Which companies stand out to you as worth admiring?
People who are asked this question often focus on companies known for innovation, creativity, resilience, and the ability to create an engaging work culture. These companies are highly regarded even though most people aren’t familiar with their operational methods.
Instead, what makes these companies stand out is their organizational capabilities. In fact, organizational capabilities are a stronger indicator of ongoing success than most other factors. Keep reading to learn the following:
- What organizational capabilities are
- Why they are important
- How to identify and develop capabilities that improve organizational performance
- What impacts organizational capabilities should have on future planning
When you know how to nurture these capabilities in your own business, you set yourself up for ongoing success.
What Are Organizational Capabilities?
Organizational capabilities can be summed up as what your company does well. However, they don’t include specific products or services, which can change over time.
Unlike products and services, organizational capabilities aren’t commodities; they are a bit more intangible. They are the sum total of a company’s expertise and abilities, along with what it can accomplish because of those assets. Organizational capabilities also represent how employees and leaders use their talents as a group to accomplish goals.
Why Is It Important to Understand Your Organizational Capabilities?
If you don’t understand your organizational capabilities, you are setting your company up for failure.
Imagine that you are planning a major strategic move. You might spend time and money analyzing market conditions, working with team leaders to produce a detailed strategy, and investing in new technology. When it comes time to execute your strategy, you feel confident.
However, suppose that the move does not work out at all as you planned. The project is a failure despite all of the planning and due diligence. What went wrong?
You may have developed the strategy without considering your organization’s capabilities. Specifically, you didn’t investigate whether your company had the talent, resilience, leadership, and other intangible attributes to successfully execute your plan.
Organizational Capabilities Inform the Customer Experience
Ultimately, organizational capabilities impact the customer experience. They impact the quality of products and services offered, how quickly your organization can solve problems, your ability to respond to customer service needs, and whether you can adapt to evolving expectations.
Organizational capabilities also impact the employee experience. They can build or hinder worker engagement and ownership. This impact is so important that all decisions relating to recruiting, hiring, onboarding, retention, and employee development should be made with organizational capabilities as a top priority.
Organizational Capabilities and Decision-Making
Ask these questions before making strategic or hiring decisions:
- How will this step improve organizational capabilities?
- Do we have the organizational capabilities to make this happen?
- What capabilities should we focus on to accomplish short-term goals?
Once you understand your organization’s capabilities, you will be able to make strategic decisions that align with them.
The Organizational Capabilities of a Company
It’s not enough to have several employees who happen to have certain competencies. For something to be considered an organizational capability, it must be an attribute of the entire company.
For example, an organization might employ several innovative people. However, if innovation isn’t valued or prioritized by that company, it will never be an organizational capability.
Interactive chart: An organizational planning tool like Functionly helps companies to see a bigger picture view of roles, responsibilities and connections within their teams, helping to identify potential organizational capabilities.
11 Organizational Capabilities That Will Lead You to Success
Examine some of the most successful organizations, and you will find that these 11 key capabilities stand out.
Agility is a business’s ability to determine when a critical change needs to be made, then make that change quickly. These changes may be in response to new opportunities, evolving customer needs, or pivots due to changes in the market.
You can track specific metrics to determine agility. One useful metric is the amount of time it takes between deciding to introduce a new service and bringing the service to market.
Agility is important because time is a finite resource. When a company can accomplish things quickly, that reflects an excellent ROTI (return on time invested). A good ROTI is also a desirable indicator of organizational health.
It takes a combination of technology, knowledge, and adequate human resources to accomplish mission-critical changes quickly and effectively.
The most consistently successful organizations set high performance standards, and their employees meet or exceed those. Accountability becomes an organizational capability when employees widely understand that anything less than high performance is unacceptable.
To determine how well your organization prioritizes accountability, you must examine how performance impacts employee success. Consider the following questions:
- Are performance reviews completed for all employees?
- Is there a connection between compensation and performance?
- Are promotions based on merit?
Organizational accountability can be gauged by your company’s willingness to spend money. If every employee receives the same annual raise, performance is not being rewarded and employees are not being held accountable. However, if the highest performers are also receiving merit-based increases, then accountability matters.
3. Acquiring Knowledge
For individual employees, acquiring knowledge refers to gaining new information, developing new skills, and adapting new best practices based on those aspects. But acquiring knowledge at an organizational level is different from individual training and education.
Organizational learning comes as a result of competitive analysis, experimentation, and acquisition of knowledge through hiring or training. Once this occurs, the next step is spreading new ideas and competencies through the organization to drive policy and strategies.
4. Customer Engagement
Engagement is the ability to build strong, long-term relationships with key customers that are based on trust. The phrase “key customers” is significant. While all customer relationships should be treated as important, 20% of customers often make up 80% of an organization’s profits, according to Investopedia.
To enhance customer engagement, you must find out who those customers are and nurture those relationships. This kind of customer engagement comes from a combination of expertise, data tracking, use of technology, referral and rewards programs, customer outreach, training, and even hiring strategies.
Workers in an organization that has embedded customer engagement as a capability will prioritize customers’ needs and experiences, even if they don’t have significant customer exposure.
Innovation is the ability to create new products, strategies, processes, customer service methods, and so on. This capability indicates that an organization is focused on the future instead of leaning on past accomplishments.
Organizational innovation means that customers are provided with new things to be excited about, workers are more engaged, and investors feel confident in continuing to support a company.
The vitality metric is useful for tracking innovation as an organizational capability. This metric tracks profits and revenues from any product or service introduced within the past three years.
Talent is the ability to recruit and retain dedicated, engaged employees. A company with talent as a core capability has a motivated workforce with the skills required to do their jobs exceptionally while adopting new skills for the future.
Organizational talent can be:
- Built through training and nurturing existing talent
- Bought by hiring new talent
- Borrowed via partnerships and alliances with other organizations
- Bound through a dedicated effort to identify and retain top talent
- Boosted by severing employment relationships with poor performers
The ability to make talent an organizational characteristic depends largely on the steps leadership is willing to take to ensure the best employees feel valued. They can accomplish this through compensation, opportunities, autonomy, and appreciation.
Talent tends to attract talent, and it tends to stick around if it is nurtured. Because of this, worker retention stats are a good metric for measuring talent.
Additionally, talent is an important factor in reputation. If your recruiting efforts are getting a lot of positive responses, job seekers probably see your company as a desirable place to work with talented employees. Using polls and surveys, organizations can also gauge this metric directly from employee feedback.
Finally, productivity and accuracy reflect strong talent. Simply put, a talented workforce gets work done well and in a timely manner.
7. Shared Company Identity
Do workers have a positive view of the company? Are the perceptions of the company’s mission, values, and personality consistent across the organization? Do customers, or even the general public, share these sentiments?
These perceptions reflect a shared company identity, which indicates that an organization has created a clear understanding and positive mindset among employees.
While workers may not be in total agreement on company identity, the majority should have views that align very closely. Without a strong understanding of the company’s unique identity, there is little chance of your team being able to work cohesively toward your organization’s objectives.
The best way to evaluate company identity is to engage workers directly. Ask them what the organization is most known for, what persona the company is trying to present, and how customers see the organization.
At least half of the workforce should share the same or similar answers. However, shared company identity doesn’t qualify as an organizational capability until 80% or more of the workforce hold the same views.
Collaboration is a capability that indicates how well the organization can work across functional and team structures in order to achieve positive outcomes.
Naturally, collaboration refers to teams working together on projects. It also includes sharing technologies and other resources, giving other areas access to talent, and communicating ideas.
This organizational capability fosters better productivity and innovation. It also saves money thanks to pooled resources and services.
Think about each division of your business. What would it be worth as a stand-alone unit for a potential buyer? Next, add these numbers up and compare that total with your company’s market value.
If your organization is worth significantly more as individual pieces than it is as a whole, you need to work on strengthening collaboration. This metric is the breakup value.
Leadership is the ability to consistently hire, nurture, and retain leadership talent throughout the entire organization. This capability applies to every layer of the organizational structure. When a business is able to do this, it can develop a distinctive leadership brand.
Good leadership can help improve retention and recruiting rates. It can also focus on developing employees and preparing them for leadership roles.
One way to track leadership is to determine how many emerging leaders you have. For example, what would happen if a large percentage of your top employees suddenly left? Would you be able to replace them with leadership talent you have been able to develop?
Contrast the number of future leaders with your top employees. This is your substitute-to-star ratio. The higher this ratio is, the better. Companies with strong organizational leadership capabilities have a substitute-to-star ratio of 1:1 or higher.
Efficiency is the ability to get things done in a way that minimizes financial and time costs. Yes, it is true that spending is required to grow a business. However, that is only feasible if there is effective cost management to balance growth.
Fortunately, efficiency is easy to track. You should never neglect your company’s financial documents. Managing costs, such as labor and costs of goods sold, is essential to increasing your company’s organizational efficiency.
11. Strategic Cohesiveness
Strategic cohesiveness refers to a shared vision among all or most members of an organization. This cohesiveness is exemplified procedurally, behaviorally, and intellectually.
Intellectual cohesiveness requires a clear understanding of the company strategy at every level of the organization. All employees should understand the organization’s overall strategy and how their role impacts it.
To determine how well this is reflected in employee behavior, talk to employees about how they spend their workdays. Are they spending most of their time in activities that support the company’s strategy? If they don’t, it’s difficult for them to feel aligned with the organization’s strategy.
Additionally, ask employees whether their suggestions for improvement are considered or implemented by leadership.
Finally, consider which processes you have identified as being mission-critical. Are you investing in these? If not, that lack of commitment is likely rippling throughout the company.
How to Conduct an Organizational Capabilities Audit
Ideally, you should use the financial audit process to ensure your company’s financial health. Likewise, you should be conducting a capabilities audit to monitor how your company is developing and maintaining the characteristics that define its strengths.
An organizational capabilities audit will highlight which items have been given the highest priority and which have not. You must review the results of the audit within the context of your organization’s strategies, goals, and history.
Additionally, a capabilities audit will measure how well these attributes are being nurtured. Finally, it will result in a clear road map for making improvements.
When to Perform a Capabilities Audit
Capabilities audits do not have to be reactionary; they can be conducted when an organization is successful with the goal of preparing for future growth and improvements. With that being said, a capabilities audit can be helpful if you want to identify why your company isn’t meeting current goals.
The Scope of Organizational Capabilities Audits
A capabilities audit can be conducted for an entire company. Alternatively, it might focus on a specific team, functional area, or region. As long as the leadership team is willing to support an audit, any business area can conduct an audit of itself.
You can choose the scope of your audit based on what you have witnessed in your organization, business goals, and known issues. The steps below detail how these audits are done.
Step 1: Define Which Capabilities Are Most Important
Take the eleven organizational capabilities listed above and identify which ones are most important to your current goals. It may help to adapt these using language that better aligns with your brand and specific business needs.
These priorities shouldn’t be set by company leadership alone. Employees and frontline managers should be encouraged to contribute their thoughts based on their own knowledge and experiences.
Step 2: Evaluate Company Performance Starting with the Most Critical Factors
Identify the ideal method for gathering data to measure each capability. Depending on your focus, that might include surveying employees, going over financials, reviewing recruitment process outcomes, tracking customer service outcomes, or even analyzing retention data.
In most instances, you will use more than one method and instrument to get the insights you need.
When polling employees, it is helpful to gather insights based on the current state and ask them to envision future scenarios. You may find that workers feel reasonably confident in your company’s current capabilities but are uneasy about upcoming challenges.
Step 3: Identify the Gaps and Points of Success
Review the information that has been gathered in light of the organization’s goals. Using that information, articulate your gaps and weaknesses. Additionally, acknowledge where the company is meeting or exceeding expectations.
Step 4: Begin Working on a Strategy to Improve Key Areas
It is not practical or effective to address every shortcoming at once. Even if there are gaps, it might not be possible to address all organizational capabilities at this time.
Instead, set priorities based on your current goals. Start by writing a very clear strategic statement detailing these goals. Then, set priorities based on the statement.
Now that your priorities are clear, you can create an improvement strategy. For example, if you have identified weaknesses in talent and customer engagement, you could begin a training and development initiative.
Then, you could plan for a critical focus area in training to relate to customer service delivery and the development of soft skills like empathy and communication.
Step 5: Audit and Iterate
Set benchmarks for success for each competency you choose to address. Then, make a plan to return to audit those areas again. Determine whether there has been adequate progress. If not, consider modifying your strategy. At this stage, you can also begin addressing your capabilities model.
Organizational Capabilities and Planning
There is another benefit to understanding your organization’s capabilities. You can use this information during the workforce planning process to ensure that you build a team with the combined skills and experience to do the following:
- Close any capabilities gaps
- Improve capabilities in order to achieve new goals
- Ensure your team is able to overcome future challenges
Members of your HR team can include organizational capabilities development when creating roles and responsibilities, writing job descriptions, screening candidates, and making employee development plans.
Consider using Functionly software to develop organizational charts as you plan for future workforce needs. These charts can include key skills, characteristics, and responsibilities that align with the most important capabilities for achieving your business objectives. Start today for free.