Organisations may be thought of as a grouping of resources and capabilities that have been brought together for the purpose of producing an outcome for clients or customers. Those organisations with the best capabilities have a competitive advantage in the marketplace. So how do you identify your competitive advantage and develop this in your organisation?
I came across a McKinseys article which inspired me to write about capabilities – how to (a) identify them and (b) how to build them in your organisation.
Let’s start with some context. The field of organisational strategy has largely been shaped around a framework first conceived by Kenneth R. Andrews in “The Concept of Corporate Strategy” (1971). Andrews defined strategy as the match between what a company can do (organisational Strengths and Weaknesses) within the universe of what it might do (environmental Opportunities and Threats). This is the basis of the SWOT analysis that is commonly used in corporate Business Planning.
A later strategic theory proposed by Jay Barney in his 1995 article “Looking Inside for Competitive Advantage” is that an organisation may be considered as a grouping of resources and capabilities. In this sense, a Resource is an input into the “factory” of the business, whilst a Capability is the capacity for the resource (or group of resources) to perform an activity. Resources and capabilities may comprise:
- Financial resources (eg. cash)
- Physical resources (eg. plant and equipment)
- Human resources and capabilities (eg. employee skills and experience)
- Organisational resources and capabilities (eg. corporate reputation and organisational culture)
Resources and capabilities can be assessed in terms of the extent to which they are:
- Valuable (do they help satisfy some customer need?)
- Rare (are they possessed by none – or very few – of your competitors?)
- Inimitable (can your competitors readily replicate them?)
- Appropriable (are they capable of or liable to being appropriated by suppliers?)
In this way we can evaluate the extent to which an organisation’s resources and capabilities are a source of sustainable competitive advantage. The diagram below outlines a process that can be applied in achieving this outcome.
With acknowledgement to Australian Graduate School of Management EBMA – Strategic Management 1, 2000
The question then arises: where do the organisation’s strategic resources and capabilities come from? The right hand side of the diagram above helps by referring to two processes by which resources and capabilities are developed over time:
- Formal investments that occur when management identifies resource and capability gaps; and
- Indirect accumulation as the by-product of previous strategic decisions.
For an organisation to maintain success, it must continually look for ways to service evolving customer needs and (to the extent that it can) ensure that it always possesses the requisite resources and capabilities. In this latter respect, organisations may consciously invest in a given resource or capability. However, the strategic decisions that are made today will invariably affect the makeup and quality of the resources and capabilities that the organisation possesses tomorrow.
So to the McKinseys article “Building organizational capabilities: McKinsey Global Survey Results” (March 2010).
The survey explored which capabilities are most critical to an organisation’s business performance and why businesses focus on the capabilities they have. It also asked respondents how their companies create and manage training and skill development programs and how effective those programs are in maintaining or improving on their capabilities.
The article recognises that organisations can gain a competitive advantage by building foundational capabilities (such as lean operations, project management and leadership skills) as well as industry-specific capabilities. Notably however, the most common reason respondents gave for their companies’ focus on the capability identified as most important to business performance is that the skill is a part of their companies’ culture, rather than any competitive reason. In effect, these companies are assuming that their current competitive advantage in the marketplace will remain a competitive advantage into the future – a dangerous assumption.
Furthermore, the results indicated that companies do not typically focus on day-to-day activities that could maintain or improve the capability that contributes the most to their business performance. For example, only 41 percent of survey respondents whose companies focus on supply chain management spent time defining roles, responsibilities, and decision rights for key positions, and just 39 percent set targets and tracked metrics.
Conversely, respondents at companies whose training programs are effective in maintaining or improving the drivers of business performance said their companies pay more attention to tools that support or enable capability building, such as standard operating procedures, IT systems, and target setting and metric tracking. This demonstrates that strengthening an organisation’s management system – the foundations of the business – is a key enabler of capability development.
The survey results indicated that companies struggle to measure the impact of training on business performance: 50 percent of respondents said their companies keep track of direct feedback, and at best 30 percent used any other kind of metric. In addition, a third of respondents didn’t know the return on their companies’ training investment. In effect, these organisations aren’t measuring what they want to manage – a fundamental mistake in business.
Despite the importance of capability building on the strategic agenda, executives’ responses indicated that they’re not very good at executing: only about a quarter thought their companies’ training programs are “extremely” or “very effective” in preparing various employee groups to drive business performance or improve the overall performance of their companies. The survey results also indicated a potential explanation: training programs are misaligned with what was thought to be the capability most important to a company’s business performance. Only 33 percent of respondents said their training and skill-development programs focused on developing their companies’ most important capability.
The article draws the conclusion that companies need to (a) be more deliberate in understanding which capabilities truly impact business performance and then (b) align their training programs accordingly.
So now we’ve covered how to identify and go about building existing organisational capabilities. I’ll explore how to find and effectively leverage capabilities in future articles.
Has this article been helpful? Please comment below or send me an email. I am always excited to hear from people making it happen!
BE (Mech), MBA