The CEO of a large consumer goods company was near the end of his rope. He was one year into a large-scale transformation that was focused on growth through a shift into premium products. The company had invested millions of dollars to develop an innovative product that warranted higher prices. The early results had been promising: initial sales were strong. However, the transformation was wrapping up, and the CEO’s attention was being drawn to other challenges: the company had begun to revert to its old ways.
The engineering team did not seem to be on track to produce additional innovative designs. Recent prototypes were unimpressive. Discounting had crept back in, and the average price had fallen below the company’s target. One successful product would not be enough to keep the business on track. Had the company invested millions to achieve only temporary results?
This predicament is all too familiar. Virtually all industries today face a whirlwind of new technologies, evolving customer behaviors, globalization, and pressure from investors. In response, companies launch transformations—profound changes to the company strategy, business model, organization, culture, people, and processes—aimed at achieving sustainable performance improvement. (See Transformation: The Imperative to Change, BCG report, November 2014; The New CEO’s Guide to Transformation, BCG Focus, May 2015; and A Leader’s Guide to “Always-On” Transformation, BCG Focus, November 2015.)
Yet many transformations fail to deliver. Why? In many cases, companies focus too much on the finish line and not enough on capabilities, the muscles they need to build and strengthen in order to get and—most important—to stay there. By “capability,” we mean an ingrained ability to do something well in a way that improves business performance. For example, a company could launch a transformation to improve its R&D performance, develop a new digital service, or change business models from wholesale to retail. Each of these transformations requires new, specific capabilities that the company needs to build—or acquire—to execute the transformation and sustain its benefits.
BCG contends that, in fact, lasting transformations hinge on capabilities. Identifying and developing the requisite capabilities can mean the difference between a successful, sustained transformation and a short-term effort whose results quickly fade. In this report, we discuss the main reasons companies fall short in this regard, along with three imperatives for building capabilities effectively and generating lasting gains. Companies must address all aspects of the target capability by applying a comprehensive definition, follow a systematic development approach, and make sure that the leaders are engaged and have committed their support.