Written by Paul Leinwand, Cesare Mainardi, & Art Kleiner
Most companies struggle to differentiate themselves. The few that succeed are those which stand apart because of their distinctive capabilities: the things they excel at doing, time and time again. In this excerpt from their new book, Strategy That Works, Paul Leinwand and Cesare Mainardi explain why distinctive capabilities are vital to success, and address a fundamental question that many companies overlook: How to bring these capabilities to scale, so that every part of the enterprise can call on them.
It’s tempting to think of distinctive capabilities as a kind of artistry performed by an elite corps of high-potential talent: the elite players work long hours and deliver unusual results, while the rest of the organization struggles along in its usual incoherent fashion. This approach rarely leads to success, especially if you have coherent competitors that have brought their capabilities to scale.
Building scale for your distinctive capabilities must be at the top of the CEO agenda. The best approach will vary from one company to the next, but at its heart lies the challenge of transcending functional boundaries–a difficult achievement in itself. This means centralizing and systematizing activity throughout your company while still fostering participation and experimentation. In the end, whatever your industry and whatever your enterprise’s size, scaling up your distinctive capabilities is one of the most difficult and yet essential things you can do.
When we began our research, we expected to hear a lot about organizational design. We thought that creative, capability-rich companies would have paid a lot of attention to the way they organized and the value that restructuring gave them.
Instead, our interviews found a willingness to let organizational forms and structures evolve naturally, developing in line with the identity of the enterprise. This makes sense, given what we know about organizational design: the best designs, as our colleague Gary Neilson has pointed out, are those which are “fit for purpose”: designed to reinforce the distinctive capabilities of that particular company.
We only uncovered one recurring pattern in organizational design, and it was closely related to the ability to bring distinctive capabilities to scale. The companies we studied, each in its own way, had transcended the limits of functional boundaries.
In other more conventional companies, work on capabilities takes place within separate specialized departments. You’ll often find customer relationship management within marketing, budgeting within finance, supply-chain management within operations, outsourcing within procurement, training within HR, and new product development within R&D. You’ll find some capabilities sitting in multiple versions in parallel functions: IT, HR, and operations will all have their own version of an outsourcing capability, with people sometimes only dimly aware of their counterparts in other functions.
The functional model of organization dates back to the 1850s. Some of the first business functionaries were railroad telegraph operators who managed schedules. Then came sales forces, finance departments, and R&D labs–including the original labs of Thomas Edison and Alexander Graham Bell. As companies grew steadily, the “corporate staff” (as it was originally called) grew accordingly. The functional model has been ingrained ever since, so much so that it is rarely questioned. Business units come and go, but finance, HR, marketing, IT, legal, and R&D seem to last forever.
We are not proposing the elimination of functions. Their value is undeniable; no company could do without them. They perform the essential task of marshaling people with important skills to manage crucial activities. But functions as they exist in many companies, without a clear link to distinctive capabilities, tend to drive incoherence and widen the strategy-to-execution gap.
On one hand, functions are treated as sources of expertise within the enterprise, which gives them an incentive to emulate world-class functions in other companies–to whom they will inevitably be compared. On the other hand, they are set up as cost centers and service bureaus, mandated to meet the needs of all their constituents as rapidly as possible under the ceiling of their budget. The entire budgeting process often facilitates and reinforces this–with functional leaders often incented and driven to protect and extend their functional reach just to maintain the resources they need. Meanwhile, as they juggle an endless list of (sometimes conflicting) demands from line units, they become skilled at solving the problems of the moment. They focus their attention on expedience, not on the most important distinctive capabilities. Aligning the functions to capabilities, which is often the only strategic way to resolve these pressures, may not even be considered.
The functional model of organizations is an important reason why so many companies struggle with the gap between strategy and execution. It makes a company good at many things, but great at nothing. When functional boundaries prevail, there is no construct for managing capabilities. It isn’t clear who owns the capabilities, how to track spending on them, or how to connect them to the strategy or to each other.
Much of the task of scaling up capabilities depends on resolving this issue–on transcending the limits of functions. For distinctive capabilities are inherently cross-functional. The most important capabilities systems do not fall neatly into groupings designed many decades ago. Indeed, much of the distinction in a powerful capabilities system stems from the sparks created when people with different backgrounds, skills, technologies, and perspectives build practices and processes together. Frito-Lay’s direct-store delivery capability brings together IT, marketing, logistics and distribution, and financial analysis. The IKEA product design process involves design, sourcing, shipping, manufacturing, and customer insight. Apple’s distinctively intuitive product and user interface design similarly involves customer insight, engineering, manufacturing, marketing, and distribution. In all these cases, the teams work collaboratively rather than sequentially; they think together, rather than throwing projects “over the wall” to each other.
Published in Harvard Business Review on the 2nd of February 2016