Part 3 of the 3-part “Strategy and Enterprise Architecture” series that explores the link connecting strategy and business models to enterprise architecture and the underlying technology that executes the strategy. Understanding this link enables companies to align resources, people, and processes to transform themselves in response to market dynamics and maintain a competitive edge.
In Part 1 of this series, we reviewed business strategy and concluded that any strategy exercise must be carried out taking into consideration the company’s business model.
In Part 2, we reviewed the business model, which is a description of how an enterprise creates and captures value. It describes the customer value proposition, how the company will organize its resources and partner network to produce that value, and how it will structure its revenue streams and cost structure to fund the operations and capture value for its stakeholders.
Now we shift our focus to business capabilities that enable the business model to operate.
Business capabilities connect the business model with the enterprise architecture, which is composed of the organizational structure, processes, and resources that execute the business model. It is a combination of resources, processes, values, technology solutions, and other assets that are used to implement the strategy.
A capability map, as illustrated in the figure above, forms a model representing all the functional abilities a business needs to execute its business model and fulfill its mission. It provides a stable overarching view of what is important to business leaders in supporting various initiatives to deliver value to customers.
This relatively simple view of the business provides the foundation for complex discussions on strategy and resource allocation. Capability maps don’t reduce business complexity, but they do illuminate the complexity in ways that provide higher levels of insight and perspective.
Capability versus process
Although capabilities can be confused with business processes, they are different components of an enterprise. Capabilities define what needs to be done. Processes are instantiations of capabilities that describe how to execute.
On higher levels, they can be very similar. Process models are dynamic, with continuous improvements changing over time, while capabilities remain stable. Business processes expose how business is done at a point in time. Capabilities, on the other hand, are stable and concise, not changing very often.
Capability provides a more stable view of the business to management as compared to a process view. In summary, capabilities orchestrate the various processes that implement it.
One way to classify capabilities is to group them into three categories: basic, competitive, and differentiated capabilities.
Basic capabilities are related to low-value areas. These should be operated effectively at the lowest cost possible. They are usually supported by industry-standard practices.
Basic capabilities keep the business afloat by aiding the completion of daily operations, for example, in accounting or financial management. Without these, the organization would not be able to conduct its daily operations. They do not help differentiate the organization from competition in the marketplace or directly impact the organization’s products and services.
Competitive capabilities must be at least industry average, but provide diminishing returns beyond that. Performance and value drivers need to be identified to ensure the desired results and benefits. From the customer’s perspective, their characteristics must be relevant. They allow the business to remain competitive in the marketplace and contribute to the long-term success of the company.
Differentiated capabilities should be supported by the company’s own practices. Performance and value drivers need to be identified to deliver the desired results and benefits. They have strategic value and add real advantage. They are rare, providing a unique advantage. They are inimitable, meaning competitors are unable to copy them. They are non-substitutable; competitors cannot simply substitute a different resource for the one that confers advantage. To a high degree, the firm really owns and can appropriate the value of the resource.
The VRINS framework is normally used to identify the differentiation elements:
In conclusion, business capabilities comprise a fundamental building block that enables and supports the business transformation initiatives companies are undertaking to remain relevant in the constantly changing marketplace. Companies that excel in mapping their existing capabilities and creating a road map to close the gap in their future capabilities are most likely to remain ahead of the competition by responding effectively to industry and market dynamics.
Therefore, the way we connect the company’s high-level strategic priorities and objectives to the resources, processes, and ultimately the system landscape that execute the strategy is by mapping and modeling the necessary capabilities.
In the next series of articles, we will dive into the other side of business capabilities: the business architecture by business capabilities.
Learn how businesses can optimize the transition to an intelligent enterprise in the “Anatomy Of The Intelligent Enterprise” series.