Concentration at the Core
Hence the appeal of the fourth group of strategy thinkers — the concentration school. Its forerunners were Gary Hamel and C.K. Prahalad, authors of Competing for the Future (Harvard Business School Press, 1994), who argued that the most effective companies owed their success to a select set of “core competencies”: These were the bedrock skills and technological capabilities (such as new forms of hardware, software, systems, biotechnology, and financial engineering) that allowed companies to compete in distinctive ways. Companies that focused on these, and used them to develop a long-range “strategic intent,” would claim the right to win.
Chris Zook of Bain & Company, drawing on his firm’s experience with private equity, has been the most prominent recent exponent of this school. In his book Profit from the Core: A Return to Growth in Turbulent Times (2001, with James Allen; Harvard Business Press, 2010), he argues that the right to win tends to accrue to companies that stick to their core businesses and find new ways to exploit them for growth and value. This means differentiating a company by starting with its central capabilities: Enterprise, Dollar/Thrifty, and Avis all prospered by focusing on, respectively, rentals for people with car repairs, vacationers, and business travelers.
However, in practice, the concentration strategy often becomes a way of holding on to old approaches, even when they become outdated. Many companies (and private equity firms) translate this strategy into slash-and-burn retrenchment. They cut costs and minimize investments in R&D and marketing to create a pared-down company that produces more profits at first, but that can’t sustain the growth required for a healthy bottom line. When they seek to grow, it’s through “adjacencies”: products or services that seem related to their existing core businesses. But many adjacencies are less profitable than they were expected to be, in part because they may require very different capabilities — and in part because the truly successful game-changing leaps, like Apple’s into consumer media or Tata’s into the inexpensive Nano automobile, can’t be managed from a concentration strategy alone.
Strategy as a Way of Life
It’s important to note that most of the thinkers who introduced these strategies to business leaders saw the challenges and limits of their approaches, and even warned against misapplying them. But businesspeople misapplied them nonetheless. Each theory thus backfired, and created opportunities for the next.
How can your company gain the most from considering all these theories of the right to win? Only by stepping back, away from any particular answer, to look at your company’s identity as a whole, encompassing the way you expect to compete, the capabilities with which you will compete, and the portfolio decisions that fit. In fact, that’s exactly what happens with the packaged-foods company described at the beginning of this article.
The CEO’s question about the right to win has sparked many levels of discussion. For several more days, spread over a few weeks, the executive team talks through its three proposed strategies in detail: the estimated market value of each, the risks involved, and the capabilities required. All three strategies have roughly the same potential for increasing enterprise value, but the differences among them become clear when the functional leaders speak.
For example, the head of operations explains that the three strategies would require completely different investments. Becoming an innovator would mean configuring a flexible value chain to launch new products rapidly and economically. The closer-to-customers option would mean selling more food at different temperatures: some frozen, some fresh. It would also mean building a more direct, collaborative relationship between operations and R&D. And the category transformation strategy would require new process technologies, economies of scale, and deftly managed acquisitions.