How to recognise a Capability
There seems to be a problem with definitions of Capability — most of the good ones were written long before the web. So you have to go hunting in old MBA text books and the like to find a definition. The term Capability has been used by the military for hundreds of years and was borrowed first by engineering then by business. In business, Capability Management has been around for decades and leads to quotes like it is ’based on the “theory of the firm” as a collection of capabilities that may be exercised to earn revenues in the marketplace and compete with other firms in the industry.’ which is taken from https://en.wikipedia.org/wiki/Capability_management_in_business
Two reasonable definitions that I dug up are:
What the company needs to be able to do to execute its business strategy (e.g. support customers through any medium — telephone, fax, the Web, etc.). These capabilities are operational in nature. — The Capable Company (2003)
The ability to reliably and consistently deliver a specified outcome relevant to your business (i.e. in support of your way to play). This capability is ensured through the right combination of processes, tools, knowledge, skills, and organization, all focussed on meeting the desired result. The most important capabilities are distinctive: each of them represents an extraordinary competence that few others can master. — The Essential Advantage (2010)
That’s not a recommendation for those books, I just went hunting on Amazon as my old books are all in boxes. Many of us EA types start off thinking about Capability upside-down or inside-out. We think it’s something like a Function or a Service or Competence. However, those are all inside the enterprise looking inwards. Capability is something you can only see from inside the enterprise looking out to a market or from outside the enterprise. You have to think of the enterprise as a black box. You have no idea what’s inside it but you know what either you or your customers can use it to achieve.
A tank has a Capability to travel across rough terrain.
If there is a traffic jam, either of my motorbikes has the Capability to sneak between the cars. The Yamaha’s implementation of that Capability is much stronger than the Harley’s. There is no “sneak between cars” button on either of my motorcycles yet both have that Capability. It is implicit in their design. Note that the Capability is not with me, the operator of the vehicle. I have Competence. Put me in a dump truck and that Competence is useless because the dump truck does not have the Capability “sneak between cars”.
That business mentioned in The Capable Company might also have the Capability to deliver goods to customers.
Those examples all use the term Capability the same way: [Black Box] has a [Capability] that can be used in [external environment]. The tank’s environment is rough terrain. The motorbikes’ environment is the road. The business’ environment is its market (its customer base).
That a business has a Capability says nothing about how it does it. Which is one of the key points. With a Capability, you should be able to change its underlying Functions, Services, Processes, Resources and so on but have the Capability still remain. For instance, the business that has the delivery Capability might switch from using a to courier to its own fleet of vehicles. It’s the same Capability but a different implementation.
A Capability can come from anything. Any object (real or notional) in any part of the business. There can be small things buried deep in the organisation that determine whether or not a Capability exists.
Basic ones. A retailer has “goods in”, “advertise goods” and “accept payment” capabilities. In each of those cases, it would probably have corresponding Function or Service that was the implementation of the Capability. However, the Capabilities themselves say nothing about how they are implemented. The Functions and Services that underlie them could change completely and the Capabilities could remain exactly the same.
More advanced. A data centre company wants to apply for government data storage contracts. To do so, all of its staff with physical or administrative access to the data centre must have a certificate that they passed a government security check. So even though the company’s Core Competencies, Functions, Processes, Services, etc. all stay exactly the same, one missing certificate can remove the Capability to apply for government data storage contracts.
One of the major points about a Capability is that it might not exist yet. By saying that a retailer wants a Capability called “next day delivery” we are saying absolutely nothing about how to implement it. Will it be implemented as a Service? Probably. But what if the retailer decides to outsource the problem? The Capability remains whether the retailer owns the Service or not.
A last example and it’s from the military. “Boots on the ground anywhere in the world within 24 hours” is a well-known military Capability. It tells the whole story to whoever wants to use that Capability. It says absolutely nothing about how it will be done. Indeed, the How will be hugely different depending on where in the world, what time of day, what opposition will be faced, etc.
Capability’s proper use is in describing potential interaction with the environment of the thing that delivers/creates the Capability. So it’s a good starting point for EA if someone has identified a gap in the market or for the exec to use as a way of understanding how they can interact with a market. They can point at the gap and say, “we need a Capability to address that gap in the market.”
However, Capability can be used to describe what goes on inside an organisation too — normally Capabilities are External but they can be Internal. Unfortunately, that seems to have caused some serious problems. If you go hunting around on the web for a definition of Capability, it is quite difficult to find genuine ones. I’ve given up. All of the ones I found are spurious.
In turn, those spurious definitions seem to have led to the serious problem that, if you try to find examples of Business Capability Maps, you might never find one. I went through the first 100 or so on Google Images and all of the things that claimed to be “Business Capability Maps” were not. Most of them were Function Maps; I have no idea what the rest were supposed to be.
Maybe the problem is that Capability was rediscovered and became a buzzword about a decade ago. Not many people knew how to describe them because they are a Business Consulting/MBA tool. But lots of IT people and business analysts who knew nothing about the subject produced fake “Capability Maps” and published them on their blogs. Now the real ones are impossible to find and fakes are all that’s left.
To make matters worse, the people who wrote the TOGAF Business Capability Guide seem to have used things like that as their source material. It seems the blind are leading the blind.
Let me leave you with a quote from Mark Goetsch — “Think of capabilities as the strands that weave together services and functions into its unique positioning in a competitive landscape. The paradigm for this is resources-competencies-capabilities. Resources are acquired by the firm (Capital), transformed into competencies (functions and services) and exposed as capabilities (the unique positioning of the firm). This is what connects tactical and strategic action. For the first 100 years of the industrial age (1860-1960) services and functions were enough. This was the theory of business enterprise by Veblen in 1904. Build it and they will come. Chandler refined the concept of a business as an enterprise with overwhelming evidence across hundreds of companies over a 150 year period finding that this worked. Mergers and acquisitions in the 1980’s destroyed this view as companies that relied on these strategies became buy-out targets. Companies needed a way of positioning that went beyond services. This is what Teece et. al. are addressing with capabilities.”
[Update 17th Nov 2019] Here’s my personal definition that might work for you too after reading the above.
Business Capability:
The ability to reliably and consistently achieve a desired effect in a market. It can be delivered by any object (real or notional) in any part of the business or any combination of them. For example it could be delivered by an individual Process, Role, Location, Service, Competence, system, piece of software, skillset, etc. or any combination of those things. It might be something as big as a set of buildings and all of the operations within; or as small as a few lines of code. However, it must be important or unique enough to a market that the executives of the business should be made aware that its use is significant to business strategy or operations. It is normally named for the desired effect.
Scaling that down to a black box system:
The ability to reliably and consistently achieve a desired effect in an environment external to the system. It can be delivered by any component (real or notional) in any part of the system or any combination of them. However, it must be important or unique enough to an environment external to the system that the operators of the system should be made aware that it is significant to the available uses of the system. It is normally named for the desired effect.
For internal Capabilities — those that are delivered and used inside the organisation — you should use the black box definition. In other words, consider a Process/Function/Service/etc. as the black box and, for example, swap the word “system” for “Process” in the black box definition.
[Update 13th Jan 2020] To give you a flavour of the mindset you need to develop, a recent example was shown to me where someone had confused Capability with Function. They had identified a need in the business and called it “Document Capture” with a “Scan Document” as a supporting Capability. Those are both inward looking, self-contained and say nothing as to the desired effect; both have already chosen a solution just at different levels of detail. In other words, they are Functions.
A Capability would be something like “Printed Documents Made Available Electronically” or “Paperless Where Possible”. Those define the desired effect and not a path to the solution or how to do it. They open up possibilities like requesting all suppliers send PDF invoices to the Finance department rather than paper ones, saving the expense of a load of scanners that is already implied in “Document Capture”.
[Update 16th Jan 2020] Another example of possible confusion of Capability with Function came up in a friend’s work for a Bank. He had labelled Loans as a Capability. It certainly can be a Capability but it could easily be a Function, high-level Process, Org-Unit, etc. The name Loans gives no real clue as to the desired effect. So let’s break it down.
For a start, there is definitely a “Loans” Function in his bank that gives loans whether the Function is called that or not. So we can ask the questions:
Who or what uses the Loans Function?
What effect does that thing or person gain by using it?
The answers are “bank customers” and “temporarily increase liquidity”. That tells us the desired effect is “temporarily increase liquidity for bank customers”. Which is a Capability of the bank. We can abbreviate that to the slightly nicer, “Temporarily Increase Customer Liquidity”.
Now we have something very, very different from the “Loans” Function which specifically tells us How we are going to increase customers liquidity. The name of the Capability leaves us with a lot more options for How. For instance, maybe a bigger overdraft facility will achieve the desired effect that is “Temporarily Increase Customer Liquidity”.
[Update 13th Jan 2020] From my EA Thought of the Day:
In business, Capabilities are useful for external markets but of questionable value internally. The term Capability comes from the military where it makes sense. Every piece of terrain is different and every opposing force has its skills so, if you are asked to secure a hill, the Capabilities you need depend on the hill and the opposing forces trying to prevent your success. Whereas, across the world, business departments and their staff skills are similar from enterprise to enterprise. Some of them are even eager for your success.
[Update 17th Apr 2020] With thanks to an excellent example from James McGovern:
There are three insurance companies, A.co, B.co and C.co.
A.co has no “Direct Sales” Capability. They only sell through agents.
B.co has a “Direct Sales” Capability that is delivered by its Sales Function operating a call centre.
C.co has a “Direct Sales” Capability that is delivered by a bespoke web app developed and run by its in-house DevOps Function. C.co has no Sales Function.
A.co signs a contract… C.co will host an A.co-branded version of the web app but still selling C.co insurance. C.co will operate it and give A.co a percentage of every sale.
A.co now has a “Direct Sales” Capability and the thing that has given it that Capability is a contract.
[Update 13th May 2020] How to spot a fake Capability Diagram
One of the big problems in learning about Capability is that the Internet is full of fake Capability diagrams. There’s an easy way to spot them: they are littered with Management. The word Management on the end of the name of an alleged Capability should set alarm bells ringing. Most of the time, things that end in the word Management are Functions not Capabilities. The way to tell the difference is to ask whether it is managing something inside itself or outside. If it’s inside, it’s a Function.
So, if you see something like “Payments Management” ask yourself, are they doing that for a customer? If not, it’s almost certainly a Function.
[Update 9th Nov 2020] Capability vs Function
Let’s say there is something called Finance Management. Is it a Capability or a Function? A quick examination is all it needs.
Finance Management — as part of any products or services you offer, you can help your customers to manage their finances.
Finance Management — as part of what your Finance department does internally and through its requirements on other departments, your organisation can manage its finances.
The first is a Capability; the second a Function. If you think it through, the second is pretty much a redundant concept. If they couldn’t do Finance Management, why on Earth would you have a Finance department?
[Update 1st Oct 2022] A physical example of Capability
This is one for the photographers. An ND Filter (neutral density) gives a good example of the difference between Function and Capability. Its Function is to reduce the amount of light hitting the sensor/film — that’s about what’s happening inside the camera. Its Capability is to allow us to take a picture in bright light — that’s about what’s happening outside the camera.
[Update 28th Nov 2022] Recently, someone gave me a questionable definition of Capability: “a combination of people, process, technology that converts inputs to desired outcomes and Value from the perspective of recipients of outcomes within and outside the organization.” — which is very similar to the definition of Function. The only difference it’s “outcomes” instead of “outputs”. To me, the definition misses an important point. The start — “a combination of people, process, technology that converts inputs” — is the Function that delivers the output associated with the Capability. The business can use the output to potentially achieve a desired effect. To be fair, a lot of people use the word Capability to mean the whole thing: the combination of the Function, it’s outputs and the resulting potential to achieve an outcome.
The upshot is you can understand Capability this way:
Function [people, process, technology, etc.] converts inputs to outputs
Capability [the business can potentially use the outputs to achieve a desired effect]
Function: build a bridge
Capability: cross a river
Business Capability Architecture: A City Plan for Enterprises
The concept of a “business system” was introduced by Harold J. Leavitt in “Applying organizational change in industry: Structural, technological and humanistic approaches”. Handbook of Organizations, J.G. March, Ed. Rand McNally, Chicago, IL, 1965. His model formed the basis for a series of major research projects at MIT Sloan School of Management, entitled “The Management in the 1990s Research Program”, the subject of which was strategic alignment in enterprises. Michael S. Scott-Morton, an expert in corporate strategy, strategic options and information technology, was the director of this program, and subsequently published “The Corporation of the 1990s: Information Technology and Organisational Transformation” in 1991. This research provides the foundation for this approach. The term business capability has more recently been used as a synonym of Leavitt’s business system, to remove confusion with applications which were not a concept in 1965.
Much as a “City Plan” seeks to describe how a city will look, a Business Capability Architecture seeks to describe how an enterprise will ideally operate through its constituent parts. All enterprises, both large and small, function using a series of inter-operating business capabilities. In modern enterprises, these business capabilities are numerous and complex, and are becoming increasingly integrated and automated through the use of technology.
Every Business Capability consists of:
• Business Information & Process: Information, Workflow, Policies, Procedures, Processes and Business Rules;
• Organisation: Roles, Responsibilities, Accountabilities, Decision Points, Reward Systems, Communication Channels, Performance Measures;
• People: Skills, Aptitudes, Attitudes, Motivation, Commitment, Culture; and
• Technology: Equipment (tools and machinery), Data, Applications, ICT Infrastructure, Networks, Telephony, Supporting Technology.
Each business capability is a unique combination of each of the four dimensions, centred on a particular set of business information. As such, a business capability is information centric, rather than process centric. A business capability does not necessarily need to be enabled by specific information systems / technologies.
Other components within each of the dimensions may exist across multiple business capabilities e.g. a staff member may have roles in multiple business capabilities, an information system (application) may support multiple business capabilities and so on. This reflects the increasingly integrated and multi-skilled nature of modern enterprises and their staff.
From an enterprise viewpoint, it is important to identify and understand all the unique business capabilities required by an organisation. It is these business capabilities that make up what the enterprise needs to do.
A Business Capability Architecture (BCA) identifies all the target business capabilities an enterprise needs to “do business” AND achieve its strategy (i.e. the mix of business capabilities required to do “business-as-usual”, together with new or changed business capabilities to achieve strategic business outcomes). The BCA creates a common, shared understanding of this important architectural dimension.
Wow, thanks for that huge and detailed response, Mark. There’s plenty of meat in there but at least a few things that give me problems. I think the biggest one comes from the fact that my EA career started out as the equivalent of a draughtsman which means I always look for a way to model things. More than that, in a model, every concept needs to be unique whereas what you have described is essentially a broad mix. That doesn’t necessarily mean that I disagree with it, just that, to me, you’re describing something at the very highest level for Internal Capabilities. While those are sometimes useful, the big question is: are there better ways to describe the interplay of supply/demand and competence/capability inside an enterprise?
Can you provide concrete examples of “internal capabilities” versus “external capabilities”?
Tim Manning gave a link over on LinkedIn to some good examples of Internal: https://matthey.com/en/inspiring-science/core-capabilities
Somewhat related – and possibly of interest: A fairly lengthy examination of “Business Functions vs. Business Capabilities”
https://intltechventures.blogspot.com/2018/09/2018-09-30-sunday-business-functions-vs.html
Let me see if I can define internal and external capabilities right. Let me take Apple as an example:
1. External Capabilities:
a. Meet market demand for products and services
b. Seamless experience across products and services
2. Internal capabilities
a. World class silicon
b. Supplies can meet demand
1.a: no, in Apple’s case, that’s just capacity, i.e. normal business operational efficiency.
a.b: yes.
2.a: yes.
b. no, again that’s just capacity (which is BAU for most businesses)
Example Apple External Capabilities:
Exquisite, tasteful design — products that are beautifully built both inside and out
Buy with confidence — all products are close to best in class
Premium price is justified
Example Apple Internal Capabilities:
Customer experience drives everything
High-pressure water cutting of aluminium (they led its introduction)
Industrial design at all levels (from working with product line machinery suppliers to design new machines to the design of the final products)
PCB design
Re 1.a and 2.b How would I rephrase this so as to describe these as capabilities? To quote you from LinkedIn, “Going with the supermarket theme
Competence: we rigorously keep the shelves stocked
Capability: our customers can always find it if we have it” https://www.linkedin.com/feed/update/urn:li:activity:6747608247005433856?commentUrn=urn%3Ali%3Acomment%3A%28activity%3A6747608247005433856%2C6747777949312802816%29&replyUrn=urn%3Ali%3Acomment%3A%28activity%3A6747608247005433856%2C6747808636711534592%29
How is high-pressure water cutting of aluminum an internal capability? It describes the tool/mechanism to achieve precision cut aluminum bodies for their products.
“Meet market demand for products and services” would only be a Capability worth talking about if it was something your competitors can’t do. Otherwise, that’s just a normal part of doing business. In Apple’s case, you might get closer with something like, “Create entirely new markets with our products and services”.
That latter is true for the iPhone, iPad, iWatch, App Store, Apple Pay and goes quite a long way back in Apple’s history to things like the original Mac, the LaserWriter, iMac and arguably the MacBook Air. If you look at it historically, it’s something that Apple is getting better and better at doing.
“How is high-pressure water cutting of aluminum an internal capability?” — because it’s not just one machine but an entire set of things. When Apple introduced it, nobody else on the planet in any industry was doing anything like it. It required a huge investment and it’s not just the machine that cuts the aluminium that counts. You have to shape the parts before they go into the machine, you have to design what will be cut, design those cuts to take circuit boards, pre-process the aluminium, post-process the cut aluminium, deal with waste, ensure safety (it’s ridiculously dangerous to have water at a pressure that can cut aluminium), etc. and do all of that at scale.
So you need the entire chain from concept through CAD/CAM through design through structural testing and on into at-scale manufacturing. Even now, more than a decade after Apple went live with it, very few other companies can do it in any industry let alone for building laptops.
The desired effect isn’t something that hardly anyone in any industry can replicate. It is something else, I think and so I disagree with you. IMO, it should be something like “multifunctional body” or something like that.
The way I see it, the desired effect is not just a case, but a case that serves akin to a keel on a ship whereas before, the case needed two parts – one to protect from the elements and another to supply the skeleton to mount the circuits, the battery and everything else. The tight fit helps a bit with heat dissipation, though it hinders heat dissipation much more because of how much coolant can be pushed through the hottest parts. With the latest MacBook Pros and Air with the M1 SOC, they have finally reached the objective they have been striving towards – the silicon is so efficient that the body of the Air is enough to dissipate heat and on the Pro, only the most compute intensive tasks require active heat dissipation. So, in the latest macbooks, the case serves a third function – that of a passive heat sink.
If a better way of building similar bodies comes up, Apple will abandon the high-pressure water cutting process for it, after all.
You seem to be confusing the outcome with the desired effect. The *internal* capability/desired effect is water-cutting of aluminium. The *external* outcome is that Apple can produce laptops that are distinctive, attractive, tough, etc.
Apple might well develop a different internal capability if it finds a more desirable potential external outcome.
I see. The desired internal effect is precision cut frames. The external outcome/desired effect of the precision cutting process is a frame cut in such a way that it maintains structural strength while being aesthetically pleasing, form fits the laptop internals and acts as a passive heat sink.
I’m with you thus far. Or I think I am…
Where I remain unconvinced is specifically calling out a specific cutting process. Why is it wrong to say “document capture” for an external capability, but right to say “high-pressure water cutting of aluminum” for an internal capability?
“The ability to reliably and consistently achieve a desired effect in an environment external to the system. […] However, it must be important or unique enough to an environment external to the system that the operators of the system should be made aware that it is significant to the available uses of the system.” — “High-pressure water cutting of aluminium” is significant to the available uses of the system; it changes what you can manufacture. “Document capture” isn’t significant to the available uses of the system; it doesn’t change what business you can do.
That makes sense. My follow on question: what happens when such a “named” capability becomes not so unique in the industry? Wouldn’t we need to rename it? To avoid that hassle, why not have a generic name for the capability at the starting post?
Global trade means the days of unique capabilities are mostly gone. Even then, it’s all about the question, what are the strategically significant things we can use it to do? Don’t get too hung up on the specific naming of “high-pressure water cutting of aluminium” because it’s just something I identified and named; Apple may not name it that way or even think in terms of capabilities.