Business Modelling (10): Modelling Organisational Capabilities
How capabilities work and how they drive performance
An Extension to the Core principles and business models.
This short course is just one of several Extensions you can use on its own or add to other Dynamic Business models, and remember you can also buy the complete set here for a lower total price (opens in a new tab).
What will I learn?
This class shows how to model organisational capabilities and learning and the big impact these can have on performance. (See the curriculum near the end of this page). Think of any business or organisation that you admire, and ask yourself how they got to be that good? It is no accident - they have got better and better, over long periods of time, by learning how to do everything they need to do as well as possible.
Top-performing companies are great at operational tasks - like delivering their product or service fast and reliably, or fixing customers' problems, or scheduling their staff working hours. Don't under-estimate the impact of these mundane capabilities - not only do they boost performance right now, but that impact frees up effort and cash to drive the business forward.
Those top companies are also great at strategic tasks - mostly about building and retaining the strong resources that will drive future performance. They develop better products, faster, hire and retain better people, and win more of the best customers, for example.
What exactly ARE capabilities? Although business writers, academics, consultants and executives alike all find it sexy to go on about capabilities and competences, there is hopeless imprecision about what exactly capabilities are, how they work, and how to manage them. In simple terms, and consistent with the meaning of common language(!):
Resources are useful things we have (tangible and intangible) : Capabilities are activities we are good at doing.
So terms describing capabilities end in '-ing' or '-ment' - like delivering on time, hiring the best staff,great product development, acquiring other companies, and so on. And to be good at any of these capabilities, you need:
The necessary skills in the staff who do the activity (and of course, enough of those staff!)
Those staff need efficient and effective procedures that, if followed, ensure the task is done well.
... and the information required to work out what to do on each occasion.
In this class you will learn how to model any capability and its impact on the organisation's performance. To figure out exactly where improvement opportunities lie for a particular capability, you will see how to combine the Stocks of skills, procedures and information. But you will also see how to model a capability as a composite factor.
Why simulate capabilities? Management time and cash are both scarce commodities, and you need to put a lot of both into building strong capabilities, so you need to know which to focus on and how exactly to achieve it. As with the other dynamic-model extensions, it is useful to model a single capability - "How exactly are we going to get better products to market, faster?" for example. And there is still more value to be gained by adding capabilities to your organisation's overall business model - "How much better could we do if we could build capabilities A, B, C to match the best of our rivals, and what will it take to get there?"
The "RoI" of this course.
Building and sustaining strong operational and strategic capabilities drives the effective performance possible, across the business.
The impact of strong capabilities is HUGE! Think back to those leading organisations we all admire. They are not just 'a bit better' than their rivals; their performance is much better - delivering many times stronger growth in sales, cash flow and business value than their weaker rivals. This graphic shows how some key capabilities for a retail store-chain combine to drive such a transformation in results - this company is faster at opening better stores, developing the best store managers, and buying and presenting its products most effectively to capture customers.
Here's what strong capabilities can do! The leading hospitality group Whitbread PLC was for most of its life a beer producer! From humble beginnings in 1742, the company had by 1980 become a top-3 UK brewing company. But the writing was on the wall for this old business model - global beer brands were sweeping all before them, and consumers wanted more from pubs than beer. What to do?
The company did have 7,000 pubs, and some were doing great restaurant business. Consumers had more to spend on eating out and were getting more adventurous. So Whitbread set about building chain after chain of reliable, branded restaurants, rolling out steak-houses, Cafe Rouge and more, and bringing Pizza Hut and TGI Friday to the UK. Many locations were also great hotel sites, and so was born the leading Premier Inns brand. Whitbread also acquired the tiny Costa-Coffee business and set about a super-fast roll-out across the UK and internationally (a business later sold to Coca-Cola for £3.9bn!).
The company became the UK's leading 'hospitality' retailer - a very rare story of a true, successful business transformation. But this was only made possible by the company's building of key capabilities. One that proved critical right from the start was the ability:
... to acquire the best locations, reaching the largest possible number of potential customers
... buy those units faster than the competitors who at first threatened the strategy
... purchase and develop those sites at the lowest cost possible
This critical real-estate capability still featured at the heart of the group's strategy in 2020 - four decades after it set them on the path to dominance!
Who is this course for?
Business leaders Some heads of marketing, R&D, HR - even some CEOs, feel it is so important to get a grip on the quality of their business that they invest effort in modelling it themselves - even a top level appreciation of the model will aid your thinking.
Analysts and accountants. Every analyst supporting a business or functional leader should know how to model the quality of their organisation's resources, and understand how they are changing through time so they can advise leaders on what needs to be done.
Consultants. These models are so powerful that clients will be blown away by the value you bring to their business. It's faster and easier than using spreadsheets and less prone to error. The approach used provides a valuable addition to a consultants toolbox.
Business students (and teachers*) The mechanisms in this course are a critical element of how business works - so understanding them will give you an important additional method for approaching strategic questions - and employers will really value this skill.
*Teachers - we can provide materials from this course for you to use in your classes - contact us for information. Please do let us know where you teach and approximate student numbers in addition to any questions or comments you have.
How long does it take?
Like all of our courses, you do not have to start at the beginning and slave through every lesson to the end - we suggest key items to focus on first. Working carefully through just those key lessons may take about a half-day.
You can then come back to fill in important extra principles and skills. That could be another ½ to 1 day, depending on how deeply you want to get into each lesson and practice it on your own cases – all time that you can claim as self-directed CPD (continuous professional development).
Then, of course, you can spend any time you want on consolidating your skills and following our detailed guidance on how to apply the modelling to your own case and issues.
Why use these models - and when?
Whether launching a new business, tackling a problem or opportunity, or planning for the longer term, surely you would simulate what could happen, just like with other complicated things we do. This lets us:
Design what we might do before we risk serious cash and effort
Test those plans against all kinds of uncertainties (Would you rather experiment with the real world, using real money and people!?)
Manage the business or issue continually against a living model of what will likely happen next.
... and if you want to be really bold and "re-invent your business model" or undergo "digital transformation" it might be best to explore where you are going before you set out!
What is the alternative?
Spreadsheets could theoretically calculate-out everything in a business, but no human could reliably capture a living business system with only rows and columns of numbers to work with.
Balanced scorecards transformed business control by looking beyond the financials! But they do not calculate-out what causes what across the business "machine", and they leave out key issues - like competition! There is no better BSC than a good DBM!
KPI systems often try to be more comprehensive than BSCs, but they often go too far, including every indicator and ratio anyone thinks important. There is no better KPI system than a good DBM!
Business-model canvas and tools like Strategyzer or Leanstack share the same limitations as balanced scorecards and spreadsheets.
Learn to model organisational capabilities now
Business Modelling class 10: Capabilities and Learning
How to model growth of organisational capabilities, learning, and the impact onbusiness performance
BONUS: Your questions answered Access to the full Extensions course at HALF PRICE
Kim is an experienced strategy professional, teacher and publisher of online courses and teaching resources on business modeling
– fast becoming a main-stream capability for executives, consultants and business students. He also offers resources to help model non-business challenges, notably in health-care and international aid.
After senior corporate strategy roles, Kim joined London Business School, to teach on MBA and Executive programs. To overcome serious limitations with standard strategy methods, he developed the powerful strategy dynamics modelling method for designing and managing strategy for any organisation or challenge. Once a specialist skill, building these simulations is now easier, faster and more reliable than spreadsheet modeling. Such models mimic real-world behaviour and performance of businesses and other organisations with uncanny realism.
Kim is author of the prize-winning Competitive Strategy Dynamics (Wiley, 2002), a major strategy textbook Strategic Management Dynamics (Wiley, 2008), and summary e-book now widely used in MBA and executive teaching – Strategy Dynamics Essentials (Kindle, 2011). He is also co-founder of Strategy Dynamics Ltd, which publishes "serious games" and online courses exploiting the user-friendly modelling application, Silico.