6

Shape Your Future

Suppose that you are an executive leader in a highly coherent company—one that has successfully closed the gap between strategy and execution. After a few years, your company achieves sustained success. It crosses a threshold and becomes a mature competitor. Your customers, employees, suppliers, distributors, contractors, and investors are loyal to your company; you have ample reason to believe it is special. You internalize that perspective. Even though you know better, maybe you even start to believe that you can do no wrong.

You and your company are about to be tested.

Just about every successful, coherent company we studied for this book has gone through a daunting episode of self-discovery, where the organization realizes that, despite its success, it is falling prey to distraction and incoherence. Sometimes the companies have an existential crisis. Apple almost went bankrupt in 1997, Lego in 2002; CEMEX narrowly avoided insolvency in 2008, after the global financial crisis. And Starbucks, after two years of intensive growth, faltered dramatically in 2009. Each of these organizations recovered; each took its value proposition and capabilities system to new levels afterward.

If your company is mature, your aspirations are likely to grow. You are likely to see new opportunities for growth, and new ways to make an impact at a larger scale. At the same time, you are likely to face new challenges. Your size, visibility, and success make you more vulnerable to competitors—especially those with new value propositions that can disrupt your existing sector, or those that deploy different capabilities from your own. If your customers shift their preferences and patterns of behavior, the value of your own value proposition may erode. Sooner or later, every successful company reaches this point.

In chapter 2, we argued that companies can only be successful at adapting to change if they remain true to their identity—and grow from their strengths. When they reach this stage of success and maturity, many companies are tempted once more to abandon those strengths and to look for new markets or sectors. But the companies we’ve studied, the companies that close the gap between strategy and execution, take a better approach. Instead of reacting to change, they get out in front of it. They leverage their advantaged capabilities system, not with a string of random growth plays but by using their capabilities to sustain new kinds of growth. Like these companies, you can shape your own future in at least three distinct (and complementary) ways:

The path from incoherence to coherence to supercompetitor status is clearly staked out. Not every company will get that far, but many will. In the rest of this chapter, we’ll look at the benefits from moving along this path and how companies do it: how they recharge their capabilities system, create demand in their markets, and realign their industries.

Recharge Your Capabilities System

Why do some companies seem to know when the world is going to change? Why did Apple put cameras in every smartphone it created, while Kodak hedged its bets on digital photography and invested both in digital technology and a digital-film hybrid? Why do Zara’s lines of clothing remain popular, while other apparel merchants struggle? It’s not because there are smarter geniuses in the companies that win. It’s because these companies adopt the discipline of looking ahead. They challenge themselves to seek out early warnings of changes that could affect their value proposition, and they adjust their strategies accordingly. When they see a challenge coming, they prepare for it in advance, before they are under duress.

They do this forward-looking activity in the context of their capabilities system. They explicitly try to anticipate changes that they might need to make in their capabilities. These changes are deliberately robust: rather than tailored for any particular prediction of the future, they are designed to be ready for any of several futures that might emerge. You could think of this approach as a coherent company’s version of agility. As we noted in chapter 2, this approach avoids incoherence by grounding your changes in the strengths you have built up over time.

Apple made one of these moves when Steve Jobs returned as CEO in 1997. It cut costs to grow stronger, bringing its product line from dozens of models down to four. Jobs could not have known exactly what the future would hold—but no matter what happened next, slimming down the product line was a good move. It also had the immediate benefit of improving cash flow, a desperate need at the company.

Recharging your capabilities system is not just a matter of launching new products or services. It is a matter of expanding your ability to launch, again and again, with consistent success. Starbucks learned how to package and sell food successfully without grilling it; since gaining proficiency in that area, it has introduced many popular snacks. IKEA has learned how to create a better online presence, which represents an ever-increasing part of its business. Natura developed a new capability, incorporating environmental sustainability into its day-to-day practices, and is using its reputation for responsible rainforest commerce as a springboard for sales outside its home country. CEMEX also introduced sustainability, in a very different industry, as a way of solidifying its role as a solutions provider.

All these company leaders realized that a value proposition is never fully achieved; a capabilities system is always open to advancement. If your strategy is grounded in a pure market play—for example, you want to gain market share in a sector or expand around the world—then once that strategy is accomplished, there is no reason to move further. But if your identity is expressed in terms of what you do, and the value you create, then there are always better ways to achieve that value. You continually have reasons to advance and improve.

One company that has continually taken this principle to heart and embedded it in daily life is Haier. As we saw earlier, the company has developed an identity as a solutions provider, but has continually improved its capabilities system and the reach and scope of its value proposition: first to consistent quality, then to niche products, then to global reach, and now to digitally driven innovation and services. Each of these moves has been coherent and logical, and while Haier has occasionally stumbled (e.g., with quality problems at times in the United States), its efforts have largely been sure-footed. Its culture resolutely steers clear of complacency.

“We have felt a sense of urgency at Haier ever since we began to rebuild the company in 1984,” says Zhang Ruimin. “From the start, we’ve felt like there was an extremely large gap between us and more established international companies, a gap we would have to overcome. The only way to survive was to pursue a path of constant self-improvement … That’s why we have a culture of self-questioning. Everyone is always challenging their own ideas and continuously surpassing themselves.”¹

About once a decade, Haier explicitly sets out to reinvent its processes, practices, and organizational structure. The most recent such move occurred in 2013. At that time, Zhang and other Haier leaders decided that the company should be restructured as an internet-based company, assuming customers would first seek access to all its products and services online. To Zhang, this also meant that every product line should be treated as an entrepreneurial enterprise—a platform sharing Haier’s capabilities and tied closely to its value proposition as a solutions provider, but open to the world in unprecedented ways.

The first step was to reshape Haier’s retail operations, starting in China. Every appliance that Haier sells there is customized, with the purchaser specifying the look, feature mix, and other aspects of functionality and design, either in the store or on the web. The next move was to change the company’s structure. Business platforms were unmoored from restrictions on hiring or recruiting. Half the senior executive positions were eliminated, and the rules about who could work on a platform, or share information, were dramatically loosened. Anyone overseeing a product had the authority to decide who else to involve, including people outside the company, as if each platform were a start-up. “As part of this change,” Zhang says, “more than four thousand employees who worked for the company were unemployed.” Many of the newly unemployed were quickly invited to reapply, but this time for entrepreneurial positions where they could build businesses under the Haier brand. “We know of no other Chinese company of our size that has done this,” Zhang says.²

To Zhang, this dramatic experiment is a way of overcoming the company’s own complacency about its capabilities. Instead of managing and controlling product development, the goal is to become more openly creative and innovative: to invite opportunities from anywhere and everywhere. “Some [of our collaborators] aren’t interested in joining [as staff],” says Zhang, “preferring to stay outside in society, partner with the company, and use our platform for pioneering work.” To him, this level of openness is a starting point for creativity. A platform leader is now like an impresario, inviting great craftspeople, from inside and outside the company, to participate in designing Haier’s next line of products and services. Among the first products to be developed this way were the successful Tianzun air conditioners described in chapter 2.

Your company may not want to go as far as Haier has gone, but you can emulate the most important thing Haier did: To allow your distinctive capabilities to evolve repeatedly without losing your focus. Most of the other companies we studied have similar stories to tell. IKEA expanded its capabilities system as it expanded around the world. Danaher expanded its capabilities system to fit the scientific and technical businesses that became the heart of its enterprise starting in the early 2000s. The opportunities for growth increase as your companies mature, but only if you can figure out ways to expand your capabilities system: to make it accomplish more, and handle more, while staying essentially true to the same identity.

Create Demand

Nearly all companies strive for growth and expect to find it in the world outside. Coherent companies can become skilled at creating demand from the insights they generate themselves. These are the companies that created online music and video stores (Apple), the self-serve retail format (IKEA), and wireless broadband (Qualcomm)—all at mature stages of their company’s evolution. Like any successful company, they pay close attention to customers. But they don’t limit their efforts to providing what customers ask for, or figuring out what customers are going to ask for and providing that. Instead, these companies also provide what no one will ever ask for, until it exists. They do this by looking closely at their capabilities system and asking themselves something that all companies should ask themselves when considering growth: “What is needed in the world at large—that only we can offer?”

The IKEA slogan for this continual growth effort is “Staying Relevant. Staying Ahead.”³ The enterprise has continually adopted anthropological methods for understanding the people who shop in its stores, particularly the stores far from its home in Northern Europe. In mid-2015, IKEA announced that it was dramatically increasing its “home visits”—house calls made by staff for research purposes—from six hundred or so per year worldwide to about a thousand per year in the United States alone.⁴ “The more far away we go from our culture, the more we need to understand, learn, and adapt,” says Mikael Ydholm, who heads research at IKEA of Sweden.⁵

As an extension of these methods, IKEA has put cameras (with permission) in people’s homes in Stockholm, Milan, New York, and Shenzhen. The IKEA identity gives it privileged access; its employees are trusted to enter people’s homes or even to install video cameras there, because customers feel that IKEA has their interests at heart. A company with less privileged access would be regarded as an intruder. It is also significant that among the visitors are store managers and senior executives; this is a visible demonstration of the depth of IKEA’s interest.

One product that came out of IKEA’s new research is the Knapper: a freestanding mirror with a rack for clothes and jewelry, making it easier to put together an outfit the night before work and avoid stress in the morning. In China, another change involved new sample rooms consistent with the local custom of sitting on the floor, with sofas as a backrest. However, the enterprise didn’t redesign its sofas for the Chinese market. “The IKEA model, remember, is volume, volume, volume,” writes Beth Howitt in a Fortune article about the enterprise’s global expansion.⁶ “It needs vast economies of scale to keep costs low, and that means creating one-size-fits-all solutions as often as possible.”

The company continually refines its means of understanding customers—not through conventional market research, but by improving its access to people, placing itself in the same frame of mind and developing a better feel for the customers’ wishes, frustrations, and attitudes. In recent years, for instance, the chain has developed more sensitivity to the needs of young adults and single adults of all ages. People who grow older without children tend to live in small urban apartments, and their social lives and homes are very different from those of the families and students who constituted IKEA’s original core market.

This activity—creating demand—doesn’t replace recharging your capabilities system. The two activities complement each other. But they place different demands on your company. In recharging your capabilities system, you set out to learn more about your capabilities—to see how you might expand your horizon. In creating demand, you set out to learn as much as you can about your customers’ potential, and how you might contribute to expanding their horizon.

CEMEX, the global cement manufacturer and ready-mix concrete provider from Mexico, has done a great deal to expand its customers’ horizons. This is a specialized group of customers: construction companies, municipality leaders, and do-it-yourself homebuilders throughout the world. At first glance, it might seem that CEMEX’s opportunities to create demand with them are limited. Cement is a commodity product if ever there was one. It is a bulky raw material, delivered in giant bags to construction crews, and it all looks roughly the same. It is a popular product—the key element in concrete, by far the most widely used building material in the world. Three tons of concrete are poured each year for every person on earth.⁷ In a literal sense, cement and concrete form the foundation of civilization. Whoever can provide it at the lowest price would seem to have an unbeatable edge.

To distinguish itself, CEMEX began to delve into the reasons people use cement in the first place. For example, thousands of people of modest means throughout Latin America build their houses one concrete room or story at a time. Their flat roofs often have black metal bars, called rebar, sticking up as anchors for the next vertical addition, while the homeowners save up enough to pay for the construction.

In 1998, CEMEX introduced its Patrimonio Hoy program. (The name means “Property Today.”) The program helps lower-income families build homes in relatively little time by arranging credit through microfinance loans, selling building materials at low prices, storing the materials safely, and guiding customers through regulatory hurdles and basic architecture. Nobody had done this before at such a scale, and the program opened up an idea among Mexican homeowners and owners of small businesses; they could aspire to a more rapid improvement in their way of life.

A few years later, CEMEX made a similarly creative move on behalf of its independent retail distributors. It introduced a new franchised retail brand called Construrama, which transformed a string of dusty outlets frequented by bricklayers into stores with consumer appeal; the new stores could better compete against foreign market entrants. The first Construrama stores opened in 2001, offering bagged cement, bricklaying tools, rebar, and other ancillary products for builders, contractors, and do-it-yourselfers. The stores, which shared marketing practices and an orange, blue, and white store logo and design, became local gathering places for people interested in home improvement.

CEMEX applied the same logic to another major customer group: local city and town officials across Latin America. Their communities needed highways, ports, and airfields, but the officials didn’t always know how to plan, organize, and manage major infrastructure projects. This challenge led the company to establish many innovative programs, like the design of entire rapid-transit bus systems. “Our capabilities helped us orchestrate infrastructural offerings in a way that others cannot,” explains Luis Hernández, executive vice president of organization and human resources. “For example, you might have a municipality with good tax revenue, but they don’t know how to structure a project, get the permits or make a good decision about where to put in a road, a bridge or a public housing project. If we can help orchestrate all this, then we can provide value.”⁸

No customer asked for any of these solutions. CEMEX came up with them through its privileged access to its customers, and its attention to their interests. For instance, the municipal consulting practice was based on the realization that leaders of communities in emerging markets are eager for help but not sure whom to trust. They are more likely to pay attention to guidance from a company they know, rather than a commodities-oriented company or a global development agency like the World Bank.

In the past, CEMEX had moved managers rapidly around its territories to share their experience and help them advance. Now, it encourages managers to stay in one location longer, to build stronger relationships with local customers. The customer relationships that CEMEX has built, starting in the late 1990s, became a primary source of stability for the company during the extremely difficult years between 2008 and 2010, when the financial crisis particularly affected construction industries around the world. In short, rather than seeking to increase its market share as a commodity producer, selling largely on price, the company created new demand that it was uniquely positioned to capture.

CEMEX’s Identity Profile

With headquarters in Monterrey, Mexico, CEMEX is a global leader in the building materials industry.

Value Proposition: CEMEX is a global solutions provider, offering builders and municipal leaders a portfolio of cement and concrete products and guidance on how to use these products effectively.

Capabilities System

Portfolio of Products and Services: CEMEX provides cement, aggregates, ready-mix concrete, specialty concrete products, and building and infrastructure solutions to individual customers, institutions, and communities worldwide.

The essence of creating demand was famously expressed in 1971 by Alan Kay, the former chief scientist of Xerox Palo Alto Research Center, who pioneered the Smalltalk programming language. “Don’t worry about what anybody else [meaning any of your competitors] are going to do,” Kay said. “The best way to predict the future is to invent it.”⁹ That maxim was updated recently by Kevin Plank, the founder of Under Armour, who has a sign in his office saying, “[The] best merchants are the ones who dictate cool, not those who try to predict it.”¹⁰ This level of confidence comes naturally in companies that put capabilities first, because they gain privileged access to customers, and just as importantly, they develop the acumen to make sense of what they see.

Realign Your Industry

The ultimate payoff for becoming and staying coherent is a position of market leadership. Companies that close the strategy-to-execution gap can become the centers of their own ecosystems, changing the structure of the industries around them to advance their own position. When companies accomplish this, they become what we call supercompetitors.

A supercompetitor is a company that gains an insurmountable advantage by realigning a broader group of companies around its own value proposition and capabilities system. You can recognize a supercompetitor by its influence over customers, talent markets, competitors, other companies in the industry, and shareholders. For example, Amazon has realigned the book publishing industry. Any individual can now self-publish a book with almost the same physical quality and reach that a conventional book publisher has. This newfound capability is changing the basic value proposition in the book trade; publishers now compete primarily on editorial and marketing skill, where Amazon has inferior capabilities, rather than on access to audiences. McDonald’s in its heyday inspired dozens of other restaurant chains. Starbucks is doing the same today. Qualcomm’s innovations realigned other telecommunications companies around the standards it fostered. Supercompetitors are not studied and copied because of their capabilities alone, but because of their influence on other companies around them.

As Thomas Hubbard, management professor at Northwestern’s Kellogg School of Business, has pointed out, supercompetitors are particularly successful in industries where capabilities systems are scalable: where they can be applied to more and more products and services.¹¹ For example, Starbucks and IKEA benefit from their ability to replicate their distinctive capabilities in locations around the world. By contrast, a high-end premium restaurant, founded by an artisanal chef, may thrive in one or two places. But its capabilities, which include procuring local ingredients, creating menus that change from day to day, and personalized marketing and service to a local clientele, cannot be scaled as easily.

At any time, in any given industry, there may be one, two, or several supercompetitors. Just as beavers and earthworms—species known as ecosystem engineers—transform their environment to better meet their needs, these new market leaders act, bit by bit, to turn industry dynamics to their advantage. As they grow larger and yet more differentiated from other companies, their value proposition becomes more successful. Their success allows them to invest more heavily in their capabilities system, enhancing what they do well and expanding into new markets successfully. Other companies find it difficult to compete with them directly, so they become the only company competing in their industry with their particular value proposition and capabilities system.

This momentum is often accelerated through mergers and acquisitions. Companies use M&A to bring in products and services that have languished elsewhere, but that will thrive with them. They also divest businesses that don’t benefit from their own capabilities. Over time, all of this gravitational pull can realign an industry around its most coherent companies, those whose capabilities align most closely with their strategy. Many industries thus evolve toward a new equilibrium in which a few supercompetitors, each with a singular value proposition and a bespoke capabilities system to match, have carved up the market among them. These companies do different things well, and therefore, even though they’re in the same industry or sector, they each attract a different part of the market to their “capabilities cluster” (see figure 6-1).

At this point, a virtuous cycle comes into play. The most highly skilled prospective employees are drawn to the supercompetitor because they know that more focused enterprises make better use of their talents and interests. The most proficient suppliers and distributors also find themselves more attuned to supercompetitors, which often invite them to play a strategic role in an environment where their work is valued highly. This adds to the success of these companies, which adds to their investment capital, which adds to the attraction. They become iconic names, at least within their industry: Apple, Frito-Lay, Haier, IKEA, Qualcomm, and Starbucks are among them.

Being a supercompetitor does not mean staying within one industry. Many coherent companies, including Amazon, Apple, Haier, IKEA, and Qualcomm, apply the same focus to several product or service categories. The single most important thing that enables a company to become a supercompetitor is its orientation to a few capabilities that work together. Supercompetitors have specialized around capabilities, not functions or products. They take advantage of the economics inherent to capabilities, which give them more leverage than mere economies of scale. The IT and human capital costs alone to support some of the great capabilities described in this book can run into millions or tens of millions of dollars. Therefore, the benefits accrued by coherent players are significant, and the industry evolves along with that.

One powerful example of this kind of industry evolution has occurred in consumer packaged goods (CPG). In the early 1990s, the CPG industry was dominated by large, diversified enterprises selling food, beverages, and personal-care products. Unilever, Procter & Gamble, Kraft, Colgate, Nestlé, and Sara Lee each owned a tremendous range of brands and business lines. Kraft, for example, made dairy-case products (including its own branded cheese and Philadelphia cream cheese), frozen foods (DiGiorno pizza), chocolate (Cadbury), chewing gum (Trident and Chiclets), and sweet and salty snacks (Oreo cookies and Ritz crackers among them).¹² Such different types of foods required a wide range of capabilities to produce and market. Unilever, Procter & Gamble, and Sara Lee were even more diverse. They thrived, nonetheless, because the benefits of scale gave them lower costs in back-office functions, broader access to distribution channels, and the deep pockets needed for expensive network television advertising.

But these advantages did not last. Starting in the 1990s, thanks to factors like more diverse consumer tastes and more accessible information technology, the barriers to entry dropped for smaller, more focused CPG competitors. Companies like Cabot Creamery, Amy’s Kitchen, Godiva Chocolates, Green Mountain Coffee, and many others in North America and Europe found it easier to develop a following. These companies promoted their brands through the internet, avoiding the costs of television advertising altogether. The largest chain retailers, including Walmart, began to cultivate them. In this new world, the old, diversified incumbents found that their complex collections of loosely related brands and products were too unwieldy to sustain, and the old benefits of scale and size became liabilities.

So the large CPG companies began reworking their strategies. They each picked a group of categories where they could compete best and doubled down on these areas. The firms acquired other businesses that matched their strategies and shed businesses that didn’t fit. Since the late 1990s, largely through mergers, acquisitions, and divestiture, the average number of segments per company has dropped by more than 25 percent, going from 4.3 segments on average in 1997 to 3.1 segments in 2015—as shown in one study that looked at fifteen such cases. The average company size in this industry has also decreased. Just about every CPG manufacturer has been affected.¹³

A map of the industry, now reorganized around capabilities systems, is barely recognizable from one of a decade ago. For example, in late 2014 and early 2015, Procter & Gamble spun off a number of well-known but isolated businesses: Iams pet food to Mars, Duracell batteries to Berkshire Hathaway, and Clairol, Wella and Covergirl cosmetics to a new business that would combine with Coty.¹⁴ A new global snack company called Mondelez, spun off from Kraft, also contains former parts of Cadbury, Nabisco, and Danone. Mondelez’s formerly disparate cookie and cracker product lines can now all take advantage of the same capabilities system, which relies on fast flavor innovation and a front-of-the-store distribution capability similar to that of Frito-Lay. Much of the rest of the old Kraft has combined with Heinz (under a deal brokered by Berkshire Hathaway) to become a source of processed and prepared foods: for example, packaged macaroni and cheese, condiments, and salad dressings. These products are sold primarily in the center of the supermarket, using different capabilities in distribution, brand marketing, and ongoing cost management (especially given the low growth of these categories). Nestlé, meanwhile, is morphing into a nutritional food, beverage, and cereal company, with former parts of Pfizer, Gerber, Novartis, Jenny Craig, and Ralston Purina under its umbrella. The old packaged-meat business from Sara Lee was temporarily renamed Hillshire Brands before being absorbed into the giant chicken producer Tyson Foods. (For an online diagram of the dynamics of CPG industry realignment, see our book’s website: www.strategythatworks.com.)

Something similar has happened in a variety of other industries, including aerospace and defense, automobile rentals, and health care. Johnson Controls announced in mid-2015 that it was splitting into two separate companies with very different capabilities systems—one for auto interiors and car seats, and the other for batteries and climate-control equipment.¹⁵ In the oil and gas industry, ExxonMobil and BP announced in 2014 that they would separate unconventional shale operations from their traditional operations. ConocoPhillips, Marathon, Murphy Oil and Total divested their downstream (refining and retail) operations so they could concentrate on oil and gas exploration; and oil and gas and chemical companies have generally reoriented themselves around more focused lines of business where they have the requisite capabilities to succeed.¹⁶ In each case, the better fit between products and capabilities gave the spun-off entity more of a competitive edge. In all of these cases, the industry is realigning around supercompetitors, each one carving out an area where their value proposition and custom-made capabilities system allow them to dominate. This industry evolution unleashes imagination, innovation, and new forms of consumer insight that would have been far less likely under more-diverse enterprises.

One new competitor emerging in consumer packaged goods is Jacobs Douwe Egberts (JDE), a coffee business that consolidated parts of two former market leaders. Douwe Egberts was spun off from Sara Lee; Jacobs from Kraft. Under their old corporate parents, these businesses had never fully realized their potential. They fell within a broader umbrella structure, adding their needs to those of other members of the diverse portfolio, with only a small part of the overarching capabilities system relevant to them. Now, Douwe Egberts and Jacobs are part of the world’s largest pure-play coffee and tea company. One of their main competitors will be Starbucks, which traditionally would have been seen as belonging to a different sector. JDE’s biggest challenge is to build and refine the capabilities needed to maintain and grow its new position.

When thinking about strategy, executives often focus on the constraints of the industry around them—including well-established competitive positions and traditional sectors. In that context, the emergence of supercompetitors may seem like yet another threat to your existing business. But by looking ahead to the changing landscape of your industry, you can rethink your portfolio in a more transformative way. You can consider in advance how you could win if your industry changed in the same way that the CPG industry did, and you can put your attention squarely on the things your company does best, as a better platform for growth. Though focusing on a small group of capabilities may seem to narrow your scope, it gives you a much more clearly defined, stronger position in the sectors you choose and far more influence on the markets you care about. It gives you control over your destiny.

(The tool “Supercompetitor Workshop” outlines specific ways you can spur the leaders in your company to think in this distinctive, long-term direction.)