Capitalizing on Capabilities - Key Intangible Assets

Ulrich, D. and N. Smallwood. 2004. Capitalizing on capabilities. Harvard Business Review (June): 119-127.

Summary by Erin Lagor
Master of Accountancy Program
University of South Florida, Fall 2004

Although they may differ in degree, number, or type, intangible assets are important to all companies. However, because they are difficult to measure, we do not often hear about ways in which to measure them or even how important it is to measure them. Ulrich and Smallwood assert that a capabilities audit can make capabilities visible and meaningful to companies’ stakeholders (p. 127). This article describes what a capabilities audit is and gives a step-by-step method on how to conduct one.

What people really respect about companies are their capabilities, i.e., an ability to innovate, or to respond to changing customer needs. Organizational capabilities are key intangible assets that make a significant difference when it comes to market value (p. 119). Organizational capabilities are stable over time and more difficult to copy than other competitive advantages like product strategy or technology. A capabilities audit can show you how you measure up and how to build on your intangible strengths (p. 119).

Organizational capabilities arise when a company delivers on the combined competencies and abilities of its individuals. The authors of this article have identified 11 capabilities that well-managed companies all tend to have. “Such companies often excel in as many as three of these areas while maintaining industry parity in the others. When an organization falls below the norm in any of the 11 capabilities, dysfunction and competitive disadvantage will likely ensue” (p. 120). The 11 capabilities are indicated in the table below.

	Organizational Capability	Explanation	Ways to evaluate/track this capability
1	Talent	Talent is the organizational capability that attracts, motivates and retains competent and committed people.	Productivity measures, retention statistics, employee surveys, and direct observation.
2	Speed	This is the ability to recognize opportunities and to act immediately. Acting quickly can refer to exploiting new markets, creating new products, establishing new employee contracts, or implementing new business processes.	How long it takes to go from concept to commercialization, or from the collection of customer data to changes in customer relations; A return-on-time-invested (ROTI) index can monitor the time required for, and the value created by, various activities.
3	Shared Mind-Set & Coherent Brand Identity	This is the organizational capability that ensures that employees and customers have positive and consistent images of and experiences with an organization.	The degree of alignment between internal and external mind-sets; Measuring the degree of consensus among employees when they are all asked what the top three things are that the company wants to be known for in the future.
4	Accountability	This is being good at obtaining high performance from employees. Performance accountability becomes an organizational capability when employees realize that failure to meet their goals would be unacceptable to the company.	Examine the tools you use to manage performance (i.e., appraisal forms, variance in compensation based on employee performance, etc.)
5	Collaboration	This is working across boundaries, ensuring efficiency and leverage. “Collaboration occurs when an organization as a whole gains efficiencies of operation through the pooling of services or technologies, through economies of scale, or through the sharing of ideas and talent across boundaries” (p. 121).	Calculate a company’s break-up value; Compare the break-up value to the current market value of the assets.
6	Learning	This is generating and generalizing ideas with impact. New ideas can be generated by benchmarking, experimenting, continuously improving, etc.	Look at what other companies are doing; Hire or develop people with new skills and ideas.
7	Leadership	Being good at embedding leaders throughout the organization. Consistently producing effective leaders is generally an indication of a clear leadership brand.	You can track your organization’s leadership brand by monitoring the pool of future leaders.
8	Customer Connectivity	Building long-lasting relationships of trust with certain customers. When a large number of employees have meaningful exposure to or interaction with customers, connectivity is enhanced (p. 122).	Identify your key accounts and track the share of those important customers over time; Frequent customer-service surveys may also offer insight into how customers perceive your connectivity.
9	Strategic Unity	Articulating and sharing a strategic point of view. There are three levels of strategic unity: intellectual, behavioral and procedural (p. 122).	Note how consistently employees respond when asked about the company’s strategy.
10	Innovation	Doing something new in both content and process.	A vitality index (for instance, one that records revenues or profits from products or services created in the last three years) (p. 122).
11	Efficiency	Being good at managing costs.	Inventories, direct and indirect labor, capital employed, and costs of goods sold can all be viewed on balance sheets and income statements.

Given a company’s history and strategy, an audit helps to determine which assets are most important. The audit is also able to reveal how well a company delivers on its most important capabilities and can lead to an action plan for improvement (p. 123).

The following table shows how a company might go about auditing the entire organization, a business unit or a region:

	The five basic steps	Explanation
1	Determine which part of the business to audit.	Division, region, entire company, etc.
2	Create the content of the audit.	Tailor the 11 generic capabilities to your own organization.
3	Gather data from multiple groups on current and desired capabilities.	90-degree, 360-degree, or 720-degree assessments*
4	Synthesize the data to identify the most critical capabilities requiring managerial attention.	Look for patterns in the data; Determine the three capabilities needed to deliver on your company’s goals.
5	Put together an action plan with clear steps to take and measures to monitor, and assign a team to the job of delivering on the critical capabilities	Education/Training events, new performance standards, new technology to sustain the capability are all ways to take action.

*For a 90-degree assessment: Collect data only from the leadership team of the unit being audited.

*For a 360-degree assessment: Collect data from multiple groups within the company. Different groups can provide otherwise missed insights and/or perspectives.

*For a 720-degree assessment: Collect data from both inside and outside the company (investors, customers, suppliers, etc.).

The authors assert that a company should not necessarily choose capabilities with low scores in actual performance to concentrate on improving. If certain weak capabilities are not essential to meeting the company’s goals, they should not be the focus of the audit. Additionally, even if a company scores high on a capability, this may not mean that it does not still need to be improved. For example, if a company scores high on talent, the leaders can choose to further invest in talent since it is so critical to success. The idea is not necessarily to boost the capabilities that are weak. Instead, the idea is to identify and build capabilities that will have the strongest and most direct impact on the execution of strategy (p. 123).

No two audits will be exactly the same. The authors finish this article by giving companies the following advice about conducting capabilities audits:

Capabilities audits help companies assess company strengths and weaknesses. These audits also define strategy, support midlevel managers in executing strategy, and enable frontline leaders to make things happen. A capabilities audit helps customers, investors, and employees all recognize the intangible value of an organization (p. 127).

For more from these authors see Ulrich, D. and N. Smallwood. 2003. Why the Bottom Line ISN'T!: How to Build Value Through People and Organization. Wiley.