Capability gaps: the part of the strategy nobody funds

The commonest way a good strategy produces a bad year is this: it requires capabilities the business plainly does not have, and nobody has said so. The strategy was chosen on the attractiveness of the market and the logic of the advantage. The question of whether the business could actually do it was assumed, and the assumption was never written down, so it was never funded.

It is not hard to see why. The strategy process ends at the choices. Capabilities feel like implementation, which is someone else's job, later. And capability spending looks like cost, a training line and some hires in next year's budget, where it competes with business-as-usual and loses.

The four kinds of capability a strategy leans on

When a strategy says "we will win in this segment because of X", the X rests on one or more of four things, and it helps to name which.

Operational skills. The things the business is good at doing: low-cost production, product development, service delivery, managing a sales force. These are the capabilities most strategies assume and most businesses over-rate.

Growth-enabling skills. The things that let a business get bigger without breaking: acquiring and integrating companies, managing risk and financing, entering a new geography, running a partnership. A strategy built on acquisitions in a business that has never integrated one is leaning on a capability it does not have.

Privileged assets. Brands, networks, infrastructure, data, licences, intellectual property. These are the easiest to see and the hardest to build, and a strategy that needs one it lacks is usually a strategy for a different business.

Special relationships. Access to customers, suppliers, regulators or partners that competitors do not have. Often unstated, often held by one person, and often the reason the strategy works until that person leaves.

The exercise is to take each strategic theme and ask which of the four it depends on, specifically, and whether the business has that at the level the theme needs. Not "we have a sales force" but "we have a sales force that can sell a solution on value to a procurement function, and it has done so".

Example: A distributor's strategy is to sell direct to consumers online. The theme depends on three things. A consumer brand, a privileged asset it does not have. Digital marketing and fulfilment, operational skills it has never run. And a relationship with its trade customers that survives competing with them, a special relationship it is about to test. Three gaps, none in the plan.

Why the gaps stay unfunded

Because nobody owns "the capability". An initiative has an owner; a capability is spread across functions, and each assumes another is building it. Because the gap is known privately and is awkward to say aloud, especially by the executive who runs the function that lacks it. Because the cost of closing it is large and lands before the benefit, in a budget year that already has a target. And because capability-building has no milestone that looks like revenue, so it is the first line cut when the quarter is tight.

The result is a strategy that is executed by people doing their best with the capabilities they have, which is the old strategy.

The capability audit

Name the two or three capabilities the strategy needs at world class, not the ten it would be nice to have. For each, rate the business honestly against the best competitor and against what the theme actually requires, using evidence: things done, not org charts. Say which ones the business does not have, in writing, in the strategy document itself.

Then do one of two things. Fund the gap like the strategic investment it is: named hires, a system, a partnership or an acquisition, with a budget line, an owner and a milestone that is reviewed alongside the initiatives. Or change the strategy to one the business can execute. Both are respectable. The third option, keeping the strategy and hoping, is the one most businesses take.

Example: A manufacturer's strategy is growth by acquisition. It has bought one business in twenty years and the integration is still a sore point. The capability audit names post-merger integration as the missing capability. The board funds an experienced integration lead a year before the next deal and makes the first acquisition small, a deliberate practice run. The gap is closed before it is tested at scale.

The five stages

Whether capabilities match the choices is one of the practices in a stages-of-excellence strategy assessment. At the bottom, the strategy requires capabilities the business plainly does not have and no one has said so. One step up, the gaps are known privately but unfunded and unowned. In the middle, the few capabilities that must be world-class are named and the gaps have plans. Above that, capability-building is resourced like the strategic investment it is, with hiring, systems and partnerships following the strategy. At the top, the capability system itself is the moat, configured so that the whole is harder to copy than any part.

Most businesses are at the bottom two, and the move up is a page in the strategy document that says what is missing.

Does your strategy need something you don't have? Take the check. · How to win: understanding your competitive advantage · The stages of excellence in strategy