Organizations are confronted constantly now with the need to reinvent themselves. Success today is no guarantee of success tomorrow. New competitors appear out of nowhere. New ideas change the game. Capabilities are the well-honed combination of know-how and distinct ways of creating value that make companies great. And when the world is changing, a company’s capabilities need to change too. ISN helps organizations design the capability system they need to learn, adapt and lead in their chosen niche.
Like the many living things in nature, companies need to be able to adapt to their environment in order to survive. Birds fly. Fish swim. Companies, too, develop special attributes to suit their role. Think of the roles defined by industry classifications – agriculture, mining, utilities, and so on.
In the environment and the economy competitive advantage is gained by being better than others in a chosen role. In both circumstances, actors adopt a strategy that increases their chance of survival, and they hone the capabilities required to thrive.
The Engine of Value Creation
In organizations, fine-tuned capabilities can mean the difference between success and failure. “Capabilities are, too often, the missing link between strategy and impact,” Monitor Deloitte writes. “When they are absent, weak or otherwise compromised, strategy execution invariably falters.” (Strategic Capabilities: Bridging Strategy and Impact. 2015.)
Business writers have described three main capability types:
- Distinctive capabilities that create a competitive advantage: that are superior to those in competitor organizations and hard to copy;
- Supplemental capabilities that are not in themselves a source of competitive advantage: that add value to distinctive capabilities but are more easily imitated; and
- Foundational capabilities that are required to be viable: that are focused on efficiency in day-to-day operations and that can be quickly acquired or developed by others.
Consultants Paul Leinwand and Cesare Mainardi wrote a book that was focused on distinctive capabilities – The Essential Advantage: How to Win with a Capabilities-Driven Strategy (2010). Strategic coherence, they said, is critical. “For a company to be described as coherent, it must be resolutely focused and clear-minded about three critical elements: its market position (its chosen ‘way to play,’ if you will); its most distinctive capabilities, which work together as a system; and its product and service portfolio. In a coherent company, the right lineup of products and services naturally results from conscious choices about the capabilities needed for a deliberate way to play.”
Organizations can capitalize on their capabilities system in three different ways: applying it more effectively to grow their core business; using it to develop adjacent opportunities in new products and services; or extending it to new geographic locations.
The authors describe capabilities as the engine of value creation – the means by which a business model is brought to life. Capabilities need to be tailored to an organization’s competitive situation; they also need to evolve as circumstances change and new opportunities and threats emerge.
Responding to Change
When change is constant, organizations have to be able to evolve their capabilities in lock-step. David Teece, professor at the Walter A. Haas School of Business at the University of California, Berkeley, described the need for organizations to react dynamically – renewing and reinventing their capabilities in response to a rapidly changing environment.
There are many ways an organization can do this. Existing capabilities can be improved. Capabilities honed in one part of the organization can often be transferred to another. When new capabilities are required, the organization can develop them from scratch or by applying innate skills and knowledge in new ways. The organization can also source capabilities externally through mergers, acquisitions, collaborations, and alliances.
Leinwand and Mainardi described the steps an organization needs to take to develop a coherent strategy based on a capabilities system:
- Identify trends and opportunities, understand the competitive environment, assess choices, and develop options for a new ‘way to play’;
- Understand the capabilities required to succeed;
- Commit to a strategic direction and the capabilities system needed to support it, as the organization’s chosen way of doing business;
- Transform the organization by building and deploying the required capabilities; and
- Sustain coherence over time.
“Every consistently successful company that we know,” the authors say, “has a clear understanding of what differentiates it as an enterprise: specifically, the way it creates value for the people who buy its products and services. This is their way to play in the market. A well-developed way to play is a chosen position in the market, grounded in a view of your own capabilities and where the market is going. It represents what Gary Hamel and C. K. Prahalad [in Competing for the Future ( 1994)] called ‘strategic intent’: a sense of direction that can prompt a group of people to stretch beyond their day-to-day goals or, as the authors put it, ‘the dream that energizes a company.’”
Integral Strategy Network has worked with many organizations to design strategies for transformative change. These are visualized in the form of a Strategy Roadmap. The map shows capabilities explicitly as clusters of actions and outcomes. Acting like a small engine, each cluster creates a key outcome required for the organization to achieve its strategic goal. The collection of these clusters – shown as shaded areas in the map – represents the capabilities system required to support the strategy.
Capabilities are created by combining intentions with respect to people, process, organization, technology, and assets in innovative ways. Collectively, these small engines drive a much larger engine: the organization’s business model. The result is a distinctive way of delivering value.
The strategic intention defined in the roadmap is an organization’s DNA – what it is here to do and in the end what it is. Each map is different, depending on the purpose of the organization and its particular value proposition. In addition to the core capabilities required to deliver value in that specific context, many other capabilities appear in the roadmaps produced by organizations we have worked with:
- Skills and resources
- Knowledge sharing
- Process excellence
Collectively, we can call these generative capabilities, for they increase an organization’s ability to actively learn, adapt, and create new possibilities. When organizations invest in enhancing these capabilities, they are better able to capture opportunities and more nimble than their competitors.
This article is an excerpt from a book in progress on complexity, collaboration, and the challenges of transformative change. It was first posted on September 21, 2018, on LinkedIn.