Preparing for Conversations with Dave Ulrich
Knowledge and Human Resource Management

Capitalizing on Capabilities
By Dave Ulrich and Norm Smallwood

Editor's note: Excerpts from Capitalizing on Capabilities, a paper by Dave Ulrich and Norm Smallwood. For the full paper, download the PDF.

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.

When asked which companies they admire, people quickly point to organizations like General Electric, Starbucks, Nordstrom, or Microsoft. Ask how many layers of management these companies have, though, or how they set strategy, and you'll discover that few know or care. What people respect about these companies is not how they are structured or their specific approaches to management, but their capabilities-an ability to innovate, for example, or to respond to changing customer needs. Such "organizational capabilities," as we call them, are key intangible assets. You can't see or touch them, yet they can make all the difference in the world when it comes to market value.

The collective skills, abilities, and expertise of an organization, these capabilities are the outcome of investments in human resources-staffing, training, compensation, communication, and other practices. They represent the ways that people and resources are brought together to accomplish work. They form the identity and personality of the organization by defining what it is good at doing and, in the end, what it is. They are stable over time and more difficult for competitors to copy than access to capital markets, product strategy, or technology. They aren't easy to measure, so managers often pay far less attention to them than to tangible investments like plant and equipment, but these capabilities give investors confidence in future earnings. Differences in intangible assets explain why, for example, upstart airline JetBlue's market valuation is twice as high as Delta's, despite JetBlue's having significantly lower revenues and earnings.

In this article, we look at organizational capabilities and how leaders can evaluate and build the ones they need to create intangible value. Through case studies, we explain how to do a capabilities audit, which provides a high-level picture of an organization's strengths and areas for improvement. We've conducted and observed dozens of such audits, and we've found them a useful and powerful way to turn intangible assets into something concrete and measurable.

Download the PDF

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