Identifying Leadership Capabilities that Drive Business Performance

Written by Brian Heger

If you enjoy content like this, you can visit my website at?www.brianheger.com?and check out and sign up for my eNewsletter,?Talent Edge Weekly, a weekly newsletter for strategic human resources practitioners, where I bring together talent insights from various sources. You can also check out?CHROs on the Go--a subscription that provides the easiest way to stay informed about who is being hired and promoted to the Chief Human Resources Officer (CHRO) role in organizations of all sizes and industries.

-----------

Few would dispute that an organization’s ability to identify and develop future leaders, better and faster than its competitors, can provide an advantage.?

Just as speed-to-market with a product enables an organization to get ahead of the competition, a steady pipeline of leaders, ready to respond to future challenges and opportunities, provides a competitive edge.

To gain this advantage, organizations invest time, money, and resources into building leadership capability—the collective leadership skills, abilities, and expertise within an organization that allow leaders to work together effectively to execute the firm’s strategic priorities.

However, organizations continue to express concern about their ability to build leadership capability fast enough to keep pace with the needs of their business; simultaneously, leadership capability is viewed as a top priority (1).

As the gap between leadership capability aspiration and reality continues to widen, Human Resources (HR) practitioners can help their organizations solve this critical business issue.?

Where Do We Start?

While the reasons for leadership capability gaps in organizations are beyond the scope of this article, one question organizations must ask when addressing this issue is: Have we accurately identified the vital few leadership capabilities most critical to our success??

Organizations that identify leadership capabilities central to their success can confidently invest in building leadership capabilities that enable superior business performance.

This article outlines four steps to identify leadership capabilities critical to an organization.

The first three steps establish business context for determining the most pressing leadership challenges an organization’s leaders are likely to face when:

1. responding to the shifting demands of the external business environment,?
2. executing the organization’s business strategy, and
3. fostering an organizational culture that enables business strategy execution.

The fourth step uses information from the previous steps to prioritize 3-4 leadership capabilities that enable effective responses to an organization’s critical leadership challenges.

Although there is no one-size-fits-all approach to identifying leadership capabilities, the four steps provide one way to determine the leadership capabilities that drive a firm’s business performance and competitive edge.

What is Leadership Capability??

Many terms are used in organizations to describe leadership effectiveness; among them are competencies and capabilities. While these terms are often used interchangeably, a practical distinction is made for this article.?

Leadership competency refers to a leader’s know-how, skills, and abilities. It answers the question, “What does a leader know how to do, and how well can he or she do it?” A leader may be skilled at setting a vision, motivating others, and fostering teamwork.?

While proficiency in specific leadership competencies enables individual leadership effectiveness, its impact on an organization is limited, especially if these strengths aren’t shared by an organization’s leaders and leveraged broadly to execute a firm’s strategic priorities.

Leadership capability, at the organizational level, converts the combined competencies and expertise of a firm’s leaders into important company outcomes. It answers the question, “How do the shared skills and abilities of our leaders enable them to work together effectively to overcome organizational challenges, capitalize on opportunities, and deliver on our strategic promises?”?

If, for example, an organization outperforms competitors, due to its leaders’ collective ability to work together to detect opportunities faster and quickly shift and align strategies and resources to execute, then this is a leadership capability. It is a capability because it is available when needed, sustainable (not tied to one leader), and enables competitive advantage through shared leadership.

Although the distinction between competencies and capabilities is subtle, it is nevertheless important to note, since organizations are often less hampered by what an individual leader can do (competency) and more by their ability to leverage shared leadership to gain competitive edge (capability).

This article is not intended to debate the academic distinction between leadership competencies and capabilities; the practical point being emphasized is that, while individual leadership is important, collective leadership ultimately drives sustainable company performance.

The following four steps provide guidance on how to facilitate a discussion with a senior leadership team to identify an organization’s critical leadership capabilities.

Four Steps to Identify Critical Leadership Capabilities?

1. Determine the impact of the external business environment on leadership requirements. Organizations do not operate in a vacuum. External factors, such as competition, shifts in customer preferences and technological advancements, present challenges to organizations and their leaders.

There are many examples of how organizations and industries are affected by changes or disruption in the external business environment (e.g. Uber on the taxi industry, Airbnb on the hotel industry, Netflix on the video rental industry, Amazon on the retail industry).?

Since organizational success is influenced by how leaders can respond to the challenges and demands posed by the external business environment, the question becomes: What leadership capabilities enable an organization to respond effectively to external factors affecting its business, while its competitors do not?

HR Practitioners can help their organization understand the leadership capabilities it needs to respond effectively, with questions such as:?

• Considering the external business environment (e.g. competition, economy, technology, etc.), what types of challenges and opportunities do we see or anticipate that may affect our business?
• Which of these challenges present the greatest risks? How do these challenges inhibit our ability to deliver strategic priorities and value to the customer?
• To capitalize on the opportunities and overcome the challenges, what is required of our leaders? What must leaders be able to collectively achieve?

An example is:

• External Factor and Internal Implication: Technological advances and changing customer preferences require us to shift strategies with speed.
• Leadership Challenges: Slow to detect needed strategic changes; ineffective coordination and integration of teams needed to execute strategic changes; inconsistent prioritization and utilization of strategic resources; change-resistant workforce.
• Leadership Capabilities: We need leaders who can work together to: 1) anticipate and initiate required strategic changes in a coordinated manner, 2) shift resources (cash, talent, attention) quickly and effectively out of less promising business strategies and into more compelling ones, 3) drive large-scale organizational change while ensuring others are supported through the process.

Since we are focused on identifying the vital few outcomes that leaders must achieve (versus the many ways in which they can achieve them), there is no need for lengthy descriptions. The capabilities should be clear, succinct, and outcome-based.

Although organizations need leaders who can operate in an external business environment of volatility, uncertainty, complexity, and ambiguity (known as VUCA), starting the discussion with an external focus, by using the questions above, can yield valuable insights into specific leadership capabilities most relevant to an organization.?

2. Identify the leadership capabilities that enable the business strategy. Once the impact of the external business environment on leadership capabilities has been established, the focus shifts internally to the organization.

In my article, Linking Talent Strategy with Business Strategy, the core message is:?business strategy (a firm’s strategic focus) informs organizational capability (the few things the organization must do best to execute its business strategy), determines talent implications (ways in which talent influences capabilities), and guides talent strategy (3-5 talent-related outcomes that support business strategy execution).?

Leadership capability, a type of organizational capability, is critical to business strategy execution since leaders drive strategy through how they work together and lead others.

Many organizations articulate leadership effectiveness criteria through a leadership competency model. These models generally include 7-10 competencies (there are some companies known to use more), with each competency accompanied by a litany of behaviors that describes how the competency is demonstrated.

Despite their usefulness, in some situations, leadership competency models can be incredibly generic, highly complex, and lack business relevance to the challenges leaders face. As a result, competency models can sometimes offer less practical guidance for helping leaders understand what is most important to overcoming leadership challenges.

HR Practitioners can help their organizations identify critical leadership capabilities needed to execute the business strategy by asking questions such as:

• In executing our strategic priorities, what types of challenges will our leaders face? What obstacles stand in their way?
• What makes these challenges so difficult to overcome?
• What must our leaders be able to achieve collectively to respond effectively to these challenges?

An example is:

• Strategic Priority: Provide a seamless and high-touch customer experience.
• Leadership Challenges: Cross-functional and inter-unit teams responsible for the customer experience work independently; lack of communication and collaboration leads to disparate customer strategies; processes and data used for understanding customer preferences are unreliable and result in inaccurate conclusions.
• Leadership Capabilities: We need leaders who can work together to: 1) jointly formulate customer experience strategies and execute them in an integrated fashion 2) create solid linkages across the organization at all customer touchpoints 3) drive accountability for cross-functional and inter-unit collaboration in delivering customer solutions, and 4) understand the needs of different customer segments and translate insights into improved customer experiences.

This straightforward approach (particularly during the leadership capability identification phase) resonates with leaders who think in terms of business strategies, the leadership challenges they present, and the important outcomes they must achieve to deliver on the firm’s business strategy.

3. Determine the leadership capabilities that enable a strategy-aligned culture. Culture is another aspect of an organization’s internal business context with leadership capability implications.

Culture answers the question, “How are things really done around here?” It represents an organization’s values and beliefs, which, over time, form a shared mindset of what is important.

Culture is often viewed as a “soft” and ambiguous term; however, culture enables business strategy when culture and strategy are aligned.

The following are three company examples of strategy-aligned cultures:

Innovation is core to Google’s business strategy. Its culture encourages new ideas, challenging the status quo, risk-taking, and learning from mistakes to continuously improve. At one point, Google had employees spend 20 percent of their work time exploring new ideas (even if not part of their work function).

Competing on customer intimacy, the Four Seasons culture empowers employees to make decisions in the best interest of the organization and its guests (e.g. employees can modify check-in processes if it will reduce wait time). Empowerment enables employees to turn potential mishaps into memorable customer service experiences.?

Costco competes on operational efficiency. It provides customers with quality goods at low prices by minimizing the company’s variable costs.?Costco’s culture supports this strategy by emphasizing discipline in following standardized processes, consistency, rules, coordination, and predictability.

One could envision how the business strategies and cultures of these organizations would be misaligned and lead to negative business performance if:

• Leaders at Google reprimanded employees who took an innovative risk that failed,
• Four Seasons urged employees to focus less time on finding solutions to customer problems to increase operational efficiency,?
• Costco encouraged employees to modify core processes that are central to its operational efficiency.?

These examples do not suggest that an organization that competes on innovation doesn’t care about operational efficiency or customer service (or vice versa); indeed, all organizations must have threshold capabilities to compete effectively. However, the strategic intent of an organization and what it needs to be great at (versus good at) to deliver customer value is the driver of a strategy-aligned culture.

Leaders drive culture through their shared behaviors and what they reinforce as important. HR practitioners can help determine the leadership capabilities their firms need to drive a strategy-aligned culture by asking questions such as:?

• If we were effectively implementing our business strategy, what would our culture feel like? How would employees and customers describe our culture??
• What types of behaviors would leaders encourage and reward? Which behaviors would they deem unacceptable? What shared beliefs would be held by our leaders?
• What stands in our leaders’ way of achieving this culture? How can they overcome this?

An example is:

• Strategic Priority: Bring innovative products to market faster.
• Leadership Challenges: Competition across units and functions leads to hoarding of ideas; short-term focus on execution inhibits innovative thinking; failed ideas of the past have created a risk-averse culture; implementation of new ideas is impeded by slow decision-making.??
• Leadership Capabilities: We need leaders who can work together to: 1) foster greater interdependence across units and functions in generating and implementing innovative ideas, 2) create an environment that encourages the experimentation of new ideas and inspires others to share those ideas, and 3) establish a shared mindset that innovative ideas and speed of execution are both important.

With culture increasingly recognized by many organizations as a critical driver of business strategy (2), the importance of culture in enabling business results (and leaders’ role in making this happen) cannot be overstated. Unlike business strategies, culture cannot be copied by competitors, which makes it a source of competitive differentiation.

4. Identify 3-4 leadership capabilities most critical to the organization’s success. The first three steps identified the most pressing leadership challenges leaders face when: responding to demands of the external business environment, executing the business strategy, and fostering a strategy-aligned culture.?The three steps also identified the leadership capabilities that enable effective responses to those challenges.?

The final step is to help the executive leadership team narrow the list of capabilities down to those they deem most critical to the organization.

While there is no magic number of capabilities, limiting the capabilities to 3-4 allows an organization to focus on building capabilities that have the greatest impact on its success. Further, exceling in 3-4 capabilities is realistic for a company to achieve and should be sufficient to enable strong business performance.

This doesn’t mean that a company should lose sight of leadership capabilities of less importance; these capabilities will still need to meet an acceptable standard. However, a disproportionate focus is placed on building strength (even world-class) in critical leadership capabilities.

To help the team prioritize capabilities, it is useful to use a flip chart (or a projection screen) that shows three columns (one for each of the first three steps).

Within each column, you can list each capability captured during the initial discussion. Give the capability a name and brief description, using a vernacular understood by the organization.

For capabilities where there is overlap (either within or across the three areas), it is helpful to indicate these capabilities in the same color font. This approach makes it easier for leaders to interpret the information and see patterns in capabilities.

Since there are interdependencies between different capabilities (where the presence of one capability makes the achievement of another capability possible), you can combine capabilities into larger themes where it makes sense. If you do this, it is important to preserve the specificity of the original capability so that the intended outcome is clear.?

Once the information is organized, you can begin a dialogue with leaders using questions, such as:?

• In looking at the three areas, what shared leadership capability themes do you see? Are certain capabilities more apparent than others?
• Which capabilities do you feel have the most direct impact on the execution of our strategic priorities??
• Which capabilities, if improved, would accelerate our ability to drive superior business performance?

Once there is sufficient discussion, ask the leadership team to vote on the 3-4 leadership capabilities they deem most critical. You can use basic voting technology or “sticky dots” where each leader can place a dot on his or her top capability choices. Either approach presents a visual depiction of the information that is easily understood. Sometimes, where there isn’t clear agreement, more discussion may be warranted.

Overall, if you can get the team to agree on the capabilities, you have helped your organization to identify the leadership capabilities most critical to its success.

Next Steps

This article was intended to help organizations implement a practical approach to identifying the leadership capabilities that drive business performance.

While the identification of leadership capabilities is a critical and necessary first step to building leadership capability, by itself, it is insufficient. Additional actions must be taken to build these capabilities within the organization. Some potential actions to consider include:???

• Identify gaps between actual and desired performance on each capability. A simple survey or dialogue with key stakeholders can be used to obtain this information.
• Develop a plan for improving capabilities. This might include a leadership strategy and tactics that will close gaps and enable leaders to deliver on the capabilities. For those who use competency models, you can map competencies to the capabilities they enable if you feel it adds value without increasing complexity.
• Communicate capabilities to leaders. Inform leaders of how the capabilities can help them overcome critical leadership challenges and achieve important results.?
• Integrate capabilities into people practices, such as selection, performance, development, and talent reviews/succession.
• Periodically reevaluate capabilities as the business strategy changes, since changes in strategy may call for new capabilities.

Final Word

As indicated at the beginning of this article, there is no one-size-fits-all approach to identifying leadership capabilities. This article offers one way to uncover leadership capabilities that are most critical to an organization’s success. HR practitioners can use the suggestions presented as a starting point for developing an approach that fits the needs of their organization.

Although the suggestions in this article may be more apparent to organizations that are established or well on their way to identifying and building critical leadership capabilities within their organizations, these ideas may be less obvious to those just getting these efforts underway. Regardless, I hope this article has offered a few ideas on how you can help your organization drive business performance through leadership capability and, in doing so, enable it to achieve a competitive edge.

If you found this article helpful, please "like" it and share with your colleagues and network by clicking the icons below.

If you would like a?PDF of this article, please email me at?[email protected].

Reference: (1, 2).?Global Human Capital Trends 2016: Deloitte University Press.

Tags: #leadershipdevelopment, #leadership, #humanresources, #talentmanagement,

NOTE: If you enjoy content like this, you can visit my website at www.brianheger.com and check out and sign up for my new eNewsletter,?Talent Edge Weekly, a weekly newsletter for strategic human resources practitioners, where I bring together talent insights from various sources. You can also check out?CHROs on the Go--a subscription that provides the easiest way to stay informed about who is being hired and promoted to the Chief Human Resources Officer (CHRO) role in organizations of all sizes and industries.

--------------

Brian Heger is the Head of Global Workforce Planning, Talent Management, and Performance with Bristol-Myers Squibb. His experience includes HR roles in both Telecom with AT&T and Retail with Saks Fifth Avenue/ Hudson’s Bay Company. Brian has led Talent Management, Learning, Organization Development, and Talent Acquisition functions and has been an HR Business Partner. He holds an M.A. in Industrial Psychology and B.A. in Psychology from Fairleigh Dickinson University.

--------------

You can access my other articles by clicking the links below:

• Building the Foundation for Strategic Workforce Planning at Bristol-Myers Squibb.
• Linking Talent Strategy with Business Strategy.?
• Linking Employee Engagement to the Employment Value Proposition and Business Outcomes. (2007 - Based on a study done at AT&T).