What do you do best?
Building a capabilities-driven strategy

By Brad Edmondson

Joe Saddi, MBA ’83, works for a company that has been helping large clients solve complex problems for almost 100 years. One recent client was the city of Dubai, and the problem was how to emerge as the business hub for the Middle East. Saddi says that the essential principle driving successful enterprises is simple: Just figure out a few things that your organization does better than any others, and make sure you keep doing them.

Saddi, who is chairman of the board of Booz & Company, as well as senior partner and managing director of the firm’s Middle East business, delivered a presentation on “Capabilities-Driven Strategy” as a Distinguished Global Speaker at the Johnson School this spring. “It is easy to lose sight of the two or three things that companies are really good at, because companies are engaged day-to-day in so many things,” said Saddi in his presentation. Executives get messages from shareholders, customers, employees, and regulators, and all of them make different demands. “Events tend to overtake managers,” says Saddi, “but the best performing companies in the long run have clarity of focus. They have in mind what they will not do under any circumstances.”

Dubai’s strategy included building an international airport, roads, and shopping malls, but “any country with cash could have done exactly the same thing,” says Saddi. So Dubai created zones where companies could move people and profits in and out freely. They also made it easy for foreigners to get visas and acquire property, which is rare in the Middle East. “They focused not only on the hard assets, but on building the ecosystem of capabilities they needed to succeed.”

An organization’s capabilities are similar to an ecosystem, says Saddi. They are “the interconnection of people, information systems, tools, and processes that congregate together to create differentiated value for customers.” The goal is “coherence,” which Saddi defines as the right balance between “the company’s way to play, its capabilities ecosystem, and the fit between what it produces and its capabilities.” (Figure 1: Coherence is essential to advantage). Booz has even developed a way of scoring its clients’ coherence, and its research shows that companies with higher coherence ratings also have higher earnings. An organization reaches coherence “when the right product and service portfolio naturally thrives within the capabilities ecosystem you have consciously chosen and implemented to support a deliberate way to play.” In plain language, this boils down to answering three questions:

figure 1

• How are we going to create value for our customers?
• What are we going to sell, and to whom?
• What do we need to do well to deliver that value proposition?

Putting the answers into practice usually means setting limits. Honda excels at manufacturing small engines, for example. So the company won’t build engines bigger than a certain size, because small engines are what sets them apart. Wrigley’s strength was in developing new flavors of candy and gum, and also in influencing retailers to display their products prominently on candy racks. So they succeeded by introducing new flavors, and in 2008 they were acquired by a larger candy company, Mars Inc., for $23 billion. For multinational oil companies, two capabilities are essential: They must excel in discovering new deposits of fossil fuel, and also in building large-scale capital projects. Oil companies that do not set themselves apart in these ways become targets for nationalization, Saddi said.

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