HBR SPOTLIGHT

Assets like leadership,

talent, and speed are what

produce superior market

value. A capabilities audit

can show you how you

measure up-and how to

build on your intangible

strengths.

Capitalizing onCapabilitiesby Dave Ulrich and Norm Smallwood

I F YOU ASK THEM WHICH COMPANIESthey admire, people quickly point toorganizations like General Electric, Star-bucks, Nordstrom, or Microsoft. Ask howmany layers of management these com-panies have, though, or how they setstrategy, and you'll discover that fewknow or care. What people respect aboutthe companies is not how they are struc-tured or their specific approaches tomanagement, but their capabilities -an ability to innovate, for example, or torespond to changing customer needs.Such organizational capabilities, as wecall them, are key intangible assets. Youcan't see or touch them, yet they canmake all the difference in the worldwhen it comes to market value.

These capabilities - the collectiveskills, abilities, and expertise of an or-ganization - are the outcome of invest-ments in staffing, training, compensa-tion, communication, and other human

resources areas. They represent the waysthat people and resources are broughttogether to accomplish work. They formthe identity and personality of the orga-nization by defining what it is good atdoing and, in the end, what it is. Theyare stable over time and more difficultfor competitors to copy than capitalmarket access, product strategy, or tech-nology. They aren't easy to measure, somanagers often pay far less attention tothem than to tangible investments likeplants and equipment, but these capa-bilities give investors confidence in fu-ture earnings. Differences in intangibleassets explain why, for example, up-start airline JetBlue's market valuationis twice as high as Delta's, despite jet-Blue's having significantly lower reve-nues and earnings.

In this article, we look at organizationalcapabilities and how leaders can eval-uate them and build the ones needed

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HBR SPOTLIGHT I ntang Ible Assets

to create intangible value. Throughcase examples, we explain how to doa capabilities audit, which provides ahigh-level picture of an organization'sstrengths and areas for improvement.We've conducted and observed dozensof such analyses, and we've found theaudit a powerful way to evaluate intan-gible assets and render them concreteand measurable.

Organizational CapabilitiesExplainedwhile people often use the words "abil-ity," "competence," and "capability" in-terchangeably, we make some distinc-tions. In technical areas, we refer to anindividual's functional competence orto an organization's core competencies;on social issues, we refer to an individ-ual's leadership ability or to an organi-zation's capabilities. With these differ-ences in mind, let's compare individualand organizational levels of analysis aswell as technical and social skill sets:

Tec

hnic

alS

ocia

l

Individual1

An individual'sfunctional

competence2

An individual'sleadership ability

Organizational

3An organization's

core competencies

4An organization's

capabilities

In the table above, the individual-technical cell (l) represents a person'sfunctional competence, such as techni-cal expertise in marketing, finance, ormanufacttiring. The individual-socialcell (2) refers to a person's leadershipability-for instance, to set direction, tocommunicate a vision, or to motivatepeople. The organizational-technicalcell (3) comprises a company's core tech-nical competencies. For example, a finan-cial services firm must know how tomanage risk. The organizational-socialcell (4) represents an organization's un-derlying DNA, culture, and personality.

These might include such capabilitiesas innovation and speed.

Organizational capabilities emergewhen a company delivers on the com-bined competencies and abilities of itsindividuals. An employee may be techni-cally literate or demonstrate leadershipskill, but the company as a whole may ormay not embody the same strengths. {Ifit does, employees who excel in theseareas will likely be engaged; if not, theymay be frustrated.) Additionally, organi-zational capabilities enable a companyto turn its technical know-how into re-sults. A core competence in marketing,for example, won't add value if the or-ganization isn't able to spark change.

There is no magic list of capabilitiesappropriate to every organization. How-ever, we've identified ii -listed below-that well-managed companies tend tohave. (Such companies typically excel inas many as three of these areas whilemaintaining industry parity in the oth-ers.) When an organization falls belowthe norm in any of the li capabilities,dysfunction and competitive disadvan-tage will likely ensue.

Talent: We are good at attracting, mo-tivating, and retaining competent andcommitted people. Competent employ-ees have the skills for today's and to-morrow's business requirements; com-mitted employees deploy those skillsregularly and predictably. Competencecomes as leaders buy (acquire new tal-ent), build (develop existing talent),borrow (access thought leaders throughalliances or partnerships), bounce (re-move poor performers), and bind (keepthe best talent). Leaders can earn com-mitment from employees by ensuringthat the ones who contribute more re-ceive more of what matters to them.Means of assessing this organizationalcapability include productivity mea-sures, retention statistics (though it's agood sign when employees are targeted

Dave Ulrich (dou@umich.edu), on leave from the University of Michigan, is the presi-dent ofthe Canada Montreal Mission for the Church of Jesus Christ of Latter-daySaints. Norm Smallwood (nsmallwood(S)rbl.net) is a cofounder of Results-Based Lead-ership, a consulting company in Provo, Utah. Ulrich and Smallwood are the coauthorso/Why the Bottom Line Isn't! How to Build Value Through People and Organi-zation (Wiley, 2003).

by search firms), employee surveys, anddirect observation.

Speed: We are good at making impor-tant changes rapidly Speed refers to theorganization's ability to recognize op-portunities and act quickly, whether toexploit new markets, create new prod-ucts, establish new employee contracts,or implement new business processes.Speed may be tracked in a variety ofways: how long it takes to go from con-cept to commercialization, for example,or from the collection of customer datato changes in customer relations. Just asincreases in Inventory turns show thatphysical assets are well used, time sav-ings demonstrate improvements in laborproductivity as well as increased enthu-siasm and responsiveness to opportu-nities. Leaders should consider creatinga return-on-time-invested (ROTI) index,so they can monitor the time requiredfor, and the value created by, variousactivities.

Shared Mind-Set and CoherentBrand \dent\ty: We are good at ensuringthat employees and customers have posi-tive and consistent images of and experi-ences with our organization. To gaugeshared mind-set, ask each member ofyour team to answer the following ques-tion: What are the top three things wewant to be known for in the future byour best customers? Measure the degreeof consensus by calculating the per-cent of responses that match one ofthe three most commonly mentioneditems. We have done this exercise hun-dreds of times, often to find a sharedmind-set of 50%to 60%; leadingcompa-nies score in the 80% to 90% range. Thenext step is to invite key customers toprovide feedback on brand identity. Thegreater the degree of alignment be-tween internal and external mind-sets,the greater the value of this capability.

Accountability: We are good at ob-taining high performance from employ-ees. Performance accountability becomesan organizational capability when em-ployees realize that failure to meet theirgoals would be unacceptable to thecompany. The way to track it is to ex-amine the tools you use to manage per-formance. By looking at a performance

120 HARVARD BUSINESS REVIEW

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appraisal form, can you derive thestrategy of the business? What percentof employees receive an appraisal eachyear? How much does compensationvary based on employee performance?Some firms claim a pay-for-performancephilosophy but give annual compensa-tion increases that range from 3.5% to4.5%. These companies aren't paying forperformance. We would suggest thatwith an average increase of 4%, an idealrange for acknowledging both low andhigh performance would be 0% to 12%.

Collaboration: We are good at work-ing across boundaries to ensure both effi-ciency and leverage. Collaboration oc-curs when an organization as a wholegains efficiencies of operation throughthe pooling of services or technologies,through economies of scale, or throughthe sharing of ideas and talent acrossboundaries. Sharing services, for exam-ple, has been found to produce a savingsof 15% to 25% in administrative costswhile maintaining acceptable levels ofquality. Knowing that the average largecompany spends about $1,600 per em-ployee per year on administration, youcan calculate the probable cost savingsof shared services. Collaboration maybetracked both throughout the organiza-tion and among teams. You can deter-mine whether your organization is trulycollaborative by calculating its brealoipvalue. Estimate what each division ofyour company might be worth to a po-tential buyer, then add up these num-bers and compare the total with yourcurrent market value. As a rule of thumb,if the breakup value is 25% more thanthe current market value of the assets,collaboration is not one of the com-pany's strengths.

Learning: We are good at generatingand generalizing ideas with impact. Or-ganizations generate new ideas throughbenchmarking {that is, by looking atwhat other companies are doing), ex-perimentation, competence acquisition(hiring or developing people with newskills and ideas), and continuous im-provement. Such ideas are generalizedwhen they move across a boundary oftime (from one leader to the next), space(from one geographic location to an-

other), or division (from one structuralentity to another). For individuals, learn-ing means letting go of old practicesand adopting new ones.

Leadership: We are good at embed-ding leaders throughout the organization.Companies that consistently produceeffective leaders generally have a clearleadership brand - a common under-standing of what leaders should know,be, and do. These companies' leaders areeasily distinguished from their compet-itors'. Former McKinsey employees, forinstance, consistently approach strategyfrom a unique consulting perspective;they take pride in the number of thefirm's alumni who become CEOs oflarge companies. In October 2003, theEconomist noted that 19 former GEstars immediately added an astonishing$24.5 billion (cumulatively) to the share

prices of the companies that hired them.You can track your organization's lead-ership brand by monitoring the pool offuture leaders. How many backups doyou have for your top 100 employees? Inone company,the substitute-to-star ratiodropped from about 3:1 to about 0.7:1(less than one qualified backup for eachof the top 100 employees) after a re-structuring and the elimination of cer-tain development assignments. Seeingthe damage to the company's leader-ship bench, executives encouraged po-tential leaders to participate in tempo-rary teams, cross-functional assignments,and action-based training activities, thuschanging the organization's substitute-to-star ratio to about i:i.

Customer Connectivity: Wearegoodat building enduring relationships oftrust with targeted customers. Since it's

2004 121

HBR SPOTLIGHT Intangible Assets

frequently the case that 20% of custom-ers account for 80% of profits, the abilityto connect with targeted customers isa strength. Customer connectivity maycome from dedicated account teams,databases that track preferences, or theinvolvement of customers in HR prac-tices such as staffing, training, and com-pensation. When a large portion oftheemployee population has meaningfulexposure to or interaction with cus-tomers, connectivity is enhanced. Tomonitor this capability, identify yourkey accounts and track the share ofthose important customers over time.Frequent customer-service surveys mayalso offer insight into how customersperceive your connectivity.

Strategic Unity: We are good at artic-ulating and sharing a strategic point ofview. Strategic unity is created at threelevels: intellectual, behavioral, and pro-cedural. To monitor such unity at the in-tellectual level, make sure employeesfrom top to bottom know what the strat-egy is and why it is important. You canreinforce this sort of shared understand-ing by repeating simple messages; youcan measure it by noting how consis-tently employees respond when askedabout the company's strategy. To gaugestrategic accord at the behavioral level,ask employees how much oftheir timeis spent in support of the strategy andwhether their suggestions for improve-ment are heard and acted on. When itcomes to process, continually invest inprocedures that are essential to yourstrategy. For example, Disney must payconstant attention to any practices re-lating to the customer-service experi-ence; it must ensure that its amusementparks are always safe and clean and thatguests can successfully get directionsfrom any employee.

Innovation: We are good at doingsomething new in both content and pro-cess. Innovation-whether in products,administrative processes, business strat-egies, channel strategies, geographicreach, brand identity, or customer ser-vice - focuses on the future rather thanon past successes. It excites employees,delights customers, and builds confi-dence among investors. This capability

How to Perfornn a Capabilities Audit

A capabilities audit will help you gauge-and ultimately boost-your organization's

intangible value. First, select a business unit (plant, division, region, zone, industry).

Then, using the following questions as a guide-and keeping in mind your overall

business strategy-assess the unit's performance in each organizational capability

(o^worst; lO^best), and rank the capabilities in terms of improvement needed

(i=highest priority, 2^next highest, and so on).

OrganizationalCapabilities

Taient

Speed

Sharedmind-setand coherentbrand identity

Accountability

Collaboration

Learning

Leadership

Customerconnectivity

Strategic unity

Innovation

Efficiency

Questions

Do our employees have thecompetencies and the commitmentrequired to deliver the businessstrategy in question?

Can we move quickly to makeimportant things happen fast?

Do we have a culture or identity thatreflects what we stand for and how wework? Is it shared by both customersand employees?

Does high performance matterto the extent that we can ensureexecution of strategy?

How well do we collaborate to gainboth efficiency and leverage?

Are we good at generating newideas with impact and generalizingthose ideas across boundaries?

Do we have a leadership brand thatdirects managers on which results todeliver and how to deliver them?

Do we form enduring relationshipsof trust with targeted customers?

Doour employees share an intellectual,behavioral, and procedural agenda forour strategy?

How well do we innovate inproduct, strategy, channel, service,and administration?

Do we reduce costs by closely manag-ing processes, people, and projects?

Assessments Rankings

may be tracked through a vitality index(for instance, one that records revenuesor profits from products or services cre-ated in the last three years).

Efficiency: We are good at managingcosts. While it's not possible to save yourway to prosperity, leaders who fail to

manage costs will not likely have theopportunity to grow the top line. Effi-ciency may be the easiest capability totrack. Inventories, direct and indirectlabor, capital employed, and costs ofgoods sold can all be viewed on balancesheets and income statements.

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Conductinga Capabilities AuditJust as a financial audit tracks cash fiowand a 360-degree review assesses lead-ership behaviors, a capabilities auditcan help you monitor your company'sintangible assets. It will highlight whichones are most important given the com-pany's history and strategy, measurehow well the company delivers on thesecapabilities, and lead to an action planfor improvement. This exercise can workfor an entire organization, a businessunit, or a region. Indeed, any part of acompany that has a strategy for pro-ducing financial or customer-relatedresults can do an audit, as long as it hasthe backing of the leadership team.We'll walk through the process below,describing as we go the experiences oftwo companies that recently performedsuch audits - Boston Scientific (a med-ical device manufacturer) and Inter-Continental Hotels Group - and whatthey did as a result of their findings.

The Massachusetts-based companyBoston Scientific has enjoyed stronggrowth over the past 25 years. In partic-ular, its international division deliversabout 45% of company revenues and55% of company profits. Yet in 2003, thegroup's executives still wanted to findways to improve on the division's suc-cess, so Edward Northup, president ofBoston Scientific International,decidedto engage his leadership team in a ca-pabilities audit.

The first step was to identify the areasthat were critical in meeting the group'sgoals. Using the n generic capabilitiesdefined above as a starting point, lead-ers at Boston Scientific adapted the lan-guage to suit their business require-ments. (No matter how you create thelist, the capabilities you audit shouldreflect those needed to deliver on yourcompany's strategic promises.) Next, toevaluate the organization's performanceon these capabilities, the internationaldivision's executives - along with theirbosses and employees and a group ofpeer executives from other divisions -completed a short online survey. Adaptedfrom the generic questionnaire shownin the exhibit "How to Perform a Capa-

bilities Audit," the survey comprised 20questions, with space for comments. Foreach capability, respondents were askedto rate on a scale of one to five thegroup's current performance as well asthe level of achievement the divisionwould need in order to meet its goals.This exercise showed gaps between cur-rent and desired capability. For exam-ple, on strategic unity-the extent towhich employees understood and agreedupon strategy - the score for actualachievement was 0.91 points lower thanthe score for desired performance. Re-spondents also chose two capabilitiesthat would most affect the group's abil-ity to deliver on its customer-related andfinancial promises.

The leaders discussed the survey find-ings at an off-site meeting. To addressthe strategic-unity gap, they developeda clearer statement of strategy thatsharpened the group's focus on serviceand profitability. Then, before formingan overall improvement plan, they de-fined the capabilities that would bemost critical to executing that strategy.

They didn't necessarily choose capa-bilities with low scores in actual per-formance. For example, even thoughthe group showed relative weakness inlearning and innovation, the leadershipteam didn't see those capabilities asessential to meeting group goals, be-cause the division is primarily a sales,marketing, and distribution arm of thecompany. However, although the divi-sion scored high on talent (see the ex-hibit "Does the Talent Deliver?"), theleaders chose to invest in further de-veloping this capability since it wouldbe critical to success; in particular, theyfocused on strengthening marketingskills and building talent that wouldallow them to target a broader set ofcustomers. They also launched an effortto create a leadership brand, startingwith a new model of high performance.Finally, they began to assess benchstrength in support of that leadershipbrand, starting with the organization'sthree regional presidents.

The idea, in short, is not necessarily toboost weak capabilities but to identify

Does the Talent Deliver?

In an online survey designed to gauge their division's capabilities, executives

at Boston Scientiinc International asked respondents to answer the following

question on a scale of one to five, with one meaning "not at all" and five

meaning "absolutely": Do International leaders ensure that they have the

best talent required to accomplish their strategy? The responses were positive

but nonetheless indicated room for improvement in this key area.

This exercise made the intangible strengths and weaknesses of the interna-

tional group tangible. It compared how executives from different parts of

Boston Scientific-inside and outside the international group-viewed the

division's capabilities, and it provided a baseline score against which to

measure the impact of future investments in these capabilities. Leaders plan

to revisit the effort in a year to learn whether their investments have made

a difference.

Respondents

Executive Committee

Operations Committee

Senior Marketing Leaders

Internationai Senior Staff

Other Functionai Leaders

Average Score !

TaJentScores

4.00

3.50

4.00

4.60

3.67

3.9S

JUNE 2004 123

HBR SPOTLIGHT intangible Assets

and build capabilities that will have thestrongest and most direct impact onthe execution of strategy.

The Berkshire, England-based Inter-Continental Hotels Group (IHG) con-ducted its audit across the entire com-pany. In late 2002 and early 2003, theglobal organization-recently spun offfrom Bass Group-faced bloated over-head costs in the competitive hotel in-dustry, experienced a decline in busi-ness and vacation travel because oftheworldwide economic downturn andthe spread of severe acute respiratorysyndrome (SARS), underwent a brandname change (from Six Continents),and battled a hostile takeover attemptby British entrepreneur Hugh Osmond.Deutsche Bank analyst Mark Finnia, ina January 2003 report, described thehotels as "chronically underperform-ing...[and] making less than a third ofwhat they should be." In an effort toimprove performance, chief executiveRichard North initiated an "organiza-tion review."

A Snapshot of IHG's Capabilities Audit Results

Intercontinental Hotels Croup executives chose which capabilities would

be most essential to the company's future success and then collected feed-

back on how well IHC delivered on these capabilities. The accompanying

chart shows both actual and desired levels of accomplishment. In the capabil-

ities designated critical for world-class success, IHC needed to invest fairly

significantly in improvements. In the areas that demanded superior perfor-

mance, it needed to invest, but not as heavily. And when it came to the capa-

bilities where IHC needed to be on par, the company was already on target

and could thus focus on efficiency and cost reduction.

As at Boston Scientific International,the audit process started with collectionof feedback from multiple sources -executives, employees at al! levels, andfranchisees who owned and managedindividual hotels. The information wasgathered by an organization-review de-sign team made up of high-potentialemployees from all regions. Supported

by external consultants, the team mem-bers worked on the review process full-time for several months before makingrecommendations to the IHG execu-tive committee. Based on this review,efficiency, or reducing costs, quicklybecame a priority. The company's costswere 15% to 20% higher than the in-dustry average, and IHG swiftly took

The Royal Bank of Scotland Group didn't become one of the largest banks in the world by sitting around talking about it. www.rbs.co.uk

Make it happen

C a p i t a l i z i n g on Capab i l i t i e s

World-ClassAchievement

IndustrySuperiority

IndustryParity

Need Significant Investmentincapabilities

Need Moderate Investmentincapabilities

CanFocu5on Efficiencyand Cost Reduction

Collaboration Speed Execution Leadership lalent Learning

Actual Stdte Desired State

\hafedMind-Set

Accountability

measures to streamline its operationsamong the various regions, creating ashared services center and aligning fi-nance, human resources, and corporatefunctions.

IHG executives also looked at whatcapabilities would be essential for fu-ture success, assessing actual and desiredcapabilities in terms of where the com-

pany required world-class skill, where itneeded to demonstrate industry superi-ority, and where it needed to achieve in-dustry parity for optimal cost-efficiency.(For a visual breakdown of the areas ex-amined, see the exhibit "A Snapshot ofIHG's Capabilities Audit Results.") Thecapabilities under review supported theoverarching priority of efficiency. Lead-

ers decided, for example, that the com-pany should achieve world-class perfor-mance in collaboration. As part of thisstrategic push, IHG gave up its decen-tralized structure, in which each regionoperated independently and was re-sponsible for its own budget and oper-ation, and became a unified corporateentity whose regions needed to work

The Royol Bank ofScotlartd Croup

HBR SPOTLIGHT Intangible Assets

together to solve budget shortfalls, in-formation technology challenges, andthe like. By collaborating across regionsand hotels, IHG streamlined operationsand saved more than $100 million a year.By focusing on the gap between actualand desired capabilities, company lead-ers were able to determine where to in-vest leadership attention. This new fo-cus allowed IHG to fend off the hostiletakeover, demerge successfully, increaseits share price by 71% from April 2003to February 2004, and outperform theFTSE 100 by a factor of two, while reen-ergizing the company culture. A surveyshowed dramatic increases in employeemorale and confidence in company lead-ership. The quality of management atthe company is no longer a matter ofpublic debate.

Lessons LearnedNo two audits will look exactly thesame, but our experience has shown usthat, in general, there are good and badways to approach the process. You'll beon the right track if you observe a fewguidelines.

Get focused. It's better to excel at afew targeted capabilities than to diffuseleadership energy over many. Leadersshould choose no more than three onwhich to spend their time and atten-tion; they should aim to make at leasttwo of them world-class. This meansidentifying which capabilities will havethe most impact and will be easiest toimplement,and prioritizing accordingly.(Boston Scientific chose talent, leader-ship, and sf)eed. IHG zeroed in on col-laboration and speed since the com-pany's leaders felt that working acrossboundaries faster would enable them toreach their strategic and financial goals.)The remaining capabilities identified inthe audit should meet standards of in-dustry parity. Investors seldom seek as-surance that an organization is averageor slightly above average in every area;rather, they want the organization tohave a distinct identity that aligns withits strategy.

Recognize the interdependence ofcapabilities. While you need to be fo-cused, it's important to understand that

Step-by-Step Through the Audit Process

while the particulars of a capabilities audit will differ from company tocompany, leaders should foliow these five basic steps:

1 Determine which part of the business to audit. This can bea division, a region, the entire company-any unit responsible fordelivering on a strategy.

2 Create the content ofthe audit. Adapt the 11 generic capabilitiesoutlined in this article to the organization's requirements. (You maywant to add "quality," for example.) A tailor-made audit template willyield the most precise information.

3 Gather data from multiple groups on current and desiredcapabilities. This information may be collected by degrees.

For a 90-degree assessment, collect data only from the leadershipteam ofthe unit being audited. This method is quick but oftendeceptive, as the leaders' self-reports may be biased.

For a 360-degree assessment, collect data from multiple groupswithin the company. Different groups may tell very different stories,as happened at Boston Scientific International, and can provideinsights that might otherwise be missed.

For a 720-degree assessment, collect information not only from insidethe company but from outside groups. External assessors might includeinvestors, customers, or suppliers. These groups are important becauseit is in their eyes that the organization's intangible value matters most.Intercontinental Hotels Croup did a 720-degree assessment to someextent by including franchisees in its data sample.

4 Synthesize the data to identify the most critical capabilitiesrequiring managerial attention. Look for patterns in the data andfocus leadership attention on no more than three capabilities requiredto deliver on strategy goals. You'll need to identify which capabilitieswill have the most impact and which will be the easiest to improve.

5 Put together an action plan with clear steps to take andmeasures to monitor, and assign a team to the job of deliveringon the critical capabilities. Actions might include coordinatingeducation or training events, setting performance standards, creatingtask forces or other organizational units to house those doing thework, or investing in technology to sustain the capability. Establish

a time frame of 90 days for the plan's execution.

capabilities depend on one another. Soeven though you should target no morethan three for primary attention, themost important ones often need to becombined. For example, speed won'tbe enough on its own; you will likelyneed fast learning, fast innovation, orfast collaboration. As any capabilityimproves, it will probably improve oth-

ers in turn. We assume that no capa-bilities are built without leaders, soworking on any one of them builds lead-ership. As the quality of leadership im-proves, talent and collaboration issuesoften surface-and in the process of re-solving those problems, the companyusually strengthens its accountabilityand learning.

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Learn from the best. Compare yourorganization with companies that haveworld-class performance in your targetcapabilities. Quite possibly, these com-panies won't be in the same industryas your organization. It's often helpful,therefore, to look for analogous indus-tries where companies may have devel-oped extraordinary strength in the ca-pability you desire. For example, hotelsand airlines have many differences,but they're comparable when it comesto several driving forces: stretchingcapital assets, pleasing travelers, em-ploying direct-service workers, and soon. The advantage of looking outsideyour own industry for models is thatyou can emulate them without compet-ing with them. They're far more likelythan your top competitors to share in-sights with you.

Create a virtuous cycle of assess-ment and investment. A rigorous as-sessment helps company executivesfigure out what capabilities will be re-quired for success, so they can in turndecide where to invest. Over time, rep-etitions of the assessment-investmentcycle result in a baseline that can beuseful for benchmarking.

Compare capability perceptions. Like360-degree feedback in leadership as-sessments, capabilities audits sometimesreveal differing views of the organiza-tion. For example, employees or custom-ers may not agree with top leaders'per-ception that there is a shared mind-set.Involve stakeholders in improvementplans. If investors rank the firm low onvarious capabilities, for instance, theCEO or CFO might want to meet withthe investors to discuss specific actionplans for moving forward.

Match capability with delivery. Lead-ers need to do more than talk about ca-pability; they need to demonstrate it.Rhetoric shouldn't exceed action. Ex-pectations for improvement should beoutlined in a detailed plan. One approachis to bring together leaders for a half-daysession to generate questions for theplan to address: What measurable out-come do we want to accomplish withthis capability? Who is responsible fordelivering on it? How will we monitor

our progress in attaining or boostingthis capability? What decisions can wemake immediately to foster improve-ment? What actions can we as leaderstake to promote this capability? Suchactions may include developing edu-cation or training programs, design-ing new systems for performance man-agement, and implementing structuralchanges to house the needed capabili-ties. The best capability plans specify ac-tions and results that will occur withina 90-day window. HR professionals maybe the architects, but managers are re-sponsible for executing these plans.

Avoid underinvestment in organi-zation intangibles. Often, leaders fallinto the trap of focusing on what is easyto measure instead of what is in greatestneed of repair. They read balance sheetsthat report earnings, EVA, or other eco-nomic data but miss the underlyingorganizational factors that may addvalue. At times the capability goals canbe very concrete, as with IHG's focuson efficiency.

Don't confuse capabilities with ac-tivities. An organizational capabilityemerges from a bundle of activities, notany single pursuit. So leadership train-ing, for instance, needs to be understood

in terms of the capability to which itcontributes, not just the activity thattakes place. Instead of asking what per-cent of leaders received 40 hours oftraining, ask what capabilities the lead-ership training created. To build speed,IHG leaders made changes in the com-pany's structure, budgeting processes,compensation system, and other man-agement practices. Attending to capa-bilities helps leaders avoid looking forsingle, simple solutions to complex busi-ness problems.

Few would dispute that intangible as-sets matter. But it can be quite difficultto measure them and even harder tocommunicate their value to stakehold-ers. An audit is a way of making capa-bilities visible and meaningful. It helpsexecutives assess company strengthsand weaknesses, assists senior leadersin defining strategy, supports midlevelmanagers in executing strategy, and en-ables frontline leaders to make thingshappen. And it helps customers, inves-tors, and employees alike recognize theorganization's intangible value. ^

Reprint R0406J; HBR OnPoint 7014To order, see page 139.

"It's the official heads-up before the heads roll.'

2004 127

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