Strategic Capabilities

Strategic capability is the adequacy and suitability of the resources and competences of an organization for it to survive and prosper (Resource are tangible or intangible)

Elements of Strategic Capabilities Resources and competences: Perhaps the most basic concept is that of resources. Tangible resources: are the physical assets of an organization such as plant, labor and finance. intangible resources: are non-physical assets such as information, reputation and knowledge Physical resources – such as the number of machines, buildings or the production capacity of the organization Financial resources – such as capital, cash, debtors and creditors, and suppliers of money Human resources – including the number and mix (e.g. demographic profile) of people in an organization. Intellectual capital is an important aspect of the intangible resources of an organization. This includes patents, brands, business systems and customer databases.

2. Threshold capabilities: Threshold capabilities are those essential for the organization to be able to compete in a given market If an organization does not have threshold resources then it will be unable to meet customers’ minimum requirements threshold competences required to deploy resources so as to meet customers’ requirements and support particular strategies

Arising from these are other important issues: Threshold levels of capability will change and will usually rise over time as critical success factors change and through the activities of competitors and new entrants. One of the challenges that firms face is the trade-offs that they may need to make in order to achieve a level of threshold capability required for different sorts of customers It is important to recognize that the threshold level required is likely to involve complementary resources and competences

3. Unique resources and core competences Unique resources are those resources that critically underpin competitive advantage and that others cannot imitate or obtain Core competences are the activities and processes through which resources are deployed in such a way as to achieve competitive advantage in ways that others cannot imitate or obtain

COST EFFICIENCY This will involve having both appropriate resources and the competences to manage costs For many organizations in many markets this is becoming a threshold strategic capability for two reasons: because customers do not value product features at any price. competitive rivalry will continually require the driving down of costs

Cost efficiency is determined by a number of cost drivers Supply locations, ownership of raw materials, PRODUCT DESIGN: labour productivity, working capital utilisation

The Experience curve

Implication of experience curve concepts that can influence competitive position First mover advantage can be important Sustained advantage through experience curve benefits are not high Continual reduction in costs is a necessity for organizations It may be possible to reduce cost by outsourcing

CAPABILITIES FOR SUSTAINABLE COMPETITIVE ADVANTAGE Value of strategic capabilities: The importance of value to the customer may seem to be an obvious point to make but in practice it is often overlooked or ignored. Having capabilities in terms of resources or competences that are different from other organizations is, of itself, not a basis of competitive advantage if that are ‘valueless’ in customer terms

Rarity of strategic capabilities: Competitive advantage cannot be achieved if the strategic capability of an organization is the same as other organizations Rarity may depend on who owns the competence and how easily transferable it is – such as a doctor in ‘leading-edge’ medicine Secured preferred access to customers or suppliers Some competences are situation dependent Sometimes incumbent organizations have advantage because they have sunk costs (say in set-up) that are already written off and they are able to operate at significantly lower overall cost.

Robustness of strategic capabilities: Robustness is sometimes referred to as ‘non-imitability’ The competences must lead to levels of performance that are significantly better than competitors

Criteria for the robustness of strategic capability

Non-substitutability: Achieving sustained competitive advantage also means avoiding the risk of substitution However, the organization may still be at risk from substitution. Substitution could take different forms In other words the product or service as a whole might be a victim of substitution. It could be at the competence level. E.g based on a charismatic leader and the way that individual has developed the management systems in the organization

Dynamic capabilities: are an organization's abilities to develop and change competences to meet the needs of rapidly changing environments These capabilities may be relatively formal such as New product development Standardized procedures for agreement for capital expenditure Major strategic moves, such as acquisitions or alliances by which new skills are learned by the organization

ORGANISATIONAL KNOWLEDGE Organizational knowledge is the collective and shared experience accumulated through systems, routines and activities of sharing across the organization. Organizational knowledge highlights the social and cultural aspects of strategic capability. Exchange of knowledge is more likely to occur in cultures of trust without hierarchical or functional boundaries Knowledge takes different forms: Explicit knowledge Tacit knowledge Arguably, the more formal and systematic the system of knowledge, the greater is the danger of imitation For example, a driving instructor can drive a car through tacit knowledge, but to teach others requires explicit knowledge

DIAGNOSING STRATEGIC CAPABILITY The value chain: The value chain describes the activities within and around an organization which together create a Primary activities: For example, for a manufacturing business product or service Inbound logistics Operations Outbound logistics Marketing and sales Service

The value network The value network is the set of inter-organizational links and relationships that are necessary to create a product or service Some of the key questions they need to address are these: Where cost and value are created Which activities are centrally important Where the profit pools are The ‘make or buy’ decision Who might be the best partners

Activity Map

Benchmarking An organization's strategic capability has to be assessed in relative terms since it concerns the ability to meet and beat the performance of competitors Historical benchmarking. Industry/sector benchmarking. Best-in-class benchmarking.

MANAGING STRATEGIC CAPABILITY The limitations of managing strategic capabilities Competences are valued but not understood. Competences are not valued. Competences are recognized, valued and understood. over-formalising or codifying them such that they become ‘set in stone’

2. Stretching and adding capabilities Extending best practices. Adding and changing activities. Stretching competences. Building on apparent ‘weaknesses’. Ceasing activities. Trade-offs External capability development.

3. Managing people for capability development Targeted training and development may be possible HR policies might be employed to develop particular competences To develop people’s awareness

Building dynamic capabilities the recognition of the significance of the intuition of people in the organization the acceptance that different, even conflicting ideas and views are to be welcomed experimentation is the norm and becomes part of the learning process