Human Resources as the Custodian of Strategic Capabilities

This article puts forward the view that HR is crucial in developing and aligning strategic capabilities to support the effective execution of new strategies. Organizational design, team reconfiguration, change management, and talent acquisition are all key activities within the scope of HR. To fulfill this role, HR must actively participate in strategy formulation and execution to assess and align company culture, plan for organizational changes, and monitor strategy execution. Giving HR the accountability to act as the custodian of strategic capabilities will accelerate the company's strategic evolution.

A typical conversation on strategic capability

The senior executives were sitting around a table to discuss new growth opportunities. Their main products had run out of ramp for growth in the marketplace. One of the team members pointed out that a competitor was making inroads with a product line they could bring to market. He closed his intervention by saying: "There is no reason why we couldn't take them on with a similar product." Most team members initially liked the idea. But then, a more skeptical voice put forward a strongly worded point of view that this kind of product needed a lot of customer attention and that "… as we have discussed before, we just don't have the culture that would allow us to give the required attention to customers: we would fail miserably with such a product." You could hear the air come out of the balloon. Everyone sat back and agreed. Without a second thought, the team went back to brainstorming other ideas to trigger the growth they badly needed.

This conversation illustrates that potentially game-changing strategies can be dismissed without considering the capabilities required for effective execution. HR can be crucial in ensuring the right capabilities are in place to execute new strategies. Culture is one of the critical elements in assembling organizational capabilities required to execute a new strategy: misalignment with the organization’s culture can quickly derail execution. If HR had taken part in this discussion, the point could have been made that culture is not an immutable obstacle. The culture can be re-aligned with the right approach to fit a promising strategy. A similar review has to identify the other organizational capabilities required and determine what needs to be done to ensure the right capabilities are in place to execute them.

What are strategic capabilities?

Let’s define our terms. Capability is the ability to execute and achieve a particular outcome. It is helpful to distinguish between individual and organizational capabilities. Individual capabilities refer to the skills, expertise, and knowledge that you will find, for instance, in an individual who is a systems architect.  On the other hand, organizational capabilities refer to an organization's collective abilities, an example of which would be agile product development. These capabilities are rooted in an organization-wide context and encompass the combined skills, knowledge, processes, systems, and infrastructure that enable an organization to achieve its objectives and deliver value to its stakeholders. The critical capabilities at the organizational level spring from collective leadership, processes, accountability structure and culture.

Although organizational capabilities receive little attention, they are crucial to implementing corporate strategies. This paper focuses on strategic capabilities, a subset of organizational capabilities that allow the organization to execute its strategic goals. These capabilities constitute the basis for strategic advantage.

It is difficult to assess the exact proportion of adopted strategies that fail to be executed as intended. However, my extensive work with Liam Fahey on strategy execution tells us that relatively few strategies adopted with great fanfare meet their targeted outcomes (even when supported by expensive consulting houses). The root cause of these failures is often related to inadequate strategic capabilities.  

Strategic capabilities shape markets.  

The rapid shift in customer preferences and market trends makes it imperative to build capabilities at an equally accelerated pace. Competitors aim to shape markets to their strengths to achieve a pre-eminent position. With increasingly intense rivalry in the marketplace, the speedy reconfiguration of capabilities becomes a significant factor in retaining marketplace relevance. For instance, a company's late introduction of a new offering may mean that its products/services enter the marketplace when much of the profitability margin has disappeared. Accelerated strategic capability development is a pre-condition to leading and shaping the market. The key to the success of enterprises resides in their strategic capabilities, which in turn depend on the capabilities of their people.

The globalization of capital and its greater availability has meant that it is no longer a bottleneck to growth. There is now a surfeit of financial capital in many businesses. The challenge is that there are too few opportunities to apply the capital available at the yield levels expected by investors. The bottleneck stems from the lack of capabilities to create new opportunities to invest financial capital with greater returns. As a result, capabilities must move to the centre of the organization's strategic planning instead of being an afterthought. The strategic goals, responses, and business models must be calibrated based on the organization's capabilities. The pace at which an organization can grow is determined mainly by the speed at which it can generate and reconfigure its capabilities. Therefore, the accelerated development of strategic capabilities is a pre-condition to lead and shape the marketplace in line with organizational strengths.

The organization that fails to respond by leveraging sufficient capabilities to compete effectively will gradually lose ground. The inability to generate the capabilities required in time to compete effectively will end up with a "competitive advantage deficit" and ultimately put its very existence into question.

The Generation of New Capabilities

Here’s a concrete example of a neglected strategic capability related to software development in a financial services firm.

The inefficiency of the shared service model has been so pronounced that the business has been prevented from entering new businesses with significant potential. Competitors have repeatedly been faster in taking advantage of strategic opportunities in the marketplace, displacing them despite substantial investment. In this case, rapidly developing digital platforms is a strategic capability, but the organization is stuck in its current structure and modalities. One gets the impression that they don't even have a label for the issue, let alone knowing what to do about it. This challenge goes into a bin of ‘unresolved issues’ that hang over the organization and handicap the long-term performance of the business.

This case illustrates how organizations need to ask themselves fundamental questions about their strategic capabilities:

• What signals are we getting from marketplace developments that indicate new strategic capabilities are needed to realize our strategic goals?  

• What are the most exciting opportunities in our strategic space, and why are we not best placed to pursue them?

• What should be our differentiated capabilities, and how should we purposefully develop them?

For some companies, strategic pricing or adroitly deploying a new digital platform can rapidly unlock value. For others, combining supply chain and flexible asset optimization at the global level can be a strategic capability for faster, on-time delivery. Another example of strategic capability is the application of agile product management to allow a company to be first to market consistently. Customer centricity is yet another distinctive strategic capability that can support the successful execution of a new strategy. In turn, cross-functional collaboration is a strategic capability essential to customer centricity.  

Beyond management systems and resources, connecting strategy and culture can significantly leverage strategic capabilities. Organizations that opt for new strategic initiatives must consider the fit with the culture. For most strategic initiatives, there are patterns of behaviours that are critical to success. The ability to partner with suppliers, to work closely with channel partners, to deeply understand customers, or to pivot rapidly when something is not working are all examples of conditions for success in selected strategies for which a culture might not be well suited. Of course, it is not possible to change a culture overnight. However, leveraging the organization's leadership strength to engage and mobilize people to support a clear, compelling strategy is possible. It is possible to build on existing strengths. A well-orchestrated change management strategy can bring people to modify behaviours to be successful.  

Forging new strategic capabilities takes time. However, time is of the essence when new opportunities appear in the marketplace. The ability required to take advantage of emerging opportunities currently often goes beyond the range of an organization's capabilities. There are different ways to different ways to address these limitations:

1. Creating internal teams by selecting people across the organization who bring the various elements of capability that can become the core of a strategic team dedicated to executing a new strategy. This team can then be complemented with highly specialized external hires who can round up the composition of a team that can lead the execution of a new strategy.
   

2. Hiring an intact team from another organization and provide them with the systems and processes that allow them to leverage existing organizational assets.    

3. Bringing together alliances that combine the 'complementary assets' of two or more organizations makes it possible to rapidly create a strategic capability that could only be duplicated in the marketplace at much greater costs.

Strategic Capabilities and the Role of HR

Change management, mobilizing people, culture alignment, reconfiguring teams, and talent acquisition are all activities in HR's wheelhouse that are central to developing strategic capability. From this perspective, HR is vital in generating and leveraging the organization's strategic capabilities.

Many of us who've had the opportunity to lead such initiatives have experienced firsthand the struggles involved. In my experience, the critical issue is the attempts to superimpose these initiatives on top of an organizational blueprint originating in the industrial era, which is now obsolete. We must clearly articulate the assumptions upon which a new foundational blueprint is implemented. The critical contention put forward in this paper is that we need to re-conceive the Human Resources mandate in capability-driven organizations. More than ever, we need to develop new models to help us reshape the assumptions that have traditionally guided this work in organizations.

Implications for HR

In most organizations, there has traditionally been a gravity pull for HR to give greater attention to individual capabilities: talent acquisition and management, learning and development, rewards and incentives, etc.   Assuming the mandate to develop strategic capabilities will require a shift to encompass organizational capability work. For instance, Human Resources Business Partners need to be able to support organizational design modifications, change management, teamwork and cross-functional collaboration.

This mandate will fill a void found in most organizations without focused accountability for building strategic capabilities. It will enable HR to integrate the support business leaders need to mobilize expertise in new team configurations. New strategic initiatives often require acquiring unique knowledge from outside the organization and the appropriate integration of alliances. Culture alignment work might also be an essential success factor for new strategic initiatives.

To play a meaningful role as the custodian of strategic capability, HR has to…

1. Be a full participant in both strategy formulation and     execution;

2. Ensure it has sufficient capability for culture assessment and alignment, change management, organizational design and team configuration.

3. Map out the strategic capability components required and plan how they can best be developed;

4. Assess the culture change involved and take an active role in planning change management support;

5. Facilitate a review of the implications for the organizational structure and work with leadership on the changes required;

6. Monitor strategy execution and help those involved pivot as required.     
   

Inserting this mandate into the organization's fabric will elevate HR's contribution and place it at the forefront of the strategic evolution of the enterprise. Looking forward, HR could reinforce its presence at the strategic planning table to help the organization leverage capabilities in both strategy formulation and execution.

To exercise this level of influence, HR must ensure it has the capabilities and frameworks to contribute significantly at the strategic level.