06/24/08Even with economic pressures mounting, the most urgent strategic issue for corporate leaders right now is not cutting costs. It’s increasing investments—but only some investments.
by Cesare Mainardi and Paul Leinwand
Investments that build meaningfully differentiated capabilities, the kinds of capabilities that drive value for your portfolio, are critical in a downturn. These need not involve an increase in the overall investment pool, but rather a shift in allocation—in fact, they often represent a major source of cost savings. More important, they can position your company for advantage through the rest of the downturn, and beyond.
To pick these investments, look strategically at the distinctive capabilities that drive your portfolio. That’s what the Toyota Motor Corporation has done with continuous investments in its production system, Procter & Gamble Company with its world-class innovation and marketing capabilities, and Wal-Mart Stores Inc. with supply chain management. All of these companies keep their best people working on building capabilities, and they continually focus on raising the quality of every individual’s work. Between 2001 and 2007, the makers of Listerine (the consumer products division of Pfizer Consumer Healthcare) used exactly this concept to build their business. They explicitly aligned their portfolio of product lines with critical capabilities—in very specific aspects of innovation and consumer insight, leading to the ability to make differentiated product claims—and they sold off parts of the business that did not fit this strategy. The result was an industry-leading growth rate, expanding fivefold over five years. Pfizer sold the division for $16.6 billion (more than 20 times earnings) to Johnson & Johnson in 2008.
Often, capabilities that seem unrelated at first glance turn out to create an essential advantage when they come together in practice. For example, one of today’s leading consumer packaged goods companies has immense embedded capabilities in sales. Its smaller brands show up on retailers’ shelves far more regularly than comparable brands from competitors. It’s also known for its abilities in short-term R&D, rapidly bringing product variations to market. These capabilities are worth investing in separately, but together they add up to a disarming advantage over competitors, especially in introducing new products.
The challenge for most management teams is marshaling the confidence to focus: to disproportionately invest in the few areas that make a difference, rather than spreading selling, general, and administrative (SG&A) expenses across all possible categories out of a feeling that “everything is required.” Evenly weighted investment strategies generally lead to high costs, poorly developed capabilities, and a lack of understanding about the impact of business drivers. A recent client counted 57 strategic initiatives on its corporate agenda. That might seem extreme, but try asking a dozen senior executives at any typical company, “What five things is this company best at doing?” You might well get a dozen different answers. If the executives had a more common understanding—of which capabilities work well with their strategy, and more importantly why—then they might invest more in some of their activities and discard many of the others. And they would be better equipped to leap ahead.
Capabilities are not static. They take time to grow. That’s why foresight—and the ability to anticipate industry dynamics in particular—is so crucial. In the last few years, we’ve had many discussions of this nature with our clients. They are difficult conversations because they often lead to difficult decisions: giving up part of a business. Risking large investments on uncertain results. Participating in new alliances and open source ventures.
But these are also the conversations that lead to the greatest rewards—both financial and personal. In the end, capabilities cannot be bought. They cannot be gained through training or technology. They are yours only when you have internalized them and made them part of your day-to-day thinking and work.
Cesare Mainardi is the Managing Director of Booz & Company’s North American business. Paul Leinwand is a Partner in Booz & Company’s Chicago office, focusing on strategic development, growth, and capability building in the consumer products industry.