Future-Proof Your Strategy: Capabilities Analysis

Robust strategic analysis is just the first step toward executing an effective and sustainable business strategy. Successful leaders and organizations are those who know how to formulate and then implement a strategic plan to full effect. Strategic management is a dynamic that integrates content and process, planning and action.

In this series, we detail four foundational analytical tools to help any organization future-proof its strategy. This installment follows Tool No. 1: Competitor Analysis and Tool No. 2: Environmental Analysis.

CAPABILITIES ANALYSIS

Your capabilities as a business organization are the tangible and intangible assets or resources that you tap to create value. The most successful companies are those that create strategies that align their plans for positioning in the market with the capabilities that they have now or plan to develop in the future.

The Capabilities Analysis Tool is useful in determining whether you have what you need to execute your strategy and achieve your goals now, or if you need to enhance or develop your organizational capabilities going forward. Similarly, the tool can help you determine certain assets or resources that are not so core to your strategy, which could therefore be outsourced to an external partner. 

This step-by-step framework empowers you to:

• Determine the principal sets of skills, resources and activities that drive value for customers
• Understand whether you have what you need to execute a strategy that is viable and sustainable
• Pinpoint areas that are strong and a source of competitive differentiation
• Identify areas for development
• Decide what needs to be done in-house and what can be outsourced to streamline operations and execute your strategy more efficiently

How do we use it?

Step 1: Determine the value chain for your business.

First, sketch the value chain for your business. Cluster all the activities that create value for a product or service, working backward from the end point of the value proposition delivered to your customers.

Remember that you might outsource some of these activity clusters to suppliers or distributors. Identify the core strategic capabilities needed to produce value in each cluster. 

Step 2: Isolate the core set of capabilities.

Look at your activity clusters and ask yourself: Which of these clusters constitute a core capability that is central to your competitive success? Which cluster really differentiates you or makes your organization world class? Think about the processes, people and the systems or technologies you have in place that drive value. Be ruthless in your analysis.

Processes: When Lou Gerstner was at the helm of IBM, he focused on just six core processes that really drove the company’s strategic repositioning in the 1990s: hardware development, software development, supply chain, services, fulfillment and customer relationship management. These were the most visible to customers and therefore most critical to capability development.

People: Identify the key skill areas that are most critical for executing and improving your core processes above in terms of time, quality and cost. Remember, intrinsic skill or pay level may not be the best indicator of strategic talent here. Southwest’s capability in ground operations depends less on the skill of its pilots (who are justifiability well paid) and more on the skill of its ramp agents and operations agents, who turn the planes around and get them back in the air.

Systems: This may include information systems, databases, proprietary technologies and the like. How well do your systems automate processes, improve efficiency and connect your people or databases?

Step 3: Determine degree of alignment.

Domino’s founder, Tom Monaghan, changed the pizza industry not because he created a better product, but because he was able to offer a different value proposition — 30 minutes or it’s free — and then create the capabilities to deliver on that promise. He aligned the key people, processes and systems necessary to develop a capability in home-delivery pizza. Domino’s used assembly-line-based standardized processes to improve efficiency and reduce preparation time.

Strategy is about making choices. Domino’s did not focus on great pizza — it focused on fast pizza. It did not customize every order but prepared all orders in advance. It didn’t hire premier pizza chefs who tossed pizza dough up in the air to make lighter crusts. It didn’t use wood-fired stoves to give the pizza an old-world taste. And it didn’t offer in-store dining. These would add cost and time that customers did not want. Each ingredient in Monaghan’s formula was aligned with its value proposition of fast delivery.

Step 4: Determine sustainability.

Finally, ask yourself these critical questions:

Are your firm’s capabilities unique? Can they be imitated (like our T-Shirt vendor Kate), and if so, how long would that take?

How durable are your resources? And how long before they need to be updated, refreshed or renewed? Remember, most resources — skills, systems, property and equipment — degrade over time.

The preceding is drawn from Future-Proof Your Strategy: 4 Essential Tools, a white paper that details foundational tools that can be used in strategic analysis — oftentimes the difference between a company’s success, resilience and failure.

This installment follows Tool No. 1: Competitor Analysis and Tool No. 2: Environmental Analysis. A follow-up entry on Darden Ideas to Action will address Tool 4: Scenario Planning.