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Capability-oriented Modeling of the Firm

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 Capability-oriented Modeling of the Firm

Daniel Beimborn, Sebastian F. Martin Ulrich Homann

E-Finance Lab, Institute of Information Systems Microsoft Corporation
Johann Wolfgang Goethe University Frankfurt, Redmond, WA, U.S.
Germany
{beimborn|smartin}@wiwi.uni-frankfurt.de ulrichh@microsoft.com

Abstract

From the theories of the resource- and competence-based view we derive a capability-based
modeling paradigm for representing business functions and processes. This method enables
analyses of optimal process cuts within business process outsourcing decisions and gives a
valuable complementary view of a firm as a structured network of capabilities.
In a case study approach, the derived modeling paradigm is applied to a particular segment
of the banking business (credit business) and it is shown that this approach can deliver added
value in particular strategic decisions. We identify areas of future research in developing
strategic competence and process measures to make the theories named above more applica-
ble to manager’s decisions.

Keywords: Resource-Based View, Competence-Based View, Capability Modeling, Out-

sourcing Decision Support

1 Introduction
In the last years, a strong trend towards industrialization activities like process analysis and
re-designing activities, information technology and business process outsourcing, as well as
mergers and acquisitions has been observed in the German banking industry. This industriali-
zation trend is mostly caused by an enormous consolidation pressure (Krabichler and Krauß
2003). Although this domain of strategic management is surrounded by many theoretical and
empirical research works, the decision-supporting suggestions extracted from these works are
often of a rather generic nature and do much less frequently provide an approach, which can
be directly used by decision makers. The following work is based on theoretical insights into
the resource-based view (Wernerfelt 1984) and the competence-based view (CBV) (Prahalad
and Hamel 1990) as well as on experiences we obtained while conducting different research
projects in the financial services industry. The paper focuses on providing a theory-based
modeling and analysis approach which is able to complement process-based analyses for stra-
tegic decisions in the domain of cutting and modularizing processes into services and to de-
termine optimal sourcing strategies. Our approach should enable managers to get a consistent
picture of a firm’s capabilities as well as of the relationships between them.
Chapter 2 gives a short overview of the theoretical bricks we will use as a fundament for our
work and extracts strategic indicators which could be used in the developed approach. Chap-
ter 3 discusses existing process modeling and redesign methods.
Chapter 4 forms the core of this paper. It introduces the concept of capability modeling (4.1)
and applies it to a subsection of a bank’s business, to show the added value this method can
provide particularly in the context of business process outsourcing (BPO) (4.2). The final part
of this chapter contains a first critical evaluation of the proposed method (4.3). Chapter 5
gives a short conclusion and highlights the next steps of our work.

2 Theories of the Firm

In order to support strategic decisions, e.g. to determine capabilities that should be out-
sourced, several theories have been developed during the last decades. In particular, theories
of the firm, esp. the resource-based view (Penrose 1959; Wernerfelt 1984) and transaction
cost economics (Coase 1937; Williamson 1985) have been cited in the overwhelming fraction
of papers focusing on outsourcing or analog organizational questions. Additionally, (core)
competence-based view (Prahalad and Hamel 1990) has been taken into account in the last
years.
In the following, we give a short overview over the most important theories relevant in the
context of our work. Later on, when introducing our approach, we will link back to the rele-
vant theoretical bricks.

2.1 Theoretical foundation

The resource-based view of the firm (RBV) (Penrose 1959; Wernerfelt 1984) and its exten-
sion, the competence-based view of strategic management (CBV) (Eisenhardt and Martin
2000; Henderson and Cockburn 1994; Prahalad and Hamel 1990), provide an explanation to
the question why firms are able to achieve and keep competitive advantage on the market. By
putting the focus on the internal organization of the firm, the RBV claims that sustainable
competitive advantage derives from a firm’s specific bundle of resources. This perspective
argues that resources have to be rare, inimitable and lack substitutes in order to confer com-
petitive advantage (Barney 1991; Wilcox King and Zeithaml 2001).
Prahalad and Hamel outline that the source of competitive advantage is to be found in the
management’s ability to identify the core competencies of a firm, i.e. “consolidate corporate-
wide technologies and production skills into competencies that empower individual busi-
nesses to adapt quickly to changing opportunities” (Prahalad and Hamel 1990).
In this paper, we refer to Wade & Hulland’s definition of resources as “assets and capabilities
that are available and useful in detecting and responding to market opportunities or threats”
(Wade and Hulland 2004). According to this, capabilities are a subset of resources, defined
by Wade and Hulland as “repeatable patterns of actions in the use of assets to create, produce
and/or offer products to markets”. Capabilities are thus capacities or abilities within a firm,
which can be linked together as business processes, in order to enable a specific purpose or
outcome. They consist of one or more workflows and routines that manage the interaction
among a firm’s resources. We regard competencies as being the cross-functional integration
and coordination of capabilities (Javidan 1998). Finally, core competencies are those compe-
tencies, that
1. provide potential access to a wide variety of markets,
2. must contribute to the perceived customer benefits of the end product and
3. are difficult for competitors to imitate (Prahalad and Hamel 1990).
An organization’s capabilities form a nested “hierarchy of integration” (Grant 1996). At the
base of the hierarchy are granular capabilities, representing for example specialized knowl-
edge held by individual organizational members. Those capabilities are integrated into
broader functional capabilities. As we move up the hierarchy, the capabilities become less
task-specific and more general and the span of specialized functionality being integrated
broadens (Grant 1996). In our concept of capability modeling, which will be discussed in
chapter 4, the hierarchy of nested capabilities culminates on the highest level in five generic
capabilities which can be found in almost every company: “developing products and ser-
vices”, “client interaction”, “fulfilling customer demands”, “managing and controlling the
enterprise”, and “collaborative activities” (see section 4.1).
Most of the literature on RBV and CBV is of an explanatory nature, pointing out that firm-
specific resources are the enablers of competitive advantage and, implicitly, are at the origin
of heterogeneity among firms on the market. Parts of it (Dibbern and Heinzl 2001; Roy and
Aubert 2000) give an explanation on how outsourcing of resources can affect a firm’s ability
to achieve and keep sustained competitive advantage.
Papers with a normative character, which address questions like how competencies can be
identified within a firm or which describe frameworks and tools to support managerial deci-
sions (Javidan 1998), are rather scarce and mostly address decisional issues on a generic
level. Attempting to make a contribution in filling this gap, the remainder of this paper con-
centrates on a framework for modeling a firm’s pool of capabilities for a valuable comple-
mentary view on a firm’s capabilities network. Furthermore, we outline the main features of a
tool that empowers managers to make strategic decisions from a resource-based point of
view.

2.2 Key indicators to support strategic decisions

In this section, we extract key indicators for evaluating a firm’s capabilities from the intro-
duced theories, which should provide managers with a means to decide whether or not a ca-
pability contributes to one of the firm’s core competencies (and - if e.g. applying them to an
outsourcing decision - therefore should be kept in-house).
Inimitability
The inimitability of resources is considered by many authors as being one of the key factors
of competitive advantage (Barney 1991; Peteraf 1993; Prahalad and Hamel 1993; Rasche
1994; Reed and DeFillippi 1990). For example, the reason for Penrose’s claim that the firm’s
accumulated pool of knowledge can be a source of sustained competitive advantage is be-
lieved to lie in the nature of knowledge, which is rather “experience-based” than “objective”
(Knudsen 1995), thus making it difficult to be imitated by other firms, because of its difficult
transferability.
Although Porter argues that “barriers to imitation are never insurmountable” (Porter 1985),
the height of those barriers is a determinant factor for how contestable or how sustainable the
firm’s advantage will be (Reed and DeFillippi 1990). Reed and DeFillippi consider tacitness,
complexity and specificity of a firm’s skills and resources as the generating factors for causal
ambiguity which on its part can raise barriers of imitation.
In his discussion about factors which influence the rents from resources, Grant considers lim-
ited replicability and transferability of a resource position (due to geographic immobility,
imperfect information, specific resources and immobile skills) as being generators of sus-
tained competitive advantage (Grant 1991). We argue that limited replicability and transfer-
ability are causes for inimitability and subsume the above-named factors under the generic
term of inimitability. Other drivers for “imperfect imitability” (Peteraf 1993) are seen by
Peteraf to be property rights, non-recoverable costs and the aforementioned causal ambiguity.
Non-substitutability
A firm’s resources can not be sources for sustained competitive advantage, if there are strate-
gically equivalent valuable resources that are themselves neither rare nor inimitable so they
can be implemented by other firms (Barney 1991). Only capabilities which are hardly substi-
tutable either by similar or by different capabilities can be sources of sustained competitive
advantage and should be treated in the same way as inimitable resources. While hardly substi-
tutable capabilities contribute directly to a firm’s competitive advantage, the provider of such
a capability, in the case of outsourcing, would be likely to fail in delivering good quality ser-
vice.
Interconnectedness
We introduce this indicator as a measure of how “deep” a capability is anchored into existing
business processes. As stressed out in section 2.1, the capabilities of a firm can be viewed as a
nested “hierarchy of integration” (Grant 1996). The more interconnections a capability is in-
volved in (i.e. the higher the degree of integration), the more complicated it would be to ex-
tract it out of an existing context or even make simple changes to the capability itself. On the
other hand, if a capability is (partly) self-contained, it may be easily exchanged. A concrete
model for quantifying this measure is subject of further research. This measure can be partly
automatically extracted from the number of outgoing and incoming connectors (see below),
weighted regarding to the type of connector and the type of flow (digital flows for example
are much easier to realize inter-organizationally than paper-based transmission).
Contribution to the perceived customer benefits of the end product
Every business consists of capabilities that enable it to carry out the necessary activities in
order to produce goods or deliver services throughout the value chain. While some of these
capabilities might perform adequately (or poor), some capabilities must be superior if the
business is to outperform its competitors (Day 1994). These capabilities have a higher contri-
bution to the generation of "perceived customer benefits" (Prahalad and Hamel 1990) than
others and are therefore valuable. These "distinctive capabilities" (Day 1994) are part of a
businesses key success factors. If, in addition, they can be used in different ways to “speed
the firm’s adaption to environmental change” (Day 1994) providing potential access to a vari-
ety of markets and are difficult to imitate, they should be considered as being part of a busi-
nesses core competence.

3 Process modeling and analyzing techniques

Business Process Reengineering (BPR) concerns the rethinking and redesign of business
processes in a radical way, in order to achieve sustained improvements in quality, cost, lead
time, flexibility, etc. (Gunasekaran and Kobu 2002). Kettinger et al. identify six stages of
BPR: (1) envision, (2) initiate, (3) diagnose, (4) redesign, (5) reconstruct and (6) evaluate
(Kettinger et al. 1997). During the diagnose stage, process documentation techniques are used
for documenting existing processes. Within the same stage, the documented processes are
analyzed using either the same or different methods. Table 1 gives an overview on the proc-
ess documentation and analyzing techniques identified by Kettinger et al.:
Stage 3: DIAGNOSE
Document Existing Processes
• Activity-Based Costing • Hierarchical Colored Petri Nets • Role Activity Diagramming
• Computer-Aided Software Engineering • IDEF0,3 • Speech Interaction Modeling
• Data Flow Diagramming • Information Control Net • Structured Interview
• Employee and Team Attitude Assess- • Job Analysis • Survey
ment • Process Flowcharting • Time Motion Study
Analyze Existing Process
• Activity-Based Costing • Fishbone Analysis • Pareto Diagramming
• Benchmarking • Hierarchical Colored Petri Nets • Quality Function
• Cognitive Mapping • IDEF0,3 Deployment
• Computer-Aided Software Engineering • Information Control Net • Statistical Process Control
• Value Analysis
Table 1: Process documentation and analyzing techniques (Kettinger et al. 1997)
Some of the techniques listed above are suitable for modeling as well as for analyzing a
firm’s business processes. We refer to them as “process mapping techniques” in the sense of
Biazzo, who states that “[…] process mapping is based both on a precise strategy for recon-
structing organizational actions and on a specific focus for the analysis” (Biazzo 2000). From
the table above, we can extract five suitable techniques which fulfill both requirements of
modeling and analyzing capabilities: Activity-Based Costing, Computer-Aided Software En-
gineering, Hierarchical Colored Petri-Nets, Information Control Net, and IDEF0,3.
Activity-Based Costing (ABC) focuses on a company’s activities which in literature are de-
fined as “any discrete task that an organization undertakes to make or deliver a product or
service” (Ittner 1999). By analyzing the costs generated by individual tasks, it tries to identify
the real costs of each of a company’s products. With ABC, activities are documented in writ-
ten form rather then graphically illustrated. Computer-Aided Software Engineering (CASE) is
exclusively used for software development processes and will not be further regarded. Petri
Nets are well suited for the modeling and analysis of workflows, providing easy-to-
understand graphical features (Salimifard and Wright 2001), but tend to become complicated
to read, requiring skilled personnel when it comes to modeling complex workflows (Moldt et
al. 2000). The Integrated DEFinition Methodology (IDEF) is a family of methods which
cover various aspects like function modeling (IDEF0), information modeling (IDEF1), data
modeling (IDEF1X), simulation model design (IDEF2) and process description capture
(IDEF3) (Mayer et al. 1992).
An in-depth comparison of the above listed techniques and the analysis of the underlying
theories go beyond the purpose of this paper. The point we want to stress out here is that,
while having their focus on issues like costs, activities, data, etc., they all fail to allow an in-
tegrated, resource-based view on capabilities, thus making the capability modeling concept
we will present in the next chapter an ideal candidate for a valuable complementary examina-
tion of a firm’s pool of resources.

4 Modeling a firm’s capabilities

By making the firm’s capabilities and their connections visible and providing corresponding
performance measures, the Capability Map concept, introduced below, helps to capture a
firm’s capabilities structure and to solve related problems of reengineering and outsourcing.
Capability modeling provides guidance on determining how changes in particular business
areas or outsourcing particular business functions will affect the overall business and not only
a singular business process.
Capability modeling does not aim at replacing other process improvement frameworks and
initiatives; it is a new type of analytical framework that is complementary to common process
modeling and analysis approaches and supports the operationalization of the RBV.
There are different optimization needs and strategies where the analytical technique of capa-
bility modeling can deliver added value when applied to the problem. For example, within a
business process, bottleneck problems could occur, problems whose origin could often not be
easily identified. If evaluating Business Process Outsourcing (BPO) options, it is often not
clear which connections exist between different processes that, of course, contain hidden
transaction costs and problems. Other application domains cover redesign strategies as e.g.
change management.

4.1 Capability Map Concept

Earlier in this paper, a capability was defined as a particular ability or capacity that a business
may possess or exchange in order to enable a specific purpose or outcome. In our concept, a
capability additionally abstracts and encapsulates involved people, workflow, technology,
information, and service level expectations. It represents only the essential information
needed to provide improvement of performance and to redesign analysis. Therefore, capabili-
ties represent firm-internal encapsulable services, i.e. units of business functionality. In con-
trast, a workflow or procedure is the end-to-end group of activities that describes how a capa-
bility is performed, while a business process is the interconnection resp. a composition of
capabilities to fulfill a market demand (Davenport and Short 1990).
Based on the concept of the “hierarchy of integration” (see section 2.1) given by Grant (Grant
1996) the capability map (CM) is a nested hierarchy of capabilities and a taxonomic diagram
that describes the interplay of capabilities while doing business. It exposes all capabilities
across the business ecosystem. It allows displaying several business processes within a single
map, thus giving valuable insights on how these processes are related with each other, by us-
ing the same capabilities. Viewing the business as a network of capabilities and connections
may help to overcome complex organizational and procedural boundaries, which may hinder
strategic analyses.
As within Grants conception, whereby “hierarchies of capabilities do not correspond closely
with their authority-based hierarchies as depicted by organization charts” (Grant 1996), a
capability map does not necessarily fit with the organizational chart, which is the framework
used by most businesses to describe their operating model. A capability map is a model of
what is done – not who is accountable for what. Nevertheless, the organization chart is an
important reference point for the capability model; it may in fact look similar in large parts
and could be cross-referenced to the capability map.
In our concept, the first level of the CM draws five generic capabilities (1st level capabilities),
which are present in almost every company (although customized naming would often fit
more to special business taxonomies): developing products and services, client interaction,
fulfilling customer demands, managing and controlling the enterprise, and collaborative ac-
tivities (Figure 1).

Figure 1: Generic Capability Map – 1st level

On the second level, the 1st level capabilities are subdivided into more industry-specific capa-
bility groups or 2nd level capabilities. (Because our research domain is primarily in the finan-
cial services industry, the visual examples in the following represent the capability map of a
bank.) For example, “Sales” is a 2nd level capability within “Client Interaction”. Capabilities
are identified by a unique hierarchically structured ID (3.1 is a sub-capability of 3, 3.1.1 is a
sub-capability of 3.1 etc.).
 Figure 2: Capability Map of a bank – 2nd level
On further levels, these capability groups are decomposed into more granular capabilities
resp. business functions. The maximum number of levels is not pre-determined; it depends
both on the size and the complexity of the investigated business and on the particular de-
mands of analysis. It is also not necessary to decompose all capabilities to the same level of
granularity.
After modeling the capabilities in sufficient granularity, their connections have to be in-
cluded. Because capabilities are regularly parts of many business processes, they provide
some specific output which is input for any following process step (again represented by a
capability). Therefore, these input/output connections will be modeled as uni-directional
edges within the CM (so-called process flow connectors). Connectors may be drawn between
capabilities on different layers. The main approach to building the map and getting the capa-
bilities and the connectors extracted is to use existing process models or documentations, to
transform appropriate process steps or groups of process steps into capabilities and to assign
the process-internal sequences to the map in form of connectors.
Other types of connectors (which we have neglected in the visual examples, in order to keep
them more transparent) are support and control connectors. A support connector exists when
information is commonly passed to another capability. Exception handling, inventory returns,
and verification (feedback) as well as inspection capabilities are examples of capabilities that
would require supporting connectors. In contrast, a control connector is apparent when there
is a capability that has no impact on the performance of other capabilities and if there is no
input/output relationship. Compliance, management policy, engineering, and regulatory busi-
ness capabilities often have influencing relationships on other capabilities, but are not I/O
relationships.
 Figure 3: Capability Map of a bank – 3rd/4th level, including selected I/O connectors
Optional further steps of modeling – which we neglect in this paper – would be to cross refer-
ence the capabilities to organizational units as well as to HR and IT resources. Further, for
representing market-based activities, capabilities can be linked to capabilities of business
partners such as customers, customer-facing channel partners, suppliers, logistics and infra-
structure providers, and financial providers (= the environment surrounding the business).
Having completed the capability map of the firm, each capability can be analyzed separately
with regard to possible performance problems and questions of strategic impact, as suggested
by the mentioned theories. After placing the introduced concept into the theoretical founda-
tion and into the methodological classification given in the former chapters, an exemplary
approach will be shown in the following section.
CM focuses on structuring a firm’s capabilities while also encapsulating the particular assets,
which are solely used by a specific capability. Therefore, a capability within CM represents
the investigation object which is in the core focus of the RBV, while the CBV is more ori-
ented on managing the integration and coordination of capabilities (= competencies). CM
allows analyzing a firm’s capabilities (as part of the resources) due to the theory-based indi-
cators given in section 2.2, which are relevant for strategic decisions.
Since CM allows both, graphically representing a business as well as strategically analyzing
its capabilities, we range this method within the class of process mapping techniques de-
scribed earlier in chapter 3.
CM is not a tool for detailed capability maturity assessment (although this could and should
be integrated into an analysis tool set). The focus is not to analyze singular capabilities in
depth for reasons of optimization, but to provide an analysis and redesign tool for helping to
locate performance problems (e.g. due to multiple business processes sharing the same capa-
bility) and to reconfigure the capability structure (e.g. outsourcing of specific parts).
4.2 Application to the Domain of Loan Processing
In summer of 2004 we conducted a case study and investigated the process of granting and
managing mortgage loans of a small German private bank (named “ABCD” in this paper due
to terms of confidentiality). Within this project, very detailed process documentation was
generated1, mapping single activities to the underlying information systems infrastructure
(which applications are used by which process step). In this way, we created a basis for ana-
lyzing media discontinuities (when and how often does data need to be retyped from one ap-
plication to another due to missing interfaces) within the investigated business process. Be-
sides an analysis of these optimization opportunities, an additional goal was to evaluate the
outsourcing potential for different parts of the process. This evaluation was based on a more
comprehensive methodology, where CM was only one part of. (It is either the goal of this
paper to develop a business process outsourcing decision support approach, nor to discuss the
set of existing methods and underlying theories in this field. A valuable and extensive work in
this field can be found in (Dibbern et al. 2004)).
The mortgage loan process of ABCD bank is shown on a more abstract level in Figure 4.
Sales Loan Administration
/Preparation Assessment and Processing / / Risk
Servicing Workout
of Loan Claim Decision Management

Managing Customer Risk Transfer to

Advertising Incoming Notification Classification Dunning
Data

First Creating Monitoring Adjustment

Contact and Customer of Monitoring
or Cancellation
Consulting Record Acceptance

Product Validating Contract Recon- Realization

Choice Credit Processing figuration of Securities
Standing

Collect Rating Outpayment Prolongation Encashment

Claim Data

Handling
First Vote Decision Archiving Payment
Discontinuties

Figure 4: Mortgage Delivery and Management Process of ABCD bank

After modeling the workflows within each process step in a very detailed approach (UML
activity diagrams), all activities were remodeled as encapsulated business functions resp. ca-
pabilities to place them into the hierarchical capability map. Figure 5 shows both the resulting
positions of customer-near capabilities within the sales-capability (in the upper right corner)
and the back office functions within the administration capability (in the lower left corner).
The process flow connectors between the front office and the back office are also shown in
the capability map. These links represent all interactions (e.g. the transmission of the loan
related documents) between front and back office during the loan process. Further, there is a
rather intense exchange between loan processing and credit risk management within the
bank’s risk management (lower right corner). Each loan request has to be evaluated if it
matches into the bank’s preferred risk portfolio and, in the opposite way, if a new loan con-
tract changes the bank’s risk portfolio. When it comes to paying out the credit amount, the
process leads to the “Transactions” capability.

1
It is quite difficult to find any flow-oriented process documentation in any area of the financial industry in
Germany.
 Figure 5 : Capability Map with focus on Loan Processing Capabilities (4th level)
In Figure 6, the capability “Administrate Loans” is shown in more detail. As the view be-
comes more detailed, more process flows are displayed between and within capabilities.
 Figure 6: Detailed view of capability "Administrate Loans"
On a sufficiently granular level, the capabilities can be described by function-oriented meas-
ures. By using a capability cockpit in form of a graphical user interface (GUI), as shown in
Figure 7, one can browse into each single capability and is able to query the properties and
pre-defined absolute and relative (efficiency) measures. It is not goal of this paper to define a
set of theory-based measures for this kind of cockpit. We just want to provide a first visionary
draft, which could act as a starting point for refinements in subsequent case studies.

Figure 7: Draft of the Capability Cockpit

This exemplary cockpit GUI consists of four different areas: the upper left area represents
basic information about the capability and its relations (description, connections to other ca-
pabilities and related inputs and outputs, superior capability, sub-capabilities etc.), while the
upper right section provides the navigation through the capability hierarchy and gives infor-
mation about the implementation (e.g. is the capability operated manually or automatically,
inhouse or outhouse?). The lower part contains strategic and operational measures which help
to determine the strategic value and the operational performance of the particular capability.
The used strategic indicators are deducted from the literature review (section 2.2) and could
be supplemented by operational data (depending on the type of the capability and on the level
it resides), such as average and worst case cycle times, exception frequencies and/or excep-
tion times (if the evaluated capability is sufficiently supported by process-oriented IS, as for
example by a transaction system or a workflow management system). Other measures could
be activity-based costs or input values, such as assigned working times or similar.
In the following, we want to illustrate a potential application domain in which the CM ap-
proach can be used: the strategic instrument of Business Process Outsourcing (BPO). After
having completed the CM analysis, ABCD bank took the outsourcing of the “Loan Docu-
ments Archiving” capability into consideration, i.e. all operations connected to the documen-
tation of a running mortgage contract (contract, collaterals etc.). After outsourcing, every sin-
gle document which attains in the bank will be transmitted to the service provider, who or-
chestrates and archives the loan documentation.
In Figure 7, an exemplary description of the back office capability of archiving the loan
documents is provided. As shown there, this capability is not strategic but possesses a lot of
connections to other capabilities (visualized in Figure 6). Every time when documents are
changed or added to the loan file (for example the collaterals documentation has to be up-
dated continuously for some kinds of loans), some activities within the “Archiving” capabil-
ity are activated and fed by one of those links. Considering economies of scale, a sourcing
provider could execute this capability cost-efficiently (one could imagine that the best-
practice values, shown in the cockpit screenshot, are bought in from an analyst) so there
would be an opportunity to outsource it. In fact, in Germany, there is already a number of so-
called credit factories that are able to offer almost every capability which is needed in retail
loan processing (BaFin 2003; Krawietz et al. 2003).
Due to the many incoming and outgoing flows that are connected with the Archiving capabil-
ity, these links also have to be analyzed explicitly. There is a lot of physical data interchange
from and to the Credit Archiving capability, which would strongly increase data transmission
costs if it took place inter-organizationally after outsourcing the archive. Based on that,
ABCD bank evaluated which ones of these process flow connectors could be switched from
physical to digital transmission. It was found that introducing an electronic archiving system
in combination with a workflow management system (both provided by an external company)
would be efficient and would diminish most physical data transfer.
Outsourcing a capability does not necessarily change the structure of the capability map. In
the case of ABCD bank, the capabilities are still part of ABCD’s business, although they are
operated externally, and therefore they are still part of the map. The Archiving capability it-
self changes its character to a virtual capability2, while the underlying structure (the sub-
capabilities) can be removed or replaced by capabilities which only include interaction func-
tionalities, such as “Transmit Documents or Change Requests to Provider” and “Request
Documents”. Because the provider will scan all documents and make them available elec-

2
Virtual capability means that the capability is not a part of the firm anymore but, still, is a
part of the business, where the provider’s capability is also a part, now. Therefore, a virtual
capability represents an interface to the sourcing provider’s executable business functions.
tronically via a Content Management System which allows employees of ABCD to access
needed files during management of running loans, the capability of “Request Documents”
will only be needed, if e.g. particular collaterals have to be returned to the customer.
Some configurations would have to be changed in the cockpit and, perhaps, several control
measures would have to be added to represent the service level agreement between the out-
sourcer and the insourcer.

4.3 Method Assessment

The concept of capability modeling was designed from the need to get a more steady picture
of the firm (compared to existing methods of process and organizational modeling), which
enables managers to evaluate consequences of strategic decisions (which affect synchro-
nously processes, data flows and the firm’s size in terms of vertical integration).
As a complementary methodology to existing modeling approaches, it provides an increased
level of abstraction of the business model (what the business does) and a raised level of proc-
ess aggregation (multiple business processes are aggregated to connectors). It is easy to trans-
parently display and to qualify the role that external partners play in ones own business.
A model of capabilities and connections is a much more stable, though not invariable, model
of the business. It is stable because it shows what is done. Still, the standardized connections,
by whom and how things are done, can be quickly re-wired to realize improvements.
By modeling static structural information (capabilities and connections) and separating it
from dynamic information (process), a model is created that uncovers design options not visi-
ble through conventional analytic techniques. To our knowledge, it is the first proposition to
operationalize insights from the RBV and CBV to provide a business modeling and analysis
tool.
Caused by the enormous consolidation and industrialization pressure, (that esp. banks are
facing nowadays), a fast switch from a monolithic and rigid process-based view to service
orientation, i.e. managing a collection of connected, self-contained business functions resp.
capabilities, is needed by practitioners. With service-oriented architectures (SOA), a para-
digm supporting this concept on the infrastructure level is already available. The presented
approach of capability modeling tries to implement and support this paradigm on the business
level.
Criticism on the introduced concept has to be made on the one hand to the capability-based
modeling per se and, based on this, on the other hand, to the integration of strategic indicators
from literature:
A basic point, which has always to be reviewed when designing hierarchical concepts, is the
question if it matches the modeled domain, i.e. should particular capabilities be assigned to
more than one superior capability or not? Our experiences while developing the banking ca-
pability map in cooperation with partners from the finance industry showed that, of course
some capabilities represent bricks of different upper-level capabilities, but the problem could
always be solved by deciding either to model the capability multiply within the corresponding
upper-level capabilities or, if it is a core function of one particular area, link the other capa-
bilities to it. Therefore, we think that the recommended concept meets the optimal trade-off
between complexity and sufficient representation.
Coming to the integration of strategic indicators into the CM concept, the selection and ag-
gregation of different measures could be certainly discussed, as it is frequently addressed in
the literature (a good overview is given in (Proff 2004)). It was not our aim to give a suffi-
cient recommendation about which measures should be applied to generic capabilities; we
primarily wanted to show the possibilities given by having a capability-oriented analysis tool.
The development of strategic measures is part of our further research, but has in any case to
be put on a kind of capability mapping, because assigning measures to capabilities requires a
fully realized concept of functional encapsulation to prevent ambiguous measurement.

5 Conclusion and Further Research

The presented paper introduces an approach to a capability-oriented modeling of a firm bridg-
ing the gap in operationalizing the RBV. We tried to develop an approach which helps encap-
sulating and connecting a firm’s capabilities to make esp. the RBV and the CBV theories
more applicable to practitioners’ decision problems. By applying it to the loan process of a
bank, it was shown that the approach could be used to model and to analyze a bank’s capa-
bilities as well as their interconnections. Furthermore, it was shown how this approach could
deliver an added value to existing process analysis methods. Based on a literature review,
several strategic indicators were derived and integrated within this approach in order to de-
velop a capability-oriented strategic and theory-based decision support tool.
Shortcomings of our approach were briefly discussed at the end of chapter 4, so in the follow-
ing we just want to discuss further research. In our next steps we will complete the capability
model of a universal bank and redraw the effects that BPO projects of our partners in the
banking industry would have had on the capability map. Case-based and process-oriented
empirical in-depth research, accompanied with condensing empirical insights from literature,
will help to make substantial developments on the strategic indicators for particular areas of
the capability map. Unfortunately, a lot of empirical research validating hypothetical relation-
ships between constructs of the RBV or the CBV has often been done only on a very generic
level (often on the firm level), making it rather difficult to be applied to particular areas of the
banking business.
Furthermore, the capability-based approach will be extended by connecting the business level
to the level of information systems infrastructures. Similar to the capabilities structure on the
business level, the applications which provide services – demanded by the business capabili-
ties – form a complex system of connected entities, even more when monolithic systems are
replaced by service-oriented architectures (SOA). An approach would be to link the capability
map to an application map, i.e. to link a capability to its corresponding application or (web)
service. This way, managers could much easier capture side effects caused by reengineering
actions.

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