This article is an excerpt from the Shortform book guide to "Playing To Win" by AG Lafley. Shortform has the world's best summaries and analyses of books you should be reading.
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What is a business capability? What capabilities does your company need in order to win?
In simple terms, business capabilities are what a company does and is able to do. If you run a business, it’s important to determine and map your capabilities so you can figure out how to reach your goals.
Here’s how to identify, map, and implement your business’ capabilities.
Build Ingredients for Success
In Playing to Win, authors Lafley and Martin say that once you’ve decided where you’re going to play and how you’re going to win, the next step is figuring out what resources and skills you need to achieve your victory—in other words, what business capabilities your company will need, such as innovation, efficiency, or leadership. To do so, determine what your company needs to be good at—and what it needs to be the best at—in order to win in the playing field you’ve chosen.
(Shortform note: Lafley and Martin suggest that you start by coming up with goals, then figuring out what capabilities you’ll need to reach those goals. However, some business strategists suggest the opposite: Start by determining three to six things that your company already does well, invest your time and resources into further improving those capabilities, and base your business strategy around those.)
Determine and Map Your Capabilities
Lafley and Martin say that a successful strategy requires you to identify the capabilities you’ll need to reach your goals within the context of your where-to-play and how-to-win choices. These core business capabilities must not only work in concert but also reinforce each other. (Shortform note: A 2014 survey of companies worldwide found that more than half named building capabilities as one of their top three priorities, but only 18% have objective systems of identifying their capabilities.)
The authors suggest creating a visual representation of these capabilities and the activities that support and branch out from them; this map is called an activity system. Mapping an activity system can also help you figure out methods to build and support necessary capabilities. The final result should look something like a web, with a few key goals connected to numerous capabilities and plans for building those capabilities.
At this point, the authors advise asking yourself how feasible your activity system is: What new capabilities would your company need to build, and how expensive would it be? If your goals are too costly to pursue, then you need to rethink your playing field, how you’ll win in that field, or both.
| How Strong Is Your Web? Another benefit of activity maps is that they allow you to see how closely related your business goals are to one another. If the same capability supports multiple goals (even indirectly), then those goals are aligned with each other and will synergize well in your overall strategy. If your activity system creates a dense, tightly connected web, then you have a strong business strategy. Conversely, if your goals and capabilities are scattered and disconnected, you may need to rethink your approach. Example: Southwest Airlines StrategicToolkit.com shows an activity system from Southwest Airlines as an example. The system shows the company’s goals (how they plan to win) in yellow, and what they need to reach those goals (capabilities and methods) in white. This is a strong and well-connected activity system, with many capabilities linking to multiple others and supporting different goals through clear, well-planned paths. |
Make Your Activity System Unique
Lafley and Martin say that your activity system should be distinct from your competitors’. If your web and theirs are too alike, they could imitate your strategy and cause you to lose your competitive advantage.
This doesn’t mean that any individual activity in your system has to be unique or impossible to replicate—rather, the combination should be one-of-a-kind. For example, no other company has been able to replicate Taco Bell’s activity system built around cheap, convenient Tex-Mex food and worldwide distribution.
(Shortform note: While Lafley and Martin advise you to study your direct competitors, some business consultants suggest a broader view: Learn from the very best, no matter what markets they compete in. For example, if you’re trying to build up your company’s capacity for creativity, you could study companies like Google, Amazon, and Netflix—world leaders in innovation.)
Identify Brand-Specific Capabilities
So far we’ve focused on companywide activity systems. Lafley and Martin say that for small companies with just one brand or product, this might be the only activity system you need to worry about. However, for larger companies with multiple brands, each brand needs a unique system of capabilities that ensures success in its own arena.
To build up the unique capabilities of each of your brands, Lafley and Martin suggest you:
- Begin at the individual level. Start with building an activity system of one indivisible brand, where every product requires the same activities. For example, Pepsi makes many different soft drinks, but each product has the same inherent system because they all share the same management, the same production, the same distribution, and so on.
- Build competitive advantage at the aggregate level. After you build activity systems at the indivisible brand level, focus on brands that are similar and therefore able to share resources, skills, and knowledge. This increases the efficiency and competitive advantage of both brands by combining their capabilities.
- Figure out how your systems are working, and expand or contract accordingly. Once you’ve created the systems for brands to share capabilities and knowledge, you may realize that your company needs to expand (create or acquire more brands with capabilities that reinforce company goals) or contract (sell off brands with unneeded capabilities).
(Shortform note: As the CEO of Procter & Gamble, Lafley practiced what he preaches in regard to brands. He spent a great deal of money to acquire new brands, strengthen the brands he already had, and cut loose the brands that would do better on their own. The result is that P&G now rests on a strong foundation of “superbrands,” a small collection of the company’s most successful brands, made even stronger by increased investments in them. The goal was to make P&G more resilient to market shocks and uncertain times.)
Build Capabilities Through Acquisitions
Lafley and Martin say that when organizations don’t have the necessary capabilities to achieve their goals, they often think the easiest way to build those business capabilities is to acquire another company. However, even though mergers between two big corporations are increasingly popular for this reason, most end up being unsuccessful—the combined profit ends up being less than the sum of its parts because the companies or brands don’t work well together.
When discussing mergers or acquisitions, companies often talk about synergy between each other, but Lafley and Martin stress that synergy begins with strategy: If another company fits into your overall strategy, then it will be a good target for acquisition and will naturally synergize with yours; if not, then it’s not worth acquiring, no matter how impressive its capabilities are or how big and loyal its customer base may be.
In other words, think carefully about your overall strategy and how a potential new acquisition will help you carry it out before taking the next step. Don’t snap up other companies just because you can.
| The Spirit of the Strategy Sometimes the reason a merger fails isn’t that the new company doesn’t fit your strategy, but that the new company doesn’t fully understand what your strategy is. The most common issues with failed mergers come from misunderstandings and “benign neglect.” In other words, people have different understandings of what they’ve agreed to, and they don’t realize it until it’s too late. When one company acquires or partners with another, these misunderstandings and disagreements can lead to a new whole that’s less than the sum of its parts—what Lafley and Martin call an unsuccessful merger. That’s why it’s crucial to make sure that everybody’s clear on the spirit of the agreement, not just the terms of it. For example, if your plan is to take the best capabilities of both companies and liquidate the rest, make sure your new acquisition understands that you’ll be closing down sites and laying off employees to carry out that streamlining strategy—the last thing you want is for the company to push back when you start implementing your plans. |
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- Why the cascade strategy will help you become victorious in your chosen field of play
- Why you should make every choice with the purpose of not just competing, but winning
- How to develop a system of decision-making for your company
