Setting Your Organization on a Trajectory to an Improved Future
David Trafford and Peter Boggis help executives and leadership teams deliver successful change, specifically technology-enabled change.
They provide thought leadership and thought partnership on all
aspects of assessing, developing and operationalising strategy.
They are founding partners of Formicio and authors of the
HOW ORGANIZATIONAL CAPABILITIES DETERMINE
AN ORGANIZATION’S TRAJECTORY
“The difficulty lies not so much in developing new ideas as in escaping from old ones.”
John Maynard Keynes (1883–1946) British economist
In the previous chapter, we argued that all organizations are on a trajectory to their default future, which is where they will end up if no action is taken, other than that which is currently planned. If the default future is judged to be better than the current state, there may be no need to take any action, other than that which keeps the organization on its current path. Alternatively, if the default future is worse than the current state, then leaders need to make choices and take action that will change the trajectory – charting a course to a better future. We also explored how an organization’s trajectory is determined by a set of navigating forces, be they exogenous or endogenous. Exogenous factors such as demographic trends, interest rates and regulatory controls, aren’t under management’s control and their influence is therefore difficult, if not impossible, to change. Conversely, we looked at endogenous influencing factors, such as organizational structure, IT infrastructure and culture, which are, in theory, under management’s control and could conceivably be changed.
We also argued that only by understanding the influence of these navigating forces can informed choices be made on the actions needed to change an organization’s trajectory. In this chapter we will build upon this idea and argue that endogenous navigating forces are largely a result of capabilities an organization has built up over time.
We call these ‘organizational capabilities’ simply because they reside within the organization, and not with individuals, although individuals of course shape, contribute to and exercise them.
Some examples of organizational capabilities include:
- Cost management
- Product development
- Customer service delivery
- Process management
- Acquisition integration
- Vendor management
- Regulatory compliance
- Risk management
- Data analytics
- Talent acquisition
- IT service management.
In many respects, these are examples of generic organizational capabilities, as they need to exist to some degree. At the same time, organizations need capabilities that are specific to their industry, like exploration in the oil and gas industry, merchandising in retail, fleet management in car rental, patient care in health services, fundraising in the charity sector and relationship management in investment banking. It’s the combination of the generic and industry-specific capabilities that enables an organization to achieve what it sets out to do, whatever that may be.
THE NOTION THAT ORGANIZATIONS HAVE CAPABILITIES IS NOT NEW
In their 1990 Harvard Business Review article “The Core Competencies of the Corporation”,49 C.K. Prahalad and Gary Hamel argue that to remain competitive, corporations need to perceive themselves as “a portfolio of competencies versus a portfolio of businesses”. They also suggested that in the coming decade, “corporations will be judged on their ability to identify, cultivate, and exploit the core competencies that make growth possible” and as a result they would need to “rethink the concept of the corporation itself ”. They defined a competency as “a bundle of skills and technologies that enables a company to provide a particular benefit to customers”. In their later book, Competing for the Future,50 they made no distinction between competency and capability,
but again emphasized the need to identify those competencies/capabilities that are core to future success.
In their 2004 Harvard Business Review article “Capitalising on Capabilities”,51 Dave Ulrich and Norm Smallwood make a clear distinction between competency and capability. In fact, they go further and make three distinctions – competency, capability, and ability. They describe organizational capabilities as “the collective skills, abilities, and expertise of an organization”. They also argue that they “form the identity and personality of the organization by defining what it is good at doing and, in the end, what it is”. Furthermore, they believe organizational capabilities are difficult to copy, and “as they aren’t easy to measure, managers often pay far less attention to them than to tangible investments like plant and equipment”. In their view, organizational capabilities emerge when a company delivers on the combined competencies and abilities of its individuals.
More recently, Paul Leinwand and Cesare Mainardi, in their book, The Essential Difference – How to Win with a Capabilities-Driven Strategy,52 define capability as “the ability to reliably and consistently deliver a specified outcome, relevant to your business”. They assert that capability “is ensured through the right combination of processes, tools, knowledge, skills, and organization, all focused on meeting the desired outcome”. In addition, they argue that for any organization to be successful it needs between three and six distinctive capabilities that reinforce one another, forming what they describe as an interlinked “capability system”.
Organizational capabilities are all of these things, and more. In the rest of this chapter we will explore how they determine an organization’s trajectory, and what leaders must do to change their portfolio of organizational capabilities if they want any chance of successfully changing their trajectory.
ORGANIZATIONAL CAPABILITIES EXIST FOR A REASON
It’s important to remember that the dominant organizational capabilities are present for a reason: to maintain the current trajectory. When an organization thinks about changing its trajectory, it usually does this by establishing a set of change initiatives. These might include creating a new business unit, launching a new product, entering a new market, introducing a new distribution channel, acquiring a competitor, implementing a new IT platform, re-engineering processes or moving production to a lower-cost geography. As we’ve previously discussed, organizations generally don’t have a good track record in successfully undertaking these types of initiative. One of the major reasons is that the influence of their current capabilities is either underestimated or ignored. The reality is that when a change initiative comes up against organizational capabilities that are not in line with the target trajectory, the initiative will fail – particularly if the influence of existing organizational capabilities is not addressed. In these situations, the organizational capabilities that contributed to past success often act as ‘antibodies’ to change.
When changing an organization’s trajectory, it’s highly likely that new and different capabilities will be required, and the influence of others may need to be reduced or ‘retired’.
ORGANIZATIONAL CAPABILITIES VERSUS
It’s important to make a distinction between organizational capabilities and individual competencies. Whereas competencies are possessed by individuals, capabilities reside within organizations. Obviously, it’s not possible for an organization to have capabilities without having competent people. But not everyone in an organization needs to be highly intelligent, as organizational capabilities develop over time, through application and practice. As we’ve said, in many respects, they act like muscles that become stronger with exercise. Also, the more embedded they become, the greater their impact on organizational culture. They are also the source of what Charles Duhigg calls an organization’s habits,53 where employees instinctively and collectively do things in a particular way without consciously knowing how or why. As we will explore later, their impact can be profound when developing and executing strategy, as existing organizational capabilities can make it very difficult for an organization to change its trajectory.
Organizational capabilities are formed from a combination of shared mental models and frameworks, common language, beliefs and mindset, processes and practices, conventions and norms, shared experiences and individual skills developed over time. Significantly, as they become embedded within an organization, they are not lost when key individuals leave.
It’s worth taking a moment to distinguish between organizational capabilities and other types of capabilities. For example, IT departments have recently shifted their focus from developing technical capabilities to building business capabilities – for example, the capability to run a credit check on an individual. This shift of perspective is aimed at encouraging IT professionals to think more in terms of what the business needs, rather than what IT solutions they can provide. But these IT-enabled business capabilities should not be confused with organizational capabilities, as they provide only one component of an organizational capability a technology platform on which they can be executed.
ORGANIZATIONAL CAPABILITIES CAN ANCHOR AN ORGANIZATION TO ITS CURRENT TRAJECTORY
Organizational capabilities create organizational habits that become the source of what organizations instinctively do. It’s often assumed that since an organization’s capabilities have been the source of its success in the past, they’ll be the source of its success in the future. But if future success depends
upon changing trajectory, then this is certainly not the case. As Tracy Goss argues in her book The Last Word On Power,48 it’s natural for people and organizations to fall back on what they know and do best when the going gets tough. She calls this their “winning strategy”. It’s a bit like doing more of the same but at a higher volume. As Goss puts it, “we may not recognize that we have our winning strategies, and we may not be able to describe them, but we instinctively act in the belief that they will continue to deliver us success”. Over time, our winning strategies become part of who we are. It’s the same with organizations; when the going gets tough, the default reaction is to fall back on its winning strategy, a strategy that’s enabled by existing organizational capabilities. To put it another way, if a winning strategy is the mindset, then the combination of individual competencies and organizational capabilities is the muscles that bring the mindset to life.
The world of IT offers a common example of existing organizational capabilities anchoring an organization to its present trajectory. Most IT organizations deliver what is expected of them; they keep the systems running, fix faults when they arise, deliver enhancements when requested and manage the risks that come with a complex – often legacy
– installed base. They do everything they can to prevent the systems from going down. Continually meeting these same, unwavering expectations results in a set of organizational capabilities that are entirely appropriate for the context as the IT team sees it – keeping the business running and minimizing the risk. Should the context change – for example, following a decision to replace core legacy systems with a modern, more integrated platform – existing organizational capabilities are likely to be out of line with those that are needed. Add to this a decision to use an offshore IT services provider, and you create a context where most IT organizations struggle, particularly when they are also expected to maintain legacy systems during the transition. It’s therefore not surprising that a vast number of IT transformation projects overrun budgets and miss deadlines, with many ultimately failing to deliver their intended outcomes.
By their very nature, organizational capabilities become omnipresent as they pervade the organization, so much so that it can be hard to recognize that they exist. In many respects, they act like invisible currents, keeping the organization on its current trajectory. The challenge comes when an organization acknowledges that it needs to change its trajectory, but existing organizational capabilities are so strong that it’s difficult, if not impossible, to achieve a course correction.
CHANGING TRAJECTORY REQUIRES DIFFERENT ORGANIZATIONAL CAPABILITIES
In chapter 2 we looked at Blockbuster and how the organizational capabilities it developed in its early years led to tremendous success. But the rapid development of broadband changed its context, and as a result its default future significantly changed for the worse. Whereas its existing organizational capabilities of locating, opening, customizing and running stores supported its original trajectory, they were not the ones needed for an online, video-streaming future. Unfortunately for Blockbuster, it was not able to acquire these new capabilities fast enough to change its trajectory.
Further examples of this trap can be seen along any high street, where online sales have continued to grow year on year and traditional ‘bricks and mortar’ retailers are finding it increasingly difficult to compete. Industry commentators were quick to point out that these companies failed because they didn’t recognize the threat from online competitors and were too slow to change their business model. Easy to say, but the organizational capabilities of these companies were those needed for high-street retailing. It’s therefore not surprising that they failed to recognize and acquire the organizational capabilities needed for e-tailing.
During our research, we interviewed the CEO of a very successful builders’ merchants and DIY chain. It had grown significantly in recent years, principally through acquisition. As it acquired companies it chose to keep their brands intact, as each addressed a different segment of the market. Its online presence across all its brands consisted essentially of electronic catalogues where customers could browse available products. However, there was little facility for customers to check stock availability or order online for either delivery or in-store collection.
Recognizing that newer entrants to the market were offering customers an omni-channel shopping experience, the CEO instigated a project to transform the company’s online presence. Initially, he thought it was essentially an IT project, so the head of IT was asked to lead it. As the CEO and his executive team understood more clearly what they were trying to achieve, they realized that neither their IT organization, nor the business units involved, had the capabilities necessary to deliver a successful outcome. What was being asked of them was completely outside their field of experience. What’s more, they soon realized that it would take far too long to develop this capability in-house. As the CEO put it, “We shouldn’t be surprised, as over the years we’ve developed the capability to understand
the industry, our customers and manage cost… but innovation, particularly technology-enabled innovation, is not in our DNA.”
The CEO chose to get the omni-channel shopping capabilities he needed by acquiring a company that already had them. He purchased a relatively new start-up in the sector whose business model was based entirely upon digital retailing. It was only after he’d bought the company that he and his colleagues fully understood and appreciated what had been acquired. It wasn’t just the omni-channel technology itself, but a whole set of organizational capabilities that were different from those in the other businesses. Not only did the business operate differently but its people also thought differently and acted differently. The subsequent challenge for the CEO and his colleagues was to bring these organizational capabilities into their other brands, and do it in a way that did not dilute or destroy what they had acquired, which often occurs with acquisitions.
Another example we came across was a successful household and motor insurance company that had recently been divested by a major financial service organization. Becoming an independent company had removed many of the constraints that had kept the CEO from realizing his vision of taking the organization to the ‘next level of digitization’. He now had more freedom, but realized that his organization didn’t have the capabilities needed to do ‘cool things’ digitally and give his customers an easy-to-use, compelling and differentiated online and mobile experience. The company already had a website that was no better or worse than any of its competitors’. While the IT function was perfectly capable of updating the site, and managing the legacy IT applications that sat behind it, they lacked a fundamental understanding of what the next-generation digital experience would look and feel like. What’s more, the CEO felt that the major consultancies and IT system integrators had little to offer
in this respect and, as he put it, “I needed to go to Shoreditch.” Shoreditch is an inner-city district of London, northeast of the financial centre. Together with Hoxton and Old Street, it forms an area known as ‘Silicon Roundabout’. It’s one of a growing number of high-tech business hubs that have emerged around the world – urban concentrations of small-tech businesses that are young, hip and have a ‘digital edge’. Those who work in these districts are innovative, agile and unconstrained by the traditional thinking that permeates most large corporations and government agencies. This CEO knew that the best way of gaining access to the digital organizational capabilities he needed was through collaborating
with these types of organizations, particularly those with online gaming and social media capabilities.
When A.G. Lafley became CEO of Procter & Gamble (P&G) in 2000 its share price was $52, down from $118. Furthermore, only about 15% of its innovations were being successfully commercialized, and in order to grow faster than the overall economy – which investors expect – he needed to find $4 billion of new revenue, and even more every year. At the time, P&G’s default future did not look good, and with a 66% drop in share price its investors knew this all too well. Despite a string of acquisitions from 1998 to 2000, Lafley knew that P&G’s current trajectory was one he didn’t want, and that making further acquisitions alone was not the answer. In confronting P&G’s default future, he knew that he needed to put the organization on a different trajectory, one based upon accelerated organic growth, fuelled by innovation.54
Traditionally, innovation in P&G came from its 7,500 researchers, but they hadn’t been delivering the results the company needed. Lafley knew that spending more and more on research and development (R&D), for less and less payoff, was not the answer. What the company needed was an entirely different approach to innovation. At this point it’s worth noting that the R&D organizational capabilities that P&G had built over the years had served them well in the past, but their focus – and measure of success – was on the number of patents registered, not the proportion that generated new revenue and profits. In fact, these R&D capabilities were anchoring P&G on a trajectory to a default future that was starved of sources of new revenue. A different approach was required – one that built upon the company’s strong R&D organizational capabilities, but also focused more on innovations that generated new revenue.
P&G’s eventual change in trajectory came from a radical idea: for every researcher there were at least 200 scientists or engineers elsewhere in the world, a total of perhaps 1.5 million people whose talents the research organization could potentially use. The challenge was to find them and connect with them. The solution was enabled in part by the growth of the internet, which provided access to external pools of talent around the world. The subsequent innovation initiative became known as Connect + Develop (C+D).55
The success of C+D was predicated on changing P&G’s innovation capabilities. Specifically, the company needed to get better at identifying external sources of new ideas and collaborating with external bodies and
individuals to bring innovations to commercial reality. To support the development of these capabilities it established a number of global networks and six C+D hubs, located in China, India, Japan, Western Europe, Latin America and the US. By 2006, more than 35% of new products had elements that originated from outside P&G, up from about 15% in 2000. And, 45% of the initiatives in the product development portfolio had key elements that originated externally. Furthermore, R&D productivity had increased by nearly 60% and the innovation success rate had more than doubled, while the cost of innovation had fallen. R&D investment as a percentage of sales was down from 4.8% in 2000 to 3.4% in 2006. And, from 2003 to 2005 alone, more than 100 new products were launched, with some aspects of execution coming from outside the company. In the five years immediately following the company’s stock collapse in 2000, its share price doubled.
The organizational capabilities built as a result of the C+D initiative undoubtedly put P&G on a different trajectory, and carried it to a better future. But, not satisfied with its initial success, P&G wanted to build on its achievements by establishing what it called ‘new-growth factories’ that would identify and bring disruptive innovations to market.56 These virtual factory operations comprise new-business creation groups, focused project teams and entrepreneurial guides who help teams rapidly prototype and test new products and business models in the market. The teams follow a step-by-step business development manual and use specialized project and portfolio management tools. Innovation and strategy assessments, once separate, are now combined in revamped executive reviews. When GE CEO Jeff Immelt announced in that 2015 Wall Street analysts’ call40 that he was selling many of the conglomerate’s biggest businesses, it was as much a move to divest core organizational capabilities as it was to shed core businesses. Such a bold move could only have been taken as a result of his decision some five years earlier to build a new set of organizational capabilities geared towards ‘digitizing in the industrial space’.
Immelt and his colleagues realized that GE was in the information business, whether it wanted to be or not. And many of its products, such as jet engines, locomotives and MRI scanners, had hundreds of sensors capable of capturing continuous data about performance, usage and need for repair. For example, on a single flight between New York City and Chicago, one of GE’s jet engines alone produces a terabyte of data. (As a frame of reference, one terabyte is equal to 16 days of continuously
running DVD movies or 8,000 times more data than the human brain retains in a lifetime.)
This realization put GE on a different trajectory, one based on data analytics.13 In 2011 Immelt declared that GE needed to become a software and analytics company or risk seeing its hardware products become commodities as information-based competitors took over.57 As Marco Annunziata, GE’s chief economist, put it, “We’re no longer selling customers just a jet engine, a locomotive, or a wind turbine; we’re bringing data and actionable solutions along with the hardware to reduce costs and improve performance.”57 GE’s intent was to build an analytics-based industrial ‘internet of things’ on which it and third parties could build, use and sell applications. By 2015, this new stream of revenue was generating $5 billion per annum13 and approaching $500 million in measurable productivity gains per year.
In order to successfully make this shift in trajectory, GE needed to not only build up its existing organizational capabilities, but also develop new ones. As Immelt put it, “We went through a process of ‘make versus buy’, ‘in versus out’. We basically said, ‘Look, do we want to make a big acquisition in analytics or IT?’ Furthermore, we don’t have the founda- tion inside the company to do a big acquisition. Do we want to partner, or do we want to do it ourselves?”13 In the end, the industrial giant decided to see if they could do it themselves. That was 2010.
In deciding to go it alone, GE embarked on building data analytics as a core organizational capability, similar to what material science had been over the past 50 years. They brought in people from outside GE and built an innovation centre in California, and then another in Boston. But building the capabilities was not simply about hiring data scientists. As Immelt put it, “This is something I got wrong. I thought it was all about technology. I thought if we hired a couple of thousand technology people, if we upgraded our software, things like that, that was it. I was wrong. Product managers have to be different; salespeople have to be different; onsite support has to be different.”
Early success in ‘digitizing in the industrial space’ gave Immelt the confidence to make his startling transformation announcement and put GE on the road to becoming a coherent whole. It was a significant shift in trajectory, and not without considerable risk. The trajectory he chose was for GE to become an industrial infrastructure business, underpinned by a data-analytics-based internet platform.
ORGANIZATIONAL CAPABILITIES DETERMINE HOW AN ORGANIZATION OPERATES
If we accept that organizational capabilities are based upon shared mental models, frameworks, language, skills, mindset, beliefs, conventions and experiences, it’s reasonable to assume that they have a major impact on how things get done – thereby shaping the organization’s operating model. To put it another way, an organization’s operating model is a manifestation of its organizational capabilities.
It’s interesting to note that in most transformation programmes one of the first questions consultants ask is, “What’s the target operating model?” If the people defining the target operating model are the same as those who operate and manage the current model, then the best one can expect is an improvement of the current model. If true innovation and transformation are to be achieved – as in the examples above – then the new operating model needs to be defined and built by people who collectively possess the organizational capabilities needed for the target future.
UNDERSTANDING THE INFLUENCE OF ORGANIZATIONAL CAPABILITIES
While some organizational capabilities are easily recognizable, others only become apparent when they are experienced. And, not all organizational capabilities will exert the same influence on the current or targeted trajectory. For example, if an organization wanted to pursue a target trajectory that gave its customers an omni-channel shopping experience
– like the builders’ merchant example – a new ‘being digital’ capability is required, as without it the trajectory simply will not change. Yet, the capability to provide a positive customer experience in their stores is no less important. But its influence is neutral when it comes to changing the organization’s trajectory. The only exception to this would be if there were a decision to close all its stores and only offer its customers the online option – which is hardly omni-channel!
The challenge is that organizational capabilities are often difficult to identify, particularly for those in the organization who are so close to them that they may not be able to see them. It’s a bit like being in a hot air balloon; you don’t feel the wind because you are travelling with it. It’s only when you come to land, and the wind drags the basket along the ground, that you notice its strength. The idiom ‘can’t see the wood for the trees’ is also acutely true in this case. Very often, organizational
capabilities are only noticed when they are not aligned with the direction the organization wants to travel. One way of identifying the most critical organizational capabilities is to ask the following two questions:
- Which existing capabilities are anchoring your organization to its current trajectory?
- What new capabilities are needed to pull your organization onto its target trajectory?
It’s important to note that some of the most influential anchoring organizational capabilities are often hidden – not intentionally hidden, but so embedded in how the organization operates that they are difficult to identify. Furthermore, many are pervasive, and drive the way everything is done. That makes it difficult for people within the organization to appreciate that they exist, and equally difficult for them to appreciate the need to introduce new ones, strengthen existing ones and reduce – or ‘retire’ – the influence of others.
ASSESSING THE INFLUENCE OF ORGANIZATIONAL CAPABILITIES
Organizational capabilities can be assessed in many ways; we advocate assessing their level of influence. The greater their influence, the more they will anchor an organization to its current trajectory or pull it onto its target trajectory.
When assessing anchoring capabilities, consider the following two questions:
- To what degree is the organizational capability anchoring the organization to its current trajectory?
- How difficult – in terms of level of effort – would it be to weaken the influence of the organizational capability?
When assessing pulling capabilities, consider the following:
- To what degree is the required pulling organizational capability currently in place?
- How difficult would it be, in terms of degree of effort, to strengthen the influence of the organizational capability?
For each question, a simple grading of 1 to 5 is sufficient, where 1 is low and 5 is high.
Ideally, the assessment would be done by a number of individuals and groups, including outside advisors who are able to give an external perspective. The goal is to create insight and align thinking through dialogue, rather than through scientific analysis of how the organization operates. To illustrate this technique we’ve taken ten anchoring organizational capabilities (1 to 10) and ten pulling organizational capabilities (A to J) – what they are is irrelevant – and mapped them onto the frameworks given in figures 3i and 3ii, respectively.
These heat-maps are similar to the one we introduced in chapter 2, which assessed the influence and change difficulty of navigating forces. All we are doing here is using the same technique to better understand the influence and change difficulty of organizational capabilities. In figure 3i, we see that the anchoring organizational capabilities that are believed to have the greatest influence and that are most difficult to change are 2, 5 and 7. The organizational capabilities that are having the greatest influence but seem to be relatively easy to change are 1 and 4. In figure 3ii we see that none of the organizational capabilities has much pulling power, and that A, D, G, I and J are more difficult to change.
The aim of these assessments is to create dialogue rather than find the ‘scientific truth’. We call them ‘dialogic assessments’ rather than audits. We often find that the paradox with these types of assessments is that people don’t like being assessed, but they love being part of an assessment process! By and large, people like to know how they and their organization are doing, especially from a capabilities perspective. But they are sceptical (and rightly so) of outside consultants who parachute in and assess them or their organizations. We therefore believe that self-assessments, supported by an expert facilitator – who can bring experience and act as an impartial arbiter to resolve differences of perspective, opinion or interpretation – work best. Not only do they allow those involved to retain ownership, they also motivate resultant action.
Furthermore, the assessment must be transparent and repeatable. Like any meaningful study, the process should lend itself to being repeated periodically with consistent, comparable results. In fact, repetition over time is important in order to track progress.
CHANGING THE INFLUENCE OF ORGANIZATIONAL CAPABILITIES
The above assessments identify those organizational capabilities whose influence needs to be strengthened in order to pull the organization onto its target trajectory and those whose influence needs to be weakened in order to reduce their anchoring effect. It’s important to remember that today’s organizational capabilities were the source of past success, and assumed by many who currently practise them to be the key to future success.
The challenge is changing the relative influence of the pulling and anchoring organizational capabilities, while at the same time maintaining those whose current influence should not be changed. This can only be done by understanding the competing commitments and underlying assumptions. What we mean by this is that while people might be committed to increasing the influence of pulling organizational capabilities, they might also remain committed to existing ones that are anchoring the organization to its current trajectory. The potentially disruptive impact of these competing commitments should not be underestimated, as they can consume considerable management time and resources.
APPROACHES TO ESTABLISHING ORGANIZATIONAL CAPABILITIES
Establishing, or strengthening, those organizational capabilities needed to pull the organization onto its target trajectory is dependent upon two criteria: urgency and difficulty. As illustrated in figure 3iii, there are essentially four approaches that can be taken.
In-house development is often considered the default option, where the targeted pulling organizational capabilities are developed through training. The limitation of this approach is that it’s difficult for people to understand what these new capabilities are until they’ve experienced them. And, as training develops personal competencies, as opposed to organizational capabilities, it only partly solves the problem. One way of overcoming this is for key individuals and groups to experience the target organizational capabilities first-hand in other organizations, pos- sibly through some form of exchange programme or by participating in experiential learning journeys.
If the urgency is high and the difficulty of bringing them into the organization is low – in the sense that they are readily available through outside service providers such as consultancies – then the best approach is to source the capability through some form of partnership, as was the case with P&G and the insurance company. Ideally these partnerships would also result in the transfer of capability.
The acquisition approach typically assumes the recruitment of new employees, but, as previously discussed, people possess competencies, not organizational capabilities. This approach therefore involves the acquisition of entire organizations, as in the case of the builders’ merchants discussed above. The challenge lies in not destroying what has been acquired. As discussed in chapter 1, some 80% of acquisitions destroy rather than create value, through the unintentional elimination of the acquired entity’s organizational capabilities.
If the urgency is low and the difficulty is high, then the best approach is to grow the required organizational capabilities internally. As was the case in the GE example, this process can be seeded by recruiting individuals who possess the targeted capabilities. Their role is to grow such capabilities through experimentation, practice and application. But care must be taken. The risk is that in their enthusiasm to build the new capability, they inadvertently destroy organizational capabilities that need to be preserved.
All four approaches work, but each needs to be applied appropriately. They must be calibrated according to how urgently the target pulling capabilities are required and how difficult it will be to put them in place. An organization can use a combination or a portfolio of these approaches depending upon what they are, their availability and the urgency of the situation. For instance, P&G not only partnered with outside organizations and individuals but also developed the necessary collaboration capabilities and grew the capabilities needed for its ‘new-growth’ factories.
MANAGING ORGANIZATIONAL CAPABILITIES AS A PORTFOLIO
Portfolio management is not new; it has been practised in financial, investment and fund management for decades. Its essence is building, balancing, sustaining and rebalancing a portfolio of assets to achieve a desired outcome. For example, when it comes to managing a financial investment portfolio, younger people want growth and are prepared to accept more risk. As one approaches retirement, on the other hand, less risk is tolerated and lower returns are acceptable, so funds might be shifted from equities to government bonds or cash. Managing the portfolio is therefore based upon a set of criteria that changes as circumstances change.
Similarly, consumer product companies actively manage their portfolio of brands and products. They frequently exchange and trade brands and product categories with competitors as they rebalance and refocus their market presence. Capital-intensive industries such as mining and steel also manage their portfolio of assets – things like mines or factories
– to ensure long-term profitable growth at an acceptable risk.
Another example of portfolio management involves selecting and managing the portfolio of change initiatives that individually and collectively contribute to changing an organization’s trajectory. These could be product investments, IT enhancements, change programmes, or M&As. Over the years, we have found that this is something all organizations understand at a conceptual level, but few have actually mastered its application. One notable exception is GE Power Systems in Atlanta, Georgia, which makes large power-generating turbines. We came across this organization when asked to plan and deliver an experiential learning journey for a group of executives from a European oil company. One of the topics they wanted to learn more about was leading practices in portfolio management. During our visit we asked then-CEO John Rice how he went about building the balanced portfolio of initiatives in GE Power Systems.
He replied, “It’s very simple. We are a growing business and we have three very clear strategic objectives. We need to do things that support our growth. We need to be profitable. We need to build connectivity with all our partners, customers and suppliers as we collaborate to build our power-generating turbines. So, when someone proposes a new initiative, I ask how does this contribute to growth, profitability or connectivity? If it does not contribute to at least one of these strategic objectives, it does not make it onto the list.”
We also asked him why he personally chaired the Portfolio Management Steering Group. At first he seemed bemused, even amused, by the question, and then answered: “Why would I delegate some of the most important strategic discussions in the company to someone else at this stage of our development?”
On a quarterly basis, Rice and his executive team reviewed the port- folio; assessed the progress of initiatives; killed, cancelled or redirected those that were not going where they wanted; and assessed the potential contribution of proposed new initiatives.
We talked to several other executives during our visit and one made a telling remark about portfolio management in GE Power Systems: “You can tell exactly where the priorities are in this business – they’re simply where the best resources are committed at any one time.”
Without question, Rice and his team recognized the importance of portfolio management and developed it as a core organizational capability. Organizational capabilities can, and should, be managed as a portfolio. They are, after all, a type of asset. And like all portfolios, each element has a current and future role to play: some are needed to pull the organi- zation onto its target trajectory, some must be maintained, some need to
have their influence reduced and others should be retired.
PORTFOLIO MANAGEMENT IS ITSELF AN ORGANIZATIONAL CAPABILITY
The general principles and practices of portfolio management can be applied to organizational capabilities. However, when managing a collection of organizational capabilities as a portfolio, particular attention needs to be given to:
- Identifying and defining the most influential organizational capabilities – an organization comprises many capabilities and they don’t all have the same importance or influence at a given point in time
- Defining the role (pulling, anchoring or maintaining) of each organizational capability
- Assessing the influence of each capability
- Increasing the influence of targeted pulling capabilities
- Reducing the influence of – or retiring – targeted anchoring capabilities.
The desired outcome is to have a portfolio of capabilities in place that enables an organization to pursue its chosen trajectory. As it travels along that trajectory, the role of each capability in the portfolio will change. Equally, new ones may need to be introduced and others retired.
RETIRING ORGANIZATIONAL CAPABILITIES THAT ARE NO LONGER REQUIRED
As in all portfolios, the time will come when some assets – in this case organizational capabilities – are no longer required, and need to be removed from the portfolio. However, unlike other assets, organizational capabilities cannot be simply divested, eliminated or stopped. And unfortunately, if no action is taken to reduce their influence, they could continue to anchor the organization to its current trajectory.
The complication in retiring organizational capabilities that are no longer required is that this involves people, often the same ones who made the organization successful in the past. They may have become such an integral part of the organizational capability that they’re unable or unwilling to appreciate that a particular capability is no longer required. While there is no easy solution to this, the focus needs to be on the future and finding ways for individuals to repurpose their competencies in ways that support the development and application of more important organizational capabilities.
THE ENTERPRISE VIEWED AS A PORTFOLIO OF ORGANIZATIONAL CAPABILITIES
If we accept the argument that existing capabilities determine how an organization operates, it could also be argued that an organization consists of a portfolio of capabilities. And, like any portfolio, it needs to be managed – dynamically. Not all organizational capabilities will be of equal importance and their relative contribution will change and shift over time. Tension is also likely between employees who value the old organizational capabilities and those who see the need for new ones. As one CEO put it: “We know cost control is our strongest organizational capability, and it’s also the one that stops us from innovating and thinking long term.” If this argument is accepted, then the role of leaders is to identify and acquire new organizational capabilities, nurture the ones that are most needed today and retire those whose influence prevents the organization changing its trajectory to an improved future.
THE CHAPTER IN SUMMARY
Organizational capabilities are an important class of endogenous navigating forces that help determine an organization’s trajectory. Formed over time – from a combination of shared mental models and frame- works, common language, beliefs and mindset, processes and practices, conventions and norms, shared experiences and individual skills – they embody that muscle-memory we’ve mentioned. If an organization decides to change its trajectory, then it needs to consider which capabilities it needs to introduce or strengthen, and which should be weakened or retired. Assuming that an organization’s trajectory can be successfully changed without changing its portfolio of capabilities is a sure-fire recipe for failure.
FIVE QUESTIONS FOR REFLECTION
- Which organizational capabilities are exerting the most influ- ence in determining your organization’s current trajectory and thereby taking it to its default future?
- What capabilities need to be introduced or strengthened in order to change your current trajectory to the targeted improved future?
- How could these pulling organizational capabilities be intro- duced or strengthened?
- How could the influence of those organizational capabilities that anchor your organization to its current trajectory be reduced or retired?
- How would you approach managing your collection of organ- izational capabilities as a portfolio?
Excerpt permission by Authors and Lid Publishing
We're an online training center providing digital marketing courses and tools helping individuals conquer the world of online marketing.
Create a Free Account Today