CAPITALIZING ON CAPABILITIES

LOOKING INTO FUTURE CAPITALIZING ON CAPABILITIES

What people respect about the companies is not how they are structured or their specific approaches to management, but their capabilities—an ability to innovate, for example, or to respond to changing customer needs. Such organizational capabilities, as we call them, are key intangible assets. you can’t see or touch them, yet they can make all the difference in the world when it comes to market value,these capabilities—the collective skills, abilities, and expertise of an organization—are the outcome of investments in staffing, training, compensation, communication, and other human resources areas. they represent the ways that people and resources are brought together to accomplish work. they form the identity and personality of the organization by defining what it is good at doing and, in the end, what it is. they are stable over time and more difficult for competitors to copy than capital market access, product strategy, or technology. they aren’t easy to measure, so managers often pay far less attention to them than to tangible investments like plants and equipment, but these capabilities give investors confidence in future earnings.we look at organizational capabilities and how leaders can evaluate them and build the ones needed to create intangible value.

Organizational Capabilities

While people often use the words “ability,” “competence,” and “capability” interchangeably, we make some distinctions. In technical areas, we refer to an individual’s functional competence or to an organization’s core competencies; on social issues, we refer to an individual’s leadership ability or to an organization’s capabilities. With these differences in mind, let’s compare individual and organizational levels of analysis as well as technical and social skill sets:

In the table above, the individual-technical cell (1) represents a person’s functional competence, such as technical expertise in marketing, finance, or manufacturing. The individual-social cell (2) refers to a person’s leadership ability—for instance, to set direction, to communicate a vision, or to motivate people. The organizational-technical cell (3) comprises a company’s core technical competencies. For example, a financial services firm must know how to manage risk. The organizational-social cell (4) represents an organization’s underlying DNA, culture, and personality. These might include such capabilities as innovation and speed.

Organizational capabilities emerge when a company delivers on the combined competencies and abilities of its individuals. An employee may be technically literate or demonstrate leadership skill, but the company as a whole may or may not embody the same strengths. (If it does, employees who excel in these areas will likely be engaged; if not, they may be frustrated.) Additionally, organizational capabilities enable a company to turn its technical know-how into results. A core competence in marketing, for example, won’t add value if the organization isn’t able to spark change.

There is no magic list of capabilities appropriate to every organization. However, we’ve identified 11—listed below—that well-managed companies tend to have. (Such companies typically excel in as many as three of these areas while maintaining industry parity in the others.) When an organization falls below the norm in any of the 11 capabilities, dysfunction and competitive disadvantage will likely ensue.

Talent:

We are good at attracting, motivating, and retaining competent and committed people. Competent employees have the skills for today’s and tomorrow’s business requirements; committed employees deploy those skills regularly and predictably. Competence comes as leaders buy (acquire new talent), build (develop existing talent), borrow (access thought leaders through alliances or partnerships), bounce (remove poor performers), and bind (keep the best talent). Leaders can earn commitment from employees by ensuring that the ones who contribute more receive more of what matters to them. Means of assessing this organizational capability include productivity measures, retention statistics (though it’s a good sign when employees are targeted by search firms), employee surveys, and direct observation.

Speed:

We are good at making important changes rapidly. Speed refers to the organization’s ability to recognize opportunities and act quickly, whether to exploit new markets, create new products, establish new employee contracts, or implement new business processes. Speed may be tracked in a variety of ways: how long it takes to go from concept to commercialization, for example, or from the collection of customer data to changes in customer relations. Just as increases in inventory turns show that physical assets are well used, time savings demonstrate improvements in labor productivity as well as increased enthusiasm and responsiveness to opportunities. Leaders should consider creating a return-on-time-invested (ROTI) index, so they can monitor the time required for, and the value created by, various activities.

Shared Mind-Set and Coherent Brand Identity:

We are good at ensuring that employees and customers have positive and consistent images of and experiences with our organization. To gauge shared mind-set, ask each member of your team to answer the following question: What are the top three things we want to be known for in the future by our best customers? Measure the degree of consensus by calculating the percent of responses that match one of the three most commonly mentioned items. We have done this exercise hundreds of times, often to find a shared mind-set of 50% to 60%; leading companies score in the 80% to 90% range. The next step is to invite key customers to provide feedback on brand identity. The greater the degree of alignment between internal and external mind-sets, the greater the value of this capability.

Accountability:

We are good at obtaining high performance from employees. Performance accountability becomes an organizational capability when employees realize that failure to meet their goals would be unacceptable to the company. The way to track it is to examine the tools you use to manage performance. By looking at a performance appraisal form, can you derive the strategy of the business? What percent of employees receive an appraisal each year? How much does compensation vary based on employee performance? Some firms claim a pay-for-performance philosophy but give annual compensation increases that range from 3.5% to 4.5%. These companies aren’t paying for performance. We would suggest that with an average increase of 4%, an ideal range for acknowledging both low and high performance would be 0% to 12%.

Collaboration:

We are good at working across boundaries to ensure both efficiency and leverage. Collaboration occurs when an organization as a whole gains efficiencies of operation through the pooling of services or technologies, through economies of scale, or through the sharing of ideas and talent across boundaries. Sharing services, for example, has been found to produce a savings of 15% to 25% in administrative costs while maintaining acceptable levels of quality. Knowing that the average large company spends about $1,600 per employee per year on administration, you can calculate the probable cost savings of shared services. Collaboration may be tracked both throughout the organization and among teams. You can determine whether your organization is truly collaborative by calculating its breakup value. Estimate what each division of your company might be worth to a potential buyer, then add up these numbers and compare the total with your current market value. As a rule of thumb, if the breakup value is 25% more than the current market value of the assets, collaboration is not one of the company’s strengths.

Learning:

We are good at generating and generalizing ideas with impact. Organizations generate new ideas through benchmarking (that is, by looking at what other companies are doing), experimentation, competence acquisition (hiring or developing people with new skills and ideas), and continuous improvement. Such ideas are generalized when they move across a boundary of time (from one leader to the next), space (from one geographic location to another), or division (from one structural entity to another). For individuals, learning means letting go of old practices and adopting new ones.

Leadership:

We are good at embedding leaders throughout the organization. Companies that consistently produce effective leaders generally have a clear leadership brand—a common understanding of what leaders should know, be, and do. These companies’ leaders are easily distinguished from their competitors’Seeing the damage to the company’s leadership bench, executives encouraged potential leaders to participate in temporary teams, cross-functional assignments, and action-based training activities, thus changing the organization’s substitute-to-star ratio to about 1:1.

Customer Connectivity:

We are good at building enduring relationships of trust with targeted customers. Since it’s frequently the case that 20% of customers account for 80% of profits, the ability to connect with targeted customers is a strength. Customer connectivity may come from dedicated account teams, databases that track preferences, or the involvement of customers in HR practices such as staffing, training, and compensation. When a large portion of the employee population has meaningful exposure to or interaction with customers, connectivity is enhanced. To monitor this capability, identify your key accounts and track the share of those important customers over time. Frequent customer-service surveys may also offer insight into how customers perceive your connectivity.

Strategic Unity:

We are good at articulating and sharing a strategic point of view. Strategic unity is created at three levels: intellectual, behavioral, and procedural. To monitor such unity at the intellectual level, make sure employees from top to bottom know what the strategy is and why it is important. You can reinforce this sort of shared understanding by repeating simple messages; you can measure it by noting how consistently employees respond when asked about the company’s strategy. To gauge strategic accord at the behavioral level, ask employees how much of their time is spent in support of the strategy and whether their suggestions for improvement are heard and acted on. When it comes to process, continually invest in procedures that are essential to your strategy.

Innovation:

We are good at doing something new in both content and process. Innovation—whether in products, administrative processes, business strategies, channel strategies, geographic reach, brand identity, or customer service—focuses on the future rather than on past successes. It excites employees, delights customers, and builds confidence among investors. This capability may be tracked through a vitality index (for instance, one that records revenues or profits from products or services created in the last three years).

Efficiency:

We are good at managing costs. While it’s not possible to save your way to prosperity, leaders who fail to manage costs will not likely have the opportunity to grow the top line. Efficiency may be the easiest capability to track. Inventories, direct and indirect labor, capital employed, and costs of goods sold can all be viewed on balance sheets and income statements.

Conducting a Capabilities Audit

Just as a financial audit tracks cash flow and a 360-degree review assesses leadership behaviors, a capabilities audit can help you monitor your company’s intangible assets. It will highlight which ones are most important given the company’s history and strategy, measure how well the company delivers on these capabilities, and lead to an action plan for improvement. This exercise can work for an entire organization, a business unit, or a region. Indeed, any part of a company that has a strategy for producing financial or customer-related results can do an audit, as long as it has the backing of the leadership team. 

How to Perform a Capabilities Audit

A capabilities audit will help you gauge—and ultimately boost—your organization’s intangible value. First, select a business unit (plant, division, region, zone, industry). Then, using the following questions as a guide—and keeping in mind your overall business strategy—assess the unit’s performance in each organizational capability (0=worst; 10=best), and rank the capabilities in terms of improvement needed (1=highest priority, 2=next highest, and so on).

The leaders discussed the survey findings at an off-site meeting. To address the strategic-unity gap, they developed a clearer statement of strategy that sharpened the group’s focus on service and profitability. Then, before forming an overall improvement plan, they defined the capabilities that would be most critical to executing that strategy. They didn’t necessarily choose capabilities with low scores in actual performance. For example, even though the group showed relative weakness in learning and innovation, the leadership team didn’t see those capabilities as essential to meeting group goals, because the division is primarily a sales, marketing, and distribution arm of the company. However, although the division scored high on talent (see the exhibit “Does the Talent Deliver?”), the leaders chose to invest in further developing this capability since it would be critical to success; in particular, they focused on strengthening marketing skills and building talent that would allow them to target a broader set of customers. They also launched an effort to create a leadership brand, starting with a new model of high performance. Finally, they began to assess bench strength in support of that leadership brand, starting with the organization’s three regional presidents.

Does the Talent Deliver?

In an online survey designed to gauge their division’s capabilities, executives at Boston Scientific International asked respondents to answer the following question on a scale of one to five, with one meaning “not at all” and five meaning “absolutely”: Do International leaders ensure that they have the best talent required to accomplish their strategy? The responses were positive but nonetheless indicated room for improvement in this key area.

This exercise made the intangible strengths and weaknesses of the international group tangible. It compared how executives from different parts of Boston Scientific—inside and outside the international group—viewed the division’s capabilities, and it provided a baseline score against which to measure the impact of future investments in these capabilities. Leaders plan to revisit the effort in a year to learn whether their investments have made a difference.