Strategy Dynamics Briefing 80: Introducing capabilities

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A capability is the ability of the organization, function or team to get something done, and is therefore quite different from resources, both tangible and intangible, that generally do not denote activity. In grammatical terms they can be recognized by the suffix ‘-ing’ or ‘-ment’ – hiring or recruitment, marketing, purchasing, product development and so on. We will define them more clearly in the next Briefing, but let’s start with an example.

What does it mean to have a stronger capability at something than another organization? Consider a retailer of any kind of products or services (except the online model). All such firms need real-estate – the units, sites or properties from which they trade. So critical is the quality of this resource that it has spawned the saying “What drives success in retailing? – location, location, location.” A vital capability for any retailer, then, is the acquiring and development of new units.

To understand how this particular capability affects performance, reconsider the retailer from Briefing 30, whose new stores enable it to reach new potential customers. The firm tries to open stores quickly in order to capture the new customers available around each location before its competitors – and of course to grow profits quickly. The fastest it could possibly open any particular new store, having made the decision to start- up in a locality, is 9 months, or three quarters. However, with little experience of finding, acquiring and developing stores, the best it can do is open each store after a process taking 18 months or six quarters. This puts back substantially its capture of customers.

This story demonstrates a principle that will recur as we explore capabilities further:

Most capabilities are concerned with building, developing or retaining resources. We will see some exceptions later, but very many of the most important capabilities are clearly located at the flow rates in the strategic architecture. Since it has been shown throughout earlier Briefings that flow rates determine the growth of resources, and are where management act to drive performance, it is only to be expected that this is where capabilities will be found.

Faster, Better, Cheaper There is more to getting stores open than simply doing so quickly. Further concerns include:

  • finding good quality locations that can attract as many potential customers as possible
  • acquiring and developing stores for a low cost

The lead-time capability’s value is an easy metric to arrive at. The actual time is six quarters, but should be three, so it can be assigned a capability level of 3/6, or 0.5. Similarly, the capability to acquire and develop stores at a low cost can be defined as the ratio between the best possible cost and the cost actually incurred. The capability to find good quality store locations can be given by the fraction of potential customers in an area that each store could actually attract. This interacts with another capability in the marketing of each store, which also aims to capture potential customers, but we are concerned here with how many the store could reach, whether or not marketing is good enough to win them.

Table 1: Capability metrics for store opening.

Detailed capability Success factor Capability indicator Low value
Opening stores quickly Lead-time: quarters Actual lead-time vs. shortest 0.5
Finding good locations Fraction of potential customers reached Actual customers reached vs. total potential 0.7
Minimizing cost of new stores Total cost of opening each store $millions Actual cost vs. lowest possible cost 0.8

Table 1 summarizes the metrics for each capability, and Figure 1 shows the performance consequences that arise from the low capability levels shown in the table. The original low capability for lead-time (middle left) delays both the store openings and the spending of capital investment, but the poor capability for opening at low cost means that cumulative investment overtakes the high-capability case. The slow capture of customers is worsened by the poor quality of store locations opened, cutting still further the sales revenue the stores achieve. Since stores still incur full operating costs, the chain cannot become profitable and losses increase, leading to a negative return on investment. The business is clearly not doing well, relying as it does on these poor store-opening capabilities.

Figure 1: Impact of low capabilities for store opening speed, quality and cost. (Click image to view larger)

Impact of low capabilities for store opening speed, quality and cost

Until next time…

 

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Not core competences!

The catchy phrase “core competence” is now widely used, though its meaning has become blurred by indiscriminate use in managerial discussions, articles and books. The phrase originally described the powerful underlying technologies developed in multi-business firms that find expression in products and services sold into diverse end-markets.Strategic Management Dynamics book coverExamples from the original article include Honda’s mastery of four-stroke engine technology, which enables them to compete in motor-cycles, cars and ski-mobiles, or Canon’s laser technology which lies at the heart of its ranges of scanners and printers. It should be pointed out that a core competence alone is not sufficient for success if the organization lacks basic capabilities in other functions. Honda struggled in the car industry during the 1990s, for example, because of weaknesses in design, marketing and production engineering.

We will reserve the phrase ‘core competences’ for its original definition.

This briefing summarises material from chapter 9 of Strategic Management Dynamics, pages 634-637.

Read more about the book on our website

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