Capability-based strategy: beware ‘core competences’.

How to win by changing the game by head of Booz N America business Cesare Mainardi, and colleagues Paul Leinwand and Steffen Lauster makes a strong case for building capabilities to capture new opportunities, rather than looking inward at what you already have. Capabilities feature strongly in current strategy writing, but seem hard to make practical. The article implies, though, that they have a way of making capabilities concrete and measurable, to arrive at a ‘capability coherence’ indicator that seems to correlate with profitability – at least in the consumer products sector. This is a big step forward from the abstract and obscure concepts that feature in academic articles on the topic.  The really great thing in this article is exactly that focus on ‘coherence’ – the need for multiple capabilities that work together. In consumer products this means appropriate capabilities in R&D, product development and marketing.  You may need to go further and make sure that capabilities in manufacturing, HR, service-support and so on are also consistent.  

This is a big step forward from the much-abused, misused and dangerous focus on ‘core competences‘ – the idea that some unique and super-powerful capability will deliver sustainable competitive advantage. [I even came across one quoted company who re-titled the entire strategic planning system in the firm as their ‘core competence process’]. Here’s an extract from my chapter 10 showing one example of why it doesn’t work …

 “Practising managers commonly look for core competences, but it should by now be clear that firm performance depends on accumulating and maintaining a complete system of mutually-supportive resources. If any of these is inadequate in scale or quality, the performance of the entire system will suffer – the firm must be capable in all resource-building and maintenance activities. Attempts to identify a single capability that will provide sustained advantage are doomed to failure, as the following quote from the Economist (July 4th, 1998) illustrates for Honda.
‘… by 1990, Honda was in thrall to its engineers – a priesthood … untroubled by the dismal business of marketing and accounting … It hardly seemed to matter that customers were not buying Honda’s flights of engineering fancy … Things were already going wrong [due to lack of] attention to what the customer wanted and producing it at reasonable cost. … it was taking twice as long to get a new Honda into production as Toyota.’ 
This brief comment is remarkable for indicating the supposedly
non-core capabilities that were in poor shape – design capability to create cars that people wanted, product-development capability to get them into production quickly, production engineering capability to achieve low unit-cost, marketing capability to build the customer-base, and accounting and control capability to translate revenues into cash. The solution to Honda’s troubles involved reducing the focus on technology for its own sake, turning attention instead to market research and product-design, and moving policy control from the engineering function to the marketing and production departments. ” – interesting to note that Honda was in this mess in 1990, exactly the year that their core competence in engine technology featured in an HBR article! Of course Honda has come a long way since then, and the HBR article never actually said that you didn’t need to be basically capable in all other functions.

So … the capability-coherence notion from Cesare Mainardi and colleagues is a welcome call to make sure all necessary capabilities are strong.

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