What Are Your Company's Capabilities — and How Should You Extend Them

Your company's capabilities are an extremely strong constraint

One of the claims of this book is that "your company's capabilities should be recognized as an extremely strong constraint."

When launching a new business, the question "what is our strength, and can we hold sustainable advantage?" inevitably comes up. And one step earlier than that, the question "before competition even starts, can we accomplish the basic step of actually launching the planned business?" will also arise.

It goes without saying that this question is asked at large enterprises; even for newly founded companies, selecting a business based on the founders' own capabilities is critical.

When selecting a target domain, market size and growth rates are debated, but the first priority point of discussion should be "the capability constraint."

Defining two kinds of capability

Here, let us think about two types of capabilities. They must be recognized as distinct.

Capability as a single point: a particular technology, a particular sales method, a strong relationship with an existing customer, and so on

Capability as a system: a system in which planning, production, and sales functions combine to continuously generate profit

In a new business, the system does not exist from the start. So the flow is: use the "capability as a single point" to enter, and while operating the business, complete the "capability as a system" and build a structure that sustainably generates profit. "Capability as a single point" alone does not generate revenue — a "capability as a system" is required to turn it into profit, and this is what creates strong defensibility against imitation.

Also, "building a system" is difficult, and creating multiple, entirely different systems within the same company is hard. Each company has a kind of business it is good at, and that is defined by the "system" the company holds.
A business that demands a system significantly different from your company's existing system constitutes a major risk-taking decision. It is not necessarily to be rejected, but to build a different system, it is better to assume actions such as creating a completely separate company or making an acquisition.

Systems behave exclusively toward other systems. For example, if you imagine that a fully commission-based sales compensation system and a seniority-based compensation system are difficult to coexist, you can see that systems struggle to coexist. As the often-cited case of "we did an M&A and tried to integrate, but the cultures did not match" shows, systems are difficult to integrate unless they are sufficiently close.

If you design a new business without accounting for this exclusivity between systems — no matter how detailed the other points are — the moment the fit with your own system is poor, you are taking on enormous risk.

How to answer the question "what is your company's strength?"

When launching a new business, the question "what is your company's strength?" will always come up — and the typical way to answer it is as follows.

・By leveraging "capability as a single point," we can at least enter the market with a distinctive product (although at this point, the capability as a system is still insufficient).

・The new "capability as a system" we should build through this business is not far removed from the system our company currently holds, so by hiring new talent and gaining hands-on experience, we can adequately acquire it.

・Once the capability as a system is in place, the business will be in a "state of sustainable advantage."

Considering a systems vendor's move into a new domain

Since this may be somewhat difficult to follow, let me give an example. This is a case from a systems vendor I used to run.

This systems vendor mainly held a "capability as a system" that continuously generated profit by selling systems and consulting services to large enterprises and local governments that could be charged at roughly 3 to 15 million yen per year.

Let us consider a new business here. First, we focus on the "capability as a single point" — "a particular technology." Suppose the technology excels at "analyzing, searching, and summarizing unstructured qualitative data."

We had been selling an FAQ search engine to call centers; the plan was to develop a VOC (Voice of Customer) analysis dashboard and add it to our offering.

Because this offering rides on the "system" the company already had, it could be launched smoothly.

The answer to the question "what is your company's strength?" introduced earlier would, in this case, be the following.

・We can sell the VOC analysis dashboard to existing customers. Competitors also have dashboards, but by leveraging our "particular technology," we can do things competitors cannot, and some companies will choose us (though at this point the sales structure required to propose VOC analysis is still insufficient).

・The target customers largely overlap with our current main customer base, and the sales and marketing methods do not change significantly. Because VOC is the product, the sales contact point may differ, but some of our employees have previously worked in marketing, so with even six months of effort we should be able to catch up.

・If we evolve the product side and establish the sales and marketing structure, we believe we will have sufficient advantage over the competition.

By contrast, even if you leverage the same "particular technology," a business that does not ride on the existing "system" is hard to get off the ground. For instance, consider launching a consumer-facing business that analyzes financial quantitative and qualitative data and offers it as a dashboard at 300 yen per month.

This does not ride on the "system" the company holds.

We have never planned or designed a B2C product, nor have we conducted marketing for one. Unless we build this new system, the business will not stand on its own.

We could hire new people and build the system, but if we launch a new B2B offering instead, we have a certain expectation of revenue, our employees are accustomed to the work, and they can take appropriate action immediately. We then face the question: should this company really move into B2C?

As shown here, even if you can enter the market by leveraging "capability as a single point," you cannot say the business stands on its own unless the "capability as a system" is assembled. And building "capability as a system" takes time and cost, and carries significant uncertainty.

As a result, companies are largely run around a small number of "capabilities as a system."

The temperament of the employees who belong to it is also defined by the system, and the system and the employees reinforce each other. This is why, across different companies, employees often feel similar in temperament when the business models are similar.

How can capabilities be extended

How should "capability as a single point" be expanded?

If you want to strengthen a particular technology, you invest in R&D and continuously use it in real work.

If you want to strengthen relationships with customers, you continuously take measures to penetrate deeper inside the customer's organization.

On the other hand, how is "capability as a system" extended? This involves the constant, steady action — every day — of developing new offerings, improving the organizational structure, and discovering and applying new sales and marketing methods. A company that has not taken these actions ends up with its direction constrained by a system that has fallen behind the times, and runs out of options.

To avoid this, you must invest deliberately and continuously in extending your own "capability as a system." Leaders need to deliberately confirm whether they are extending their "capability as a system" day by day.

Do not overestimate capability as a single point

In practice, what gives sustainable advantage is fundamentally the "capability as a system," but because it is hard to see, "capability as a single point" — such as a patented technology or a large membership base — which stands out, tends to draw attention.

However, it is often difficult to attribute the actual driver of continuously generated profit to "capability as a single point."
Having a superficially similar product, and having a "capability as a system" underneath, are entirely different states.

Capability as a single point should perhaps be recognized as no more than a catalyst for entering a new domain, or as something that gives the initial product a feature unavailable elsewhere.