The Migration of Capabilities

The Migration of Capabilities

In the start-up stages of a business, much of what gets done is attributable to its resources—particularly its people. The addition or departure of a few key people can have a profound influence on its success. Over time, however, the organization’s capabilities shift toward its processes and values. As people work together successfully to address recurrent tasks, processes become defined. And as the business model takes shape and it becomes clear which types of business need to be accorded highest priority, values coalesce. In fact, one reason that many soaring young hot-product companies flame out after they go public is that the key initial resource—the founding team—fails to institute the processes or the values that can help the company follow up with a sequence of hot new products.

Success is easier to sustain when the locus of the capability to innovate successfully migrates from resources to processes and values. It actually begins to matter less which people get assigned to which project teams. In large, successful management consulting firms, for example, hundreds of new MBA’s join the firm every year, and almost as many leave. But they are able to crank out high-quality work year after year because their capabilities are rooted in their processes and values rather than in their resources.

As a new company’s processes and values are coalescing, the actions and attitudes of the company’s founder typically have a profound impact. The founder often has strong opinions about the way employees ought to work together to reach decisions and get things done. Founders similarly impose their views of what the organization’s priorities need to be. If the founder’s methods are flawed, of course, the company will likely fail. But if those methods are useful, employees will collectively experience for themselves the validity of the founder’s problem-solving methodologies and criteria for decision making. As they successfully use those methods of working together to address recurrent tasks, processes become defined. Likewise, if the company becomes financially successful by prioritizing various uses of its resources according to criteria that reflect the founder’s priorities, the company’s values begin to coalesce.

As successful companies mature, employees gradually come to assume that the priorities they have learned to accept, and the ways of doing things and methods of making decisions that they have employed so successfully, are the right way to work. Once members of the organization begin to adopt ways of working and criteria for making decisions by assumption, rather than by conscious decision, then those processes and values come to constitute the organization’s culture.[16] As companies grow from a few employees to hundreds and thousands, the challenge of getting all employees to agree on what needs to be done and how it should be done so that the right jobs are done repeatedly and consistently can be daunting for even the best managers. Culture is a powerful management tool in these situations. Culture enables employees to act autonomously and causes them to act consistently.

Hence, the location of the most powerful factors that define the capabilities and disabilities of an organization migrates over time—from resources toward visible, conscious processes and values, and then toward culture. When the organization’s capabilities reside primarily in its people, changing to address new problems is relatively simple. But when the capabilities have come to reside in processes and values and especially when they have become embedded in culture, change can become extraordinarily difficult.

Every organizational change entails a change in resources, processes, or values, or some combination of these. The tools required to manage each of these types of change are different. Moreover, established organizations typically face the opportunity to create new growth businesses—and the consequent requirement to utilize different resources, processes, and values—at a time when the mainstream business is still very healthy—when executives must not change the resources, processes, and values that enable core businesses to sustain their success. This requires a much more tailored approach to managing change than many managers have felt to be necessary, as we will discuss next.[17]

[16]See Edgar Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1988). Our description of the development of an organization’s culture draws heavily from Schein’s research.

[17]Professors Michael Tushman of Harvard and Charles O’Reilly of Stanford have studied deeply the need to manage organizations in this way to create what they call “ambidextrous organizations.” As we understand their work, they assert that it is not enough simply to spin off an autonomous organization to pursue important but disruptive innovations that don’t match the mainstream organization’s values. The reason is that too often, executives spin it off to get the disruption off their agenda so that they can focus on managing the core business. To create a truly ambidextrous organization, Tushman and O’Reilly assert that the two different organizations need to be located within a business unit. Responsibility for managing the disruptive and sustaining organizations needs to be at a level in the organization where the two are not treated as businesses in a portfolio. Rather, they should be within a group or business unit whose management has the bandwidth to pay careful attention to what should be integrated and shared across the groups, and what should be implemented autonomously. See Michael L. Tushman and Charles A. O’Reilly, Winning Through Innovation: A Practical Guide to Leading Organizational Change and Renewal (Boston: Harvard Business School Press, 2002).