Capability management in business
Capability management, a topic that originally came from the defense sector, is being applied to align organizations to strategic intent and to accelerate results.
- 1 Business capability
- 2 Capability management topics
- 3 History of capability modeling in business
- 4 Capability management frameworks
- 5 Capability value contribution
- 6 Gap analysis and heat maps
- 7 Variants and alternatives
- 8 See also
- 9 References
A business capability is what a company needs to do to execute its business strategy (e.g., enable ePayments, tailor solutions at point of sale, demonstrate product concepts with customers, combine elastic and non-elastic materials side by side, etc.).
Another way to think about capabilities is that they are a collection or container of people, process and technology that is addressable for a specific purpose. Capability management is an approach that uses the organization's customer value proposition to establish performance goals for capabilities based on value contribution. It helps drive out inefficiencies in capabilities that contribute low customer impact and focus efficiencies in areas with high financial leverage; while preserving or investing in capabilities for growth.
Capability management topics
Capability vs. process
A process is how the capability is executed. Much of the reengineering revolution or Business process reengineering focused on how to redesign business processes.
Business vs. organizational capability
An organization capability refers to the potential of the people in an organization and their cooperation to get things done. The way leaders foster shared mindset, talent, change, accountability, and collaboration across boundaries define the company's culture and leadership edge.
Capability vs. competency
Dave Ulrich makes a distinction between capabilities and competencies: individuals have competencies while organizations have capabilities. Both competencies and capabilities have technical and social elements.
|Technical||Functional Competencies||Business Capabilities|
|Social||Leadership Competencies||Organizational Capabilities|
At the individual-technical intersection, employees in the firm bring functional skills and competencies such as programming, cost accounting, electrical engineering, etc. At the individual-social intersection, leaders also have a set of competencies or skills such as setting the strategic agenda and building relationships. Moving to the intersection of organizational and technical, are business capabilities. In short, they are the technical things or what the firm must know how to do to execute strategy. For example, a financial service firm must know how to manage risk and design innovative products. Finally, we have organization capabilities such a talent management, collaboration, and accountability. They integrate all the other parts of the firm and bring it together. When leaders have mastered certain competencies, organization capabilities become visible. For example, when a leaders master "turning vision in to action" and "aligning the organization," the organization a whole shows more accountability.
History of capability modeling in business
Capability management's earlier ancestors include the value chain, also known as value chain analysis, first described and popularized by Michael Porter. Core competencies (also called core capabilities) are what give a company one or more competitive advantages in creating and delivering value to its customers in its chosen field, a cluster of extraordinary abilities or the excellence that a firm acquires from its founders, and which cannot be easily imitated.
Lee Perry, Randall Stott and Norm Smallwood added to the capabilities body of work the concepts of strategic options based on customer value proposition and business focus and types of work which characterized work as either:
- Unit of competitive advantage (UCA) – the work and capabilities that create distinctiveness for the business in the marketplace
- Value-added support work – the work and capabilities that facilitate the UCA
- Essential support work – the work that doesn't support UCA or facilitate it but must be done to operate the business
Building on earlier themes, the concept of dynamic capabilities was introduced in 2000. The basic assumption of the dynamic capabilities framework is that in fast changing markets, firms need to respond quickly and innovatively.
Around the same time, Richard Lynch, John Diezemann and James Dowling extended the concepts above in The Capable Company: Building the capabilities that make strategy work. Key additions to the body of work were tools to translate strategic shifts to new sets of capabilities required whether these were core competencies or not. Building on the types of work ideas, the authors added performance target setting based on the capability value contribution. When compared to actual performance, the method outlined an approach to identify capability gaps and priorities. They also laid out a framework to continually align capabilities based on strategy shifts and external changes through the project agenda. The first full capability model was built by the authors in 2001 as the framework for the demerger of Intercontinental Hotels Group (then known as Six Continents) from the parent Six Continents PLC (formerly Bass & Co Brewery). The model included thee levels of capabilities, value contribution, performance targets, capability gaps, recommended actions and sourcing decisions.
In 2004, the UK Ministry of Defence released its enterprise architecture framework, MODAF. This framework extended the existing DoDAF specification by adding views for capability planning. These views were standard ways to represent how the enterprise was expected to perform over time, expressed in terms of capabilities.
Other important contributions include the concept of value maps for detailing the customer proposition and more recently the profit proposition to identify capabilities that will help create Blue Ocean Strategy. Value maps extend the work of real-time strategy and the capable company by depicting a strategy canvas and providing an action framework to capture markets. In the mid-2000s, a team at Microsoft, in concert with Accelare, developed the motion methodology – a capability-based framework. In 2008, Ric Merrifield, Jack Calhoun and Dennis Stevens, in "The Next Revolution in Productivity" added the use of SOA and its role in supporting capability delivery at breakthrough cost and speed. Also introduced was the use of heats maps for capability analyses.
Capability management frameworks
A complete picture of the capabilities is the enterprise capability model. It is a blueprint for the business expressed in terms of the capabilities necessary to execute strategy including delivery of services. Capabilities are described in levels of abstraction; usually three levels of details:
- Family of capabilities; often shown as chevrons
- Groups of capabilities; illustrated in the health care provider diagram
- Specific capabilities; the level of detail to assess capabilities
At the higher level, are the attributes of ownership, location, and project road maps. The lower level is where the action is and where performance targets are set, performance assessed and gaps noted. It is at this level sourcing decisions are made or projects established to close gaps. The framework includes strategic, core and enabling capabilities.
- Strategic capabilities: capabilities in organizational planning, strategy, and investment
- Core capabilities: the inventory of business capabilities that are identified as delivering the products and services that an organization offers to its market.
- Enabling capabilities: the inventory of business capabilities that are required to support the but not sold or offered to the market
Companies like Harvard Pilgrim Health Care and Intercontinental Hotels Group have used capabilities to focus on where to take out costs and outsource non strategic capabilities while improving service and adding brands.
Microsoft is using capability models to enter into conversations with clients to identify capability and process pain points to better align IT solutions to the business.
New growth platforms
Capabilities are also being used in new growth platform development. Platforms are a foundation that spawns multiple products and/or services that, by themselves, are eventually the size of a business unit. These innovations result from identifying new domains created at the intersection of enablers or "unstoppable trends" and customer dynamics, linked to an essential set of core capabilities called the platform logic: those capabilities that are unique, valuable, and portable.
Capability value contribution
Building of the earlier type of work logic, Accelare added a distinction in assessment of the capabilities necessary to operative the business by examining the financial impact as well as the customer impact.
- Figure 3: Capability value contribution to strategy
Some capabilities directly contribute to the customer value proposition and have a high impact on company financials. These "advantage capabilities" are shown in the upper right. Value contribution is assured when performance is among the best in peer organizations at acceptable cost. Keep them inside and protect the intellectual property. Moving to the top left quadrant, strategic support capabilities have high contribution in direct support of advantage capabilities. Keep them close. Value contribution is assured when performed above industry parity at competitive cost. Other capabilities shown in the bottom right are essential. They may not be visible to the customer but contribute to company's business focus and have a big impact on the bottom line. Focus on efficiency improvement; especially in high volume work. Value contribution is assured when performed at industry parity performance below competitors' cost. Other capabilities are "business necessity". Value contribution is assured when performed at industry parity performance below competitors' costs. They can be candidates for alternate sourcing.
Gap analysis and heat maps
A capability gap assessment can be portrayed in a heat map.
- A heat map is a visualization of which capabilities required attention.
- A heat index is calculated using effectiveness and efficiency scores and the gap between targeted and actual performance; high heat (red/orange) in the gap column suggests investment.
Capability value contribution helps stack rank investments, for example advantage capabilities with high heat move to the top of the agenda, followed by business essential capabilities with large inefficiencies.
Variants and alternatives
- Value chain
- Strategy maps
- The MODAF StV-1 Provides a standard way to represent capability planning over time for an enterprise
- Capability management in defense
- Capability approach in welfare economics
- Relationship to operating model
- Relationship to enterprise architecture
- Relationship to business architecture
- Ric Merrifield, Jack Calhoun and Dennis Stevens "The Next Revolution in Productivity", (Harvard Business Review, June, 2008)
- Dave Ulrich and Norn Smallwood, How Leaders Build Value: Using People, Organization, and Other Intangibles to Get Bottom-Line Results (Jossey-Bass, 2006)
- Competitive Advantage: Creating and Sustaining Superior Performance. 1985.
- Lee Perry, Randall Stott and Norm Smallwood Real Time Strategy (Wiley 1993)
- Benjamin B. Tregoe and John W. Zimmerman Top Management Strategy (Simon & Schuster, 1980) Business Focus builds on the work of the "driving force" and "nine strategic areas" and how they suggest capabilities needed.
- Richard Lynch, John Diezemann and James Dowling, The Capable Company: Building the capabilities that make strategy work (Wiley-Blackwell, 2003)
- James Larson and Richard Lynch, "Reinventing a Hotel Company" (BPM Connections, October/November 2004)
- Ric Merrifield, Rethink: What do you need to do today? (FT Press, 2009)
- Ric Merrifield, Jack Calhoun and Dennis Stevens "The Next Revolution in Productivity", (Harvard Business Review, June, 2008
- Capability-Based Management (White Paper from Accelare, 2009)
- Jack Calhoun, Richard Lynch and Jim Dowling, "The Cost-Take-Out Challenge", (www.accelare.com).
- James Larson and Richard Lynch, "Reinventing a Hotel Company"(October/November 2004 issue of BPM Connections)
- Donald L. Laurie, Claude Sheer and Yves Doz, "New Growth Platforms" (Harvard Business Review, May 2006
- Leander Kahney, "Straight Dope on the IPod's Birth" (Wired, October 17, 2006) illustrates this concept well.
- Jack Calhoun, Richard Lynch and Jim Dowling, The Cost-Take-Out Challenge, (Accelare, 2009).