new financial-services products for them. In 2005, Bank of America acquired MBNA, making it one of the world’s largest credit card issuers; in the summer of 2008, it stepped in to purchase Countrywide Financial (the largest originator and servicer of housing loans in the U.S.); and in September, it agreed to purchase Merrill Lynch & Company (probably the major investment bank most known for promoting its services to “mass affluent” consumers). The latter two acquisitions were made as a response to the financial crisis, but both were wholly consistent with the bank’s focus on consumer banking capabilities. Indeed, in his early statements about the Merrill Lynch purchase, Bank of America CEO Kenneth D. Lewis indicated that Bank of America was most interested in gaining retail brokerage capabilities.
In our experience, those companies that do not build a portfolio of complementary, reinforcing capabilities often lose to those companies that do. Accordingly, Bank of America beat analysts’ forecasts for the second quarter of 2008 and announced that Countrywide was expected to turn a profit for the year. (Few banks could have achieved the same synergy with Countrywide, because they would not have built up the same prowess at retail banking.) On July 22, 2008, Lewis was quoted in the New York Times as saying, “We are actually having great success in the marketplace given that others are so inwardly focused.”
• Divest businesses that don’t fit. This final step in building a capabilities-driven strategy is where you save money. Streamline or sell those businesses that do not exploit or further the development of your highest-priority capabilities. The challenge for most management teams is marshaling the confidence to focus — to disproportionately invest in the few capability areas that make a difference, rather than spreading your selling, general, and administrative expenses across all possible bets.
Most of the companies mentioned in this article have visibly (and sometimes painfully) let go of businesses that did not fit their capabilities portfolio. Bank of America’s retrenchment from its institutional businesses provides one example. In 2008, the bank sold its prime brokerage operations on the heels of extensive layoffs in its investment banking operations. P&G has similarly been selling its food businesses — Sunny Delight, Jif, and, most recently, Folgers — as it focuses its portfolio on health and beauty and consumer health care, where it has built distinctive innovation capabilities that are not applicable to the food categories.