Organizational capability definition, strengths and weaknesses

Co-authored with Dr. Johanna Anzengruber

This is article 5 of 6 in the Organization Capability series. The first article, Organization capability: The missing piece connecting organization design and the operating model, introduced the series. The second article, Resolving confusion about organization design, the operating model, and organization capability, defined the three domains. The third article, The operating model and organization design strengths and weaknesses, compared those two key parts of the organizational system. The fourth article, Challenges of system design and optimization, addressed which parts of system design can be set upfront during the design phase, versus the parts that have to be addressed later during the rollout/implementation phase while the work is ongoing.

Organizational capability definition

Organizational capability provides the missing pieces of the puzzle not sufficiently addressed by the organization design and operating model. This includes the collective skills, knowledge, abilities, and resources within an organization that enable it to perform its functions and achieve its objectives. It encompasses the competencies, capacities and expertise of individuals, teams, functions, departments, units, and the organization as a whole. Organization capability is not simply the aggregation of individual skills or competencies. Rather, it is the outcome of complex system design and optimization that is built on both individual and team- or group-level dynamics and contributions to organizational performance.

People often conceive of organizational capabilities as what is built or is embodied within people, teams, etc. But capability is not static. Just as individual competencies are a combination of KSAs (knowledge, skills & abilities) and behaviors, organizational capabilities are also dynamic and depend on people doing the right thing, at the right time, for the right reasons. We deem someone “competent” when they not only can perform the way we expect, but that they actually do perform as expected. Similarly, we consider an organization to have a particular capability – speed, quality, innovation, etc. – only if it exhibits the capability in line with market expectations, not based on its potential.

Because of this, core elements of organizational capability include not just the enterprise-level equivalents of KSAs, but also actual performance. And the bridge that gets an organization from potential to actual performance includes essential managerial processes and decision making such as goal setting, holding people accountable for doing what they need to do, and rewarding everyone – individuals through entire business units – for doing the work the right way so the desired results are achieved. Processes have to be designed and executed as intended, and rewards – both formal and informal – have to be designed and applied to ensure the processes are done the right way.

Ultimately, organizational capability depends on people – everyone from frontline staff through the CEO – doing their jobs fully aligned with the strategy and operating model. The devil is in the details. And there are too many details and contingencies that cannot be forecast and decided ahead of time.

Process and reward optimization is extremely difficult, and takes as much energy and attention as the upfront operating model and organization design work. Yet the optimization happens under highly constrained conditions. Once the upfront design is done, senior leaders switch their mindset from exploration to execution mode, assuming all design decisions are done. In their view, with all the new reporting lines defined, budgets set, and roles and responsibilities determined for all key processes, the most important objective is putting everything into place. They are willing to accept that some tweaks might be needed, yet they put the organization into a defensive position, where people need to “prove” that any changes are warranted.

If you take the perspective that the upfront design is the best possible, that people do not like change (which they do not, of course), and that many people may be legitimately skeptical about the changes, then it is reasonable to singularly focus on executing the upfront design, figuring that people just need time to figure out how to make it all work. Yet that mindset is exactly what leads to many problems with strategy execution: any information that crops up about problems with the design is downplayed if not outright dismissed by leaders who want their people to take enough time to try to make things work out.

The answer is that the development and refinement of organization capabilities, and any adjustments needed to the operating model and organization design, have to be conducted after the work is underway. Thus there is no clear dividing line between the upfront initial system design, and the subsequent execution and learning phases. Depending on what happens during the execution and learning phases, immediate adjustments are often needed in the upfront design. Which means that the upfront design needs to be treated more like a set of guidelines or guardrails in which there is substantial flexibility, rather than a set of blueprints to be followed exactly without question.

Organization capability strengths

• The yin to the organization design’s yang: the two are necessary complements to each other.
• Solves the problems created by the shortcomings in the organization design.
• Addresses the weaknesses in trying to design a system perfectly upfront.
• Solutions are tailored to how the work needs to happen to be successful.

Organizational capability addresses gaps created by

• Siloes
• Shared decision making / matrix designs
• Challenges of coordinating work across many different units and functions
• Getting diverse teams to work together effectively
• Shortcomings in performance management systems and processes
• Etc.

Organizational capability weaknesses

• Focusing on capability alone, without regard for the existing organization design, can lead to too-narrow diagnoses and imperfect solutions to improving performance.
• Many sources of problems can be traced back to the organization design, and must be acknowledged. Structural challenges cannot be overcome solely through managerial process improvement and executing within the upfront design.
• The desired objectives and KPIs may never be attainable, especially given the conflicting and competing nature of most corporate strategic objectives (better, cheaper AND faster). Focusing on how people are held accountable and rewarded for unrealistic KPIs that are baked into the strategy cannot solve the foundation of the problem.
• On the flip side, because there is so much complexity in the system, and people are independent operators, not machines, it may be impossible to determine beyond a shadow of a doubt whether it’s the KPIs that are unattainable, or the people and processes in the system that get in the way of attaining the KPIs. So there is a tradeoff between holding people accountable for implementing the upfront design, emphasizing execution, and providing oft-needed leeway to make quick, real-time adjustments, emphasizing learning and adaptability of the upfront design decisions.

Next article: Combining organization design and capability for deeper impact.

For more details and a deeper dive into this topic, please join us for the workshop Optimizing Capability to Drive Business Performance in Chicago November 7-9, 2023.