In our previous blog, we outlined the relationship between business strategy and capabilities at a high level. But we have not given you any guidance yet as to how to create a good overview of your capabilities. In this blog we look at why identifying capabilities is important for organizations, how they can be defined, how to classify them, and how to include them in a capability map.
Capabilities define what an organization needs to be able to do, in order to successfully achieve the outcomes that are defined as part of the corporate strategy. They are the key building blocks of the business, unique and independent from each other, and tend to be stable over time.
To help you define business capabilities, the following guidelines may be helpful:
A capability defines what the business does or what it can do, not how it does that or who is doing it. They are different from business processes, functions, services, organization units, or IT systems, although these may all contribute to a capability. The same capability may be implemented in different ways, e.g. manually, IT-supported or fully automated.
Capabilities are owned by the business and named and defined in business terms. Their definition should be easy to understand for all business professionals involved. Their names are nouns (e.g. ‘Product innovation’) as opposed to business processes, which are named with verbs (e.g. ‘Purchase materials’).
Capabilities are unique and stable. They are defined only once for the whole enterprise and they rarely change, unless, for example, the enterprise undertakes a completely new line of business or divests part of its current business.
Capabilities may be composite, consisting of sub-capabilities. A capability may also use other capabilities.
Capabilities can be organized in a capability map, that provides an overview of the entire enterprise.
A capability’s maturity can be assessed across different dimensions, such as people, process, technology, assets or information. These are the basis for capability-based planning.
A Capability map is a map of the enterprise that visualizes its capabilities in a particular state, for example current capabilities and their current maturity level, or required capabilities in a future state. Each key capability can be made more specific by decomposition. From a top down perspective, capabilities are derived from the strategic direction of the organization. From a bottom up perspective, components and assets (e.g. applications) can be linked to the capabilities they support, providing an indirect link of these components and assets with strategic direction. In this way, capabilities can be used as a starting point for the definition of asset portfolios.
Capabilities can also be classified further, for example in:
core vs. non-core
strategic vs. operational vs. supporting
customer-facing vs. internal
innovating vs. differentiating vs. commodity
Such a classification scheme helps in investment and sourcing decisions:
Differentiating, customer facing capabilities are core and are seldom outsourced.
Strategic, innovating capabilities are important for the long-term future of an enterprise and are often assigned a separate budget, to avoid the ‘innovation squeeze’, where the core, operational capabilities eat up all the budget.
Non-core, commodity or supporting capabilities are good candidates for outsourcing to partners that have these as their core, differentiating capabilities.
Coming back to our example from the previous blog, we take a look at the Capability map of ArchiSurance (Figure 1). The first thing you'll notice is that all of the capabilities in this capability map are named as nouns (e.g.: “Product management”). Furthermore, there are seven main capabilities (e.g. “Claim management”, “Asset management”, etc.), which have been further decomposed into more specific capabilities (e.g. “Claim settlement”, “Contract administration”, etc.). Furthermore, their capability map is stratified into Strategic, Operational, and Supporting capabilities.
Figure 1. Capability map.
The capability map is an essential component which can be used by organizations to perform high-level performance assessments. We will address capability analysis, using heatmaps and spider charts, and other topics such as capability realization in our upcoming blogs. Stay tuned for more!