Book 4: Competing with Capabilities

(Originally posted on the OUBS Blog)

Superior performance over time comes from a distinctive and hard to imitate competitive advantage. Opportunities emerge from a firms unique capabilities. Grant (1991, pp. 118–9) argues: _While resources are the source of a firm’s capabilities, capabilities are the main source of its competitive advantage._

This resource based view moves strategy more to the level of the organisation and will help to understand ones organisation and its uniques bundles of capabilities that can or need to be grown and used/exploited. It is still unresolved whether this view complements or substitutes the market-positioning view of Porter. Both likely have more or less importance in different industries, depending on how competitive the environment is for example.

There are two methods to find resources and capabilities of a company. Ones looks at functional areas and the other uses Porter’s value cahin methodology. Then you cna find the (potential) sources of advantage, sources of improvements, linkages, costs drivers and more.

Why do organisations differ?

Different organisations cluster resources and capabilties differently and some then work more efficiently, have better access to scarce resources or a better capability to learn and build new or exisiting capabilities. Especially the last point is important because internal and external environments change. Otherwiese, sets of resources might make prisons out of existing recipies. Now please read Grant’s article on resources and capabilities.

To be remembered here is that your resources and capabilities need to fit the environment your are working in and organisations differ in their ability to secure an advantage from the resources and capabilities, which is what it is ultimately about. We now live in a world of uncertainty, complexity and conflict and exactly this also brings with it multiple opportunities.

It is also critical that the rare resources that a better performance is based on, need to remain scarce/rare for a long time. You need to try to make sure that the competitor thinks it cannot immitate what you do. The thought is what counts here. Sometimes resources need to be built up a certain way and over a long time, which is something that is hard to imitate. Heterogenity is necessary but not sufficient for a long-term sustainable advantage.

Know-How, tacit knowledge and human resources

Here the mini case on Saatchi & Saatchi is a great read. In general, the fact that a lot of knowledge is mostly embodied and internalised inside human beings means that acquireing an investment bank, financial services company or software house carries a high risk because the humans that carry a lot of the knowledge that makes the company work might leave. Accenture tries to internalise as much of the knowledge inside the company in routines and recipies as possible to be able to leverage economies of scope and to reduce the risk of loosing that knowledge. Consider team play in tennis here though. You can’t just copy a good team or take one member and put her into another team.

Resources and capabilities

By the 2nd half of the 20th century, resources have gone global and become more mobile, like technology, information, brands and financial instruments. These days, all that is needed is sufficient access to the resource. This could be developers for a european company sitting far away in India or doctors diagnosing patients hundres of miles away.

Framework for analysis of resources and capabilities by Grant (more here)

Markets and hierarchies

Oliver Williamson (1975) argued that to choose markets (outsourcing an activity to them) or the hierarchy (doing it yourself), you need to look at the total transaction costs of what you are doing. EDS is growing tremendously by taking up facilities management and often take up the staff of the company they sign a contract with under their wings too. This is central to thinking about your own capabilities, those that you need to secure your customers and those that you can more efficiently outsource. But, you need to think about what outsourcing a function might do to your company in the future as it might drain crucial knowledge and expertise.

Economies of scope are also important here, which are derived from using a resource more than once, with little or even no extra costs. You could also call this synergy. You also need to build up routines to learn and transfer capabilities long-term. The resource based view suggests that to find a competitive advantage you need to look at the processes of capability building, capability management and capability retention. These processes as such can be a competitive advantage. Some, who have been in place for a long time might even need to be broken up to enable new processes to form (see the Novotel case here).

Also important is to not outsource things that might build tacit knowledge needed for later innovative capabilities.

Innovation

An important capability is that to innovate. This gradually moved from the entrepreneurial skills to bigger R&D labs, especially where critical mass is needed. The problem here is that R&D needs to be closely linked to the factory, market and sales, as to develop products or services that the company can build. At the same time you need to watch out that your R&D lab does not become something that only researches per order but can freely experiment and find truely new products. (I suggest reading The Innovators Dilemma by …… here.) Remember that R&D is not only about innovating from within but also about understanding innovations coming from the outside. Everything arround you changes and so does your strategy and so need your capabilities.

The boundaries

You do not need to own all your resources though. Your capabilities should stay internal though. The question then becomes where an organisation should draw the boundaries. These boundaries are often changing based on mergers, divestitures and other things.

Quasi-integration is now more popular because it allows (through contract or agreement) the same control without the need for one single company. An example is cited with Marks and Spencer and its suppliers. They almost form a virtual organisation, being dependant on each others activities. This collaboration among firms common to the virtual firm concept is getting more widely used, partly due to the increasing complexity to have all resources and even capabilities in house.

You also need to build organistaion capability to learn and transfer knowledge. This includes tranfering the long-term routines that hold organisation’s forman, informal, codified and tacit knowledge.

To understand the boundaries a value chain is essential.