Managing Organisational Capabilities as a Portfolio

In this article David Trafford and Peter Boggis bring together the two powerful ideas of organisational capabilities and portfolio management. They argue that managing organisational capabilities as a portfolio enables leaders to create the conditions that increase the chances of successful strategy implementation and transformational change.

In a previous Formicio Insight article, Using Organisational Capabilities to Pull the Present into the Future, we argued that if an enterprise wanted to change its trajectory – away from its default future to an improved future – a key condition for success was having the necessary organisational capabilities in place. We further argued that having these organisational capabilities in place created a context where people could better exercise their judgement, apply their experience and use their expertise to ‘pull’ the organisation to its target improved future.

But not all the organisational capabilities needed for the future will be new. Some that are required today will also be required in the future; while others may have a less important role to play as the organisation transitions to its target future. As their importance and contribution change over time they need to be managed, and it’s our contention that the best way to do this is to manage them as a portfolio. As with all portfolios, not all of its contents will have equal importance at a particular point in time. Equally, different parts of the portfolio will contribute in different ways over time.

Managing Organisational Capabilities figureIn making these portfolio decisions, it’s important to remember that while an organisation’s current capabilities have got it where it is today, they may not necessarily be those needed for the future. As one CEO put it: “We know cost control is our strongest organisational capability, but it’s also the one that stops us innovating and thinking long term”. The role of leaders is therefore to ensure that the necessary organisational capabilities are in place, both those needed to run the business today, but more importantly those needed to pull the organisation from the present into the future. We believe applying portfolio management disciplines to organisational capabilities is a powerful way of achieving this objective and ensuring the necessary balance between those needed for today and those needed for the future.

Organisational capabilities are different from individual competencies

Organisational capabilities differ from individual competencies as they include everything that is needed to deliver an outcome of value. For example, an individual or team may be trained and competent to perform a specific task but unable to do so because the necessary processes, tools or information are not available. In this situation, the resultant performance is based upon the heroic efforts of individuals rather than the inherent capabilities of the organisation.

Organisational capabilities are formed from a combination of shared mental models and frameworks; processes and practices; common language, mindset and beliefs; shared experiences and individual skills. Significantly, as they become embedded in the organisation they are not lost when individuals leave. Examples of organisational capabilities include the ability to innovate, integrate acquisitions, deliver compelling customer experiences, manage external partners and collaborate across organisational boundaries.

It’s worth taking a moment to distinguish between organisational capabilities and other types of capabilities. For example, IT departments have recently shifted their focus from developing IT capabilities (systems and solutions) to building business capabilities. This shift of perspective encouraged IT professionals to think in terms of what the business needs in order to deliver repeatable business outcomes – rather than what IT solutions they can provide. But these IT-enabled business capabilities should not be confused with organisational capabilities as they only provide one, albeit important, component – a platform on which organisational capabilities can be further developed.

In many respects, organisational capabilities are like muscles – the more they are used, the stronger they become. And the stronger they get, the greater they shape organisational culture. In effect they drive organisational habits, where people collectively do things in a particular way without consciously knowing how or why. As with all habits they can become invisible to those that practise them – which makes it a particular challenge when an organisation aims to make them explicit and manage them as a portfolio.

Portfolio management is itself an organisational capability

Portfolio management is not new: it has been practised in Financial, Investment and Fund Management for decades. Its essence is building, sustaining, balancing and re-balancing a portfolio of assets – typically financial – to achieve desired target outcomes. For example, when it comes to managing a financial investment portfolio, younger people want growth and are prepared to accept more risk, but as one approaches retirement, less risk is tolerated and lower returns are acceptable; as a result, funds are moved 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 re-balance and re-focus their market presence. Capital-intensive industries such as mining, minerals and steel also manage their portfolio of assets – whether it is mines, plants or factories – in order to ensure long-term profitable growth at an acceptable risk.

All organisations manage portfolios, whether it is their products, investments, assets or change initiatives. The key questions are the extent to which:

  1. The target outcomes of the portfolio – over time – are explicitly defined.
  2. How the contents of the portfolio are defined in terms of types or classifications.
  3. The criteria for making choices aimed at balancing the contents of the portfolio are in line with the target outcomes.
  4. The process by which these choices are made.

Our experience is that while it’s important to have the ‘mechanics’ of portfolio management in place the true value comes from the quality of the conversations – the openness, trust, and honesty with which decisions about competing priorities are made.

Managing the portfolio of organisational capabilities

As with any portfolio, the general principles and practices of portfolio management can be applied to organisational capabilities. However, when managing organisational capabilities as a portfolio, particular attention needs to be given to:

  1. Identifying and defining critical organisational capabilities.
  2. Defining the role of each organisational capability at a point in time.
  3. Assessing the maturity of each organisational capability.
  4. Putting the necessary organisational capabilities in place.
  5. Retiring organisational capabilities no longer required.

These aspects are discussed in the following sections.

The aim is to have a portfolio of organisational capabilities in place that will enable and support implementation of the chosen strategy by pulling the organisation from the present into the future. As the organisation travels along its chosen trajectory the role of the organisational capabilities will change. By definition they will all remain important, but their contribution will be different.

  1. Identifying and defining critical organisational capabilities
    The challenge is to identify and define the organisational capabilities that are critical to implementing the organisation’s strategy – as opposed to defining all capabilities. As discussed previously, this involves identifying those organisational capabilities:

    • Needed to change the organisation’s trajectory by ‘pulling’ it from the present into the future.
    • Needed to run the business today.
    • That potentially could anchor the organisation to the present.

    Ideally, there would be a relatively small number of these critical capabilities, typically 5 to 7. A good place to identify these is in strategy documents and by asking executives “what needs to be in place for the strategy to work?”

    Once identified they need to be defined in terms of their ‘ability to….’ Examples are given below.

  2. Examples of organisational capabilities

    The ability to integrate acquisitions in 90 days or less.
    – Cisco Systems

    The ability to put the patient experience at the centre of everything we do.
    – Liverpool Heart & Chest Hospital

    The ability to provide the highest levels of retirement service care quality.
    – Methodist Homes

    The ability to drive innovation through collaboration with our customers, partners and suppliers
    – Procter and Gamble

    The ability to know more about its customers’ buying patterns than any of its competitors.
    – Tesco

  3. Defining the role of each organisational capability at a point in time
    At any point in time, organisational capabilities play a role in the organisation’s current, future and past success. As a result, their contribution and classification change over time. For example, a particular organisational capability may have been crucial to the success of the organisation in the past, but as circumstances changed, its contribution became less. It’s important to identify these organisational capabilities as they have the potential to anchor the organisation to the present and prevent it changing its trajectory to a different (improved) future.

    Equally, it’s important to identify the organisational capabilities required to run the business today. The risk is that in focusing on those organisational capabilities required for the future they may be ignored and allowed to deteriorate through lack of attention. Furthermore, these capabilities may have an equally important role to play in the future.

  4. Assessing the maturity of each organisational capability
    The paradox 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 are doing, especially from an organisational perspective. But they are sceptical (rightly so) of consultants or other ‘agencies’ that come in and assess them or their organisations. Self-assessments, supported by an expert facilitator – who can bring experience and act as an impartial ‘judge’ to resolve differences of perspective, opinion or interpretation – work best as they allow those being assessed to retain ownership, both of the results and resultant actions.

    Furthermore, an assessment must be transparent and repeatable. Like any meaningful scientific experiment, the process should lend itself to repetition with consistent, comparable results. In fact, repetition over time may well be important to sustain investment in capability improvement activities. All too often assessments are conducted, discussed and then ignored. Not only is this wasted effort, but it will be that much harder, or even impossible, to get people to participate in future assessments.

    Assessing the effectiveness of organisational capabilities can be done in many ways, the best being to determine their level of maturity. The more mature a capability, the greater its contribution to organisational success. In our view, a maturity model containing no more than five levels should be used (see below), with clear and differentiated distinctions made between what it means to be at one level rather than the next.

    In the context of implementing strategy, our view is that any assessment needs to be ‘forward-looking’. This means assessing the maturity of an organisational capability in the context of what is needed for the future – not what was needed up until now. Such a forward-looking assessment will inevitably identify the gaps in capability.

    It’s important to note that the approach we advocate is different to benchmarking where an organisation compares its capabilities with other organisations. While benchmarking can be of value it doesn’t assess to what extent the organisational capabilities needed to change the organisation’s trajectory are in place.

  5. Organisational Capability Maturity Model

    5 = Transforming: leading transformation of the business function or enterprise, for greater business value
    4 = Value-adding: making a significant contribution to business function or enterprise performance
    3 =Sustainable: self-sustaining, based upon shared language, frameworks and mental models
    2 = Procedural: reliance on the application of procedures, manuals and training
    1 = Ad hoc: not consistent and dependent upon a few individuals

  6. Putting the necessary organisational capabilities in place
    The best approach to putting the necessary organisational capabilities in place is dependent upon two criteria, namely urgency and difficulty. As illustrated in the diagram below there are essentially four approaches that can be taken.

    Develop: Often considered the default option where it’s assumed organisational capabilities can be developed through training. The problem with this thinking is that it’s difficult for people to understand what an organisational capability is until they’ve experienced it. One way of achieving this is for key people to undertake experiential learning journeys where they visit other organisations to get a sense of the organisational capability and what it could bring.

    Managing Organisational Capabilities figure 2Partner: If the urgency is high and the difficult is low then the best approach is to source the capability – ideally through partnerships – from organisations that have the required capabilities and are willing to share them.

    Acquire: Often assumes the recruitment of people, but as previously discussed, people possess competencies, not organisational capabilities. The acquire approach actually involves the acquisition of one or more organisations. An example is a successful UK builders and DIY chain that recognised that they didn’t have the organisational capabilities needed to create a compelling multi-channel presence. They also recognised that it would be very difficult, if not impossible, to develop this in-house and that it was becoming an increasingly urgent issue. Their response was to acquire a company in their sector that had the required organisational capability. The challenge with this approach is not to destroy what has been acquired. It’s well recognised that more than 80% of acquisitions destroy, rather than create, value. A principal reason for this is that the organisational capabilities in the acquired organisation – and possibly the rationale for the acquisition – are unintentionally eliminated.

    Grow: If the urgency is low and the difficulty is high, then the best approach is to grow the required organisational capabilities internally. This process can be seeded by recruiting individuals who have worked in other organisations that excel in the target organisational capabilities. While bringing in experienced people can be effective care must be taken that, in their enthusiasm to change the organisation, they do not inadvertently destroy those organisational capabilities that need to be preserved. A case in point is when a new CIO was recruited to transform the IT organisation of a UK-based logistics company. His approach was to bring in the ‘brightest and best’ from within and outside the industry. The result was that the rest of the organisation felt they were not valued, the very organisational capabilities needed to run the business became impaired and the CIO was asked to leave.

    All four approaches work, but need to be applied appropriately based on the urgency and difficulty of the organisational capabilities targeted.

  7. Retiring organisational capabilities no longer required
    As in all portfolios, some assets – in this case organisational capabilities – are no longer required, and as a consequence need to be removed from the portfolio. However, unlike other assets, organisational capabilities cannot be simply divested or stopped. Equally, if action is not taken to ‘retire’ them they could anchor the organisation to the present and prevent it from changing its trajectory to a different and improved future.

    The complication in ‘retiring’ organisational capabilities that are no longer required is that they involve people, often the very same people that made the organisation successful in the past. Often they have become such an integral part of the organisational capability that they are unable or unwilling to appreciate that the capability is no longer required. While there is no easy solution to this situation, the focus needs to be on the future and finding ways for individuals to re-purpose their individual competencies in the development and application of different organisational capabilities.

The portfolio of organisational capabilities is only one of several organisational portfolios

The portfolio of organisational capabilities is one of a number of organisational portfolios that need to be managed. As we have discussed earlier in this article, others include brands, products, properties, retail outlets, change projects and technology. As we will explore in a future article, changing an organisation’s trajectory requires re-aligning one or more organisational portfolios. In this article we have focused on one, albeit important, portfolio – organisational capabilities.

Five key questions

If you’re currently implementing strategy or managing the delivery of a significant change programme, consider these five questions:

  1. What organisational capabilities need to be in place to change the current trajectory and pull the organisation to its target (improved) future?
  2. What is the current and, more importantly, the target level of maturity of each of these capabilities?
  3. How could the maturity of these organisational capabilities be best developed or acquired?
  4. Which organisational capabilities currently in place have the potential of anchoring the organisation to its current trajectory?
  5. How could these ‘anchoring’ organisational capabilities be best weakened or eliminated?

We welcome your thoughts.

David Trafford
david.trafford@formicio.com

Peter Boggis
peter.boggis@formicio.com

Related articles

Beyond Default – Moving Your Organisation to an Improved Future
Using Organisational Capabilities to Pull the Present into the Future
How Operating Principles Can Make Strategy Meaningful
Developing Portfolio Management as an Organisational Capability

Formicio Insight Article: Managing Organisational Capabilities as a Portfolio

 
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