Understanding Business Capabilities: A Comprehensive Guide

This article first appeared on Acorn Labs in January 2023.

A business capability describes the skills, knowledge, processes, systems and other resources an organization possesses which allows them to achieve their strategic goals, objectives, and business functions. They assist in identifying and prioritizing strategically important capabilities to assist in decision making, business agility, and generating value streams.

The importance of business capabilities

Business capabilities are what your organization does, why it does it, and how. Consider business architecture—how does your business perform core functions to generate business value?

To understand your business capabilities and how they relate to your organization, you can use a business capability map to visualize the hierarchy of capabilities from top-level organizational capabilities to day-to-day functions. This helps in three major ways.

1. Improving performance and return on investment (ROI): By linking capabilities to business needs, your organization becomes better at performing its core functions. This creates more efficient processes, better innovation, and increased productivity.
2. Prioritizing decision-making: Clearly defining business capabilities is a crucial first step in executing informed strategic investments, decisions, actions, and projects. It ensures that you use resources efficiently to drive organizational change.
3. Maintaining a competitive advantage: Ongoing capability-based planning drives continuous improvement in the workforce and addresses your strengths and weaknesses to mitigate business risks.

Key characteristics of business capabilities

The first characteristic distinguishing business capabilities from other organizational assets or resources is that they are specific and measurable. They can be tracked and quantified over time to assist organizations in making data-driven decisions on investments and improvements.

The second is that business capabilities are actionable, meaning they can be directly managed and influenced through specific actions and decisions. In other words, they have a clear set of development steps to follow in order to reach desired outcomes.

Business capabilities are also dynamic, making them easier to adapt and change in the face of new technology and processes that affect the industry. With regular monitoring, capabilities can be developed and adjusted to meet the changing needs of customers and stakeholders.

Finally, business capabilities are derived from and directly aligned with an organization’s strategic goals, ensuring resources, strategic tactics and talent decisions are all truly focused on achieving those objectives.

How to use business capabilities to improve organizational performance

How you o about using your business capabilities to drive organizational performance depends entirely on the individual needs of your business. But in general, there are five steps you need to follow regardless of your industry or specific organizational needs.

1. Conduct a capability assessment: This reveals strengths (your current capabilities) as well as opportunities for improvement (capabilities that need to be added or further developed).
2. Identify key capabilities: These should align with your organizational objectives. They are derived from your strategic goals to ensure a direction for development.
3. Develop an actionable plan: Define the steps you’ll take to build your business capabilities in the workforce.
4. Implement and measure progress: This involves measuring how you’re tracking towards your strategic goals and the effectiveness of your training programs.
5. Continue to review: Adjust business goals and capabilities over time to improve your organization in line with industry and technological change so you can remain competitive.

The impact of not having business capabilities

When an organization fails to define and build their specific business capabilities, they lack alignment between capabilities and business goals. Given business capabilities are derived from business goals, a lack of alignment between the two makes it impossible to pinpoint where training should be directed to transform the organization. It also means that communication and collaboration between leaders and business units will be unclear, making your capability-building programs and priorities even more confusing.

This then leads to an inability to measure performance, as you won’t understand your baseline capability, including where your current weaknesses lie. Not only that, but you’ll lack tangible steps to track towards organizational improvement, meaning your workforce won’t be equipped to adapt to changes and challenge in the industry.