Join Anil Gupta for an in-depth discussion in this video Assembling the right capabilities, part of Designing Growth Strategies.
- Success, in any business, requires that the company assemble the needed set of capabilities in such a way that the capability bundle would give it competitive advantage over other players. Consider Honda, one of the world's most successful car companies. Honda's success rests on its superiority in a set of capabilities including automotive R&D, especially engine technology, efficient and high-quality manufacturing of mechanical machines plus marketing, sales, distribution, and after-sales service.
Like other car companies, in 2014, Honda launched Fit EV, an all-electric car. Not doing so would have created serious risks for Honda's ability to sustain growth. Look at the capability challenge that Honda faces in diversifying from gasoline powered cars to all-electric cars.
The bundle of core capabilities essential to the electric car is very different from that essential to the gasoline powered cars. Honda's strengths in engine technology are totally irrelevant for the electric car business. Instead, what Honda needs is strength in battery technology. Similarly, the manufacturing capabilities needed for electric cars are radically different from those needed for gasoline-powered cars.
Because, there is no need for an engine or a transmission system. An electrical car has far fewer mechanical parts. In fact, assembling an electric car has more in common with assembling a smart phone than the traditional automotive assembly line. Because of these differences, even the capabilities needed for after-sales service are very different for electric cars than for gasoline powered ones.
If Honda hopes to be as successful in all-electric cars as it has been in gasoline powered ones, it must figure out how to put together the new bundle of required capabilities. Some of the capabilities are common to the old and the new product lines and can be leveraged without much difficulty. Capabilities in areas such as automotive styling, manufacture of car bodies, marketing, and so forth.
At the same time, as we just discussed, some of the core capabilities that the new product line requires are fundamentally different from the pre-existing ones. Every company contemplating diversification into a new product line faces this type of challenge. With key questions are universal. What set of capabilites are essential for success in the new product line? Within this set, which capabilities are common to the new and the current business? How should we transfer or leverage these common capabilities to help us succeed in the new business? How should we fill the gaps in the required bundle of capabilites for the new business? Should we do so by building these capabilites from the ground up? Or, should we build strategic alliances with other companies which have these capabilities? Alternatively, should we acquire an existing company which has the needed capabilites? Finally, how should we integrate the current and the new capabilities, so that the whole is greater than the sum of the parts? As reflected in these questions, gaps in the required capability bundle for the new business can be filled in one of three ways.
One approach is to build these capabilities from scratch. So far, this has been Honda's preferred approach. It followed this approach when diversifying from motorbikes into cars and later into other products including most recently, the all-electric car. A second approach is to engage in a strategic alliance with a complimentary partner.
Phillips was a pioneer in launching compact discs. However, these discs are made from poly-carbonate, a chemical which was DuPont's strength. Not surprisingly, Phillips and DuPont set-up a joint venture to pool their complimentary strengths. A third approach is to acquire a company with the needed capabilities.
This is exactly how both Coke and Pepsi diversified into the orange juice business. Coke, by acquiring Minute-Maid, and Pepsi by acquiring Tropicana. Which approach would be best for your company? The answer depends on the specifics of the context. How easily and speedily can you build the needed capabilities from scratch? Does there exist the right partner for a strategic alliance? And is there a suitable candidate available for acquisition at the right price? As is clear, the optimal approach for assembling the needed bundle of capabilities varies from one context to another.
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- The growth imperative
- Identifying opportunities for growth
- Assessing and choosing among the growth options
- Implementing the chosen growth strategy
- Organizing and leading for growth