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What is Your Core Organizational Capability? A Critical Question for Leaders

What is Your Core Organizational Capability? A Critical Question for Leaders

No matter where you are currently positioned within an organization, can you recall the most frequently asked or discussed organizational question you’ve encountered? Is it about how many people the organization currently has and how they are distributed? Is it about labor productivity and per capita output? Or perhaps it’s about employee engagement and satisfaction?

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All of the above questions are valid, and they can even be considered good questions. However, I believe they may lack the depth needed. There is another question that leaders, especially those in top positions and the executive team, should consistently focus on and provide a firm answer to, and that is: “What is our core organizational capability?” (If the most common question you hear is “How is employee XX doing?” then it might be worthwhile to read this article a couple more times.)

Why is “organizational capability” so crucial? Because, on one hand, it directly impacts the effectiveness of strategic execution, and on the other hand, it influences the choice of strategy.

Despite the importance of organizational capability, many top executives and leaders often struggle to articulate their organization’s “core organizational capability” right away. Moreover, leaders within the same organization often lack a unified understanding of what constitutes their “core organizational capability” without in-depth discussions.

Why does this lack of awareness, insufficient discussion, and lack of unified understanding occur?

I believe there are two primary reasons. First, leaders are often too familiar with their own organizations. They are so familiar that they tend to provide numerous opinions and suggestions on specific personnel, systems, and events. However, they may overlook discussions of the most macroscopic and critical issue—the core organizational capability. It’s akin to a parent who frequently focuses on issues like their child’s messy handwriting, lack of social greetings, or hesitation to pay the bill when eating out but fails to recognize that their child is, in reality, a sensitive and helpful individual.

The second reason lies in the complexity of defining “organizational capability.” In such cases, every executive may have their own understanding of organizational capability, and most of these understandings have not been rigorously validated or subjected to genuine testing.

Below, I’ll attempt to visually illustrate the various interpretations of organizational capability using a formulaic approach.

Formula 1: Business Success = Strategy x Organizational Capability

This formula actually emphasizes the importance of organizational capability. It is a significant improvement over some familiar slogans such as “As long as you stand in the wind, even a pig can fly” or “Replace management problems with operational problems.”

I won’t dwell too much on the implications of organizational capability within this thinking framework because the major issue with this framework is its separation of the impact of organizational capability on strategic choices.

We can understand strategy as a combination of “want to do,” “should do,” and “can do.” “Want to do” represents a company’s mission, vision, and values. “Should do” involves external factors, market analysis, and customer considerations. “Can do” refers to organizational capability. Strategic planning that doesn’t analyze organizational capability often leads to overly idealistic strategies, ones that may not align with the company’s inherent organizational capabilities. As a result, there is a risk of replacing actual strategy with “vision” and “desire.”

The representation “Strategy x Organizational Capability” sometimes gives the impression that one group is responsible for formulating strategy while another group executes it. This can lead to the externalization of organizational issues.

I have witnessed a well-performing niche To B SaaS company that, after conducting market opportunity analysis, decided to strategically shift towards To C consumer-facing products. Over a year has passed, and the business results are not as expected. When the company’s core leadership team conducted a painful post-mortem analysis, they believed that they lacked the spirit and capability of lean entrepreneurship, leading to excessive investments without first validating the model. This is indeed one of the reasons. However, if we trace it back further, we will find that asking several questions about organizational capability during the strategic planning process would have helped us approach market opportunities more rationally and objectively evaluate our organization’s DNA.

These questions could include: What are our current core organizational capabilities? Are they in line with To B or To C? What benefits can core To B organizational capabilities bring, and how can we maintain and strengthen them? What changes do we need to make to establish To C organizational capabilities? Are these changes easy to implement, and how long will it take to achieve them? Will developing new capabilities potentially weaken existing strengths? And so on.

Formula Two: Organizational Capability = Individual Capability × Number of People

Leaders with this kind of thinking model are prone to two mistakes: first, they emphasize individual capabilities and indiscriminately increase the talent density; second, they blindly increase the number of people.

However, the equation itself is flawed because an increase in either individual capability or the number of people does not necessarily reflect an increase in organizational capability. External stakeholders (customers, suppliers, and competitors) always perceive a company as a whole.

I’ve seen a platform company where their business team was divided into two small teams, one responsible for maintaining existing customers, and the other for expanding new customers. The constant internal demand received by the CEO and HR was always about the lack of personnel. There were too many existing customers to handle, and the need to expand new customers required additional staff. The internal tug-of-war within the organization did not add value to the organization or its customers. When HR analyzed the situation, they said something that left a deep impression on me: “It’s unbelievable that we have capable people but lack organizational capability. It’s painful.”

Where is the problem? In simple terms, it lies in the design of the organizational structure, resulting in a mismatch between tasks, personnel, and capabilities. Later, the business department switched to customer engagement based on industry alignment, and the internal issues related to departmental walls and staffing were resolved. With the same people and the same number of staff, a change in processes and structure suddenly gave the organization the capability it lacked. How miraculous!

If organizational capability is not about individuals and their numbers, then what is it?

Organizational capability is about what your organization is genuinely good at, what customers recognize, and what competitors cannot easily surpass in the short term. Based on organizational capability, a company can achieve corresponding business results. Like many individual capabilities, organizational capabilities can generally be described qualitatively.

For example, Procter & Gamble, established in 1837, summarized its five core capabilities as: understanding consumer needs; building and creating brands; conducting the broadest innovation; establishing partnerships with customers and suppliers to jointly expand the market; and fully utilizing global scale.

If companies with hundreds of thousands of employees and hundreds of departments can summarize their organizational capabilities, then most young startups are also worth spending time thinking, discussing, and crystallizing their own organizational capabilities.

What’s the use of accurately identifying your existing organizational capabilities? I believe the most significant role is in anchoring development directions and strategic paths. Leveraging your own strengths will undoubtedly accelerate your pace of development. In addition, it can boost the organization’s confidence, making everyone aware that our success has reasons behind it and will motivate them to be more committed to organizational development.

At this point, some may wonder, what should I do if I assess my organization and find that it lacks the organizational capabilities I need? How do I build them? Don’t I still need to hire people?

First, after you take stock of your existing and required organizational capabilities, hiring will be more targeted. Who to hire? Hire people who possess the capabilities you need and are also a good match for your existing organizational capabilities. Of course, well-funded companies can not only hire but also directly acquire companies to supplement their organizational capabilities.

Second, what is the purpose of hiring this person? It should never be just about achieving performance; rather, it should be about hiring someone with core capabilities to establish organizational capabilities. Business results will naturally reflect the presence of organizational capability.

Third, how do you expand individual capabilities into organizational capabilities? The answer lies in multiple approaches, often achieved through process/mechanism/system reforms or the introduction of tools/equipment/AI. This transformation is often accompanied by an upgrade and shaping of the corporate culture.

Formula Three: Organizational Capability = f(Talent, Culture, Processes/Mechanisms/Systems, Tools/Equipment/AI, X)

Please note that talent, culture, processes/mechanisms/systems, and tools/equipment/AI are four variables that apply to all companies. The variable X provides different enterprises with the space to customize some special elements of organizational capabilities.

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