Turning capabilities into advantages

Operational excellence is not the whole story Successful companies need privileged assets, growth-enabling skills, and special relationships too How to bundle them into a competitive edge How did Gillette, a razor blade company, justify spending $7 billion to buy battery maker Duracell? How has SAP, Europe's leading software company, managed to sustain such high growth rates? And how has entrepreneur Li Kashing been able to pull off the kinds of deals in China about which others only dream? The answer is capabilities: the skills, assets, and relationships that companies assemble to build competitive businesses. Our research into companies that succeed in sustaining growth for long periods reveals that they think broadly about capabilities. Naturally, some rely on operational skill, the narrow definition of capability. But a surprising number from our sample thrived by employing less obvious capabilities. When businesspeople refer to organizational capabilities, they usually mean the skills embedded in a company's people, processes, and institutional knowledge. These are so basic to survival that they are often referred to as core competencies. In any competitive environment, a company must be good at what it does and possess skills that make it stand out. Distinctive competencies allow growth companies not only to make more money from existing businesses but also to extract greater value from new opportunities. Important as operational skills or competencies are to a company's success, too narrow a focus on them can stunt growth. A broader definition of capability - one that includes all resources useful in gaining competitive advantage - is required. In addition to operational skill, our definition of capability would include three other classes of resources: privileged assets, growth-enabling skills, and special relationships. Privileged assets Privileged assets are physical or intangible assets that are hard to replicate and confer competitive advantage on their owner. They include infrastructure, intellectual property, distribution networks, brands and reputations, and customer information. Distribution networks. A business can use the scale of its distribution network to increase sales of its existing products and services or to reduce the cost of a new-product launch. For Gillette, the principal motive for its $7 billion acquisition of battery maker Duracell in late 1996 was synergy in distribution. The distribution network that gets Gillette's razor blades into supermarkets and convenience stores - the same outlets where batteries are sold - was second to none. So big was this opportunity that investors added $4.1 billion to the companies' combined capitalization in the two days following the announcement of the deal. Gillette was able to help Duracell grow by taking it global. This strong domestic player had 50 percent of the US market, but little exposure in such emerging economies as China and India, where Gillette's network was especially strong. Brands and reputation. Strong brands can be extended to launch products without threatening the credibility of the current business. Gillette has used its brand to enter the market for men's grooming products. The Gillette Series for Men includes products such as aftershave, shaving cream, and deodorant as well as razors and blades. Launched in 1990, the men's Sensor razor achieved $2.9 billion in sales in 1997 alone, with over 60 million users worldwide. Gillette is seeking to beat this record with the MACH3, a three-blade multiangled razor. Customer information. Detailed information of all kinds can be critical to maximizing sales. Some of the most valuable information involves customers' buying habits and needs. Seven-Eleven Japan's point-of-sale information system helps to ensure that the company has the right product mix for every customer who walks into its stores. …