In the article series “The connection between strategy and enterprise architecture,” I made the case that business capabilities are the link connecting the strategy and business model to the enterprise architecture and underlying technology that execute the strategy. Understanding this link enables companies to align resources, people, and processes to transform themselves in response to market dynamics to maintain a competitive edge.
In this article, I want to unpack the business capability model and show how it can be used to effectively drive business growth, adapt to marketing conditions, and drive competitive advantage.
Defining the business capability model
The business capability model describes what the business does from a pure business perspective. It shows the overarching needs of an enterprise to perform its core functions. In practical terms, it is a list of enterprise abilities to operate the day-to-day business as well as to grow, adapt, and acquire a competitive advantage. These building blocks support the enterprise’s strategy by enabling the execution of the business model(s).
Some of the characteristics of a business capability model are:
- It covers the entire enterprise with cross-business units and functions.
- It is a common language to standardize communication across the enterprise.
- It articulates the various dimensions of a capability.
- The purpose is to describe what the enterprise does without getting into the details of how it is done.
The main underlying components of a business capability are:
- People: The competencies, skills, and workforce necessary to enable a talent base to execute the capability.
- Process: An efficient set of processes and activities designed to produce the desired outcome.
- Technology: Software applications, hardware infrastructure, and necessary tools to enable the capability.
- Governance: Compilation of clear roles and responsibilities, decision policies to facilitate integrations within and across other capabilities, functions, and business partners.
Capabilities are defined at different levels. It is very common to map the capabilities of an enterprise from the top down, as shown in the figure below. Starting from the aggregate level, to the capability area, and moving all the way down to sub-capabilities and process tasks.
|0||Capability area||Supply chain management|
|1||Capability group||Production execution|
|2||Capability||Shop floor control|
|3||Sub-capability||Report production quantity|
|4||Tasks||Tasks that constitute the process flow to report production quantity|
The primary objective of the business capability model is to frame the range of critical choices and provide a systematic way to prioritize investments across the dimensions of a capability. The dimensions are People, Technology, Processes, and Governance.
To achieve that, enterprise capabilities are classified into categories such as strategic, core, and foundational. This categorization drives focus and where the enterprise should concentrate its investments.
Basic or foundational capabilities
Basic capabilities keep the business afloat by aiding completion of daily operations, for example, capabilities in the areas of accounting or financial management. Without these, the organization would not be able to conduct its daily operations.
They are not distinctive nor do they impact customer choice, when delivered correctly, but are required to be a viable competitor. They focus on efficiency while maintaining threshold levels of performance. They can still become critically important to competition, if they fall below industry thresholds. Performance beyond threshold levels is not valued by customers; however, failure to meet thresholds can quickly undermine the competitive position.
Basic competencies differ from core competencies in two important respects. First, they do not help differentiate the organization from others in the marketplace. Second, they do not directly impact the organization’s products and services.
Foundational capabilities are necessary to run the business, and the organization should strive for operational efficiency through standardization across these capabilities.
Competitive or core capabilities
Competitive capabilities must be at least industry average, but there are diminishing returns beyond that. They should be supported by industry best practices. Performance and value drivers need to be identified to ensure desired results and benefits. In the eyes of customers, their characteristics must be relevant. They deliver value to customers. They lead to delivering competitive products and services to customers. They allow the business to remain competitive in the marketplace and contribute to the long-term success of the company.
They do impact customer choice and/or shape the economic profit proposition but are not a defensible source of advantage; they focus on effectiveness. These represent customer-relevant dimensions of performance through which competitors continually jockey for position. They differentiate for value.
- Are contested dimensions of competition
- Drive consumer and customer choice but aren’t distinctive, are competitive
- Should be vigilantly honed, refined, and strengthened, as competitive performance requirements rise over time
Differentiated or strategic capabilities
These serve as the basis for competitive advantage; they are required to win. These capabilities must be distinctive versus competitors and either meaningful to customers or a source of economic advantage. There are two types:
- Capabilities that help the organization in the present
- Adaptive capabilities that help the organization learn, adapt, and thrive over time
Both types differentiate for competitive advantage, and only a few capabilities drive differentiation and advantage to the enterprise.
They should be supported by the business’ own best practices. Performance and value drivers need to be identified to ensure the desired results and benefits. They also have strategic value: the resource must add real advantage in an area of strategic importance.
Capabilities that provide a unique advantage are rare. They are inimitable, meaning competitors are unable to copy them nor simply substitute a different resource for the one that confers advantage. They are also appropriable to the degree that the firm really owns and can appropriate the value of the resource.
The VRINS framework is normally used to identify differentiation elements:
|V||Valuable||Capability helps raise revenues or lower costs|
|R||Rare||Capability is unique among organizations|
|I||Inimitable||Capability cannot be readily copied|
|N||Non-substitutable||Other capabilities do not provide the same functionality|
|S||Sustainable||It can be scaled and repeated over time with little loss|
Business capability gap assessment
A capability maturity model is used to assess the current state of the enterprise business capabilities. The process starts with an assessment of the current state of the enterprise capability by measuring the maturity of the business capability’s components. Subsequently, using the same components, we define the future state of each capability.
|Maturity Level 1||Maturity Level 2||Maturity Level 3||Maturity Level 4||Maturity Level 5|
|Does not exist or early stages||Below industry standards||Industry standards||Above industry standards||Industry-leading|
|Capability||Current Maturity Level||Target Maturity Level|
As a result of this exercise, we have a clear view of the gaps that need to be closed to bring the capabilities to the desired maturity level.
Following are some examples of criteria by which capabilities should be assessed:
- Criticality assesses the capability’s importance to the business and the link to strategy. What operational expenditures are required? What is the importance of the data used by the capability’s components?
- Lifecycle management assesses the capability’s underlying component’s stage in the lifecycle.
- Security assesses the vulnerability of the capability’s underlying components.
A well-documented current maturity level, as well as a clear definition of the end state for each capability, will draw a picture of the work the enterprise needs to take to drive gap closure.
Business capability road maps
Based on the current and target state of capability maturity and the list of gaps, we can start prioritizing and sequencing the initiatives to close those gaps. The results of this step are strategic road maps that will drive programs and projects. One particular road map is the technology road map, which shows the technology investment the enterprise has to make to bring a capability to an acceptable level of maturity to meet its strategic goals. This road map articulates, for example, the rationale to invest in proprietary technology for highly strategic capabilities that will differentiate the enterprise and create strategic advantage. At the same time, it will make clear which capabilities should use standard commercial solutions. Similarly, road maps for investment in talent or in process improvement are created, driven by the capabilities the enterprise has deemed critical for its strategic objectives.
In this way, technology strategy, and all investments in systems and IT infrastructure, are driven by the business capabilities that really matter to the enterprise’s objectives.
For background, read the “Strategy And Enterprise Architecture Series.”