Strategic Capabilities

 Strategic Capabilities: Capabilities of an organization that contribute to its long-term survival or

competitive advantage.
 Each organization has its own strategic capabilities, made up of its resources (e.g. machines and
buildings) and competences (e.g. technical and managerial skills).
 The fundamental question on capability regards the organization’s strengths and weaknesses (e.g.
where is it at a competitive advantage or disadvantage?).

 The Key Issues:

 Resource-Based View (RBV) of strategy (capabilities view):

- The competitive advantage and superior performance of an organization are explained by the
distinctiveness of its capabilities.
 Strategic Capabilities:
- Capabilities of an organization that contribute to its long-term survival or competitive advantage.
 Resources: assets that organization have or can call upon (eg: from partners or suppliers), that is
‘what we have’.
 Competences: the ways those assets are used or utilized effectively that is ‘what we do well’.
- Components of Strategic Capabilities:

- Redundant Capabilities:
 Those capabilities that were effective in the past can become less relevant as industries
evolve and change.
 Such capabilities can become ‘rigidities’ that obstructs change and become a weakness.
- Dynamic Capabilities:
 The means by which an organization has the ability to renew and recreate its strategic
capabilities to meet the needs of changing environments.
 Dynamic capabilities are distinct from ordinary capabilities that may be necessary to
operate efficiently now but that may not be sufficient to sustain superior performance in
the future.
 Ordinary capabilities allow companies to be successful and earn a living now, but they
are not likely to provide for long-term survival or competitive advantage in the future.
 To be effective, capabilities need to change, cannot be static as capabilities can be
imitated that can eventually become ‘common practice’ in an industry.
- Generic Dynamic Capabilities:
 Sensing Capabilities: constantly scanning and exploring new opportunities across
markets and technologies (e.g. R&D and market research)
 Seizing Capabilities: addressing opportunities through new products, processes and
activities.
 Re-configuring capabilities: new products and processes may require renewal and re-
configuration of capabilities and investment in new technologies.

- Threshold Capabilities:
 Those needed for an organization to meet the necessary requirements to compete in a
given market and achieve similarity or equivalence with competitors in that market –
‘qualifiers’
 Identifying and managing threshold capabilities is challenging because threshold levels of
capability will change as critical success factors change or through activities of
competitors and new entrants.
- Distinctive Capabilities:
 Those that are required to achieve competitive advantage. Distinctive or unique
capabilities that are of value to customers are which competitors find difficult to imitate –
‘winners’.
 Core Competences : the linked set of skills, activities and resources that, together:
- Deliver customer value
- Differentiate a business from its competitors
- Potentially can be extended and developed as markets change or new opportunities arise
 VRIO Strategic Capabilities as a Basis of Competitive Advantage:
- The 4 criteria by which capabilities can be assessed in terms of providing a basis for achieving
sustainable competitive advantage are: VRIO
1. Value
2. Rarity
3. Inimitability
4. Organizational Support

- Value: Strategic capabilities are of value when they:

 Take advantage of opportunities and neutralize threats.
 Provide value to customers.
 Are provided at a cost that still allows an organization to make an acceptable return.
- Rarity:
 Capabilities that are valuable but common among competitors is unlikely to be a source
of competitive advantage.
 Rare capabilities are those possessed by uniquely by one organization or only by a few
others. (eg: patented products, supremely talented people, a powerful brand).
 In the case of rare capabilities, competitive advantage is longer-lasting.
 Rarity could be temporary (patents expire, key individuals leave and brands can be de-
valued due to adverse publicity).
- Inimitability:
 Those that competitors find difficult and costly to imitate, obtain or substitute.
 Competitive advantage built on unique resources but may not always be sustainable.
 Sustainable advantages is more often found in competences and the way competences are
linked together and integrated.
 Barriers to imitation lie deeply in the organization in linkages between activities, skills
and people.
 Criteria for the inimitability of strategic capabilities:
 - Organizational Support:
 The organization need to be well organized to support the valuable, rate and inimitable
capabilities that it has.
 This includes having appropriate processes and systems in place.

 If capabilities for competitive advantage do not exist, then managers need to consider if
they can be developed.
 Organizational Knowledge as a basis for competitive advantage: Organization specific,
collective intelligence, accumulated through both formal systems and people’s shared experience.
- ‘Explicit’ Knowledge: ‘objective’ knowledge is transmitted in formal systematic ways. E.g.
systems manuals or market research.
- ‘Tacit’ knowledge: more personal, context specific, hard to formalize and communicate, and is
difficult to imitate, e.g. the knowledge and relationships in a top R&D team.
 Diagnosing Strategic Capabilities:

- Benchmarking: a means of understanding how an organization compares with others – typically

competitors.
 Two approaches to benchmarking:
1. Industry/sector benchmarking: comparing performance against other organizations in the
same industry/sector against a set of performance indicators.
2. Best-in-class benchmarking: comparing performance or capabilities against best-in-class
performance – wherever that is found even in a very different industry.
- The Value Chain:
 Describes the categories of activities within an organization which together create a
product or service.
 Consists of 5 primary activities and 4 support activities.
 Competitive advantage can be analyzed in any of these activities.
  The Value Systems:
 Comprises the set of inter-organizational links and relationships that are necessary to
create a product or service.
 Competitive advantages can be derived from linkages within the value system.
 Value chains (supplier, organization, channel, customer)
 Uses of the Value Chain:
 A generic description of activities – how discrete and clusters of linked activities
contribute to consumer benefit.
 Identifying activities – where the organization has strengths or weaknesses.
 Analyzing the competitive position – using VRIO criteria which enables
identifying sources of sustainable advantage.
 Looking for ways to enhance value or decrease cost in value activities (e.g.
outsourcing)
 Uses of the Value System:
 Understanding cost/ price structures: analyzing best area of focus and best
business model.
 Identifying ‘profit pools’ – levels of profits in different parts of the system.
 The ‘make or buy’ decision – which activities to do ‘in-house’ and which to
outsource.
 Partnering – deciding who to work with and the nature of these relationships.
- Mapping Activity Systems:
 Identify ‘higher order strategic themes’ – how organization meet critical success factors
in the market.
 Identify the clusters of activities that reinforce the ‘higher order strategic themes’ and
how they fit together.
 Map them in terms of how activity systems are interrelated.
- SWOT Analysis:
 Provides a general summary of the strengths and weaknesses explored in an analysis of
strategic capabilities and opportunities and threats in an analysis of the environment.
 Internal Analysis = Strengths, Weaknesses
 External Analysis = Opportunities, Threats
 Uses of SWOT Analysis:
 Major strengths and weaknesses are identified.
 Scoring (+5 to -5) can be used to assess interrelationships between environmental
impacts and the strengths and weaknesses.
 Can be used to examine strengths and weaknesses in relation to competitors.
 Focus on strengths and weaknesses that differ in relative terms compared to
competitors and leave our areas where the organization is at par with competitors.
 Key opportunities and threats are identified.
 Focus on opportunities and threats that are directly relevant for the specific
organization/ industry and leave out general broad factors.
 Summarize the results and draw concrete conclusions.
 Can be used to generate strategic options using a TOWS matrix.
 o The TOWS Matrix:

 Dangers in a SWOT Analysis:

o Long lists with no attempt at prioritization.
o Over generalization – sweeping statements often based on biased and
unsupported opinions.
o Used as a substitute for analysis.
o Not used to guide strategy, it is seen as an end in itself.

 Managing/ Developing Strategic Capabilities:

- Internal Capability Development:
 Building and recombining capabilities – requires creative entrepreneurial skills
 Leveraging capabilities – sharing best practice across all other departments/sections etc.
 Stretching Capabilities – building new products or services out of existing capabilities.
- External Capability Development:
 Adding capabilities through mergers, acquisitions or alliances.
- Ceasing activities:
 Non-core activities can be stopped, outsourced or reduced in cost.
- Monitor outputs and benefits:
 When it is not possible to fully understand capabilities.
- Awareness Development:
 Developing the ability of people to recognize the relevance of what they do in terms of
how that contributes to competitive advantage are central to capability deployment and
development.

 Strategic Capabilities and Culture

- Historically embedded capabilities are very likely part of the culture of the organization.
- The cultural analysis of the organization therefore provides a complementary basis of analysis to
an examination of strategic capabilities.
- Such an analysis of capabilities should end up digging into the culture of the organisation,
especially in terms of its routines, control systems and the everyday way in which the
organisation runs.