2

Commit to an Identity

If you asked your employees, “How do we create value for our customers?” would you get a clear answer? And would different people within your company hold the same view?

This question—how do you create value?—is the most fundamental inquiry about strategy that anyone could ask. Instead, many people think strategy has to do with choosing a direction: where are we going to grow next?

That’s why so many executives focus their attention on creating purpose and mission statements. They are trying to define where the company should go, in a way that everyone can support and that will lead to profitability and growth. But these statements tend to ring hollow because they reflect the incoherence of the company that makes them. To encompass all of its disparate activity, the statements have to be generic and vague. A statement like “We want to be the company of choice for our customers,” or “We are committed to delivering the highest quality and widest selection” affirms a goal, but it doesn’t explain why this company is special or why it should have any hope of achieving that goal with distinction.

A true identity, by contrast, expresses what your enterprise does exceptionally well and why it matters. When the company is coherent, the people who work there can typically talk about its identity with certainty and clarity. Just as an individual identity is grounded in the things that make a person special—what the person does, how he or she does it, and what the person cares about—the identity of a company expresses what distinguishes this company from all others.

It takes time, dedication, and persistence to construct a truly differentiating identity—an identity that sets a company apart, grounded in the complex, difficult-to-build capabilities that no one else can copy, and that shape its attitudes and collective behavior. That’s why we titled this chapter “Commit to an Identity.” Commitment implies staying true to that identity over the long term. You develop the ability to change when necessary, but you recognize that the source of your greatest strength involves a commitment that may last for years. In this chapter, we’ll explain how companies forge that identity, make the commitment to stay with it, and use it as a vehicle for sustainable growth.

Choosing and developing an identity requires a great deal of reflection, for the same reason that choosing a career does for an individual. Your choice is limited by the capabilities you have, or can reasonably build or buy. Where your company can go in the market—what products and services you can offer and to whom—is a function of who you are and what you do exceptionally well. Only when you understand your company’s capabilities can you understand where you can expect to win, why you would win there, and what else you must do to enhance your capability system to capture a winning position.

A good example of a strong identity is Apple, which iterated and refined its identity over three decades. In his biography Steve Jobs, Walter Isaacson describes the early years of the company, when Apple’s cofounder and ultimate CEO foresaw a compelling future in which computers would become powerful tools that would deeply improve everyday life. Jobs’s unwavering conviction was echoed in his original description of the Macintosh, in the early 1980s, as a “computer for the rest of us.” Most computer users were programmers; even consumer programs were as complex to learn as programming languages. Apple would be different; it would produce elegant, engaging computers that met people more than halfway. This powerful value proposition was possible because Apple already had the necessary capabilities: breakthrough innovation, customer insight, a well-evolved prowess in technological integration, and a facility for intuitively accessible design. Together, these capabilities overcame all the obstacles that Apple faced during its early years, including those that stemmed from Jobs’s own temperament. They were instilled deeply enough in the company, even in those relatively early years, that they gave Apple an identity that lasted into the 1990s, long after Jobs was pushed out of the CEO position.¹

Then in the late 1990s, when he returned as CEO, Jobs took the company’s identity a step further. He began by reminding the attendees at a Macworld conference in 1997 that their job wasn’t to compete with Microsoft. “We have to let go of this notion that for Apple to win Microsoft has to lose.” He later explained his reasoning: Apple couldn’t beat Microsoft at its own game. “Apple had to remember who Apple was.”² Creating yet another Windows-like clone would not suffice; Apple had to find its own distinctive path.

But that didn’t mean returning to the identity that it had ten years before. It was too late to base a computer’s success just on being distinctively well-designed and user-friendly, like the original Mac. Jobs didn’t unveil the next incarnation of the Apple identity until the annual Macworld conference in January 2001.³ In his keynote address, he said that the first great era of the PC, the golden age of productivity, had passed around 1994 and had been replaced by the age of the internet. Now, however, the internet had matured and the PC was “on the verge of entering its third great age.” Cell phones, camcorders, and other digital devices were exploding in popularity. Digital cameras represented 15 percent of all cameras sold in the United States. “Soon it will be fifty percent,” Jobs said. Apple’s computers, he added, would “become the digital hub of our emerging digital lifestyle … not just adding value to these devices but interconnecting them as well.” Apple would be the company that brought that digital hub to life.

Articulating this grand ambition led, over the next few years, to major investments of money and attention in Apple’s capabilities system—for example, the development of the negotiating and packaging skill to procure and sell recorded music online. Apple would also revolutionize digital photography by including cameras in the iPhone, incidentally giving Jobs’s prediction about digital cameras a whole new meaning.

“Some people argue,” says Harvard Business School strategy professor Cynthia Montgomery, who uses the Apple story in executive education, “that a strategy is understood only in hindsight, retrospectively trying to make sense of a group of haphazard, reactive moves. But here’s a case where, when the stock price was still very low [in 2001], Steve Jobs laid out his animating idea in public, in advance. When Apple came out with iTunes, the iPod, and the Apple Store, it all made sense in light of that idea.” ⁶

Starbucks is also known for the clarity of its identity. Its retail stores vary significantly from one location to the next, but they are all recognizably Starbucks. This strong presence didn’t happen accidentally. It developed because CEO Howard Schultz and many others in the company have deliberately stayed true to a single identity. As with Apple, the company’s identity is grounded not in one particular product, but in its value proposition and everything it does. Having a single powerful identity opens up diverse paths of growth, including product sales in supermarkets, its own distinctive food menus, snacks, and pioneering differentiation in mobile payments. Starbucks never stops being Starbucks, and it will probably never stop roasting and selling gourmet coffee. But it is resilient in the face of change; it moves easily into and out of a variety of changing markets.

In 2008, Schultz summed up the way the company manages its identity in a statement he called “seven bold moves.” Two of the seven were directly linked to the company’s value proposition: “Be the undisputed coffee authority,” and “Ignite the emotional attachment with our customers.” The other “bold moves” were related to the company’s distinctive capabilities. Each move specifically had to do with how the company would be able to create value as a whole. Schultz didn’t say, “Become the top performer in our global category.” He said, “Expand our global presence while making each store the heart of the local neighborhood.” High performance would naturally follow. He didn’t say, “Employees will be our greatest asset.” He said, “Engage and inspire our partners.” (All Starbucks employees are called “partners,” which reflects the fact that although they are paid retail-worker salaries, most of them hold stock in the company and receive health-care benefits.) He didn’t even say, “Sell the best coffee,” or anything else limited to product quality. He said, “Create innovative growth platforms worthy of our coffee.” In one area he was vague, because this area required new levels of innovation: “Be the leader in ethical sourcing and environmental impact.” And when it came to financial results, even there he focused on the necessary capability: “Deliver a sustainable economic model.”⁷

As you think about your own company’s identity, keep thinking about what you do and who you are. You may be tempted to define your identity in terms of what you sell—your sector, category, or industry: “We are a leader in Asia,” or “We are at the top of the energy industry.” But your people already know that you do something more specific than that. While you might have defined yourself through particular products or services in the past, don’t limit your identity to that definition. Products and services may change. Your company may well evolve to transcend the current limits of your sector or category, enabling you to move into new enterprises without losing the qualities that set you apart.

How Haier Found Its Identity

For an example of a company that has achieved prodigious success from humble beginnings while always staying true to their identity, consider the Haier Group. Founded in Qingdao, a coastal city of three million people midway between Beijing and Shanghai, this company is the world’s fastest-growing appliance maker and enjoys the largest market share in white goods worldwide. It holds about 14 percent of the global market, facing at least seven other major competitors, including Whirlpool, Electrolux, and GE Appliances. Haier is also a world leader in technological innovation. That’s not bad for a company with its roots in Chinese Communism. Moreover, only three decades ago the company was in such desperate straits that the CEO had to borrow money to pay workers’ salaries, and many of the products it was selling needed to be repaired before they could be used for the first time.

Haier’s value proposition is that of a solutions provider: a company that not only understands, but also does something about, problems people have with daily life. This unique identity began in 1984, when current CEO Zhang Ruimin took the helm, only a few years after Premier Deng Xiaoping came to power and began to open up the Chinese economy. For millions of Chinese people moving out of a subsistence existence, the “big three” aspirations were to own a television, a refrigerator, and a washing machine. (“Just a decade before,” wrote Bill Fischer, Umberto Lago, and Fang Liu in Reinventing Giants, a history of Haier, it “had been a bicycle, a watch, and a sewing machine.”)⁸ Qingdao was one of China’s first enterprise zones, and the Qingdao Refrigerator Factory, a city-owned company that had been founded in the 1930s, sold all the refrigerators it could produce. That was only eighty per month; would-be customers crowded around delivery trucks to buy the scarce devices before the machines were unloaded.

After three managing directors resigned in rapid succession, a thirty-five-year-old deputy manager in the company named Zhang Ruimin was asked to find a replacement. He found no acceptable candidates, and he reluctantly took on the challenge himself. His reservations were understandable. Despite its captive market, the company was a mess. It was in debt for RMB1.47 million (about US$11 million), and its eight hundred workers were owed several months of back pay. The doors of the factory had been broken up for firewood the previous winter, and so many employees were using the floor as a toilet that Zhang had to institute a rule forbidding it. He also had his hands full solving urgent operational problems, like refinancing the debt and installing new production lines.

Then, an almost unprecedented event happened. A customer sent a letter to Zhang complaining about a refrigerator that wouldn’t stay cool. Zhang sent a few staff members into the warehouse to find a replacement, and they reported back that seventy-six of the almost four hundred refrigerators in inventory were unusable. Zhang was frustrated, but he saw an opportunity. China’s middle class was poised for growth. People would not tolerate faulty products in the future. By solving the problem of poor quality, ahead of other companies, this little old refrigerator manufacturer from Qingdao could set itself apart.

From now on, Zhang announced to his staff, “everything that leaves our plant should be a grade 1 product.”⁹ He told the employees to line up all seventy-six defective units in the street outside the factory. He brought a sledgehammer, and one by one, they smashed the refrigerators to bits in full sight of the rest of the plant workers and the community. (The sledgehammer is now on display in a national museum in Beijing.) Everybody knew that Zhang could have easily sold those refrigerators; even the defective ones could have been repaired, and then they would have been worth more than two years of a worker’s salary.¹⁰ But instead, he literally hammered home the company’s new identity. It would not be like most other Chinese companies, assuming that its customers’ low incomes and nonconsumer backgrounds would lead them to accept anything they could afford. This company would provide solutions to Chinese customers’ real problems—starting with the problem of poor reliability.

To deliver, Zhang knew, the company had to rapidly ramp up its capabilities. He was one of the first Chinese manufacturing executives to adopt Western quality approaches. He set up a joint venture with the German industrial company Liebherr and brought Six Sigma and other innovative lean production methods to Qingdao. Within two years, the company was winning local awards for quality and reliability. Even then, Zhang and the other company leaders understood that quality was just the means to their true goal: to be the company that met the real needs of consumers by solving their problems. In China, that meant delivery problems, so Zhang explicitly sought out mastery of China’s notoriously complex supply chain. By 1989, when he reorganized the company and renamed it Haier (derived from the second half of Liebherr’s name), it was the largest Chinese appliance manufacturer, holding its own in China against rivals from the West and branching out to washing machines, dishwashers, and stoves.

During the 1990s, Haier expanded its value proposition and leveraged its capabilities system by providing solutions in a different way: to niche markets. The company set up cross-functional product launch teams where marketers and engineers worked together on products that other companies didn’t even consider producing. For example, on discovering that Chinese farmers were using its washing machines to clean their sweet potatoes, Haier produced new machines designed specifically for washing vegetables. This innovation capability enabled it to expand rapidly overseas. For example, Haier makes large washing machines for Pakistani robes, small ones for Chinese undergarments (which are often washed separately in China), and wine coolers and small dormitory-style refrigerators for the United States.

In the 2000s, it further expanded its role as a solutions provider by developing a capability for on-demand production and delivery: setting up a multichannel system that allowed customers to specify the color and features of appliances over the internet. Haier also expanded its customer support capability, with staff in China who often form ongoing relationships with customers, visiting them on a monthly basis. This customer support capability has allowed the company to launch a new line of water purifiers that are tailored to remove specific pollutants for each purchaser’s neighborhood, with 220,000 variations in China. This remarkable site-specific system emerged from a collaboration with the Strauss Group (an Israeli food and beverage company) and Dow Chemical (which jointly holds more than 20 water purification patents with Haier). Other solutions-oriented innovations include a design service helping thousands of Chinese country-to-city migrants get used to apartment life and buy the furniture as well as appliances that they need, and an air conditioner and purifier with a miniature wind tunnel that excels at cooling the air a bit but not making it too cold. This feature was originally suggested by consumers on a Haier social media forum. The model, dubbed “Tianzun” (Mandarin for “heaven”), also has a circle of light in its center that shifts from red to blue when the air quality improves, and software that connects it to smartphones for control. It has proven extraordinarily popular in China.

Through all these changes, Haier’s employees are always conscious of one company aspect that stays the same: its core identity as a solutions provider. Though it is sometimes associated with low prices in the West, Haier has never identified itself as a value player. It doesn’t offer every appliance in every market, but only enters markets when its leaders believe Haier has an advantage in solving a particular problem. The company has also remained coherent; all the capabilities reinforce each other’s value to the strategy. For example, the degree of customization Haier can create is possible partly because of the on-demand production and delivery capability. On-demand production and delivery, in turn, builds on Haier’s operational excellence. All of it can be traced back to that moment when Zhang Ruimin realized that he could create a company that solved problems for potentially millions of loyal customers, first in China and then everywhere else.

Defining Who You Are

The profiles scattered throughout this book show the identities of companies we have studied. Your own identity can be as powerful as theirs. You may expand successfully to new lines of business with the same identity—as Haier did with home design and water purification services, Starbucks with its instant-coffee innovation, Apple with its smartphone and iTunes store, CEMEX (the Mexican cement company) with infrastructure design consultation, Lego with its Mindstorm computer-driven products and Bionicle characters, and Amazon with cloud computing. You might also discover, as Amazon did with its Fire Phone or Starbucks with its hot breakfast menu, that there are limits to what you can successfully develop. And you may sometimes need to push the boundaries of your identity: to expand who you are.

A good place to start closing your strategy-to-execution gap is by first defining two or three primary elements of your identity: a clear, recognizable value proposition and the capabilities system that supports it. You continue to iterate these; with each iteration, you match them more closely together. At some point you must consider how these fit your portfolio of products and services and how to drive coherence among all three elements.

Let’s look at these three elements of your identity—value proposition, capabilities system, and lineup of products and services—in more detail.

Your Value Proposition

By assessing your mix of industry conditions and your current capabilities, you can find the value proposition that is most promising for you. You can generally start determining the right value proposition for your company (also known as its “way to play” in the market) by looking at common, generic ways of creating value. We call these puretones—basic, self-evident value propositions such as aggregator, innovator, value player, and experience provider. These basic value propositions alone may not fully capture the nuances of your business, but like primary colors they can be combined to reflect a more complex value proposition. (You can find an extensive list of puretones we’ve identified in appendix C and an interactive tool to help identify your own value proposition at www.strategythatworks.com.)

In every company profile that you’ll find throughout this book, we’ve included the puretone “building blocks” that come together into the company’s value proposition. We also link those ways to play to the capabilities systems that enable them.

Every company combines the puretones in its own way to create its own custom approach to providing value. For example, Qualcomm, IKEA, and CEMEX are all innovative enterprises, but each in a different way. Qualcomm is also a platform provider. Its innovations are all oriented toward industry leadership through franchising fundamental forms of technology that other players adopt. IKEA is a value player. Its innovations in packaging and logistics shave costs, while its design innovations enable it to provide stylish home furnishings at very low prices. CEMEX is a solutions provider; every innovation is oriented to addressing a particular customer problem or group of problems.

These value propositions define in detail what the capabilities system needs to do. For example, IKEA’s capabilities in product and retail design clearly involve ongoing innovation, but this is always in service to being a value player and experience provider: finding ways to make products less expensive and the retail environment more engaging. CEMEX has a well-honed innovation capability, used to deliver solutions to homeowners and commercial and government customers. This reinforces its value proposition as a solution provider—differentiating itself in an industry, in this case cement and concrete, which is prone to commoditization.

At the same time, the capabilities system of your company—the capabilities you already have and those which you know you can build, buy, or borrow (through joint ventures)—should help determine your value proposition. Your value proposition is a promise. You’ll need a distinctive capabilities system to keep it. You should only adopt a value proposition that you’ll be able to deliver.

Don’t assume you have to follow every opportunity that promises returns. Instead, look at your capabilities. Pick the places to compete where there will be no gap between strategy and execution, because you already have prowess that fits that challenge. The value proposition you are aiming for should fulfill the following criteria:

Your Capabilities System

In chapter 1, we defined a capability as a well-designed combination of processes, tools, knowledge, skills, and organizational design. Together, these generate the capacity to reliably and consistently deliver a specified outcome relevant to your business. A distinctive capability is more specific: it is what you do well, what customers value, and what your competitors can’t beat.

Your capabilities system is the group of three to six distinctive capabilities that differentiate you from other companies and that allow you to deliver on your value proposition. These critically important capabilities do not stand alone; they are part of a mutually reinforcing system, which is the key to a company’s differentiation. Apple, for instance, is not a superior company just because of its exquisite design capability alone. Its “secret sauce” is its combination of capabilities. This includes the consumer insight needed to spot a latent need; the ability to integrate technology (often technology originated by others, but Apple always brings it to fruition and improves it); design prowess that makes its user interfaces intuitive, elegant, and easy to use, and its products packaged and marketed with cachet; and a breakthrough innovation track record that extends even to customer support (the Genius Bar in its retail store). All of this together has made Apple the default consumer standard, difficult to overtake even by much less expensive computers and mobile phones, earning high margins long after the offerings are launched. Whether Apple will succeed in extending this system into cars, televisions, or wearables isn’t yet clear. But the full system of capabilities allows Apple to transcend any particular product or service. It gives Apple an identity to which employees, customers, and shareholders will continue to commit their time and money.

CEMEX gains a similarly strong identity from the several capabilities in its system. We’ve already mentioned one: its solutions-oriented innovation capability. Another is operational proficiency; the company is known for its precision in timing deliveries in many locations. A third is relationship-building through guidance. CEMEX’s community-based salespeople are trained in providing local officials and homeowners with knowledge about building and design. The company also knows how to share knowledge about customer problems (extending to financing and construction advice), and how to promote energy efficiency and other aspects of environmental sustainability related to the building industries. Its use of alternative fuels grew from 5 percent in 2005 to an industry-leading 28 percent in 2014.¹² Capabilities like these are not just functional activities. Each of them combines people, processes, technology, and organizational measures like incentives across a range of functions.

Some readers may associate a capabilities system with the concept of a value network, as articulated by Clayton Christensen in The Innovator’s Dilemma. A value network is the group of common capabilities shared by every company in an industry: the common standards, efficiencies, and interoperability that allow many suppliers and customers to interact easily.¹³ As we’ll see in chapter 5, these value networks are like “table stakes” in a card game. Every company must ante up, developing some level of proficiency in each of them, just to survive in that industry. These industry-wide capabilities are important. (In appendix D, we name some prevailing table-stakes capabilities relevant to particular sectors.) But they do not lead to competitive advantage. Your systems of distinctive capabilities are the opposite of value networks. They include the few capabilities that aren’t table stakes, that other companies don’t share, that help you succeed because they are difficult to copy or emulate.

It takes some precision to describe the distinctive capabilities that differentiate you. A conventional functional label like logistics—or innovation, marketing, merchandising, or analytics—is generally too broad. It overlooks the precise elements that make this capability effective. C. K. Prahalad and Gary Hamel recognized this back in 1994 when they proposed the concept of core competencies (a forerunner to the idea of distinctive capabilities): “A substantial amount of effort is required,” they wrote, “to cluster and aggregate the skills and technologies in some meaningful way, and to arrive at labels that are truly descriptive and promote shared understanding.”¹⁴

That’s why the best descriptions of capabilities are grounded in specific observation, reflecting their complexity and bespoke nature—their ties to this particular company. For example, at Starbucks, one distinctive capability is the company’s consistent proficiency in developing and retaining skilled, committed staff in a storefront retail environment. This is not easy to do, and it would be too simplistic to describe it simply as a “human capital” capability. It involves skillful recruiting and the delivery of a far-sighted health care policy, to be sure, along with a carefully thought out approach to employee stock ownership. Most staff members (who are called “partners”) also own shares in the company. Moreover, every “partner” in the company gets involved in training others. The company has developed processes and tools to help staff members succeed at this, and to ensure that training is closely aligned to Starbucks’ desired customer experience. All of these facets, and more, combine together to establish a high level of loyalty and commitment among Starbucks employees, especially in that high-turnover industry.

Another example is the logistics capabilities of three very different companies: Frito-Lay, Amazon, and Inditex. Frito-Lay’s supply chain, which we will describe in detail in chapter 3, is geared toward delivering snacks tailored to local tastes, using highly sophisticated and increasingly automated direct store delivery (DSD) systems. Amazon’s supply chain makes use of other companies for trucking, but relies on its own robotics- and cloud-computing-facilitated warehouse system, delivering a broad variety of goods around the world, generally with next-day service at very low rates. (The company spent $775 million in 2012 to acquire Kiva, the company that makes the robots.¹⁵) Inditex uses its supply chain to link its factories with its Zara retail stores, with the intent of making its manufacturing responsive. It takes as little as two weeks for an idea to bubble up from a random conversation in the store, gain the attention of Zara management, go to a clothing designer, be translated into a manufactured garment, and appear on the retail racks.¹⁶ All three of these capabilities could be called “logistics,” and all three are IT-enabled, but you could not easily substitute one for another.

Despite all this precision and detail, however, a distinctive capability should not be seen as being “in the weeds.” It is the core driver of strategy. While it is cross-functional and many-faceted, it is also intrinsically whole—it stands on its own, with all its related activities complementing each other. You cannot remove any part without compromising the entirety. Thus, any description of the capability should be simple and clear enough to convey a sense of its power. It should galvanize leaders, including the top leaders of the company, to make the necessary commitment to it to propel the company to success.

In chapter 3, we’ll describe how companies design and build distinctive capabilities and bring them to scale. As you develop your capabilities system, keep in mind the needs, strengths, and culture of your company. It does not do you much good to emulate some other company’s capabilities, not even if it’s world-class. Just about every business leader these days would love to have Apple’s capabilities system at his or her disposal. But unless you have the same value proposition and a similar lineup of products and services, it won’t be economically or culturally feasible. You need to identify the capabilities system that fits your own enterprise.

Your Product and Service Mix

Becoming and remaining coherent also requires that the products and services you offer fit seamlessly with your value proposition and drive scale to your capabilities system. A portfolio review should give at least as much weight to strategic fit as it gives to financial performance. Ideally, every one of the company’s individual businesses should link strategy to execution in this way.

When they look at their portfolio with an eye toward capabilities fit, many companies realize that some offerings don’t fit their chosen identity, even if the offerings are individually successful. Other companies have the capabilities to do better with these offerings and are benefiting from the resulting advantage. That is why a growing number of companies are divesting businesses that don’t quite match their capabilities system—so that they can release funds to acquire products and services that fit more closely.

Though products in the same industry are often assumed to fit together, a capabilities-driven view on portfolios forces business leaders to discard conventional views of their portfolios and growth opportunities. The Standard Industry Classification (SIC) definitions, most of which were last revised by the US Office of Management and Budget in 1997, represent the established boundaries for judging where products and services fit, and the definitions are highly misleading when it comes to capabilities fit. For example, motorcycles and bicycles are grouped in one SIC category, but they are produced in very different ways for very different customers; they require very different capabilities in product launch and marketing. The conventional view of grocery goods includes canned, frozen, and preserved foods together, but these require very different forms of production, distribution, and marketing.¹⁷ If you aren’t careful to look at capabilities, you risk falling into the “adjacency trap”: expanding into seemingly similar products or services—for example, from canned to frozen foods, or from bicycles to motorcycles—without taking into account the very different capabilities needed to succeed in that new enterprise.

Growth, Change, and Identity

Most business leaders recognize the power of a strong identity. They understand how alignment between strategy and execution enables a company to win, and they recognize the role of distinctive capabilities in creating that alignment. They also see the level of focus this requires. Why then do they let their companies get distracted?

One big reason is the daunting pressure that many companies face: to seek growth in the face of uncertainty, increased competition, and relentless commoditization. They pursue many diverse growth avenues and organizational interventions. They do this in the name of agility or resilience or with the idea that if they try a lot of things or let a thousand flowers bloom, they’ll be more likely to find a path that works. This saves them from having to make difficult choices in advance about their portfolio, and to allow them to hedge their bets. But it also diffuses their efforts, reinforcing incoherence. Inevitably, those multiple businesses will have to justify their demands by growing revenues as rapidly as possible, even if that growth comes at the expense of sustained profits.

In practice, this approach leads companies into a growth treadmill: chasing multiple market opportunities where they have no clear identity, and not enough of a powerful capabilities system to compete with. They find themselves serving so many different customer groups with diverse offerings that it’s impossible to define what the company is really about. Although such companies may have been great once, their lack of focus makes it hard to be truly excellent now.

Consider, for example, the story of Smith-Corona. In the 1960s and 1970s, it was the preeminent maker of user-friendly, portable typewriters for consumers: students, teachers, and people with home offices. The company’s leaders saw disruption coming: electronic calculators had eclipsed its adding machine business and the company realized early that computers could do the same thing to its typewriter business.

So Smith-Corona hedged. In the mid-1960s, it acquired Procter-Silex (which made kitchen appliances), Glidden (paint), and Durkee (salad dressings and seasonings), all of which needed different capabilities than typewriters. It also bet heavily on electronic word processing machines, which seemed to represent a compelling extension of its existing product line. But the new R&D facility, opened in 1976, was located in Danbury, Connecticut, a four-hour drive from the company’s headquarters near Syracuse, New York, where the mechanical engineers worked on “real” typewriters. The two facilities were treated as two different operations, with no regular opportunity to learn from each other or build a common identity and capabilities system.

In 1986, after five years of losses, the company was acquired in a hostile takeover. The new owners sold off most of the non-core businesses and focused the company on word processing computers, which succeeded at first; SCM (the new name of the company) led the market in 1989. But the company continued to distract itself. There was a series of failed products, including personal computers (a joint venture with Acer), daisy-wheel printers (which could not print pictures), label makers, electronic dictionaries, and a service that set up home offices. The company declared bankruptcy in 1995, and today it is a much smaller manufacturer of pressure-sensitive labels and thermal paper.

Smith-Corona never carved out a true identity for itself. You might question whether it ever had the right capabilities to become the purveyor of the next generation of writing machines, the kind that even Apple or Microsoft could not make. But because of the company’s array of ancillary businesses and the accompanying distractions, it never got the chance to find out.¹⁸

It’s understandable that businesses get caught in this growth treadmill, even when they are aware of its dangers. The treadmill is a natural response to a major dilemma in business today: the transience of advantage. Even the most formidable position in an industry, buttressed by assets and capital, can be vulnerable to rapid change: commoditization, technological upheaval, shifting capital flows, political and regulatory turmoil, and other facets of a chaotic and unpredictable world.

But there is a second reality, just as powerful: distinctive capabilities are inherently slow to change. The capabilities system in any large, coherent enterprise involves hundreds or thousands of people as well as embedded investments in technology and specialized skills. These capabilities have been built up slowly, decision by decision, and thus they are sticky: they take time to update and replace. If the capabilities system could be changed easily, it wouldn’t be worth very much, because anyone could build something similar. It is impossible to shift identity and build new distinctive capabilities on a dime.

The answer is to treat the stable nature of your capabilities as a strength, not a weakness. The goal of being adaptive and resilient is admirable, and when you’re in industries under disruption, you have to move quickly. But you can’t move effectively unless you’re willing to plot your expansion path in line with, not in opposition to, your existing strengths. Amazon’s founder and CEO, Jeff Bezos, clearly agrees, as a 2012 video interview shows.

“I very frequently get the question ‘What’s going to change in the next ten years?’” he said. “I almost never get the question ‘What’s not going to change in the next ten years?’ And I submit to you that that second question is actually the more important of the two. Because you can build a business strategy around the things that are stable in time.”

Then he gave an example. “In our retail business, we know the customers want low prices. I know that’s going to be true ten years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future ten years from now where a customer comes up to me and says: ʻJeff, I love Amazon, I just wish the prices were a little higher. I just wish you delivered a little more slowly.’ [When] you have something that you know is true even in the long term, you can afford to put a lot of energy in it.”¹⁹

The core value proposition for Amazon—vast selection, low prices, and fast delivery—has remained intact since it began as an online bookseller in the late 1990s. It has also maintained essentially the same capabilities system since the beginning, combining distinctive approaches to online retail interface design, back-end supply-chain management, merchandising, customer relationship management, and technological innovation. Yet despite this high level of continuity, the company is clearly capable of rapid change. Many of its innovative bets, including auctions, cloud-based services, Kindle e-books, online media distribution, automated logistics, and its rapid delivery options, have paid off. Some bets, like the Fire Phone, have failed and have been criticized for overreach, but enough of them have been in line with the company’s strategy that they fueled a consistently remarkable and long-standing growth rate.²⁰

True agility doesn’t come from pursuing growth wherever it may be located or somehow spotting trends and getting to those markets first. It comes from pursuing opportunities where your capabilities give you what we call the right to win—the ability to compete more effectively than your competitors could in the arenas where you choose to do business. Agility depends on having these advantages already in place. They give you the tools and engines to disrupt new markets, they focus your energy on staying in front of customers where it really matters, and they enable continuous innovation—not just in the individual products and services that you launch, but in your capabilities themselves, and thus in the ways you create value.

In suggesting a growth strategy, we suggest starting with your strengths: Use your capabilities system to grow. Our colleagues Gerald Adolph and Kim David Greenwood have developed a model for this that combines four complementary ways to grow, all making use of your advantaged capabilities system:

Some industries are facing disruption now as digital technologies cross a threshold of integration. Cloud computing, electronic commerce, mobile payments, three-dimensional printing and other forms of digital fabrication, the internet of things, data analytics, broad-based activity monitoring, social media, and other digital innovations are indeed transforming business models and challenging old ways of working.

Why are some companies managing this transition well, while others get it wrong? The digital winners don’t try to build a separate technological solution; they reimagine their existing capabilities, using digital technology to move their strategy forward. Starbucks, for example, has rapidly developed prowess with mobile payments and a strong online presence. It has invested both time and management attention in the capabilities needed to accomplish this. It has also taken advantage of its intensive cost-consciousness, investing heavily in digital while making sure that it doesn’t waste money, for example, on overlapping IT vendors. Lego similarly incorporated digital design into its existing capabilities. Its computer-driven building block sets like Mindstorms are examples of staying true to its “play well” heritage while increasing its relevance to today’s children and parents.

Natura has, in some ways, a tougher challenge. Its customers—particularly the young Latin American women who represent its future—will inevitably be regular e-commerce purchasers. If the company doesn’t move rapidly to have more presence online, particularly with the internet and social media, it could lose these young customers. On the other hand, if it moves in a way that isn’t congruent with its distinctive identity, the company could undermine its current value proposition, which is based on sales “consultants” who have traditionally sold to their neighbors in the physical world.

Their solution is to adapt their existing capability in relationship-building to the online world. “Natura is already a social network,” Alessandro Carlucci, the former CEO, explains, “even though we have not been connected online. We have offline moments of truth, and we don’t want to lose them; they are important. But we want to add the online moments of relationship.” The new Natura system allows Brazilian women who spend significant time abroad to remain as Natura consultants even when they’re out of the country, while embracing customers around the world who could not previously buy Natura products.

In navigating this change, Natura is deliberately not shifting away from its existing capabilities system. Instead, it is adding new capabilities by building on its existing system. Its online platform is one example of making fundamental changes, while remaining true to its core value proposition. “Some people ask why we need to keep consultants,” says Carlucci. “But we know we need them, because they are the people who connect the company to its customers. They put a level of energy into relationships with clients that we could never match. And because consultants have these authentic relationships, they can use electronic platforms—and extend their relationships—in ways that would not otherwise be possible. If we do this right, we can create an online platform that is uniquely Natura.”

The Triggers of Identity

It may feel daunting to think about defining your company’s identity in this manner and making a full commitment to it—not for a quarter, but for years and maybe decades. You may feel it requires too great a leap. After all, you may have several value propositions at the moment, each based on a different product or service group. They may not be sharply defined enough to help you differentiate your company and lead your industry. The capabilities of your company may be pretty good, but they may not be embedded cross-functionally in the way they need to be. Your portfolio of products and services, if you’re a large global enterprise, may have evolved in ad hoc fashion over the years. Their diversity may have provided a hedge against disruption in the past, but now it creates tremendous pressure on your functions—and, frankly, on your bottom line.

In that light, you may not think that your company has what it takes to become coherent, let alone to grow successfully. But look at how far Haier came. Even if your company, like Haier in 1984, only has the bare beginnings of a value proposition or capabilities system, you might be surprised to see how far you can come and how rapidly you can see results. (Haier was already winning quality awards within three years of Zhang’s sledgehammer blow.)

Indeed, most of the companies we studied started at a point of relative incoherence. They all have stories to tell of the reasons they started down this path—and the rapid progress they made. When we ask executives to tell us about what stimulated their commitment, they tend to describe one of four triggers.

“We Can Do That!” ²³

Some companies start down the path to coherence when their leaders realize that they can excel at something. So they build a business around it. Mitchell Rales and Steven Rales, the founders of Danaher, had such a realization in 1986. They had recently acquired the first of their manufacturing enterprises, Chicago Pneumatic, which in turn owned a subsidiary business called the Jacobs Brake Company, which made brake components for diesel trucks. Jake Brake, as everyone called the company, was midway through a remarkable turnaround, led by its then president, George Koenigsaecker. A few years before, the factory had produced such poor-quality output, and the company had been so difficult to work with, that some of its largest customers were openly looking for alternative suppliers. Familiar with Japanese quality and lean production methods, Koenigsaecker had invited two former sensei (master teachers) of the Toyota Production System to come in one week every month for a year to help the company revamp its processes. “There’s magic in that weeklong cycle,” recalls Koenigsaecker. “It’s long enough to study, make changes, and get the change semi-established.” As one of the first American businesses to adopt Japanese production techniques, Jake Brake recovered rapidly, and it was soon producing high-quality output with high productivity and customer satisfaction.

The Rales brothers had bought the business just in time to benefit from the turnaround. “They came up to see what we were doing,” Koenigsaecker recalls. “We thought they would kill our approach. If they’d been manufacturing guys, it wouldn’t have made sense to them.” Instead, the brothers realized that they could apply similar techniques to buy and turn around other companies. Rather than selling the companies off, as a private equity firm might do, Danaher could hold them and profit from them.

It turned out that this approach to corporate turnarounds worked even better for companies that weren’t in trouble. And Danaher, as we noted at the beginning of this book, had a knack for it. “Within a year,” says Koenigsaecker, “we had established these practices as the beginning of the Danaher Business System.” Every senior leader at Danaher still tells the story of saving the Jake Brake plant. It was the first step on a path that would take Danaher from less than US$400 million in market capitalization in 1990 to a value of more than US$62 billion in mid-2015.²⁴

“We Have a Dream!”

Some coherent companies literally exist to change the world or at least their part of it. Ingvar Kamprad’s statement of aspiration for IKEA, “Creating a better everyday life for the many people,” is one example of this trigger. Another is Natura’s slogan bem estar bem (“well-being, being well”).²⁵ Others include Apple’s “computer for the rest of us” and Walmart’s vision of everyday low prices in categories that include not just consumer products but basic health care, eye exams, and financial services.

Probably the best-known example, among the group of companies we looked at, is Starbucks. When Howard Schultz took over a five-store Seattle coffee emporium in 1987 and began to transform it into a global retailer, he “saw Starbucks not for what it was, but for what it could be.” He envisioned a convivial “third place” beyond home and work for people to gather, grounded in what he called “the romance of the coffee experience, the feeling of warmth and community people get in Starbucks stores.” From the beginning, he set up health-care programs for his part-time employees and stock options for everyone who had been there six months. “We treat warehouse workers and entry-level retail people with the kind of respect most companies show for only high executives.”²⁶

At first, Schultz defended this aspiration as a way to earn employee loyalty and attract customers. But it went deeper, in a way he didn’t fully articulate until 2007, when the company lost its way. He had resigned as CEO but remained board chairman, and his successors were caught up in a growth drive, opening as many as six stores per day. The supply chain was more efficient now, but overall quality was declining rapidly, in subtle but telling ways. Store managers were encouraged to boost revenue however possible, so they began selling products, like stuffed toys, that didn’t fit with the coffee-bar atmosphere that had been so carefully cultivated. Hot breakfasts seemed like another good idea, but the stores began to smell like melted cheese. A new espresso-making machine that was introduced blocked the customers’ view of the baristas preparing drinks. Other changes seemed less tangible, such as reductions in the quality of staff training, but they affected the store experience most of all. Each new misstep made the chain less distinctive, and by 2007, sales had slowed noticeably. Competitors like McDonald’s and Dunkin’ Donuts seemed likely to overtake Starbucks. The challenge of being a rapidly expanding global chain, without commoditizing the product, seemed insurmountable.

Schultz returned to the CEO seat and articulated a new aspiration: to “inspire and nurture the human spirit,” in part by bringing the partners (employees) behind the counter to a new level of engagement and skill. In other words, the company would become a model of paying attention to the quality of life for employees, customers, and the community around each store. This change in aspiration occurred at the height of the global recession; while other retailers cut staff and dropped salaries, Starbucks invested in an immersive learning program that included coffee tastings and courses that ultimately qualified for college credit. (This was also the moment that Schultz wrote the “seven bold moves” described earlier in this chapter.)

The chain is always innovating and improving the capabilities needed to realize this goal, and it will never compete on price; that’s not its value proposition. Yet it has more than rebounded from its 2007 doldrums. One of several books about the revitalized company, Michael Gates Gill’s How Starbucks Saved My Life, recounts how partners can use the job to lift themselves from despair and remake their lives. That’s the kind of thing that happens when a company reorients itself around a grand dream.²⁷

“We’re Going to Be in Trouble!”

Some companies are prescient enough to recognize trouble in advance. They see that the gap between strategy and execution renders them vulnerable to looming challenges. In the late 1980s, CEMEX had to face a new reality when discussions began about the North American Free Trade Agreement (NAFTA), which would remove commercial restrictions between the United States, Mexico, and Canada. The company had long enjoyed a protected status as a supplier of cement and other building materials within its home country.

The then CEO, Lorenzo Zambrano, recognized NAFTA as a strategic threat to the protected business model that CEMEX had relied on. A major global competitor could now enter the Mexican market and easily encroach on or undermine that business. Thus, during the few years remaining before 1994, when NAFTA would go into effect, Zambrano drove a transformation in CEMEX to turn the threat into an opportunity. This effort combined ruthless operational efficiency with a series of acquisitions throughout Mexico, Spain, and Latin America. Zambrano’s resolve launched the company on a path to become one of a handful of global players in the industry, and the only one from an emerging economy—with its success directly related to its ability to be a solutions provider.

“We’re Already in Trouble!”

Some companies get on the path to coherence when they see no other options. Desperation in a time of crisis triggers a change of attitude. A company could be in the midst of decline, facing imminent failure, or even confronting bankruptcy, and everyone knows it. The only possible responses are fight or flight—either build the capabilities the company will need for the long term while stanching the bleeding in the short run, or look for a niche where the company can defensively survive a while longer.

Lego was the world’s most profitable toy maker in 2014. But just ten years earlier, in 2004, it was losing a million dollars a day and had a profit margin of negative 30 percent. The company’s leaders suddenly realized that its survival was in doubt, unless it could turn itself around.

One problem was complexity. Though only thirty products generated more than 80 percent of the company’s sales, Lego had a “long tail” of about fifteen hundred other products in inventory. The company’s thousands of separate components included bricks of more than one hundred hues, sourced from an incredible eleven thousand suppliers (more suppliers than Boeing). Meanwhile, Lego’s favored independent toy-shop customers were being replaced by big-box global retailers like Toys “R” Us, with which Lego did not have the same relationships.²⁸ And its efforts toward growth had included video games, clothing, and amusement parks, where it did not have the capabilities to succeed.

The board nominated a new CEO, Jørgen Vig Knudstorp, and charged him with rethinking both strategy and execution. He and Lego’s other senior leaders set up a “war room” where they made a series of rapid decisions: choosing which products to cut and debating how to fix operational weaknesses, including such detailed matters as resin costs and distribution center locations. Knudstorp himself visited the room frequently. Within two years, Knudstorp and other leaders brought the company’s strategy and execution together. They rebuilt the company’s logistics and supply-chain capabilities, making it profitable for the first time in years, but never losing sight of the company’s identity—innovative, distinctive toys that pleased both children and their parents.