Intangible competitive advantage

Article

Miles, S.J. and Mark Val Clieaf. (2017). “Strategic Fit: Key to Growing Enterprise Value through Organizational Capital.” Business Horizons. 60, 55-65.

Reviewer

Dr. Allan Gray, Executive Director and Professor

Summary

The authors explore the elements that create organizational capital for a business. Organizational capital is an intangible asset that allows a business to create value through revenue growth, innovation, operational excellence, and stakeholder relationships. The authors provide a comprehensive model of organizational capital that highlights the key factors that influence organizational capital: leadership, strategy, and organizational design. They argue that the fit between these three elements ultimately determines the ability to use organizational capital as a strategic advantage that enhances the firm’s enterprise value. The ability of senior leadership to design the organization (they call this work levels) to organize tangible and intangible assets and maximize human capital to deliver on strategy determines the firm’s organizational capital. The authors provide a blueprint for building organizational capital that includes:

1. Identifying the work domain and work level of the organization.
2. Identifying the expectations, accountabilities and performance metrics for top leadership.
3. Linking and aligning organization design to the strategy (identifying management work levels, defining and clarifying accountability structure and performance objectives, and aligning organizational systems and processes).
4. Set leading/lagging indicators for the measuring fit between strategy and organizational design.

What this means for food and agribusinesses

Competitive advantage in food and agribusiness is increasingly elusive. The ability to differentiate ourselves on tangible assets such as unique products or services, geographical protections, or superior physical assets is ever more difficult and any advantages are usually short-lived.

Historically, agribusiness has been built and success has been realized through tangible assets; making it hard for many leaders to identify and relate to the power of intangible assets. Those firms that recognize and manage intangible assets (discovery/learning, customers, human resource intangibles, and organizational capital) have the opportunity to find longer-term advantages. Organizational capital is a particularly important intangible asset because it is the “glue” that often allows the other intangible assets to be more effective. Organizational capital is a combination of:

1. Practices and process for acquiring, developing and retaining talent.
2. Culture, leadership, and alignment of people to strategic goals.
3. Organizational design.

The key argument behind the development of organizational capital is the alignment of senior management. In particular, the need to have the CEO, CFO and Chief Human Resources Officer (CHRO) aligned around the firm’s strategy and the talent needed to execute that strategy. The CFO is primarily responsible for the acquisition and management of tangible assets. The CHRO is primarily responsible for acquisition and management of intangible assets. Having these key executives aligned with the CEO (primarily responsible for strategic direction) allows for much stronger development of an organization capable of executing the firm’s strategy at the highest level. In agribusiness, it seems that we are just beginning to recognize the strategic value of having an executive level position in charge of the intangible assets of the firm, namely talent. Yet, the ultimate differentiator for a business is its talent level.

Aligning the firm’s talent to allow for maximum execution of the strategy is also crucial for developing organizational capital advantages. We can essentially think of this as a high-performance culture where every person in the organization understands what their goals are and how those goals align to the company’s overall strategy. Among agribusiness managers I work with, it is amazing how often we talk about setting appropriate goals for our people and how hard this is to do in practice. Part of the difficulty, I suspect, is because the nature of the business is one where many things are outside of our control. Because of this, we worry about setting goals that are achievable for our people. While this is a challenge, there are ways to set goals that allow for outside factors to be accounted for and still hold our people accountable for performance they can control. In addition to uncontrollable factors, we often seek to set vague goals for our people in hopes that they will discover new ideas or processes to improve performance rather than simply perform to standards. Yet, we need to understand the organization’s innovations’ needs and the levels of the organization responsible for various types of innovation.

Innovation is very much a part of company’s strategic organizational capital advantage. Innovation is often thought of as “everybody’s job,” but companies that truly have a strategic advantage in organizational capital intentionally design their organizations to clarify the innovation expectations of the organization. In this article, they identify seven different work levels that company should consider. I have recreated that figure here (Figure 1). What they show us is that company leadership has to consider the level of innovation and time investment in that type of innovation as they think about the organizational structure of the company. More complicated innovation requirements of the firm and its markets will require longer time horizons and higher levels of managerial organization to separate day-to-day operations from longer-term performance metrics. As agribusiness enters a time where innovation will become more crucial for long-term sustainability we may need to reexamine the structure of our businesses to allow for more innovation.

How well are you developing, managing and leveraging your organizational capital? The agribusiness industry faces ever-increasing challenges to create efficiency, find more sustainable solutions, and prepare for disruptive innovations from multiple arenas. The organization of our company’s managerial leadership and the talent of its people will likely be the keys to success in this dynamic environment.