Organizational Capabilities: Definition, Examples, and Building Process

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Organizational Capabilities: Definition, Examples, and Building Process

Organizational capabilities enable companies to maximize their performance and achieve their goals. Let’s take a look at an organizational capabilities definition, some examples, and how L&D and HR teams can help build organizational capabilities.

What are organizational capabilities?
Importance of organizational capabilities
Types of organizational capabilities
Examples of organizational capabilities
How L&D and HR teams can help build organizational capabilities

What are organizational capabilities?

Organization capabilities (OC) are the intangible, strategic assets that an organization draws from to get work done, execute its business strategy, and satisfy its customers. 

These capabilities cannot originate from a single effort or by following an external template. Instead, they are acquired and refined internally from multiple interactions to be organization-specific. They can include expertise, activities, information, knowledge, procedures, processes, skills, systems, technologies, or unique adaptive features.

The strength and alignment of such assets define a company’s identity and differentiate it from competitors. Each organization develops and integrates these attributes into its culture over time, so they are challenging for others to pinpoint and replicate. For instance, Coca-Cola could sell its soft drink formula to another company, but that company would not be able to emulate the same emotional connection customers have with Coke.

Building organizational capabilities is an indispensable part of the organizational development process.

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We will go into these in more depth below, but some organizational capabilities examples are:

  • Organizational culture
  • Leadership performance
  • Strategic unity
  • Innovation
  • Agility
  • Talent
  • Customer connectivity

Importance of organizational capabilities

The most successful and admired companies have distinct combinations of attributes that make them stand out from the competition. People respect organizations like Starbucks, Apple, and Disney because of their capabilities, not their structures. It’s their knack for innovation and their willingness to adapt to consumers’ changing needs that make them trustworthy and relevant.

Boston Consulting Group (BCG) conducted a detailed survey and interview of senior executives from international corporations in various industries to determine why their companies are thriving. The results pointed to a clear correlation between organizational capabilities and success.

The right mix of organizational capabilities helps businesses operate effectively and deliver excellent service and satisfaction to customers. Organizational capabilities are a driving force in:

  • Gaining competitive advantage – The ability to manage resources and information effectively helps focus an organization on meeting customer demands with its distinctive products and services. This leads to surpassing competitors and gaining prominence in the marketplace.
  • Adapting to change – An organization that makes effort to align with employees, customers, and emerging trends and markets can better foresee and plan for the new directions it must take. 
  • Driving business performance – Investing in the development of organizational capabilities hones a company’s strengths and identity. Harnessing this intangible value promotes stability and makes the most of what everyone has to offer. This delivers optimal performance.
Impact of Organizational Capabilities

Types of organizational capabilities

In order to focus on building organizational capabilities, it is helpful to understand the big picture of what they are. Definitions of organizational capabilities might vary, as there are multiple different types and categorizations of OC. Here’s an overview of a few broad categories:

Operational capabilities

These attributes reflect a company’s ability to align skills, routines, and processes to successfully operate in specific markets and meet its stakeholders’ requirements. 

Operational capabilities materialize gradually over time, according to the specific characteristics of each business. They often blend into the background, so they are less obvious and more difficult to imitate. Hence, they can be a competitive advantage.

Let’s use a restaurant as an example of operational capabilities. Whatever training chefs have needs to be customized to a specific restaurant’s type of menu, prices, available ingredients, etc. The recipes used may be very similar to other restaurants, but the unique process for making certain dishes is developed over time and passed on to new chefs. The capacity to leverage resources and the chefs’ skills will reflect the restaurant’s cooking style and character to its customers. 

Strategic capabilities

These are connected to strategy and vision and indicate how well an organization handles its business environment and sets itself apart. Strategic capabilities are what take an idea to a successful reality. 

For example, a manufacturing company wants to have more products available for a growing customer base. The company must evaluate whether it has the resources to create the products and get them to the customers. Do the usual suppliers have the raw materials needed? Is our warehouse adequately staffed? Are the shipping companies able to handle an increase in products? The company’s capability to execute this strategy will ensure that process doesn’t get bogged down. 

Dynamic or meta capabilities

These focus on how well a company adapts to a changing business environment by building, integrating, and reconfiguring its competencies. In other words, the capability to change capabilities. 

David J. Teece defined this concept in 1997 and explains it as the capacity to: “(1) Sense and shape opportunities and threats, (2) seize opportunities, and (3) maintain competitiveness through enhancing, combining, protecting, and, when necessary, reconfiguring the business enterprise’s intangible and tangible assets.”

Apple demonstrated dynamic capabilities back when it was still just a computer manufacturer by creating the iPod. Although MP3 players already existed, Apple saw the need for a device that was smaller, sleeker, and more appealing to consumers. The iPod increased Apple’s share price immensely and started it on the path to becoming a revolutionary consumer electronics design company. 

Context capabilities

These are found in the functions that are essential for getting things done but are more behind-the-scenes. They are more apparent when they don’t work well. 

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Consider the accounting department at most companies. If they offer refunds for a product or service, and the refund process runs smoothly, they’re meeting their customers’ needs. On the other hand, if the process is slow or fails altogether, customers will be frustrated, and other departments will hear about it.

Core vs. non-core capabilities

Organizational capabilities have varying levels of value and connection to each company. One way to break them down is into core and non-core capabilities. Core capabilities are integral to a company’s business and competitive edge and are held inside the organization. Non-core capabilities can be outsourced to a strategic partner. 

Whether a capability is core or non-core depends on the type of business. A mobile app development company has in-house developers because that’s what they do. A utility provider that wants to develop a mobile app to better serve its customers would need to outsource this capability. 

Behavioral vs. structural capabilities

Another way to break down organizational capabilities is into the classifications of structural and behavioral. 

Structural capabilities relate to how the organization is arranged. This includes project management, shared services, business analytics, and layers of leadership, etc. 

Behavioral capabilities relate to employees’ attributes and approaches. This includes areas such as change management, leadership performance, cross-functional coordination, and employee engagement.

The BCG survey mentioned earlier showed that 77% of respondents view behavioral capabilities as very or extremely important for the future, while 63% named structural capabilities. 

Examples of organizational capabilities

It’s useful to see what OC look like in a real-world application. Since the many different kinds of organizational capabilities are too numerous to cover, let’s go over just the following seven examples:

Organizational cultureAn inclusive company culture empowers and engages employees, and supports organizational goals:
– Culture supports development and shapes the organization’s identity. 
– Employees’ mindsets help them function well.
– Collaboration promotes teamwork, forms alliances, and allows cross-functional communication. 
Leadership performanceBusiness leaders represent the company well and effectively manage and inspire employees:
– A clear leadership brand exists that distinguishes the company from competitors. 
– Perception of leadership is positive.
– Leadership qualities remain consistent throughout teams.
Leadership competencies are embedded throughout the organization, with learning opportunities for all employees.
Strategic unityStrategic point of view is articulated and embraced throughout the organization:
– There is a continual investment in the practices and procedures necessary for strategy development and to implement the strategy.
– All employees throughout the organization consistently understand the business strategy is and why it matters.
– Employees recognize how their role supports the strategy.
– Employees feel heard and see their suggestions acted on.
InnovationDelivering successful new products and services. Regularly updating processes for continuous improvement:
– Focused on the future, not the past.
– Willingness to re-invent parts of the organization.
– Sound processes are in place that can take on something new.
– An atmosphere of excitement is created over new concepts.
AgilityBeing responsive and flexible concerning changes in the internal and external environment:
– Skilled and knowledgeable employees who are prepared to adapt.
– Prompt decision-making processes that don’t rely on bureaucracy.
– Proactive planning that can be adjusted to respond to the competition or unexpected events.
– Flexible systems and workflows that can accommodate the organizational change process or expansion.
TalentEmployees at all levels are competent in what they do:
– Employees are equipped with the skills and tools they need to perform their roles in the present and for future requirements.
– Employees are committed to doing their jobs well and consistently.
– Learning and development is championed and provided.
Ability to motivate and retain competent employees.
Customer connectivityEstablished customer relationships based on trust and overall strong customer focus are the mainstay.
– Priority is placed on dedicated teams who have a meaningful connection with customers.
– Committed accountability to customers.
– Strong customer data collection and analytics.

How L&D and HR teams can help build organizational capabilities

While L&D and HR teams are not solely responsible for building organizational capabilities, it is something they can help with. This is especially the case regarding behavioral capabilities like management effectiveness, employee performance management, culture, etc., where the HR function can add a lot of value.

Here are some actions you can take to assess and cultivate organizational capabilities:

1. Engage leadership

Communicate with leaders to ensure they fully understand the process of assessing and building organizational capabilities, and their role in it. Since you need leaders to support the initiative, it’s essential to explain what will happen and what will be expected of them. They will be expected to devote time and energy to it and may even have to sacrifice some short-term results. Getting everyone orientated and onboard from the start can prevent misperceptions down the road.

2. Define and list your organizational capabilities

Since the term “organizational capability” can evoke many interpretations, clarify to your stakeholders what you mean by it. This will also help you establish a language in which you talk about OC at your organization to make sure everyone is on the same page. 

Brainstorm what your organization must be good at to prosper in the long term. Your list should include the required capabilities, and it should indicate those that are already helping execute the business strategy and gain an advantage over the competition.

Consider different types of OC, but focus mainly on the strategic capabilities. Line up who will be responsible for observing the lessons learned from each area. Also, be thinking about how sustainable and relevant each capability will be if there is a shift in your business strategy or other changes. 

3. Conduct an organizational capabilities assessment

Set performance indicators for each capability and determine where you currently stand in comparison. You can do this through internal surveys or interviews. Other options include consulting outside experts or other data sources. Your assessment should emphasize resources, processes, and structures.

4. Understand the capability gap

Take a candid look at where your organization is and where you want it to be regarding each capability. For instance, your leadership might not be as strong as you wish because you have a weak leadership pipeline. You’ll need to consider what effort it will take to transform this. Then you can start identifying future leaders and prepare leadership development plans for them.

5. Prioritize and create an action plan

You won’t be able to bridge all the gaps in one quarter or even one year. Identify the critical capabilities that bring the most value and start with those.

You can rank each capability by how important it is and how difficult it will be to implement. Start sooner on those that are important and fairly simple to get going. The capabilities that are more complex to implement may need to be assigned to a team that can dedicate the time and resources required. Sorting the capabilities this way is an excellent place to start creating an action plan with concrete goals.

For instance, if you find out that employees in a specific department lack a certain skill that would make them more productive, you can implement a targeted training program to help them build that skill. That way, you’re building up your talent capability.

6. Track progress and follow up

Any initiative needs to be measured and reviewed to understand its impact and achieve success. Capabilities can be challenging to evaluate because they are abstract, so you need to have quantitative goals and milestones in place. This will allow you to track where you are once you put your plan into action.

Let’s gp back to our leadership pipeline example. For instance, your goal might be to identify five new potential leaders, develop a custom leadership development plan for each of them and get them started with it in the next two quarters. At the end of the second quarter, you can evaluate how you’ve progressed and where you can improve.

Consistently reinforce the significance of these capabilities. There should be an ongoing association between them and the company’s objectives and employee rewards. Use metrics to continually gauge the plan, so you can make appropriate adjustments and broaden it for further investment in the crucial capabilities.

Concluding points

Organizational capabilities have a profound impact on any business. A thorough understanding of organizational capabilities and their different types allows you to focus your efforts on building the most impactful ones. L&D and HR professionals who can provide guidance in this area will help their organizations be better equipped for future success and ready to thrive in a rapidly changing environment.

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