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Misunderstanding the Capabilities-Driven Strategy

Mihai Ionescu - Senior Strategy Consultant, Owner Balanced Scorecard Romania, Author.

Although PwC's Strategy& (formerly Booz & Company) claims a certain level of thought leadership in regard to the Capabilities-Driven Strategy, the concepts of such strategy model is widely spread throughout the business executives' and management consultants' community, world-wide.


The Capabilities System

While Strategy& consultants explain, in simple terms, that the Core Capabilities cannot be employed in isolation, but together with a complementary set of Supporting Capabilities, leading to what is called a Capabilities System, it is always relative and subjective, in one case or another, to tell which capabilities are 'core' and which ones are 'supporting'.


Since a Capabilities System cannot function adequately even if only one capability is missing, whether it's a 'core' or a 'supporting' one, the distinction between the two categories of capabilities tends to loose significance.


Is a capability 'core' if it exists and 'supporting' when it needs to be acquired? Is the cost (in terms of money, time and resources) needed to build or acquire a certain capability what makes it 'core' or 'supporting'? Could Capabilities System function, even if not at optimal parameters, if a 'supporting' capability is missing, but might it not function at all if a 'core' capability is missing? As you can see, there is a lot of room for interpretation and the subjectivity can only increase if we try to benchmark similar Capabilities Systems between different industries or between different business models, within the same industry.


Strategy based on Existing Capabilities

The often-encountered misunderstanding about the Capabilities-Driven Strategy is a perspective that is expressed in statements like:


We don't need other Core Capabilities, we just need to better use those that we currently have, to grow or expand our business.

or, in a refined version:


We only need to add some less important Supporting Capabilities to the Core Capabilities that we currently have, to grow or expand our business.


The root of such perspective is the belief that we can build a Strategy without changing significantly our existing Capabilities System, or even not at all, if possible. Furthermore, such belief assumes that we can change our Strategic Positioning by adopting only those new Strategic Choices that can re-use our existing Core Capabilities, or by adopting only those Strategic Choices that need small changes or the addition of some lesser important Supporting Capabilities. Although we have to admit that changing a current Strategic Positioning, in order to build what is called a New Transient Competitive Advantage, is seldom an easy task and that it involves dealing with the uncertainties of the future and a potentially increased level of risk, the apparent comfort of making fewer or less significant changes in our Capabilities System and getting significantly better results is, in many cases, just an illusion. As Michael E. Raynor explains in his book 'The Strategy Paradox', having a Strategy and committing resources to the changes [of Core Capabilities] required by that Strategy brings with it a risk of failure that is proportional to the level of commitment made. But this is no reason to avoid having a Strategy, or adopting only Strategic Choices that requires little or no commitment regarding the changes of our existing Capabilities System.


The misunderstanding, put in practice

Peter F. Drucker once said that

The purpose of business is to create and keep a customer.


But the question is: Could we gain a new category of customers, or enter a new market by using our existing Capabilities System, with little changes, or - ideally - with no changes at all? Or, in other words: Could we change our Strategic Positioning without changing our Core Capabilities? Let's see a practical example:


Ice World is a company that produces and distributes ice. They have a central production factory, a selected number of customers (mainly retail chains and local retail shops), an ecosystem of local agents and a fleet of vans, equipped with refrigeration equipment, for transporting their ice products to customers' locations.


But a couple of consecutive years with colder summers, have put the company in a difficult financial situation. So, they started looking for alternative business lines and alternative markets. At the same time they were attracted by the idea of re-using their existing resources and capabilities, with virtually no changes, and without making any new investments. One of their options was to offer pharmaceutical companies their services of distributing cold-chain drugs (mainly insulin and vaccines), from warehouse to the drugstores, in the same territory where they were distributing ice, mostly during the cold season. In this way, the company could gain a new category of customers and an incremental revenue source, improving their financial situation.


They've looked into the required capabilities and found out that they only needed to adapt the monitoring of temperature during transport to the requirements of the cold-chain drugs prescriptions (2-8 degrees Celsius) and to get a commercial liability insurance specific for this business. So, they've met with the logistics managers of several pharmaceutical companies and expected to sign some contracts soon. But it didn't happen.


First of all, their full commitment was only for the cold season, when their vans didn't have much ice to distribute. Secondly, they were seen as some sort of surrogate solution by the pharmaceutical companies, which understood that transporting their products was only a non-core and non-specialized business for Ice World, therefore outsourcing even a part of their cold-chain drugs distribution would have brought a level of uncertainty and an increased level of risk, both for them as a company and for their end-users (the patients). Moreover, the logistics management system of Ice World was designed for non-critical transport requirements, significantly different from those of their potential new customers, which included urgent transport orders and point-to-point delivery (including occasional small volumes), rather than by distribution routes.


So, did the new Strategic Positioning succeed for Ice World without fully adapting their Capabilities System to the complete set of requirements of their potential new customers? In other words, New Strategic Choices without new Core Capabilities?


Conclusion

Don't misunderstand what the Capabilities-Driven Strategy is all about, because it might prove to cost you more than you have hoped. And rather than avoiding risks, you may end up taking more risks and spoiling opportunities that could have been successfully exploited, if you would have understood the correct relationship and dependency between Strategic Positioning (and Strategic Choices) and the required new or upgraded Core Capabilities. Which might be different or even significantly different from your existing ones or their current level of maturity, complexity or functionality. Having a Strategy, even a bold one, doesn't mean that you need to take more risks. Read Michael E. Raynor's book, mentioned above, and you'll understand how.

#strategy #management #balancedscorecard #training #consultancy #capabilities