Why spend the next 15 minutes reading this?
This piece is specifically for L&D professionals that are looking to have a high impact on the performance of their whole organization and helping it become better equipped for the future.
We’re going to explore the idea of organizational capabilities, how it connects to L&D, business strategy, and other organizational areas, how you can contribute to developing organizational capabilities, how to increase their sustainability and what to avoid during this journey.
In my work as a Strategy & Organization Adviser, I’m partnering with L&D teams quite often, in our quest of enabling together organizations that are more effective and that create more relevant value to their stakeholders.
I’ve summarised here some of my practical takeaways when it comes to organizational capabilities, along with a fictive case study of a traditional Retail organization developing a new capability.
Hope you’ll find it useful and that you will start a conversation with your colleagues about organizational capabilities after reading this article.
Let’s dive right into it!
What is an organizational capability?
A simple definition would be: “the ability of the whole organization to do something”.
This ability is usually specific to the organization and its context, in the sense that it cannot be copy-pasted from one organization to another.
Let’s take the example of a traditional Retail organization developing an e-commerce capability in response to the pandemic lockdowns last year. This capability would translate to “the ability of the organization to sell products and services online”.
As you can imagine, for this traditional Retail organization to gain this new ability, it’s not only about developing an e-commerce website and learning to use it for selling products and services. There are many other connections that we’ll explore below.
Meanwhile, if we look to software development for analogies – you can consider how developing a software product requires much more than just knowing how to write code. Similarly, growing the capability of an organization to achieve the desired purpose implies much more than learning new things or using a new set of tools.
Types of organizational capabilities
Next, let’s take a look at the different types of capabilities that organizations have or could develop.
First of all, there are basic or operational capabilities. These are the capabilities that help organizations operate in specific markets, delivering the expected value to their customers and gaining average profit margins in those markets.
Keeping these operational capabilities up-to-date is table stakes for the viability of the organization in the current markets and they are connected to basic expectations of customers and other stakeholders of the organization.
In contrast, strategic capabilities are about how the organization strategically navigates its business environment. They are usually connected to strategic bets of the business, anticipatory investments, and enabling the vision of the whole organization.
In our Retail example, before the pandemic just a part of the traditional Retail players made strategic bets in developing their e-commerce capability, offering their customers both Web and Mobile experiences for being able to buy online the products and services that they were selling.
The traditional Retail organization in our case study was not part of those making this strategic investment before the pandemic hit. In their case, developing the e-commerce capability was rather a reactive response, as this capability has started shifting from a strategic to an operational one. Due to the lockdown restrictions, most customers now had the basic expectation to be able to order what they wanted online.
Dynamic capabilities are another type that is relevant to consider given the rapidly changing business environments. Another name for them is meta-capabilities because they are capabilities to change capabilities – is the organization able to adapt and reconfigure current capabilities in response to internal and external dynamics?
One example of a dynamic capability is the organization’s learning capability – is the organization able to collectively learn from its experience and use this learning effectively?
Not all organizational capabilities have the same level of importance and connection to what the organization is about, to how it produces value now and in the future. That’s why another categorization looks at core and non-core capabilities. Core capabilities are usually kept inside the organization or developed through strategic partnerships, while non-core capabilities can be outsourced and handled through transactional relationships.
For example, the Retail organization in our case study decided that the e-commerce capability has become a core capability for them after one year of experience with it and continues to develop it internally and through some strategic technological partnerships.
Emergence. A systems lens to organizational capabilities
The interesting thing about organizational capabilities is that they emerge from the interaction of multiple organizational elements and not through any single endeavor.
The ability of the whole organization to do something is tied to people in the organization collectively forming complex patterns of coordination between each other and with various types of resources (tools, collective knowledge, individual competencies, etc)
For a better understanding of how this plays out in practice, it’s useful to explore how organizational capabilities are interconnected to other organizational elements.
Inter-connections with business strategy
Strategy shapes decisions to invest in developing certain organizational capabilities. Current and adjacent organizational capabilities shape the strategic options that the organization can pursue.
Capabilities fill the gap between organizational intention and actual outcomes. Ignoring organizational capabilities when developing strategy heavily impacts the feasibility of any chosen strategy. Ignoring strategy when developing organizational capabilities can lead to wasted investments, as the two inform and shape each other.
Going back to the case study: Even though the Retail organization has decided to invest in developing its e-commerce capability as a defensive strategy, to maintain viability in its current markets, having a functioning e-commerce capability now enables new strategic options for creating value.
Inter-connections with organizational effectiveness
Effectiveness is about the ability to achieve a purpose. You can achieve a purpose by doing things.
If you’re not able to do those things as an organization, if you don’t have the organizational capabilities in place, your effectiveness as an organization suffers.
Conversely, if you’re not effective as an organization in achieving your purpose and providing value to your customers and other stakeholders, there are slim chances that you can invest to develop the required organizational capabilities.
So organizational capabilities and organizational effectiveness are deeply interconnected. It’s one of the reasons why my work involves a lot of interaction with organizational capabilities while enabling organizational effectiveness.
The effectiveness of the Retail organization has started suffering during the first pandemic lockdowns. Luckily for them, they were able to avoid the vicious loop that brings many organizations to existential crises (lower effectiveness leads to lower investments in relevant organizational capabilities, which lead to lower effectiveness and so on) by activating their dynamic capability and starting a timely investment in developing their e-commerce capability.
Inter-connections with organizational design
Org. design is the bridge that aligns the strategy, the business model (how the business works), the operating model (how the business delivers value), and the organizational model (how people organize to create value in the business) to sustain each other.
Organizational capabilities need to connect with and sustain these models, so an org. design question in the conversation about capabilities is whether there are any other aspects in the business, operating, or organizational model that need attention, given the endeavor of growing this new capability?
At the same time, the way the business currently works, how it’s currently delivering value, and how people organize now to create value in the business shapes the way the organizational capability will grow and start creating value for the whole organization.
In our case study, when the Retail organization starts developing its e-commerce capability, this has multiple impacts on its business, operating, and organizational model.
On the business model side, it may give the option to address new customer segments, like people who wouldn’t otherwise have visited the physical stores of the retailer. There may be other types of value enabled for customers, definitely a new channel through which value is delivered, new customer relationship opportunities, new possible revenue streams like for example increasing the ability to cross-sell. Then, connecting to the operating model, new resources being used, new activities, new locations like warehouses, new information flows circulating in the org, new partners like secure payment solution providers, and new types of costs.
Furthermore, on the organizational model side, I’m going to detail this a bit in the new ways of working section below.
Inter-connections with new ways of working
Developing an organizational capability is usually connected to adaptations of the ways of working, roles, processes, and even governance and decision making.
These may be minor adaptations to accommodate how the organizational capability grows, or even shifts of the whole organizational model going further.
For the Retail organization, the e-commerce capability came initially with minor adaptations for the whole organization, following the “just make it work” mantra. Then, as it became a core capability for the business, they started to rethink the organizational model to enable not only the day-to-day Retail operations but also new business model, product, and service innovation for the new customer segments discovered via using the e-commerce capability.
Even though there are many organizational models that can serve as inspiration for enabling value creation in conditions of increased uncertainty, the Retail organization decided to create their own, taking into account their specific business and organizational context and culture.