Business Horizons (2017) 60, 55—65

Available online at www.sciencedirect.com

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Strategic fit: Key to growing enterprise value

through organizational capital
Sandra Jeanquart Miles a,*, Mark Van Clieaf b

a
Arthur J. Bauernfeind College of Business, Murray State University, 304 North 16th Street,
Murray, KY 42071, U.S.A.
b
Partner, Organizational Capital Partners, 3001 North Rocky Point Drive East #200, Tampa,
FL 33607, U.S.A.

KEYWORDS Abstract Organizational capital is an intangible asset that is a continuous creator of

Organizational capital; value through generating above-normal revenue growth, innovation, operational
Human capital excellence, and stakeholder relationships. The elusive nature of organizational
management; capital stems from competing perspectives on how it can be defined and managed.
Value creation; This article presents a comprehensive model for understanding the critical process,
Strategic leadership; components, and necessary linkages that result in increased enterprise value through
Work levels; the creation of organizational capital. Attention is given to the factors that influence
Levels of innovation; organizational capital (fit among leadership, strategy, and organization design), its
Stratified systems influence on human capital, and, ultimately, the impact on operational excellence,
theory; stakeholder capital, and the essential levels of innovation that drive capital efficient
Future value; growth. Guidance is provided for the CEO, CFO, and CHRO wishing to harness the
Resource-based theory; power of organizational capital and increase both current and future value of the firm.
Intangible assets; # 2016 Kelley School of Business, Indiana University. Published by Elsevier Inc. All
Organizational rights reserved.
alignment

1. Significance of organizational lives of global communities by helping to address the

capital
On October 14, 2015, Toyota announced revolution-
ary strategic plans, projecting 35 years into the
future, that will transform not only the automobile
industry but global society. The vision is to create a
fleet of mostly zero emission vehicles and enrich the
* Corresponding author
E-mail address: smiles@murraystate.edu (S.J. Miles)
climate change goals agreed to by 180 countries
(Toyota, 2015). This level of innovation and long-
term strategic ambition is astounding, signaling
significant achievements in Toyota’s Back to Basics
movement launched after experiencing millions of
dollars in operating loss due to product recalls from
2009—2010. By the end of 2014, Toyota was gener-
ating twice the operating profit margin of General
Motors or Ford, and three times the net income/full
time employee (FTE) as an indicator of organiza-
tional productivity. On top of that, Toyota had three

0007-6813/$ — see front matter # 2016 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.bushor.2016.08.008
56
times higher expectation for innovation and future
growth reflected in its enterprise valuation. The
company has crafted and is executing a revolution-
ary strategic plan that has been a factor in reclaim-
ing Toyota’s financial stability, and may very well
usher in a new era set to disrupt the automobile
industry through its aggressive innovations. To
achieve this ambitious goal, Toyota’s leadership will
have to continue to harness the power of a very
elusive, intangible asset: organizational capital.
Organizational capital (OC) is defined as the ex-
traordinary value created and realized through
unique organizational processes, systems, and man-
agement structures. It is considered one of four
intangible assets (the others include: discovery/
learning, customer, and human resource intangibles)
that drive the value and growth of companies (Lev,
Radhakrishnan, & Zhang, 2009). OC is understood to
be a continuous creator of value for organizations
and their stakeholders; indeed, firms deemed as pos-
sessing OC earned 4.6% higher returns (Eisfeldt &
Papanikolaou, 2013), associated with five years of
future operating and stock return (Lev et al.,
2009), and performed three to five times better than
competitors in the same industry sector (IRRCi, 2014).
While research connects OC to increased profits, many
firms are unable to create or capture OC. Consider
Kodak (Mui, 2012) and Yahoo (Myatt, 2015) as exam-
ples of companies who have been unable to create
long-term value through exhibiting the requisite lev-
els of innovation; this has led to declining revenues
and return on invested capital (ROIC) performance.
Difficulty in creating or capturing the potential
value of OC is a result of the under-conceptualization
in how it is manifested and managed effectively.
Hence, the purpose of this article is to present a
comprehensive model for conceptualizing OC and its
impact on firm performance, growth, innovation, and
long-term value creation. Attention is given to the
factors of OC that influence key capital outcomes.
These capital outcomes impact enterprise growth
and value, assist executive leadership in growing
OC, impact financial performance, and increase en-
terprise value. By understanding the complex chain
of events and interactions among variables and re-
sources in the development and realization of OC,
strategic leaders will be able to cultivate and manage
these factors to provide sustainable growth and value
creation for both the enterprise and stakeholders.
2. The constitution of organizational
capital
Researchers investigating OC, with their diverse
perspectives, are behind the conceptualization
S.J. Miles, M. Van Clieaf
and definition of the term. All agree it is a key
intangible asset, and one of the most elusive at
that. The following elements emerge as critical in
understanding the definition and conceptualization
of OC:
 Intangible asset (Lev et al., 2009);
 Practices and processes for acquiring and retain-
ing talent (Eisfeldt & Papanikolaou, 2013);
 Culture, leadership, and alignment of people to
strategic goals (Kaplan & Norton, 2004);
 Organizational design (Child, 2015); and
 Role of leadership capability in transforming
resources into a competitive advantage (Sirmon,
Gove, & Hitt, 2008).
These critical elements, coupled with resource-
based theory (RBT)–—the process for understanding
how firms achieve and sustain a competitive advan-
tage through resources and capabilities–—
result in an expanded definition and a comprehen-
sive model for building OC. We define OC as the
extraordinary value created and realized when the
transformation factors of value creation (i.e., lead-
ership, strategy, and organizational design) create a
synergistic sequencing of events that allows for
optimal resource orchestration, enabling the firm
to fulfill its strategic mission and realize both en-
terprise and stakeholder value. Our conceptual
model, shown in Figure 1 and detailed below, illus-
trates the process for developing and realizing OC.
3. Growing organizational capital:
The model
Figure 1 illustrates the flow of resources (tangible
and intangible) as input factors of production
that are transformed through the factors of value
creation–—leadership, strategy, and organizational
design–—into tangible and intangible (i.e., human
capital) assets. A key to growing enterprise value
through OC is managerial capability, a key element of
capital allocation and resource orchestration
(an extension of RBT). Management’s ability to
conceptualize, execute value creation strategies,
manage resources, and synchronize practices across
processes results in higher levels of firm performance
(Holcomb, Homes, & Connelly, 2009). As such, firm
leadership determines the strategy and must create
an organizational design that aligns with the strate-
gic position. The better the ‘fit’ between strategy
Strategic fit: Key to growing enterprise value through organizational capital 57

Figure 1. Organizational capital as a driver of enterprise value

Input Factors of Value Creation Re-investment to achieve expected Future Value Enterprise Value (Future and
(Tangible & Intangible Resources) Current), Free Cash Flow,
Return on Invested Capital, &
Revenue Growth

Intangible Assets

Strategy, Vision, Innovation

Values Capital

Operational
Organizational F Excellence
Leadership I Work Capital
T Levels

Alignment/Gap
Organization Stakeholder
Structure & Capital
Systems

Tangible Assets Organizational Capital Assets/

Transformational Factors of Value Creation Liabilities

and organizational design, the more synergistic the
enterprise becomes (Porter, 1996).
The degree of fit determines how resources are
allocated and orchestrated. Resource orchestration
is the combination of resources, capabilities, and
managerial acumen that results in firm perfor-
mance. To be effective, managers at all levels of
the firm must engage in carefully prioritized and
synchronized resource allocation. More specifically,
they must focus on how resources are structured
(acquired, accumulated, and divested), bundled
(stabilized, enriched, and pioneered), and lever-
aged (mobilized, coordinated, and deployed) to
create a competitive advantage (Sirmon, Hitt, &
Ireland, 2007). The integrative process amongst
the transformation factors of value creation are
discussed in this section.
The firm’s leadership is accountable for crafting a
business strategy and forging a fit among organiza-
tional design components. This ensures proper stra-
tegic execution. The depth and breadth in the
management structure (i.e., managerial capability)
ensures the synchronization of practices and pro-
cesses that enable the structuring, bundling, and
leveraging of resources (Sirmon et al., 2008). The
degree of fit between the strategy and organization
design influences the firm’s ability to optimize re-
sources and realize a competitive advantage. These
critical factors and their capacity for transforming
resources into value are discussed below.
3.1. Strategic leadership
A firm’s leadership is accountable for strategy de-
velopment, resource management, and enterprise
performance. For optimal results, two key elements
are required for managerial capability that results in
value creation: alignment of leadership roles and
identification of the scope and complexity of the
work and leadership domain.
Current research focuses on the alignment and
integration of roles among the CEO, chief human
resource officer (CHRO), and CFO roles. Firms with
a strong link between the CFO and CHRO, as well as
between CEO and CHRO, experience higher levels of
performance (Ernst & Young, 2014; Chadwick,
Super, & Kwon, 2014). A triumvirate leadership
model aligns and integrates the roles and account-
abilities of each position. This model contributes to
high performance through role alignment and an
accountability structure for human resource man-
agement systems, as well as the alignment of the
firm’s strategy, level of growth, and innovation
(Charan, Barton, & Carey, 2015). When the CEO,
CFO, and CHRO (herein referred to as leadership)
are linked, aligned, and held accountable by the
strategic position of the organization, a hierarchy of
performance measurement can be effectively dif-
ferentiated, aligned, and cascaded through the
management structure to create an integrated
framework for crafting a fit among strategy,
58
organizational design, and performance manage-
ment. This ensures the necessary managerial depth
and breadth for optimal resource management.
The second element of strategic leadership is
properly identifying the leadership domain and com-
plexity of the firm’s work. Both elements are critical
in the development of an appropriate strategy for
long-term success. The work and leadership domain
is contingent on the complexity of the firm in terms
of the assets, product portfolios, and business mod-
els the leadership is accountable to manage and
transform into value for the customers, sharehold-
ers, and broader society.
Research on stratified systems theory (Jaques,
1989) and related work levels (Rowbottom & Billis,
1987; Van Clieaf, 2004) identified three basic work
and leadership domains: operational, business de-
velopment, and global industry. The work level
of the organization (illustrated in Table 2) is
determined by the level of innovation required
for long-term financial viability and enterprise
sustainability; the level of stakeholder relationship
management; as well as the risk management,
change complexity, and longest time horizon for
planning and decision making for which leadership
roles are held accountable. When value-adding
management levels are structured in accordance
with the work levels framework, the management
structure and its accountability will be aligned with
the goals and objectives of the leadership across
multiple levels of management (Van Clieaf, 2004).
This provides a framework for the structuring, bun-
dling, and leveraging of resources.
Strategic leadership that is linked and aligned to
the identified level of work and leadership domain
enables the most senior leadership roles to craft a
strategy directed at the correct work level and level
of innovation for the firm. In accordance with the
strategy, the leadership team then sets an organi-
zational design to orchestrate resources into capa-
bilities to match the required level of innovation.
For Toyota, setting the strategy, investment plans,
and broad milestones reaching 35 years into the
future is intended to revolutionize and transform
the world and global transportation systems. This
level of envisioned long-term innovation at Toyota
sets the firm up for durability, sustainability, and its
contribution to global society.
3.2. Strategy
Strategy defines how the firm intends to compete,
serve customer segments, provide product/service
solutions, and outperform competitors in the mar-
ketplace. It is the firm’s leadership that identifies
a strategic position or a sustainable competitive
S.J. Miles, M. Van Clieaf
advantage through matching what is distinct about
the firm to its competitive environment (Porter,
1996). Integrated leadership, paired with appropri-
ate cascading of measurable objectives, ensures all
levels of the firm are committed and focused on the
attainment of the strategic objectives.
The development of an excellent strategy and
business model–—and the economics behind it–—to
position the firm for the long term is important, but
the execution of that strategy is most challenging.
The execution of a well-formed business strategy is
carried out by the roles and their incumbents at all
levels of the firm within the organizational design.
3.3. Organizational design
Organizational design is any structure, function,
system, process, or procedure that coordinates
the work of a firm to achieve strategic objectives,
and is regarded as one of the last sources of a
sustainable competitive advantage. Like strategy,
organizational design is firm specific and has to be
developed in order to meet the specific needs and
strategic position of the firm. Leadership who can
create an organizational design that best orches-
trates resources in accordance with the strategic
position, evolving customer needs, and appropriate
decision making at all levels will increase operation-
al efficiency, optimize access to and influence of
human capital, and have the ability to respond
quickly to new opportunities and external threats
(Child, 2015).
The alignment of organizational design with
strategy (strategic fit) ensures coordination and
information exchange within and between all firm
activities, eliminates redundancy, and minimizes
wasted effort and resources. Strategic fit is accom-
plished when there is appropriate accountability in
the vertical management structure, as well as the
coordination of horizontal design within groups
(e.g., teams, functions, processes, information
and metrics, delegated decision authority). Strate-
gic fit allows resources to be managed with the
requisite breadth and depth that ensures optimal
flow through the firm, resulting in value through
profit growth that creates a ROIC greater than the
cost of capital over time.
3.3.1. Management structure
The structure of the organizational layering refers
to the distribution and delegation of accountabil-
ities and decision authorities across roles in the firm,
and how they cascade down the layering of the
managerial structure and reporting relationships.
Research in the area of stratified systems theory
(Jaques, 1989) and work levels (Rowbottom & Billis,
Strategic fit: Key to growing enterprise value through organizational capital
1987) focused on managerial structure effectiveness
and efficiency through appropriate levels of mana-
gerial accountability and distribution of supporting
roles. Subsequent research identified other factors
of differentiation that account for performance
differences among firms: levels of complexity of
work and innovation up the vertical management
structure and accountability hierarchy, as well as
customer/stakeholder management, change com-
plexity, risk, and leadership integration complexity
(Van Clieaf, 2004). As a result of measuring these
complexities, the work levels approach creates ef-
ficiencies among the roles, processes, and people
(i.e., resources) impacting strategy execution.
Value-adding work levels influence the firm’s
ability to generate OC and, ultimately, enterprise
value. Without an appropriate managerial account-
ability framework, human capital is negatively im-
pacted. Managers may misalign or confuse roles in
the firm or improperly allocate resources. At the
employee level, a firm may experience high turn-
over and general disengagement, which results in
output that is well below the necessary innovation/
growth level. These impacts can reduce customer
satisfaction. (Child, 2015). The formal structure of
the firm and role clarification of the value-adding
levels of management (work level) ensures each
level is aligned with the strategic goals and objec-
tives of the firm (Van Clieaf & Kelly, 2005). In addi-
tion to the formal vertical structure, the firm
systems and processes play a critical role in trans-
forming resources into value.
3.3.2. Organizational systems and processes
The firm’s systems and processes are comprised of
activities necessary to acquire and transform resour-
ces into assets that will return value to the enter-
prise. Typically, activities comprise processes, and
processes are combined to form systems. It is the
orchestration of these processes and systems that
contribute to fit and the realization of competitive
advantage through effective resource investment.
The extent to which leadership aligns the organiza-
tional design with the firm’s strategy determines the
extent to which strategy is properly executed and
value created. It is through these systems and pro-
cesses that resources are accumulated (tangible and
intangible) and leveraged, resulting in value crea-
tion. With tangible resources, if something in the
system is not aligned, it is readily transparent and
adjustments can be made. For intangible resources
such as human capital, that is not always the case. As
such, orchestration of human resource management
systems is critical in generating OC.
The synchronization of processes in human
resource management traditionally focused on
59
staffing, training and development, compensation,
and performance management practices, which
are viewed as complementary in nature and
aligned with business strategy. For optimal
orchestration of resources the practices among these
systems must be bundled (often referred to as
commitment-based HR systems), since it is through
these bundled practices that the development of
knowledge, skills, competencies, and capabilities
occurs in a firm’s human capital (Lepak & Snell,
2002). As such, training and development play
a key role in ensuring that the current human
resources continually develop the necessary capa-
bilities to ensure the required levels of human
capital are consistently available to the firm.
Systems that are synchronized with the firm’s
strategy acquire and develop human resources with
the requisite knowledge and motivation to deliver
on firm expectations. Systems that are inconsistent
or not aligned may result in undesirable consequen-
ces in terms of employee behavior and customer
outcomes (Miles & Mangold, 2005). Though the role
of human capital and tangible assets are critical in
the creation of OC, the greatest challenge is the
manner in which the human resources are aligned to
the levels of work and required innovation that
determines the level of human capital available
to the firm. The gap between the human capital
required for the level of work and the human capital
for which the firm has access indicates the degree of
strategic fit. The bigger the gap–—which includes the
‘fit to role’ and level of problem solving of the
individual compared to the level of required inno-
vation of the position–— the less fit there is between
strategy and organizational design. When a firm
does not have access to the required human capital
and leadership capacity required, it cannot imple-
ment the strategy.
3.4. Human capital
Human capital is defined as the stock of skills,
talent, knowledge, conceptual capacity, level of
problem solving (competencies), and the scope of
influence available to the firm at all work levels in
the firm’s structure (Weatherly, 2003). Firms do not
own human capital, they can only access and influ-
ence it to achieve the goals of the firm. In essence,
employees may have the competencies to perform
the job but it is the motivation or engagement that
is difficult to harness and ultimately determines the
OC a firm can realize.
The extent to which firms can access and influ-
ence human capital is determined by the fit the
leadership creates between strategy and organiza-
tion design, including management structure,
60
accountability, and incentive design. Firms in which
systems are aligned and consistent with strategy
create human capital that is both able and willing
to deliver the desired behavior and returns value to
the firm through innovation capital, operational
excellence, and stakeholder capital (Mangold &
Miles, 2007).
Human capital is optimized when it is aligned
with the work levels and level of innovation ac-
countability structure. As previously noted, each
level of management has accountability for in-
creased levels of innovation, decision making, and
a longer horizon for planning and risk management.
Ensuring that requisite human capital requirements
are accessible for each work level positively influ-
ences the levels of innovation, flexibility, and stake-
holder relationships the firm can realize. Firms that
can access and influence human capital contribute
to the outcomes of flexibility, innovation (Eccles &
Serafeim, 2013), operational excellence, and cus-
tomer capital (Miles & Mangold, 2005). Ensuring the
requisite levels of human capital are aligned to the
appropriate work levels and levels of innovation of
the firm does more than contributing to operational
excellence. This alignment also enables innovations
that answer a firm’s sustainability needs, facilitat-
ing the firm’s ongoing ability to create long-term
value through development of new products, new
markets, new business models, and even new
industries.
3.5. Organizational capital
OC is created through the integration of both tangi-
ble and intangible resources as they move through
the transformational factors of value creation. The
tighter the fit between the level of strategy and
organizational design, the higher the level of human
capital that interfaces with other resources. This
results in tangible outcomes and value creation
through two core value streams that drive growth
in economic profit, firm cash flows, and enterprise
value in the longer term. The first revenue stream
comes from improved business processes, efficiency
innovations, and overall operational excellence that
contributes to profit margin expansion and a ROIC
greater than the cost of capital from existing prod-
ucts and markets. The second core value stream,
which impacts future value’s contribution to enter-
prise value, are the strategies and investment plans
for future revenues–—the profits and returns from
breakthrough innovation driven by new technolo-
gies, new products, new markets, new business
models, and even new industries. Thus OC is real-
ized through a combination of breakthrough inno-
vation, operational excellence, and stakeholder
S.J. Miles, M. Van Clieaf
capital, making OC key to sustained long-term per-
formance.
3.5.1. Innovation capital
Innovations are conceptualized and executed by
people and the roles in which they are deployed
throughout the organization. Firms that have clearly
included levels of innovation into their structure
and acquire and deploy the appropriate human
resources influence the human capital available at
all levels within the firm (such as Toyota, Unilever,
and Siemens). Christensen and Van Bever (2014)
classified innovation into three categories, including
efficiency innovation, sustaining innovation, and
disruptive innovation. Van Clieaf (2013) further
identified a hierarchy of complexity of innovation
through interviews with executive management and
by analyzing management structure. This hierarchy
of innovation can be directly linked to the profit and
loss statement, balance sheet, and valuation of the
firm (Organizational Capital Partners, 2010), as
illustrated in Figure 2.
For instance, in work level 1 the expectations are
to follow the rules and procedures to deliver service
excellence (limited innovation) and work level 2 is
accountable for continuous improvement, while
work level 3 is accountable for process innovation,
creating efficiencies, and market share growth from
current operations. In work level 4, the accountable
innovation focuses on developing totally new prod-
ucts, new markets, and new channels (e.g., Motor-
ola, Herman Miller, Monster Beverage); with work
level 5, innovation comes through new business
models (e.g., Netflix, Southwest Airlines, Nucor
Steel). In work level 6, innovation occurs with
new industries, industry ecosystem, and infrastruc-
ture innovation (e.g., Apple, Amazon, Walmart),
with a balance of asset stewardship and corporate
citizenship, resulting in a triple bottom line. Lastly,
work level 7 companies intentionally, as part of their
strategy, look to add value long term to global
society and nation building through societal innova-
tion and development, while at the same time
providing products, services, and businesses they
invest in to meet the evolving needs of their cus-
tomers around the world (e.g., Toyota, Unilever,
Alphabet).
Firms that do not have full access to human
capital or lack the necessary human capital, lead-
ership, and level of problem-solving capacity at the
requisite work levels will not be able to innovate and
adapt in a timely manner. This will negatively im-
pact long-term performance of the firm as well as
the environmental, social, and governance perfor-
mance that contributes to the sustainability of the
enterprise (Eccles & Serafeim, 2013). Firms with the
Strategic fit: Key to growing enterprise value through organizational capital
Figure 2. Work and leadership domains and work levels
Source: Adapted from Organizational Capital Partners (2010)
requisite human capital and problem-solving capac-
ity at all work levels contribute not only to realizing
innovation capital, but also operational excellence
capital through cost savings associated with process
innovations, improved production technology, ex-
panding margins, and returns on invested capital.
Innovation capital is realized in such tangible ways
as new patents, software copyrights, new products,
new markets, and new industries, all of which are
sources of enterprise value.
3.5.2. Operational excellence
Operational excellence and organizational produc-
tivity is the consistent and reliable execution of
activities necessary to carry out the firm’s strategy.
Enterprise value increases through an efficient cost
structure, resulting in revenue growth from existing
products and markets while driving growth in oper-
ating profit and ROIC. Operational excellence is also
evidenced by the net income/FTE or net operating
profit after tax/FTE, which indicates the productiv-
ity of the workforce in creating economic value.
Toyota has demonstrated operational excellence
through constant recalibration of current resources
by fine-tuning its Toyota production system, foster-
ing a culture of continuous improvement and pro-
cess innovation to drive operational excellence. As a
result, Toyota’s net income/FTE is three times the
61
productivity multiple compared to General Motors
or Ford’s net income/FTE.
3.5.3. Stakeholder capital
The firm’s key stakeholders are customers; value is
realized in the strength of those relationships. Cus-
tomer loyalty, share of customer spending, and
positive word of mouth positively impacts a firm’s
reputation and is considered a source of increased
revenues, profits, and enterprise value. The extent
to which human capital delivers the firm’s promises
to customers or other relevant stakeholders deter-
mines the strength and direction of relationships
that exist between customers and the firm. Human
capital delivering on firm promises positively
impacts both stakeholder capital and operational
excellence realized through lower employment
costs (Miles & Mangold, 2005).
Human capital impacts the amount of OC and
stakeholder capital a firm can realize. Firms that
have the required levels of human capital and can
access and influence stakeholders in accordance
with the strategic objectives of the firm are able
to realize the innovation capital (at the required
work levels), operational excellence capital, and
stakeholder capital resulting in extraordinary enter-
prise value. This relationship capital includes build-
ing stakeholder relationships and influence with
62
government regulators and NGOs who can impact
the firm’s license to operate.
3.6. Enterprise value
Enterprise value (EV) is a financial measure used to
understand the true value of the firm at current
market value with a marker for the long-term finan-
cial viability and durability. EV also reflects the
capital markets’ expectations in terms of: future
economic profit from current operations; future
economic profit from new growth and innovation
beyond current operations; as well as the expected
growth, innovation, and the discounted future value
of economic profit. The EV consists of both the
current value (CV) and the future value (FV) of
the enterprise. The earnings and cash flows from
current products and services can be converted into
a steady state model by dividing those earnings by
the cost of capital at a discounted rate to create the
current value of the firm as a perpetuity. EV minus
CV equals the expected FV, which is implied by the
current stock price and market capitalization of the
firm (IRRCi, 2014).
The FV is created and realized through invest-
ment in R&D and the creation of new products, new
markets, and new business models, in addition to
the required capital investment to commercialize
these innovations. The track record of past growth
and innovation by the firm, along with the future
business strategy and investment plans disclosed to
shareholders, generates the expected FV of the firm
and its disclosed strategy in the form of expected
future growth and innovation implied in the firm’s
valuation, market capitalization, stock price, and
price-earnings ratio. Higher growth and higher in-
novation firms will show a market capitalization/
FTE much higher than their peers, which drives
increased expectations for the firm and its organi-
zational design and workforce deployment to sus-
tain higher growth and innovation.
EV is maximized through OC when the enterprise
realizes the growth and innovation expectations
based on the disclosed strategy. OC contributes to
both the FV and CV of an enterprise and is thus the
organizational finance of the firm. Operational ex-
cellence capital delivers operational productivity
through process improvement, cost savings, and
reduced invested capital, thereby creating the val-
ue the firm realizes in the shorter term (work levels
1—3). Innovation capital and stakeholder capital
contribute to both CV and FV. Future value is real-
ized through breakthrough innovation and bringing
new technologies to market. Creating new products,
new markets, and new business models are innova-
tions that contribute to the sustainability of the
S.J. Miles, M. Van Clieaf
enterprise in the mid to longer term (work levels
4—7). OC also contributes to the organization’s
reputation not only as a firm but also as an employer,
where contributing members add value to society.
The economic value realized from both CV and FV is
returned to the firm, facilitating resource acquisi-
tion and improvements to the transformational fac-
tors of value creation to continually improve the
business system. For a firm to deliver value to its
stakeholders it must be able to transform its re-
sources and ensure the necessary levels of human
capital to generate OC realized through innovation
(aligned with work levels), operational excellence,
stakeholder capital, and any other firm-specific,
value-adding capital.
4. Blueprint for building
organizational capital
OC creates above average revenue growth, margin
expansion, returns on invested capital, and in-
creased shareholder returns. Creating EV through
OC requires resource orchestration through the
transformational factors of value creation, which
enables optimal management of resources. Guide-
lines for the creation and management of OC are
presented below.
4.1. Identify work domain and work level
of the organization
Identifying the level of work and level of innovation
ambition for the firm enables leadership to craft an
appropriate strategic position based on firm com-
plexity and the competitive environment. Figure 2
assists leadership in identifying the appropriate
work domain, the correct work level of the firm,
and the levels of innovation required to deliver
value to the firm’s stakeholders.
4.2. Identify the expectations,
accountabilities, and performance metrics
for top leadership
The strategic position provides the foundation for
the development of a strategic map, bridging strat-
egy, finance, organization design, and HR to design
an internal framework for planning and measuring
the expectations and accountabilities for leader-
ship. In so doing, the financial and other key perfor-
mance indicators will be linked to the executive
roles and key people accountable for delivering
targeted performance. The design and structure
of key accountabilities, metrics, and the perfor-
mance periods for internal and external reporting
Strategic fit: Key to growing enterprise value through organizational capital 63

of strategic and operational goals are aligned to the
business strategy.
4.3. Link and align organizational design
to strategy
The identification of a strategic position and the
alignment of a firm’s top leadership roles sets the
stage for designing the cascading management and
accountability structure, as well as the alignment of
organizational systems and processes to support the
role accountabilities and delegated decision author-
ities. The tighter the fit among them, the more
value the firm will realize when there is no gap
between human capital available and human capital
required. Key elements for proper alignment are
presented below.
4.3.1. Identify management work levels
After diagnosing the work and leadership domain,
along with the required work level of the firm, the
number of work levels under top leadership roles
can be used to indicate the optimal levels of value-
adding management required in an optimal mana-
gerial structure. For instance, a firm such as
Unilever, Nestle, or Toyota (work level 7) should
have four cascading value-adding management
layers (work levels 6—3), a front line manager level
(work level 2), and non-managerial front line worker
(work level 1). Note, work level 3 is a hinge organi-
zational level, in that it is on the cusp of a more
complex work and leadership domain. In order to
grow beyond level 3 and current operations, the firm
must create operational processes to support inno-
vation for new products and new markets, in addi-
tion to its focus on current operational excellence to
grow EV.
4.3.2. Define and clarify accountability
structure and performance objectives
Aligning the levels of management with clear ac-
countabilities for innovation at the requisite work
level is critical, and must work in conjunction with
performance metrics that assess both CV and FV.
Figure 2 provides a model for diagnosing the man-
agement structure and required contributions for
each work level of the firm. The optimally struc-
tured firm has unique value-adding and decision-
making levels that increase in complexity in the
vertical organization management structure.
The accountability structure is designed in accor-
dance with the management level. As the complex-
ity of the firm increases, the time horizon for
evaluating success should also extend to reflect
the longest time horizon for planning, decision-
making, and risk management. Figure 3 contains

Figure 3. Hierarchy of work level performance metrics and links to value creation
Key Performance Indicators for Work Levels Enterprise Value

10–12 yr. change in Relative Growth, ROIC, relative P/E, FV, and CV
Work Level 7 through global business/societal innovation. Sustainability by managing
the interdependencies among economic, environmental, social, and
political factors globally.

7 yr. change in portfolio Relative Growth, ROIC, relative P/E, FV, and CV
Work Level 6 growth through industry innovation, policy, investment strategies,
leveraging business models across multiple geo-political, socio-economic,
and technological boundaries.
Future growth value
(FV) as percent of
5 yr. Relative Growth, ROIC > 8%, and relative P/E through new business enterprise value (EV)
Work Level 5
model innovation and strategy.

3–5 yr. revenue, EBIT margin, profits, ROIC growth from new
Work Level 4 product/service, new markets, new technologies, new channel
innovation; product portfolio strategy.

Work Level 3 Annual revenue growth, margins, NOPAT, economic profit via process
innovation/optimization for existing products, markets, and customers.

Current value (CV) as

percent of enterprise
value (EV)
Work Level 2 Quarterly and annual improvements in revenue, costs, margins through
quality and continuous improvement (Front Line Manager).

Source: Adapted from Van Clieaf (2016)

64
sample metrics for measuring the extent to which
management roles are contributing to either cur-
rent or future EV. Ensuring all of the roles within the
firm are aligned through appropriately delegated
accountabilities and decision authority is critical.
In the accountability structure and role design,
identifying both role and the human capability
requirements and the competencies necessary
for each role–—including conceptual capacity for
problem solving–—at each requisite level of work
complexity is key for proper ‘fit to role.’ More
simply, the level of problem solving of the individual
must match the level of work complexity and
innovation of the role.
4.3.3. Align organizational systems and
processes
A firm’s systems and processes consist of all end-to-
end sequencing of activities required to acquire and
transform resources into products, services, and
solutions that are of value to customers. Specific
attention should focus on the transformation of
human resources into human capital that can be
deployed by the firm. These resources are unique
in that capabilities need development over time.
Ensure a superior talent management strategy is
integrated within the formal systems and processes
to ensure the required capabilities are available to
the firm. A firm’s access and ability to influence
human capital can only be achieved if there is
alignment and integration among and within the
firm’s systems, processes, and practices. The extent
to which they direct behavior in accordance
with the strategic mission and values results in a
strategic fit.
4.4. Set leading/lagging indicators for
measuring fit between strategy and
organization design
The process for building OC offers many opportuni-
ties to check the connections among the parts to
ensure key performance indicators are met. Early
detection of exceptions in the system allows man-
agement to take corrective action and minimize a
negative impact on EV. The following should be
monitored:
 Performance metrics and delegated decision au-
thorities designed to ensure that accountability
and management structure is aligned correctly
with the levels of innovation required by the
business strategy and business model;
 Organizational systems measured for alignment
with firm mission and strategy;
S.J. Miles, M. Van Clieaf
 An established hierarchy of performance mea-
surement that is effectively designed, cascaded,
and aligned to each level of innovation;
 Benchmark performance metrics that include in-
novation and contributions to both future and
current EV in accordance with the work level,
as well as incentive designs linked to key perfor-
mance indicators for both current and future EV
performance measurements that align to execu-
tive roles;
 Gaps between human capital requirements at
each work level and the human capital available,
ensuring good ‘fit to role’ (i.e., level of work
complexity = level of problem solving of the
individual);
 The alignment of ‘fit to role’ across the work
levels and possible lack of clarity of accountabili-
ty across work levels or lack of delegated decision
authority, despite the amount of human capital
available; and
 Outcomes such as innovations, stakeholder rela-
tionship management, and the realization of oth-
er firm-specific OC.
The alignment of organizational design with busi-
ness strategy and financial outcomes creates a tight
fit through which resources are orchestrated to
create OC. Firms that are able to do this realize
above-normal financial performance and growth in
EV enabled through OC.
5. Organizational capital and
enterprise value: A final word
OC is a source of both current value and future value
and how they contribute to growing EV. This includes
the ability of the enterprise to sustain value, creat-
ing growth and innovation. The integration of the
levels of innovation into an effective management
structure design, and the further alignment with
current and future value, creates the firm’s finance
and performance levers for the CEO, CFO, and CHRO
positions. The extent to which OC is managed also
decides the amount of human capital that can be
realized and influenced, determining not only a
firm’s capabilities but the ultimate value returned
to the enterprise and broader stakeholders. OC is
firm specific and can produce a tremendous source
of value by harnessing the power of a firm’s key
assets that do not show up on the traditional balance
sheet–—its structure and its people and how they are
Strategic fit: Key to growing enterprise value through organizational capital
aligned. The role of strategic leadership creates the
critical requirements of strategic fit in establishing a
competitive business and economic model where
the accountability structure is aligned with the
requisite levels of innovation required, a model that
is supported by the firm’s systems and processes.
The fit created between strategy and organiza-
tion design provides the foundation for optimal
resource orchestration. This fit creates value
through innovation, operational excellence, and
stakeholder capital. By concurrently designing the
managerial accountability structure and levels of
innovation for both operational excellence and
breakthrough innovation, companies can seize op-
portunities that drive revenue growth and sustain
innovation, margin expansion, ROIC, and thus
growth in firm free cash flows and long-term enter-
prise value.
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