New strategies usually require that new things be done well. You have already thought about the new resources that would be needed to support your strategic proposal, and the new preferences that would be required of senior management. But filling gaps in those two areas may not be enough. Your new resources, put into the hands of people who still act in the “same old way,” may not be of much use. You might build a new factory, for example, but if the people in it do not understand that customer responsiveness is the key to your new value proposition, your strategy will never be properly executed.
Consider the case of Mattel Inc., the American toy company, when it sought to reduce its dependence on the U.S. market by doubling its international sales.2 To do this, the com-pany began to design and produce toys for individual foreign markets, rather than simply adapting U.S. products. The organization structure changed to give more prominence to international activities, and bonus incentives were tied to international growth targets.
Mattel’s plan was ambitious, and definitely required new resources, new management preferences, and the development of new organizational capabilities. By way of example, let us focus on one aspect of the challenge facing Mattel: hiring non-American employees, and then learning to manage a more diverse, multicultural organization. In all likelihood, it would not be so difficult for Mattel to hire the needed new resources, in the form of people who understand foreign markets, foreign business practices, and who speak languages other than English. But Mattel’s American employees would need to learn to work effectively with those of other nationalities, and vice versa. The company would also have to learn to create attrac-tive international career paths and manage employees on foreign assignments. Developing the ability to work effectively across cultures usually takes some time. In this particular exam-ple we would judge that developing the new organizational capability (the ability to work across cultures) will prove more difficult than the challenge of finding the new resources.
There are, of course, many other types of organizational capabilities. In Chapter 1 we mentioned 3M’s outstanding ability to innovate, a capability which has underpinned the company’s strategy for the past 90 years. In other businesses the prized capability is to produce at the lowest cost. Aluminum companies, for example, routinely prepare and study histograms showing the relative cost positions of each of their smelters and those of competitors all over the world. The perpetual challenge is to find ways to move down the cost curve. Such an emphasis is common in industries in which the price of the end product is beyond the control of any individual player.
Another capability (see Table 8.1) that has gained prominence in recent years is speed. Firms have become aware of just how slow, in comparison to global industry lead-ers, some of their processes are. American automotive companies realized that the time to develop new models had to be cut by 50 percent. Jack Welch, former CEO of General Electric, proclaimed that “speed, simplicity, and self confidence”3 were to become the hallmarks of GE businesses, and many other companies have tried to follow suit. Welch also highlighted “boundarylessness,”4 meaning the ability to work effectively across boundaries inside and outside the organization. Many companies are working to develop this capability, but finding it difficult.
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Capabilities such as those shown in Table 8.1 do not exist in isolation in an organi-zation. They are based on the behaviour of your employees, which is in turn influenced and supported by the culture of the organization. We have illustrated these relationships in Figure 8.2. In this diagram, which is the basis for much of this chapter, we have also included three organizational leverage points that both support your existing culture, behaviour, and capabilities and act as your potential levers for change. As we shall discuss later, if you want to develop new capabilities you will need to change the behaviour and culture of your orga-nization. These three leverage points are the means you have to make changes.
It is important to note that there are many organizational frameworks you could adopt. For example, Galbraith’s “Star Model” depicts a five-point star with strategy at the top, connected to people, structure, rewards, and processes.5 Many of these models take a very micro view of organizational processes, right down to the task level, and are particu-larly valuable in helping you understand the connectivity between these micro-processes.
Our intent is to take a more macro view by focusing on structure, management processes Table 8.1 Examples of Organizational Capabilities
Innovation
The capacity to stimulate and support strategies based on new ideas. Perhaps the creation of new markets, new products, new processes.
Prominent example: W.L. Gore.
Productivity
The capacity to stimulate and support strategies based on cost efficiency and price.
Prominent example: Wal-Mart.
Speed
The capacity to stimulate and support strategies based on speed. Perhaps to be first to market with new products, first to develop new technologies, first to gain government approvals, or to offer fast response to customer needs.
Prominent example: FedEx.
Cross-Cultural Effectiveness
The capacity to stimulate and support strategies based on unusually effective cooperation between employees of different cultures. The ability to gain a competitive edge by taking advantage of cultural diversity within the firm.
Prominent example: Nestlé.
Cross-Unit Synergies
The capacity to stimulate and support strategies that require seamless
cooperation and support between different units within the company. Perhaps cooperation between business units, functional units, geographic regions.
Prominent example: Disney.
and leadership as three leverage points that affect culture, behaviour, and ultimately orga-nizational capabilities.
Later in the chapter we will ask you to identify the changes in behaviour and culture that you would need to bring about in order to develop new organizational capabilities in your business. To help visualize such relationships, we have provided some examples in Table 8.2.
Figure 8.2 Organizational Capabilities Model
Table 8.2 Organizational Capability, Behaviour, and Culture Organizational
Capability
Related Behaviour Supporting Cultural Belief
• Decision making close to the customer
• We believe in delegation of responsibility and authority
• The ability to be a low cost producer
• Focusing on activities that add financial value
• Everything comes down to money
• Ability to innovate • Financial and moral support for fledgling projects
• New product ideas are precious
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Further examples are provided in the following sections in which we take a closer look at behaviour and culture.
BEHAVIOUR
When we speak of behaviour, we are talking of readily observable behaviour, not aspects of people’s actions that one would need to be a trained psychologist to notice. When managers refer to the behaviour of others in their firm, they are generally thinking of how much energy they put into various aspects of their job, how they manage their subordi-nates, how much attention they give to external issues, how they relate to one another, and so on. One senior manager discussing the behaviour of executives who reported to him stated the following:
All of my managers are pressed for time. Everyone has more things on their ‘to do’ list than they can possibly get around to doing. So for me the essence of behaviour is not about what time people get to work or how they dress, it is about what items come to the top of the priority list. Given all of the things that a manager could choose to spend his or her time on, which will they actually choose? If I am going to bring about change here, I have to begin by changing the things that come to the top of people’s priority lists.
Clearly, the priorities of senior managers are an important element of behaviour, but you will have to cast a wider net to capture all of the key behaviour changes that would be necessary to develop a new organizational capability. A group of senior man-agers in a global chemical company, for example, wanted to develop new capabilities to support a move from commodity to specialty chemicals, and they went to some lengths to describe the behavioural changes that would be required. The four capabilities they were seeking were (1) the ability to recognize and assess changes in the external envi-ronment in a more timely fashion; (2) the ability to make better strategic choices—
particularly a willingness to say no to more projects; (3) the ability to meet quality and delivery promises made to customers; and (4) an enhanced ability to understand where they were, and were not, performing well. The behaviours required to support these capabilities are listed in Table 8.3, alongside descriptions of current behaviour.
Collectively they referred to the process of developing the new behaviours and capabili-ties as “getting more market focused.”
The change in behaviour that these managers wanted to achieve in their company was going to be difficult, and they knew it. The problem, as one of them expressed, was that:
We have a strong culture, which has resulted from our successful history, and it supports the current behaviour. We knew that if we were to change behaviour in anything more than a very temporary way, we were going to have to find a way to change our culture. I think many long established companies face the same problem.
CULTURE
An organization’s culture can have a major impact on the behaviour of everyone in the organization, and thus on its capabilities. When we speak of organizational culture we are referring to the values, beliefs, and core basic assumptions, more or less shared by people in an organization, that have worked well enough in the past to be considered valuable, correct, and true, so much so that they are taught to new employees as the proper way to think and to act.6 In an organization with a strong culture, those values, beliefs, and core assumptions will be widely shared and strongly held.
As part of your organizational snapshot you should identify the key elements of your company’s culture. Do not be concerned if you cannot be particularly precise. One writer described corporate cultures as having “the ephemeral qualities of flame or fog. You know they’re there; you know they’re real; but you can’t grab hold of them or even describe them very well . . . ”7 We mentioned earlier 3M’s continued capacity for innovation; here are some phrases used by 3M employees that capture important elements of the 3M culture:8
Listen to anyone with an original idea, no matter how absurd it may sound at first.
Encourage; don’t nitpick. Let people run with an idea.
Hire good people and leave them alone.
Encourage experimental doodling.
Give it a try, and quick.
Table 8.3 Inwardly-Focused and Market-Focused Behaviour Internally Focused Behaviour Market-Focused Behaviour
Assessing the External Environment We are absorbed by internal issues
and indifferent to market-based information.
We need to be driven by external challenges, taking pains to acquire and share market information.
Making Strategic Choices We think of internal political realities
when decision making.
We need to make choices in line with external realities and internal capabilities, based on judgments of future performance.
Achieving Operational Excellence We work in boxes and guard
boundaries. Kick disputes upstairs.
We need to operate as a team. Solve disputes on the spot.
Assessing Performance We measure progress by internal
standards.
We need to measure progress by external standards.
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Try to make a similar list to describe your own company’s culture, particularly those elements of it which are most strongly held. It will be critical, later in your analysis, that you be able to tell the difference between new organizational capabilities your culture could support and those it could not. If a strategic proposal would require capabilities that you judge would fit well with the existing culture, you will probably be confident of your ability to implement it. If this is not the case, you will need to be cautious.
When Sir David Simon at British Petroleum was trying to create a new culture in which all employees would understand that “everything comes down to money”, he was up against a very strongly entrenched culture. He recounted a conversation between him-self and a worker on an oil rig:
I ask: ‘How much money do you make?’ An employee will reply: ‘I can tell you how much oil we produce.’ I say: ‘Yes, but I am not interested in how much oil you produce, this is a factory for me. Where’s the money?’ Oil is only relevant in terms of money for shareholders, not in terms of barrels. That’s very important. It’s part of the change that can be implied by the direction the board takes. The board can say: ‘We want this to be a performing culture, we want this culture to understand much more about the commercial than the technical merits of the business.’ Those are very deep-seated cultural issues.9
Needless to say, a “deep-seated” culture, as Sir David put it, can be a real asset if it supports the behaviour and capabilities required by your current or proposed strategy. If a strong culture is inappropriate, it will be a major hindrance—and possibly disastrous.
Before leaving the topic of culture, we must emphasize that an organization’s cul-ture not only pushes “inward” (in Figure 8.2), impinging on behaviour and capabilities, but also has an “outward” force, influencing the choices that managers make about the organization structure, management processes, and the leadership behaviour of senior managers in the organization. Just as culture influences behaviour, so too is culture built, changed, and maintained by behaviour. We will examine this outward influence in more detail when we discuss the judgments you will make about your firm’s ability to develop new capabilities, but to give one example now, consider the choices that managers make when making hiring and promotion decisions.
There is no doubt that hiring and promotion decisions are a vital aspect of corporate life, and have a major impact on the collective behaviour and capabilities of the corpo-ration. So how are such decisions made? In many companies, new employees are hired because they look like they would “fit in,” and they are promoted once it is clear they are competent, and are “our kind of manager.” Herb Kelleher, the former CEO of Southwest Airlines, one of the success stories in the American airline business, expresses the views of many CEOs in the following statement:
We’ll take the person with less experience if he or she has the values we are looking for. . . . We look for attitudes. We’ll train you on whatever you need to do, but the one thing that we can’t do is change inherent attitudes in people . . . . Part of the purpose of the probationary period is to determine that. You may be an exceptional performer, but incompatible with our culture here. It doesn’t mean there is anything wrong with you, there is just not a match.10
Clearly such decisions reinforce and support the existing culture. If that culture sup-ports the capabilities that you need for the challenges that lie ahead, you are in great shape. If not, you may face a major challenge.
We are now ready to turn to the analytical steps outlined in Figure 8.1. As you work your way through these steps you may wish to return to Figure 8.2 from time to time, as your judgments about the relationships depicted there will play a crucial role in your assess-ment as to whether, and how, your organization could develop needed new capabilities.
STEP 1: IDENTIFY REQUIRED ORGANIZATIONAL CAPABILITIES
The first step in deciding if your organization is likely to prove capable of implement-ing a new strategy is to break the strategy into its four component parts, and identify the capabilities needed for each. We suggest that you do this by preparing a table like Table 8.4.
Table 8.4 Identifying Required Capabilities Objective Required Capability Implement New
Goals
What are the most critical organizational capabilities required by the goals of the new strategic proposal? (For example, an ability to stimulate and manage a faster rate of growth.) Implement New
Value Proposition
What are the most critical organizational capabilities required by the value proposition of the new strategic proposal? (For example, the ability to respond to customer requests within 24 hours.)
Implement New Product-Market Focus
What are the most critical organizational capabilities required by the product-market focus of the new strategic proposal?
(For example, an ability to move aggressively into international markets.)
Implement New Core Activities
What are the most critical organizational capabilities required by the key activities of the new strategic proposal? (For example, the ability to manage outsourced activities, or to establish joint ventures.)
Close Resource Gaps
What are the most critical organizational capabilities that will be required to close the resource gaps that you identified in your resource analysis of the strategic proposal?
Close Preferences Gaps
What are the most critical organizational capabilities that will be required to close the management preferences gaps that you identified in your preferences analysis of the strategic proposal?
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The difficulty you are likely to have in doing this is that your analysis will be hypo-thetical, meaning that you are guessing at what it would take to implement a strategy that you have never, in fact, implemented. There are several things to keep in mind as you do this.
Be as Specific as You Can About the Capabilities That You Will Need If your value proposition to customers, for example, is going to include “outstanding cus-tomer service,” you will need the capability to deliver that. But what does “outstanding”
actually mean? Remember that the quality of your service will be judged by custom-ers, not by you, and their standard of comparison will be the service offered by others.
“Outstanding” is too vague to be useful. So do some benchmarking. You may discover that
“outstanding” means that you would need to offer 24-hour turnaround to a client needing repairs to a piece of equipment, anywhere in the world. That is a clear demand, and later you will have to assess whether or not you can develop the organizational capability to meet it. On the other hand, having a quick turnaround time for aircraft at the gate may be valuable in terms of a cost leadership strategy, but from the customers’ point of view, all that matters is that the plane leaves on time. How long it takes to clean the cabin, refuel, on or off load luggage, etc., is irrelevant to the customer.
“outstanding” means that you would need to offer 24-hour turnaround to a client needing repairs to a piece of equipment, anywhere in the world. That is a clear demand, and later you will have to assess whether or not you can develop the organizational capability to meet it. On the other hand, having a quick turnaround time for aircraft at the gate may be valuable in terms of a cost leadership strategy, but from the customers’ point of view, all that matters is that the plane leaves on time. How long it takes to clean the cabin, refuel, on or off load luggage, etc., is irrelevant to the customer.