The Idea in Brief
Rivals everywhere are seeking to blunt your strategic edge. How to strike back? Strengthen your organizational capabilities—intangible, hard-to-copy assets such as leadership, efficiency, and innovation. These capabilities reflect your workforce’s collective expertise and define what your firm does best.
But to strengthen organizational capabilities, you have to measure these notoriously difficult-to-quantify assets. Don’t ignore them in favor of tangible, easy-to-quantify assets like facilities and equipment. Intangibles influence corporate success far more.
How to assess your firm’s organizational capabilities, so you can reinforce the crucial ones? Conduct a capabilities audit: Identify the two or three capabilities most essential to carrying out your strategy, uncover gaps between actual and desired performance on those capabilities, and devise a plan for improving them. There’s no magic list of proficiencies that every company needs in order to succeed. But there are 11 intangible assets that well-managed companies overall tend to have. These companies typically excel in only three of these capabilities, while maintaining industry parity in the rest.
Companies that use capabilities audits enhance their ability to execute strategy—and generate powerful results. For example, focusing on key capabilities of efficiency and collaboration helped U.K.-based InterContinental Hotels Group save more than $100 million a year, raise share price 71%, and outperform the FTSE 100 by a factor of two.
The Idea in Practice
Conducting a Capabilities Audit
1. Decide which business unit (division, region, entire company) to audit. Any part of your organization responsible for delivering on strategic objectives can benefit from auditing. Example:
Medical-device manufacturer Boston Scientific targeted its international division for auditing, to improve service quality and profitability.
2. Identify capabilities critical to meeting your unit’s goals. Consider these:
Talent: attracting, motivating, and retaining competent and committed people
Speed: making important changes rapidly
Shared mind-set and coherent brand identity: ensuring positive, consistent perceptions of the company among employees and customers
Accountability: demanding high performance from employees
Collaboration: working effectively across organizational boundaries
Learning: generating ideas with impact
Leadership: embedding leaders throughout the organization
Strategic unity: articulating and sharing a strategic viewpoint
Customer connectivity: building enduring relationships of trust with targeted customers
Innovation: developing breakthrough products and processes
Efficiency: managing costs
3. Use surveys to gather data on current and desired capability performance. Survey respondents may include the unit’s leadership team, employees, investors, suppliers, and customers. They rank the unit’s current performance on each capability you’ve identified, and define performance levels needed for the unit to meet its goals. Example:
Boston Scientific had international division managers and their bosses, employees, and peers from other units rate the division’s current and desired performance on a list of capabilities.
4. Identify the two or three capabilities most required to deliver on strategic goals. Focus on weaknesses only when they’re strategically important. Determine which current capabilities should be further strengthened to enhance future success. Example:
Boston Scientific survey respondents, who rated talent as a strength, saw it as critical to the group’s ability to deliver on its customer-related and financial promises. They also identified strategic unity as another vital capability, but rated it as a division weakness.
5. Develop an action plan. Outline steps needed to strengthen key capabilities. Clarify who will deliver on the capabilities and which metrics you’ll monitor. Example:
Boston Scientific managers decided to invest further in talent—even though it was a division strength—because it was critical to their customer-acquisition strategy. They strengthened marketing talent to target more diverse customers. They also closed the strategic unity gap by developing a clearer statement of strategy that sharpened the group’s focus on service and profitability.
If you ask them which companies they admire, people quickly point to organizations like General Electric, Starbucks, Nordstrom, or Microsoft. Ask how many layers of management these companies have, though, or how they set strategy, and you’ll discover that few know or care. 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.
