Capabilities: a different perspective.

In their research collaboration over ten years, Dennis Turner and Michael Crawford focussed on the management of change. The questions of critical interest, set out in the introduction to their major book Change Power (1998), were three:

1. Why are some attempts by management to change their organisations spectacularly successful while so many others fail?

2. Are special capabilities needed to change an organisation effectively? Are they the same as, or different from those needed to manage an organisation to achieve high performance?

3. What are the important things that we should do?

As the book's extended title (Capabilities that Drive Organizational Renewal) reveals, the focus on organisational change and transformation leads inexorably to analysis of the conditions that underlie successful change and in particular, capabilities which may be prerequisite. Although as we shall see, this approach and the methodology used differ quite markedly from those typical of strategic management, the central role of capabilities parallels the emerging major paradigms of resources and dynamic capabilities that have been the centrepiece of debate in strategic management research. In this brief review, I juxtapose the two to show how Turner and Crawford's insights represent a potential major contribution to the strategy field.

The central issue that defines strategy and strategic management as a field is performance: how can we explain and understand and explain differences in performance between firms and, in particular, are such differences sustainable for extended periods or are they rather transient phenomena?

Although the focus on performance remains the linchpin, strategy research has demonstrated the multi-facetted complexity of the question. First is the issue of the unit of analysis. During the 70s and 80s developments in strategy were heavily influenced by systematic attention to micro-economic theory and industrial organisation, as exemplified by Michael Porter's seminal Corporate Strategy text, which appeared in 1980. Following the conventions of economics, the primary unit of analysis was the strategic business unit (SBU), that is, the product-market ('industry') in which firms competed and the position in that market held by each firm. Performance differences were attributed to differences in competitive advantage which were implicitly SBU-specific.

If, however, competitive heterogeneity and advantage are SBU-specific, this leaves little role for the firm other than asa financial investor in a portfolio of SBUs. Such a portfolio perspective did indeed prove fruitful in understanding how the differing financial performance of multiple SBU, (especially in terms of cash flow) created strategic issues at a firm-wide level if a firm is reluctant to raise additional equity of if periodic capital market shocks make portfolios that balance cash requirements more robust. But this perspective of the firm as a portfolio investor is obviously too narrow. It ignores the long sweep of history in which firms have diversified in ways that draw on economies of scope extending beyond the single SBU, as eloquently described by Chandler (1972), and hence how firms predominantly expand into products and markets that are 'related' in some fashion to the existing business. As Rumelt (1972) showed, firms that pursue a 'related constrained' strategy of diversification--one in which each of the SBUs draw on 'the same common core skills, strengths or resource' outperform those where the businesses are essentially unrelated (and hence a pure 'portfolio' aggregation).

So it is the diversification of the firm, and the evidence that this process has been shaped by skills and resources which can be used to better or worse advantage outside the context of the original business, that forces strategy researchers to see 'competitive advantage' as residing not only at the individual SBU level, but more pervasively across related businesses as a firm-level performance driver. Over the last 20 years, the strategy field has evolved from its primary focus on industry and market structures to a concern for the underlying skills and resources which generate competitive advantage at the product level and for the way in which firms compete by the acquisition and development of such capabilities or core competencies over time. As Rumelt elegantly summarised in his Foreword to the Hamel and Heene conference volume (1994), the concept of core competence has four key components

1. 'core competencies span businesses and products within a corporation'

2. 'competences are more stable and evolve more slowly than do products'

3. 'competences are gained and enhanced by work. They are the collective learning in the organisation.'

4. 'product-market competition is the superficial expression of a deeper competition' to acquire skills and competences (pp. xv-xvi)

It is clear that what are now more broadly called the 'resource-based theory of the firm' and 'the dynamic capabilities perspective' have struck a powerful chord with strategy researchers and managers. But a critical observer could not avoid noticing how slow the field has been to provide robust explicit measures of these concepts or compelling evidence of their contribution to differences in performance at the firm-level. For example, the most recent Special Issue of the Strategic Management Journal, entitled Why Is There a Resource-Based View? (Heapes, Madsen & Walker 2003), is devoted to these concepts--but of its 11 papers, the majority are primarily concerned with articulation of language and concept and only 3 have any empirical measures.

We can speculate on several reasons why the strategy field has found this development so difficult. First, the concepts are dynamic and require explicit analyses of the time-path of evolution. Although such models have emerged in the strategy field (for example models of sequential entry with prime-mover advantages, or the experience curve as a general model of learning-by-doing), the mainstream tendency of strategy research remains somewhat anchored in comparative statics. There is a stronger affinity to the equilibrium reasoning of economics than to the control theory of mathematics or engineering.

This may be accentuated by the reliance placed on accounting and financial market measures of performance. Accounting rates of return oscillate around the true economic return on any investment; typically they understate returns during periods of rapid investment and overstate returns in times of strong growth or disinvestment. This problem is exacerbated by the asymmetrical accounting treatment of different forms of investment. Typically plant and equipment are capitalised, while investment in R & D, advertising and human capital are expensed. These measure problems loom large if one is trying to demonstrate the contribution of investments in intangible capabilities to performance over a lengthy period of time.

Finally, the strategy field appears to have focussed on variables that can be measured 'objectively' (as in patent counts, product variety, specific media announcements etc). While the results in a few cases where access has been negotiated to very rich databases have been powerful, especially Henderson and Cockburn's pharmaceutical R & D (1994), the consequence here is to focus on capabilities at a technical level which are specific to a cluster of SBUs. Hence (typically) little heed is paid to other forms of capabilities that may playas decisive a role in the competition to acquire skills and manage the ongoing transformation of the firm.

Against this context of the emerging paradigms now dominating strategy research, the approach taken by Turner and his colleagues is refreshingly different. As an experienced manager himself, Dennis Turner has always had a strong interest in the competencies and capabilities of the individual manager and how these are shaped and developed by the organisational context and the influence of mentors. His colleagues, Dexter Dunphy and Mike Crawford, share this focus on the individual and on the central role of teams, groups and social interaction within the organisation. At a fundamental level, Turner and Crawford are interested in the capabilities of individuals and of groups, and how these are embedded in organisations and how they manifest themselves in personal satisfaction as well as organisational performance. The organising perspective of their work then lies a good way from the current strategy mainstream: the point of convergence is how capabilities drive and sustain performance.

These differences in starting point then result in basic differences in approach and methodology. First, the unit of analysis is a distinct organisational change. These changes, which could be either at the level of strategic formulation or operational implementation, were substantial, 93% of the cases involving change in either most of the firm of a major division or function of the organisation (Crawford & Turner 1998). The choice of the change itself as the unit of analysis avoids prejudging whether the scope is 'related' units or not and captures changes which destroyed or damaged capabilities as well as those enhancing capabilities. Second, the primary data sources are self-reports by senior managers of their perceptions of their organisation.

This builds on a long tradition of research in organisational behaviour at the AGSM introduced by Yetton in the School's early years. Experience has been built over many years collecting data not only from participants in AGSM executive programs but also from their bosses, lateral peers and subordinates. As a result, the research methodology has vigorously addressed questions of validity and reliability. Moreover, it allows Turner and Crawford to build a measure of performance based on the managers' own assessments, independent of the vagaries of accounting standards; and it allows the sample to include government bodies and other not-for-profit organisations which are routinely excluded by most strategy researchers.

These methodology choices are critical scaffolding which allow Turner and Crawford to set out a hypothesis which has, in my view, a significant role to play in strategy: it certainly fits well with the current focus on core competencies. Specifically, they hypothesise that we should distinguish between competencies in terms of their time orientation, that is, between the operational competencies that are primarily focused on current performance, and the reshaping competencies required to create a future for the organisation. (1994, p. 243).

Starting with this basic premise, their subsequent empirical work culminates in a striking result. The two key outcome measures--Current Business Performance and Change Effectiveness--are only weakly correlated. Moreover, the key drivers (in terms of explanatory variables) are distinctly different. Current Business Performance rests heavily on what Turner and Crawford call 'Biztech', a complex capability which incorporates possession of the range of business-specific technology through which the organisation creates and delivers value. By contrast, Change Effectiveness depends first and foremost on Engagement, again a high-level integrative capability--involving the members of the organisation 'actively and coherently' in the new directions chosen. The glue that binds current and future performance together is the joint reliance on the capability of Performance Management.

In effect, Turner and Crawford lay down a challenge to the predominant 'economics-dominated' strategy field. If we interpret 'Biztech' as broadly capturing the technical and operational competencies which now occupy centre-stage in strategy, then 'Engagement' reasserts the central role of leadership in a social organisation as a fundamental determinant of longer-run performance.

If the holy grail of strategy research is to explain and predict differential performance, Turner and Crawford demonstrate how difficult this will be until the strategy field embraces an unfamiliar orientation and methodology in which the managers involved have their say.

References

Chandler, A.D. 1972, Strategy and Structure, MIT Press, Cambridge, Mass.

Crawford, M. & Turner, D. 1997, 'Capabilities, change and business performance: Evolution of an idea', UNSW Centre for Corporate Change, Sydney.

Henderson, R. & Cockburn, I. 1994, 'Measuring competence? Exploring firms effects in pharmaceutical research'. Strategic Management Journal, vol. 15, Winter Special Issue, pp. 63 84.

Rumelt, R.P. 1972, Strategy, Structure and Economic Performance, Harvard University Press, Boston, Mass.

Turner, D. & Crawford, M. 1994, 'Managing current and future competitive performance: The role of competence', in Competence-Based Competition, ed. G. Hamel & A. Heene John Wiley & Sons, Chichester, U.K. pp. 241-64

Turner, D. & Crawford, M. 1998, Change Power: Capabilities that Drive Corporate Renewal, Business and Professional Publishing, Warriewood, NSW.

Jeremy G. Davis, Australian Graduate School of Management, UNSW, Sydney, NSW 2052. Email: [e-mail]