Virtual Roundtable – Summary of Discussion on Whether Capabilities are the Key to Successful Strategy

The aim of the Beyond Default Roundtables is to give practitioners in strategy and change an opportunity to share their experiences, challenge conventional wisdom, brainstorm ideas and network with peers who share the same interests and challenges.

In February 2023 a group of executives, consultants and academics met virtually to discuss whether capabilities are the key to successful strategy. The discussion was led by David Trafford, co-author of Beyond Default and moderated by Chris Hallam, founder of CH Coaching Solutions.

As the Roundtable followed Chatham House Rules, the summary below only attributes information that is in the public domain.

Moderator: Welcome everybody to our first Roundtable of 2023. It’s great to see so many familiar faces and some for the first time. Our topic for today is whether capabilities are the key to successful strategy. When I looked at this topic my immediate thought was yes, capabilities are key, but I suspect there’s more to it. So, David, could you start by telling us what capabilities organisations need when it comes to strategy.

David: Thanks Chris, and welcome everyone. The first thing I would say is that most organisations don’t have a good understanding of what capabilities are, let alone what capabilities they have or need. When it comes to strategy, capabilities are not given the consideration needed, in the sense that organisations think they either have them or can easily acquire them.

Moderator: How would I know whether I’ve got them or not? Typically, an organisation would develop a strategy in the belief that it had the capability to execute it, but how do they know?

David: Firstly, we need to define what we mean by capabilities as opposed to competences, as the terms are very often confused. The distinction is that competencies are held by individuals and capabilities reside within organisations. Competencies comprise the knowledge, skills, experience, aptitude and intelligence that individuals have developed over time. Whereas capabilities enable an organisation to do what it does. They are formed from a combination of shared mental models and frameworks, common language, beliefs and mindset, processes and practices, conventions and norms, shared experiences and, of course, the competencies of its people. Significantly, as they are embedded within an organisation, they are not lost when individuals leave. Equally when people come into the organisation with different competencies, they don’t necessarily have an immediate impact on the organisation’s capability. An organisation’s capabilities are the muscles that it has developed over time, and we all know that when we try to use different muscles it hurts. It’s the same for organisations and that’s why they tend to continue to use the muscles they have rather than develop the ones they need.

We’ve all experienced organisations that have organisational capabilities that are aligned with their strategy: things get done with little thought or effort. Equally we’ve seen organisations that don’t have the capabilities needed: the place looks and feels chaotic and amateurish. At one level it’s quite easy to see whether an organisation has the capabilities needed for its strategy to succeed.

Discussion: For clarity, how do you see organisational culture fitting into this thinking?

David: Culture simply describes the way things get done within an organisation, what Charles Duhigg calls the habits of an organisation. It’s what people instinctively and collectively do without consciously knowing why. Organisations have habits, as do individuals. Some habits are good as they support strategic intent, while others get in the way. Culture is a manifestation of an organisation’s capabilities: it’s a result of the muscles and habits that have developed over time. While it may be difficult to identify an organisation’s capabilities, its culture is more obvious.

Discussion: I agree. All too often people don’t appreciate that capabilities comprise elements other than competencies, such as process, method, technology and a whole metric system. One thing I’ve seen is the confusion between capability and capacity. I did a piece of work several years ago for a financial services organisation on their strategic capabilities and about 80% of the senior management kept thinking it was about capacity not capability. Capacity is important because if you don’t have the capacity you don’t have the capability to deliver. Building capability is not a simple exercise in recruiting bodies.

Moderator: David, do you have any practical suggestions on how an organisation can make a real honest assessment of their current capabilities, and the ones that they’re missing to realise their strategic intent?

David: The technique I use is based on assessing the maturity of each capability based upon a scale of zero to five, where zero is where the capability is not recognised or present, through to five where it’s robustly embedded within the organisation. I tend to do this through a self-assessment process where a leadership team rates each capability and then compares the results. This is an effective way of not only assessing the capabilities, but also the degree of alignment across the leadership team.

It’s important to make the distinction between those capabilities needed to run the organisation and those needed to develop and execute strategy. The capabilities needed to run an organisation fall into two types – those that are generic to all organisations like financial management, people management and operational management, and those that are specific to an industry sector. For example, exploration in the oil and gas industry, merchandising in retail, fleet management in car rental, patient care in health services, and fundraising in the charity sector.

Discussion: Am I therefore right in thinking that if an organisation wants to change its trajectory it will need to acquire new capabilities?

David: Correct, and this takes us to capabilities and strategy. Firstly, it’s important to remember that the capabilities that exist in an organisation are there for a reason; they are the result of past strategies and management actions. They’re the resultant muscles that have developed over time. Secondly, if you want to change trajectory it’s highly likely that you will need different capabilities, those that will pull the organisation onto its target trajectory. Equally, you might need to eliminate or reduce the influence of those capabilities that are keeping the organisation on its current trajectory.

When people say that their organisation is resistant to change what they actually mean is that their organisation has extremely strong muscles that are keeping it on its current trajectory, and that they are either unwilling or not capable of developing different muscles that will pull it onto its target trajectory.

There are also two other capabilities needed. One is the ability to confront an organisation’s default future and figure out what the new trajectory should be. This is the capability needed to develop strategy and one that the leadership team needs to have. It’s a capability that includes being able to understand the context within which an organisation operates and, more importantly, how the influence of exogenous and endogenous forces are changing it. What’s also needed is the ability to figure out what the strategic intent should be and the best trajectory for realising it. These capabilities don’t need to be present across the whole organisation, but do need to be present across those who have accountability for the future of the organisation.

As the strategic intent won’t realise itself a further capability is required, which includes process redesign, organisational design, programme and project management, change management, technology architecture design, data migration, and communications. All those capabilities needed to successfully execute a change programme.

Moderator: You paint a powerful picture about how and why an organisation has developed its current muscles, presumably ones that the leadership team has extensively used in the past. In your experience what’s the spark that gets them to realise that they may not have the capabilities they need for the future? Is it something external that comes to them or is it sometimes a realisation on their part?

David: The simple answer is when they realise that the trajectory is either not changing or not changing fast enough. The evidence for this is that the transformation programme is behind schedule and/or over budget. Even then they may not realise it’s a capability issue. The reality is that a strategy is not complete until the organisational capabilities needed to pull the organisation onto its target trajectory are defined and, equally importantly, how they should be put in place. It should also address how the organisational capabilities anchoring the organisation to its current trajectory are mitigated.

Discussion: I agree, capability analysis and capability design are something that’s normally done by the EAT (Enterprise Architecture Team), particularly the business architects. The problem is that they tend to talk in TOGAF (The Open Group Architecture Framework) language that turns executives off. What you then find is that the people who should be talking to executives about capability design and capability maturity modelling are not those in the transformation team. My experience is that most executives think that capability design is something that some other part of the organisation does and that it’s not core to their job. Equally worrying is that they don’t think it should be part of the transformation programme either.

One of the realisations I’ve come to over the years as a recovering enterprise architect is that capabilities are the thing that binds together the strategy, the operating model and the architecture. If you get it right the IT systems support the processes and the capabilities you’re building. Capabilities form part of the operating model needed to operate as a functional business. Your strategy should be building capabilities for the direction you want to travel. The problem is that they’re not seen that way. What you tend to find is that organisations do target operating model design, which is little more than defining job titles and job families. I think capabilities are so important and are often overlooked by people involved in transformation generally, and strategy specifically.

Discussion: What’s your thoughts David on the crawl, walk, run analogy, particularly when it comes to expectations on how fast you might need to either acquire a capability or build a capability? I find that the metaphor is used too loosely in terms of going through the phases without recognising that you might need a capability way out in the future or that you might need it more immediately.

David: The model is useful, but suggests there is only one way of putting capabilities in place. The best approach to take depends upon two factors, firstly urgency and secondly difficulty. Imagine a two-by-two matrix with the vertical axis being urgency and the horizontal difficulty. In the bottom left-hand corner you have ‘low urgency’ and ‘low difficulty’ and in the top right-hand corner ‘high urgency’ and ‘high difficulty’. In the former, the best way to put the target capabilities in place is to develop them through training – which is often the default option. This approach only works if you know how to develop them and have the time to do so, hence them being of low urgency and low difficulty.

If, on the other hand, the urgency is high and the difficulty is high then the best approach is to acquire the capabilities, possibly through acquiring a company that already has them. If the urgency is high and the difficulty is low – in the sense that they are readily available through outside service providers, you could insource them. If the urgency is low and the difficulty high, then you could grow them internally over time.

The approach you take depends upon how urgently the pulling capabilities are needed and how difficult it is to put them in place. It’s certainly not a one-size-fits-all approach and organisations may need to use multiple approaches depending upon what capabilities are required. The crawl, walk model is useful, but it doesn’t apply to all approaches.

Discussion: I’d like to go way back to the question right at the beginning of the roundtable, which was how important are capabilities in strategy? I think that they’re necessary but not sufficient. The reason I don’t think they are sufficient is that you need to spend time understanding the external (exogenous) forces. Only by understanding the external forces can we get a handle on what capabilities are needed and how quickly you need to put them in place.

David: I completely agree. If you don’t understand the influence of the exogenous forces that are changing the context in which you operate, how can you decide what organisational capabilities are needed. Without this understanding you’re in danger of putting in place organisational capabilities that were needed in the past, not those that are needed for the future.

Discussion: I’m running into this right now with a medical company that I’m working with. They’re completely changing their capability suite and one thing that we’ve run into is the unwillingness of people to adopt new capabilities. It’s so important that you have people on your team who are open to change, are growth-minded and are willing to step out of their comfort zone to do different things. The resistance has led some people to leave their positions because they just couldn’t handle what was being asked of them.

David: I believe that if people don’t understand the reason why they’re being asked to do something different, why should they change? And this is the main reason I developed the default future approach. On the whole people are smart and if you can help them understand how the context is changing and the future it will bring, the more likely they are to accept the resultant change. Changing trajectory invariably involves putting in place new capabilities, which in turn may involve some individuals taking on new roles that require different competences. If they accept this then you can help them develop new competencies. If they don’t then it’s probably best that they find an organisation that values their current competencies. We can’t stop the world changing, but we can do our best to adapt.

Discussion: There’s a big debate at the moment on the competencies needed for today’s leaders compared with those of the past. The question focuses on what competencies are needed to engage people who are joining the workforce today versus those who are already in it. Organisations are finding it increasingly hard to recruit people from the 18-plus generation who are often turned-off by the leadership styles of the past. Today’s leaders need to be self-aware and realise that what got them to where they are now might not get them where they need to be in the future.

Discussion: I run an organisation that’s made-up entirely of volunteers and one of the challenges I face is knowing what the volunteers are good at. I suspect this applies to most voluntary organisations.

David: As some of you may know I helped develop the strategy for the previous speaker’s organisation. A key aspect of the strategy was identifying the organisational capabilities needed to realise its strategic intent. The thinking was that if we made the strategic intent clear and described the capabilities needed to realise it, people would self-select. And from what I observe it’s working; people are volunteering based upon what they can bring to building the organisational capabilities needed.

Discussion: That’s very helpful because when you’re implementing strategy you tend to go down to the detailed operational level and forget the bigger picture of what you’re trying to achieve, and how.

Discussion: What I think I’ve just heard you say David is a variation on the famous Field of Dreams quote ‘if you build it they will come’ to ‘if you say what you want to build they will help you build it’. This is a smart way of operating because it allows you, at a low cost, to get those capabilities in place.

Moderator: We’ve got about five minutes before we need to bring the discussion to a close, would anyone like to raise a question or make a comment?

Discussion: I’d like to comment on what David said earlier about the importance of getting people to understand that the as-is state is unacceptable, and until they accept that nothing will change. That resonates with me so much at the moment. I read about it in Beyond Default, but didn’t really believe it, but I do now because it’s something I’m facing in my personal life. Confronting your default future is certainly a prerequisite for change, whether it’s in your professional or personal life. Equally important is sharing what you think the alternative futures could be.

Discussion: One point I’d like to make is the power of using operating principles to help people understand how they need to change. Defining that we’re going to operate this way, as opposed to that way, adds great power to helping people think about and understand the change of trajectory.

Moderator: David, would you like to wrap things up before we close.

David: Thanks Chris. I think we all agree that organisational capabilities are important, because if the required capabilities are not in place the strategy will not succeed, it’s as simple as that. The strategy needs to define what the required capabilities are, and how they will be put in place; remembering that there are at least four ways, based upon difficulty and urgency.

Moderator: Thanks David. Our next call is in May 2023 when we’ll be discussing the role of strategic signatures in strategy. We hope you’ll all be able to join us. Until then goodbye.

Note: This is a summary of the discussion that has been condensed and edited for clarity.

Please email David if you have any points that you would like to raise.

More articles, blogs, podcasts and videos are available on the Beyond Default Resources page.