This article was written with Paul Leinwand and Nadia Kubis.
Every enterprise is regularly confronted with questions of where to grow, how to acquire, and what should make up its business portfolio. The corporate landscape is littered with companies that have lost their way because their answers to those questions became detached from who they are: their way of creating value for customers and shareholders (or “way to play”), and the differentiating capabilities they leverage to play their way better than anyone else. These two essential components of every company’s identity must work together and reinforce each other for a company to have a right to win in its particular markets (as explained in depth in Paul Leinwand and Cesare Mainardi’s 2010 Harvard Business Review article, “The Coherence Premium” [pdf]).
Where Should You Grow?
Companies that sustain profitable organic growth are the ones that can consistently spot and close gaps in the market between existing offers and customer needs. For example, McDonald’s saw a gap in the market for cheap and easy breakfast meals. It repurposed its unparalleled food sourcing, menu development, and kitchen management capabilities to close that gap, producing for itself an enormous new revenue stream.
McDonald’s has, thus, found growth opportunities even without adding restaurants (though it has been doing this, too). No competitor has the capabilities that McDonald’s has to deliver easily accessed, low-priced meals with consistent quality and service to the masses around the world. McDonald’s knows where to grow because it knows who it is. It understands where it can—and cannot—extend and take advantage of its distinctive capabilities and way to play. Alas, too few organizations have this kind of self-awareness.
The CEO of a leading consumer company once said to me, “We could fill this conference room with customer research and yet we can’t seem to convert it into growth.” The problem? The research said nothing about gaps in the market where the company had a comparative advantage to close that gap with its particular set of enterprise capabilities. For example, the research showed that the company was not satisfying women’s need for variety and size ranges in apparel. This suggested a big opportunity. But seizing it would require the company to have an adaptable supply chain, which would adversely affect its efficiency and effectiveness across the entire business. Though the company’s variety and sizing pilots worked, it could not replicate them across the enterprise. By not looking at where it should grow through the lens of its own capabilities, the company was wasting a lot of time, energy, and money chasing unobtainable opportunities—and this seriously diluted its total “return on effort” to generate profitable organic growth.
Knowing your markets means you can identify gaps between existing offers and customer needs. Knowing yourself means understanding where your way to play and differentiating capabilities give you a substantial advantage in closing some or all of those gaps and, importantly, where they do not. If you don’t have an adaptive supply chain, for example, pursuing opportunities that demand it will only set you back unless you make a concerted effort to build this capability. Knowing yourself and knowing where to grow are inextricably linked.
How Do You Acquire?
Most acquisitions result in companies getting bigger, not better. We studied nearly 800 acquisitions over 15 years with a cumulative cost of almost US$300 billion. The average pre- and post-valuation of the acquiring companies barely budged, suggesting the average deal had little effect on the growth and profitability prospects of its perpetrator. But another study revealed enormous disparity across the spectrum of acquisition results: The deals with the strongest returns displayed a clear fit between the acquirer’s capabilities and those of the acquired business. Those with poor capabilities fit were in the red (see “The Capabilities Premium in M&A,” by Gerald Adolph, Cesare Mainardi, and J. Neely, s+b, Spring 2012).