Strategy Dynamics Briefing 81: What exactly are capabilities?

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Briefing 80 explained briefly that a capability is the ability to get something done – fast, well and cheaply. To clarify the difference between resources and capabilities it is worth noting the same classification of asset stocks we used when explaining intangible resources in Briefing 73 (Figure 1).

Figure 1: A classification of resources and capabilities. (Click image to view larger)

A classification of resources and capabilities

Capabilities are asset-stocks, but not resources. They accumulate and deplete, so their current level reflects the history of their own gains and losses. Growth of capabilities, that is their inflow rate, often depends on rates of change in the resources with which most are associated — we get better at hiring people by doing more of it. Cisco Inc, for example, has now acquired and integrated so many small high-tech firms that its success rate is near 100%. Capabilities can also be lost, i.e. they have an outflow – if processes and procedures are forgotten or become obsolete, if the required data or information is not maintained, or if too many people leave and deplete the skill-base needed.

Capabilities are more than skills. As explained in Briefing 27, skills are attributes of individuals, and move with the people who hold them. Skills may be simple, such as typing, generic skills like book-keeping, or complex skills such as actuarial analysis and equipment maintenance. Move the person to another situation offering the same challenge, with the same basic tools and information, and they will perform to the same level. The key distinction is that individuals cannot take capability with them to a new situation, because it relies on the existence of other significant resources, many of which are intangible and somewhat specific to the organization. Loss of many individuals would, though severely damage a capability.

Capabilities are composite asset-stocks. The implication of the previous point is that capabilities must be composite factors, arising from the combination of several elements – skills, knowledge and procedures – each of which is a stock in its own right. This means that any properly specified capability could be reliably dis-aggregated into the elements that make it up, but it is both possible and useful to formulate a capability as a single factor, rather than split out these separate components.

Capabilities are the same as competences. The term “competences” is often used in discussion of capabilities within the strategy field. When applied to a single business, there is no clear and agreed difference between capabilities and competences, so for clarity we will refer only to capabilities when discussing things that need to be done well within an organization.

Capabilities need not be core, distinctive, ‘strategic’ or organizational. Much discussion of capabilities discounts the possibility that anything easily specified could possibly contribute to competitive advantage, by the logic that if it could be so specified then others would copy it and the advantage would disappear. This has led to a rich variety of phrases for the more special capabilities thought to explain competitive advantage — the literature mentions core capabilities, distinctive capabilities, strategic capabilities, firm – specific competence, organizational competence and many other adjective-noun combinations. But, just as for resources, it is not safe to dismiss mundane capabilities as irrelevant to competitive advantage. Even if everyone knows what a specific, simple capability is, there can be significant differences in its level between competitors. Firms vary widely in the effort and investment they devote to building a particular capability, and in their success at doing so. There are also considerable costs and lead-times in building capabilities, just as there are for many resources, both tangible and intangible. Furthermore, as we have noted before, it is the system that generates performance, not a simple sum of separate elements, so if a single capability is weak, no matter how simple, the performance of the whole business will suffer.

Until next time…


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Generic capabilities

Just as some generic resources feature in nearly all organizations (customers, staff, capacity, products and cash) some generic capabilities also arise, linked, not surprisingly, to those same common resource types. Moreover, those capabilities are located at one or more of the three key flow-rates in any resource-domain – winning them, developing them, and retaining them. Marketing and sales capability wins, develops and retains customers. In HR, we need strong capabilities in hiring, developing and retaining staff. We need the capability to discover and develop new products and services, and to upgrade those we already have. Adding capacity is often a complex task, requiring a strong capability (retail stores being a specific example). Finally, managing the firm’s cash resource has long been the capability most keenly expected of the finance and accounting function.

Strategic Management Dynamics book coverEach industry may have its own manifestation of these generic capabilities – retail store-opening being a specific version of ‘adding capacity’. In airlines, the equivalent would be the adding of new destinations and opening of new routes. In a consulting firm, the equivalent would be opening new offices. Other industries, however, feature distinct capabilities that are limited to that sector or similar ones. In oil, gas and mineral businesses, for example, the discovery of new reserves is vital, but has no equivalent in most other cases.

This briefing summarises material from chapter 9 of Strategic Management Dynamics, pages 634-637.

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