business assignment

www.hbr.org

A R T I C L E

H B R S

P O T L I G H T

Capitalizing on Capabilities

by Dave Ulrich and Norm Smallwood

•

Included with this full-text

Harvard Business Review

article:

The Idea in Brief—the core idea

The Idea in Practice—putting the idea to work

1

Article Summary

2

Capitalizing on Capabilities

A list of related materials, with annotations to guide further

exploration of the article’s ideas and applications

10

Further Reading

Product 7014

H B R S

P O T L I G H T

Capitalizing on Capabilities

page 1

The Idea in Brief The Idea in Practice

C O

P Y

R IG

H T

© 2

0 0 4 H

A R

V A

R D

B U

S IN

E S

S S

C H

O O

L P

U B

L IS

H IN

G C

O R

P O

R A

T IO

N . A

L L

R IG

H T

S R

E S

E R

V E

D .

Rivals everywhere are seeking to blunt your strategic edge. How to strike back? Strengthen your

organizational capabili- ties

—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 capabili- ties, 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. Intangi- bles influence corporate success far more.

How to assess your firm’s organizational ca- pabilities, 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 intangi- ble assets that well-managed companies overall tend to have. These companies typi- cally excel in only three of these capabili- ties, while maintaining industry parity in the rest.

Companies that use capabilities audits en- hance their ability to execute strategy— and generate powerful results. For example, focusing on key capabilities of efficiency and collaboration helped UK-based Inter- Continental Hotels Group save more than $100 million a year, raise share price 71%, and outperform the FTSE 100 by a factor of two.

CONDUCTING A CAPABILITIES AUDIT

1. Decide which business unit (division, re- gion, entire company) to audit.

Any part of your organization responsible for delivering on strategic objectives can benefit from auditing.

Example:

Medical-device manufacturer Boston Scien- tific 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 per- ceptions of the company among employ- ees and customers

•

Accountability:

demanding high perfor- mance from employees

•

Collaboration:

working effectively across organizational boundaries

•

Learning:

generating ideas with impact

•

Leadership:

embedding leaders through- out 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 re- spondents may include the unit’s leadership team, employees, investors, suppliers, and customers. They rank the unit’s current perfor- mance 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 capabili- ties should be further strengthened to en- hance 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 an- other vital capability, but rated it as a divi- sion 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 in- vest 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 sharp- ened the group’s focus on service and profitability.

H B R S

P O T L I G H T

Capitalizing on Capabilities

by Dave Ulrich and Norm Smallwood

harvard business review • june 2004 page 2

C O

P Y

R IG

H T

© 2

0 0 4 H

A R

V A

R D

B U

S IN

E S

S S

C H

O O

L P

U B

L IS

H IN

G C

O R

P O

R A

T IO

N . A

L L

R IG

H T

S R

E S

E R

V E

D .

Assets like leadership, talent, and speed are what produce superior

market value. A capabilities audit can show you how you measure

up—and how to build on your intangible strengths.

If you ask them which companies they admire, people quickly point to organizations like Gen- eral Electric, Starbucks, Nordstrom, or Mi- crosoft. 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 capabili- ties—an ability to innovate, for example, or to respond to changing customer needs. Such

or- ganizational 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 orga- nization 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 atten- tion to them than to tangible investments like plants and equipment, but these capabilities give investors confidence in future earnings. Differences in intangible assets explain why, for example, upstart airline JetBlue’s market valuation is twice as high as Delta’s, despite JetBlue’s having significantly lower revenues and earnings.

In this article, we look at organizational ca- pabilities and how leaders can evaluate them and build the ones needed to create intangi- ble value. Through case examples, we explain how to do a capabilities audit, which provides a high-level picture of an organization’s strengths and areas for improvement. We’ve conducted and observed dozens of such anal- yses, and we’ve found the audit a powerful way to evaluate intangible assets and render them concrete and measurable.

Capitalizing on Capabilities

•

•

•

HBR S

POTLIGHT

harvard business review • june 2004 page 3

Organizational Capabilities Explained

While people often use the words “ability,” “competence,” and “capability” interchange- ably, we make some distinctions. In technical areas, we refer to an individual’s functional competence or to an organization’s core com- petencies; on social issues, we refer to an indi- vidual’s leadership ability or to an organiza- tion’s capabilities. With these differences in mind, let’s compare individual and organiza- tional 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 compe- tence, 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 organiza- tional-technical cell (3) comprises a company’s core technical competencies. For example, a fi- nancial services firm must know how to man- age risk. The organizational-social cell (4) repre- sents 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 competen- cies and abilities of its individuals. An employee may be technically literate or demonstrate lead- ership 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.) Ad- ditionally, organizational capabilities enable a company to turn its technical know-how into re- sults. A core competence in marketing, for ex- ample, won’t add value if the organization isn’t able to spark change.

There is no magic list of capabilities appro- priate to every organization. However, we’ve identified 11—listed below—that well-man- aged companies tend to have. (Such compa-

nies 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 to- day’s and tomorrow’s business requirements; committed employees deploy those skills regu- larly and predictably. Competence comes as leaders

buy

(acquire new talent),

build

(develop existing talent),

borrow

(access thought leaders through alliances or partnerships),

bounce

(re- move 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, re- tention statistics (though it’s a good sign when employees are targeted by search firms), em- ployee surveys, and direct observation.

Speed:

We are good at making important changes rapidly.

Speed refers to the organiza- tion’s ability to recognize opportunities and act quickly, whether to exploit new markets, create new products, establish new employee con- tracts, or implement new business processes. Speed may be tracked in a variety of ways: how long it takes to go from concept to commercial- ization, for example, or from the collection of customer data to changes in customer rela- tions. Just as increases in inventory turns show that physical assets are well used, time savings demonstrate improvements in labor productiv- ity as well as increased enthusiasm and respon- siveness to opportunities. Leaders should con- sider 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 employ- ees and customers have positive and consistent images of and experiences with our organiza- tion.

To gauge shared mind-set, ask each mem- ber of your team to answer the following ques- tion: What are the top three things we want to be known for in the future by our best custom- ers? Measure the degree of consensus by calcu- lating 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%;

Dave Ulrich

([email protected]), on leave from the University of Michigan, is the president of the Canada Montreal Mission for the Church of Jesus Christ of Latter-day Saints.

Norm Smallwood

([email protected]) is a cofounder of Results-Based Leadership, a consulting company in Provo, Utah. Ulrich and Smallwood are the coauthors of

Why the Bottom Line Isn’t! How to Build Value Through People and Organiza- tion

(Wiley, 2003).

T ec

h n

ic al

S o

ci a l

Individual Organizational 1 3

An individual’s An organization’s functional core competencies

competence 2 4

An individual’s An organization’s leadership ability capabilities

C op

yr ig

h t

© 2

00 4

H ar

va rd

Bu si

n es

s Sc

h oo

l P ub

lis h

in g

C or

p or

at io

n . A

ll ri

g h

ts re

se rv

ed .

Capitalizing on Capabilities

•

•

•

HBR S

POTLIGHT

harvard business review • june 2004 page 4

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 in- ternal 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 capa- bility 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 look- ing at a performance appraisal form, can you derive the strategy of the business? What per- cent 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 pay- ing for performance. We would suggest that with an average increase of 4%, an ideal range for acknowledging both low and high perfor- mance 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 ser- vices, 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 organiza- tion and among teams. You can determine whether your organization is truly collabora- tive 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 cur- rent 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 ac- quisition (hiring or developing people with new skills and ideas), and continuous improve- ment. Such ideas are generalized when they move across a boundary of time (from one leader to the next), space (from one geo- graphic location to another), or division (from one structural entity to another). For individu- als, learning means letting go of old practices and adopting new ones.

Leadership:

We are good at embedding lead- ers 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’. Former McKinsey employees, for instance, consistently approach strategy from a unique consulting perspective; they take pride in the number of the firm’s alumni who become CEOs of large companies. In Oc- tober 2003, the

Economist

noted that 19 former GE stars immediately added an aston- ishing $24.5 billion (cumulatively) to the share prices of the companies that hired them. You can track your organization’s leadership brand by monitoring the pool of future leaders. How many backups do you have for your top 100 employees? In one company, the substitute-to- star ratio dropped from about 3:1 to about 0.7:1 (less than one qualified backup for each of the top 100 employees) after a restructuring and the elimination of certain development assignments. Seeing the damage to the com- pany’s leadership bench, executives encour- aged potential leaders to participate in tempo- rary 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 tar- geted 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 connectiv- ity may come from dedicated account teams, databases that track preferences, or the in- volvement 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

Capitalizing on Capabilities

•

•

•

HBR S

POTLIGHT

harvard business review • june 2004 page 5

monitor this capability, identify your key ac- counts 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, be- havioral, and procedural. To monitor such unity at the intellectual level, make sure em- ployees from top to bottom know what the strategy is and why it is important. You can re- inforce this sort of shared understanding by re- peating simple messages; you can measure it by noting how consistently employees re- spond when asked about the company’s strat- egy. To gauge strategic accord at the behav- ioral 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 pro- cess, continually invest in procedures that are essential to your strategy. For example, Disney must pay constant attention to any practices relating to the customer-service experience; it must ensure that its amusement parks are al- ways safe and clean and that guests can suc- cessfully get directions from any employee.

Innovation:

We are good at doing something new in both content and process.

Innovation— whether in products, administrative processes, business strategies, channel strategies, geo- graphic reach, brand identity, or customer ser- vice—focuses on the future rather than on past successes. It excites employees, delights customers, and builds confidence among in- vestors. 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 ca- pability to track. Inventories, direct and indi- rect 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 behav- iors, a capabilities audit can help you monitor

your company’s intangible assets. It will high- light which ones are most important given the company’s history and strategy, measure how well the company delivers on these capabili- ties, and lead to an action plan for improve- ment. This exercise can work for an entire organization, a business unit, or a region. In- deed, any part of a company that has a strat- egy for producing financial or customer- related results can do an audit, as long as it has the backing of the leadership team. We’ll walk through the process below, describing as we go the experiences of two companies that re- cently performed such audits—Boston Scien- tific (a medical device manufacturer) and In- terContinental Hotels Group—and what they did as a result of their findings.

The Massachusetts-based company Boston Scientific has enjoyed strong growth over the past 25 years. In particular, its international di- vision delivers about 45% of company reve- nues and 55% of company profits. Yet in 2003, the group’s executives still wanted to find ways to improve on the division’s success, so Edward Northup, president of Boston Scientific Inter- national, decided to engage his leadership team in a capabilities audit.

The first step was to identify the areas that were critical in meeting the group’s goals. Using the 11 generic capabilities defined above as a starting point, leaders at Boston Scientific adapted the language to suit their business re- quirements. (No matter how you create the list, the capabilities you audit should reflect those needed to deliver on your company’s strategic promises.) Next, to evaluate the orga- nization’s performance on these capabilities, the international division’s executives—along with their bosses and employees and a group of peer executives from other divisions—com- pleted a short online survey. Adapted from the generic questionnaire shown in the exhibit “How to Perform a Capabilities Audit,” the sur- vey comprised 20 questions, with space for comments. For each capability, respondents were asked to rate on a scale of one to five the group’s current performance as well as the level of achievement the division would need in order to meet its goals. This exercise showed gaps between current and desired capability. For example, on strategic unity—the extent to which employees understood and agreed upon strategy—the score for actual achievement was 0.91 points lower than the score for desired

Capitalizing on Capabilities

•

•

•

HBR S

POTLIGHT

harvard business review • june 2004 page 6

performance. Respondents also chose two ca- pabilities that would most affect the group’s ability to deliver on its customer-related and fi- nancial promises.

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 exe- cuting 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 com- pany. However, although the division scored high on talent (see the exhibit “Does the Talent Deliver?”), the leaders chose to invest in fur- ther developing this capability since it would be critical to success; in particular, they fo- cused 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. Fi- nally, they began to assess bench strength in support of that leadership brand, starting with the organization’s three regional presidents.

The idea, in short, is not necessarily to boost weak capabilities but to identify and build ca- pabilities that will have the strongest and most direct impact on the execution of strategy.

The Berkshire, England–based InterContinental Hotels Group (IHG) conducted its audit across the entire company. In late 2002 and early 2003, the global organization—recently spun off from Bass Group—faced bloated overhead costs in the competitive hotel industry, experi- enced a decline in business and vacation travel because of the worldwide economic downturn and the spread of severe acute respiratory syn- drome (SARS), underwent a brand name change (from Six Continents), and battled a hostile takeover attempt by British entrepre- neur Hugh Osmond. Deutsche Bank analyst Mark Finnla, in a January 2003 report, de- scribed the hotels as “chronically underper- forming…[and] making less than a third of what they should be.” In an effort to improve performance, chief executive Richard North initiated an “organization review.”

As at Boston Scientific International, the audit process started with collection of feed- back from multiple sources—executives, em- ployees at all levels, and franchisees who owned and managed individual hotels. The in- formation was gathered by an organization- review design team made up of high-potential

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).

Organizational Capabilities

Talent

Speed

Shared mind-set and coherent brand identity

Accountability

Collaboration

Learning

Leadership

Customer connectivity

Strategic unity

Innovation

Efficiency

Assessments Rankings Questions

Do our employees have the competencies and the commitment required to deliver the business strategy in question?

Can we move quickly to make important things happen fast?

Do we have a culture or identity that reflects what we stand for and how we work? Is it shared by both customers and employees?

Does high performance matter to the extent that we can ensure execution of strategy?

How well do we collaborate to gain both efficiency and leverage?

Are we good at generating new ideas with impact and generalizing those ideas across boundaries?

Do we have a leadership brand that directs managers on which results to deliver and how to deliver them?

Do we form enduring relationships of trust with targeted customers?

Do our employees share an intellectual, behavioral, and procedural agenda for our strategy?

How well do we innovate in product, strategy, channel, service, and administration?

Do we reduce costs by closely manag- ing processes, people, and projects? Co

p yr

ig h

t ©

2 00

4 H

ar va

rd B

us in

es s

Sc h

oo l P

ub lis

h in

g C

or p

or at

io n

. A ll

ri g

h ts

re se

rv ed

.

Capitalizing on Capabilities

•

•

•

HBR S

POTLIGHT

harvard business review • june 2004 page 7

employees from all regions. Supported by ex- ternal consultants, the team members worked on the review process full-time for several months before making recommendations to the IHG executive committee. Based on this review, efficiency, or reducing costs, quickly be- came a priority. The company’s costs were 15% to 20% higher than the industry average, and IHG swiftly took measures to streamline its op- erations among the various regions, creating a shared services center and aligning finance, human resources, and corporate functions.

IHG executives also looked at what capabili- ties would be essential for future success, assess- ing actual and desired capabilities in terms of where the company required world-class skill, where it needed to demonstrate industry superi- ority, and where it needed to achieve industry parity for optimal cost-efficiency. (For a visual breakdown of the areas examined, see the ex- hibit “A Snapshot of IHG’s Capabilities Audit Results.”) The capabilities under review sup- ported the overarching priority of efficiency. Leaders decided, for example, that the company should achieve world-class performance in col- laboration. As part of this strategic push, IHG gave up its decentralized structure, in which each region operated independently and was re- sponsible for its own budget and operation, and became a unified corporate entity whose re- gions needed to work together to solve budget shortfalls, information technology challenges, and the like. By collaborating across regions and hotels, IHG streamlined operations and saved more than $100 million a year. By focusing on the gap between actual and desired capabilities, company leaders were able to determine where

to invest leadership attention. This new focus al- lowed IHG to fend off the hostile takeover, de- merge successfully, increase its share price by 71% from April 2003 to February 2004, and out- perform the FTSE 100 by a factor of two, while reenergizing the company culture. A survey showed dramatic increases in employee morale and confidence in company leadership. The quality of management at the company is no longer a matter of public debate.

Lessons Learned

No two audits will look exactly the same, but our experience has shown us that, in general, there are good and bad ways to approach the process. You’ll be on the right track if you ob- serve a few guidelines.

Get focused.

It’s better to excel at a few tar- geted capabilities than to diffuse leadership en- ergy over many. Leaders should choose no more than three on which to spend their time and attention; they should aim to make at least two of them world-class. This means identify- ing which capabilities will have the most im- pact and will be easiest to implement, and pri- oritizing accordingly. (Boston Scientific chose talent, leadership, and speed. IHG zeroed in on collaboration and speed since the company’s leaders felt that working across boundaries faster would enable them to reach their strate- gic and financial goals.) The remaining capabil- ities identified in the audit should meet stan- dards of industry parity. Investors seldom seek assurance that an organization is average or slightly above average in every area; rather, they want the organization to have a distinct identity that aligns with its strategy.

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 re- sponses were positive but nonetheless indi- cated room for improvement in this key area.

This exercise made the intangible strengths and weaknesses of the interna- tional group tangible. It compared how exec-

utives from different parts of Boston Scien- tific—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 invest- ments in these capabilities. Leaders plan to revisit the effort in a year to learn whether their investments have made a difference.

Executive Committee

Operations Committee

Senior Marketing Leaders

International Senior Staff

Other Functional Leaders

Average Score

4.00

3.50

4.00

4.60

3.67

3.95 1 3 5

Respondents Talent Scores

C op

yr ig

h t

© 2

00 4

H ar

va rd

Bu si

n es

s Sc

h oo

l P ub

lis h

in g

C or

p or

at io

n . A

ll ri

g h

ts re

se rv

ed .

Capitalizing on Capabilities

•

•

•

HBR S

POTLIGHT

harvard business review • june 2004 page 8

Recognize the interdependence of capabil- ities.

While you need to be focused, it’s impor- tant to understand that capabilities depend on one another. So even though you should tar- get no more than three for primary attention, the most important ones often need to be combined. For example, speed won’t be enough on its own; you will likely need fast learning, fast innovation, or fast collaboration. As any capability improves, it will probably improve others in turn. We assume that no ca- pabilities are built without leaders, so working on any one of them builds leadership. As the quality of leadership improves, talent and col- laboration issues often surface—and in the process of resolving those problems, the com- pany usually strengthens its accountability and learning.

Learn from the best.

Compare your organi- zation with companies that have world-class performance in your target capabilities. Quite possibly, these companies won’t be in the same industry as your organization. It’s often helpful, therefore, to look for analogous indus- tries where companies may have developed extraordinary strength in the capability you desire. For example, hotels and airlines have many differences, but they’re comparable when it comes to several driving forces: stretching capital assets, pleasing travelers,

employing direct-service workers, and so on. The advantage of looking outside your own in- dustry for models is that you can emulate them without competing with them. They’re far more likely than your top competitors to share insights with you.

Create a virtuous cycle of assessment and investment.

A rigorous assessment helps com- pany executives figure out what capabilities will be required for success, so they can in turn decide where to invest. Over time, repetitions of the assessment-investment cycle result in a baseline that can be useful for benchmarking.

Compare capability perceptions.

Like 360- degree feedback in leadership assessments, ca- pabilities audits sometimes reveal differing views of the organization. For example, em- ployees or customers may not agree with top leaders’ perception that there is a shared mind-set. Involve stakeholders in improve- ment plans. If investors rank the firm low on various capabilities, for instance, the CEO or CFO might want to meet with the investors to discuss specific action plans for moving forward.

Match capability with delivery.

Leaders need to do more than talk about capabil- ity; they need to demonstrate it. Rhetoric shouldn’t exceed action. Expectations for im- provement should be outlined in a detailed plan. One approach is to bring together lead-

A Snapshot of IHG’s Capabilities Audit Results

InterContinental Hotels Group executives chose which capabilities would be most es- sential to the company’s future success and then collected feedback on how well IHG de- livered on these capabilities. The accompany-

ing chart shows both actual and desired lev- els of accomplishment. In the capabilities designated critical for world-class success, IHG needed to invest fairly significantly in improvements. In the areas that demanded

superior performance, it needed to invest, but not as heavily. And when it came to the capabilities where IHG needed to be on par, the company was already on target and could thus focus on efficiency and cost reduction.

World-Class Achievement

Collaboration Speed Execution TalentLeadership Shared Mind-Set

Accountability

Industr y Superiority

Industr y Parity

Learning

Need Significant Investment in Capabilities

Can Focus on Efficiency and Cost Reduction

Need Moderate Investment in Capabilities

Actual State Desired State

C op

yr ig

h t

© 2

00 4

H ar

va rd

B us

in es

s Sc

h oo

l Pu

b lis

h in

g C

or p

or at

io n

. A ll

ri g

h ts

re se

rv ed

.

Capitalizing on Capabilities

•

•

•

HBR S

POTLIGHT

harvard business review • june 2004 page 9

ers for a half-day session to generate questions for the plan to address: What measurable out- come do we want to accomplish with this ca- pability? Who is responsible for delivering on it? How will we monitor our progress in attain- ing or boosting this capability? What decisions can we make immediately to foster improve- ment? What actions can we as leaders take to promote this capability? Such actions may include developing education or train- ing programs, designing new systems for per- formance management, and implementing structural changes to house the needed capa- bilities. The best capability plans specify ac- tions and results that will occur within a 90- day window. HR professionals may be the ar- chitects, but managers are responsible for exe- cuting these plans.

Avoid underinvestment in organization in- tangibles.

Often, leaders fall into the trap of focusing on what is easy to measure instead of what is in greatest need of repair. They read balance sheets that report earnings, EVA, or other economic data but miss the underlying organizational factors that may add value. At times the capability goals can be very con- crete, as with IHG’s focus on efficiency.

Don’t confuse capabilities with activities.

An organizational capability emerges from a bundle of activities, not any single pursuit. So leadership training, for instance, needs to be

understood in terms of the capability to which it contributes, not just the activity that takes place. Instead of asking what percent of lead- ers received 40 hours of training, ask what ca- pabilities the leadership training created. To build speed, IHG leaders made changes in the company’s structure, budgeting processes, compensation system, and other management practices. Attending to capabilities helps lead- ers avoid looking for single, simple solutions to complex business problems.

• • •

Few would dispute that intangible assets mat- ter. But it can be quite difficult to measure them and even harder to communicate their value to stakeholders. An audit is a way of making capabilities visible and meaningful. It helps executives assess company strengths and weaknesses, assists senior leaders in defining strategy, supports midlevel managers in exe- cuting strategy, and enables frontline leaders to make things happen. And it helps custom- ers, investors, and employees alike recognize the organization’s intangible value.

Reprint R0406J

Harvard Business Review

OnPoint 7014

To order, see the next page or call 800-988-0886 or 617-783-7500 or go to www.hbr.org

Step-by-Step Through the Audit Process

While the particulars of a capabilities audit will differ from company to company, leaders should follow these five basic steps:

1. Determine which part of the business

to audit.

This can be a division, a region, the entire company—any unit responsible for de- livering on a strategy.

2. Create the content of the audit.

Adapt the 11 generic capabilities outlined in this ar- ticle to the organization’s requirements. (You may want to add “quality,” for example.) A tai- lor-made audit template will yield the most precise information.

3. Gather data from multiple groups on

current and desired capabilities.

This infor- mation may be collected by degrees.

•

For a 90-degree assessment, collect data only from the leadership team of the unit being audited. This method is quick but often deceptive, as the leaders’ self-re- ports may be biased.

•

For a 360-degree assessment, collect data from multiple groups within the com- pany. Different groups may tell very dif- ferent stories, as happened at Boston Sci- entific International, and can provide insights that might otherwise be missed.

•

For a 720-degree assessment, collect in- formation not only from inside the com- pany but from outside groups. External assessors might include investors, cus- tomers, or suppliers. These groups are important because it is in their eyes that the organization’s intangible value mat- ters most. InterContinental Hotels Group did a 720-degree assessment to some extent by including franchisees in its data sample.

4. Synthesize the data to identify the

most critical capabilities requiring manage-

rial attention.

Look for patterns in the data and focus leadership attention on no more than three capabilities required to deliver on strategy goals. You’ll need to identify which capabilities will have the most impact and which will be the easiest to improve.

5. Put together an action plan with clear

steps to take and measures to monitor, and

assign a team to the job of delivering on the

critical capabilities.

Actions might include coordinating education or training events, setting performance standards, creating task forces or other organizational units to house those doing the work, or investing in technol- ogy to sustain the capability. Establish a time frame of 90 days for the plan’s execution.

H B R S

P O T L I G H T

Capitalizing on Capabilities

To Order

For reprints, Harvard Business Review OnPoint orders, and subscriptions to Harvard Business Review: Call 800-988-0886 or 617-783-7500. Go to www.hbr.org

For customized and quantity orders of reprints and Harvard Business Review OnPoint products: Call Frank Tamoshunas at 617-783-7626, or e-mail him at [email protected]

page 10

Further Reading A R T I C L E S How to Have an Honest Conversation About Your Business Strategy by Michael Beer and Russell A. Eisenstat Harvard Business Review February 2004 Product no. 5925

This article provides additional ideas for gath- ering data about your firm’s current and de- sired capability performance. The authors lay out steps for a strategic conversation: 1) Se- nior managers draft a statement about strat- egy based on individual answers to questions such as “What are our company’s objectives and aspirations?” and “What unique value do we offer customers?” 2) Members of a task force ask key employees “What strengths should we build on, and what barriers should we remove, to implement this strategy?” 3) Task force members present employee feed- back themes in a roundtable discussion, while executives listen without interruption or de- bate. 4) Executives distill core strengths and weaknesses in organizational structure, cul- ture, and capabilities, deciding how to lever- age strengths and correct weaknesses.

Transforming Corner-Office Strategy into Frontline Action by Orit Gadiesh and James L. Gilbert Harvard Business Review May 2001 Product no. 6749

Gadiesh and Gilbert focus on the organiza- tional capability strategic unity, which helps companies balance decentralized decision making with coherent, strategic action. To clarify and communicate your firm’s strategy in ways that promote and guide employee ac- tion: 1) Develop your strategic principle: a pithy, memorable phrase that captures the timeless essence of your company’s unique competitive value. For example, AOL’s strate- gic principle is “Consumer connectivity first— anytime, anywhere.” 2) Test the phrase’s ability to help employees make trade-offs between

competing resources, gauge the wisdom of business moves, and know the boundaries within which they can experiment. 3) Com- municate your strategic principle consis- tently, simply, and repeatedly. You’ll know you’ve succeeded when employees—along with business writers, MBA students, and competitors—all “chant the rant.”

Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer Harvard Business Review April 2004 Product no. 6573

This article examines the organizational capa- bility efficiency, which enables you to create new ways, not just better ways, of working. The payoff? You cut costs, perform key strate- gic processes more quickly, and boost cus- tomer satisfaction.

To generate these operational innovations: 1) Seek role models outside your own industry. (Benchmarking within your industry doesn’t lead to breakthroughs.) 2) Identify and eradi- cate the assumption that slows progress to- ward your strategic goal. One hospital began responding to physician referrals more quickly by challenging the assumption that beds must be assigned before patients were ac- cepted. Now it assigns them after accepting patients—while patients are en route. 3) Turn do-or-die innovations into everyday practice. After a sudden surge in demand forced a packaged-goods maker to devise a way of conveying real-time demand information to manufacturing, the company standardized the process—slashing costs and delighting customers.