In an earlier post we considered the importance of a company’s resources to its strategy, but it’s worth noting that resources are not productive on their own. A surgeon, for example, cannot perform to the best of their ability without an anesthetist, nurses, instruments and expensive equipment. For resources to perform a task, they must work together to form organisational capabilities.
Organisational capability (or competence) is a firm’s capacity to deploy resources for a desired end result - our interest as strategists is that these organisational capabilities can provide a basis for competitive advantage. A firm’s core capabilities have been described as those that:
- make a disproportionate contribution to ultimate customer value, or to the efficiency with which that value is delivered, and
- provide a basis for entering new markets.
In order to identify a company’s core competencies, it is helpful to first consider the full range of organisational capabilities by using both a functional analysis and a value chain analysis to classify and disaggregate its activities.
A functional analysis identifies capabilities in relation to the functional areas of the firm, for example:
- Corporate functions
- Financial control
- Management development
- Strategic innovation
- Management information
- Management information systems linked to decision-making
- Research and development
- Product development
- Continuous improvements
- Flexibility and speed of response
- Brand management
- Responsiveness to market trends
- Sales and distribution
- Speed of distribution
- Customer service
A value chain analysis separates the activities of a company into a sequential chain, perhaps distinguished (as suggested by leading strategy author Michael E. Porter) into primary activities (those involved with the transformation of inputs and interface with the customer, for example inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (such as infrastructure, HR management, technology development, procurement etc.)
As discussed in our post of analysing resources, drawing up an inventory of a company’s resources is fairly straightforward. Capabilities pose greater problems – they are much more elusive. Apple’s distinctive competency is in the design of aesthetically-pleasing products with a superior user interface, but where within Apple is this capability located?
To understand capabilities it is important to note that they require the efforts of various individuals to be integrated with each other and with other resources such as equipment, technology and so on. This often occurs through a sequence of coordinated actions referred to as an organisational process, and can be mapped using a flowchart.
A key feature of most processes is that they are routine – and becoming routine is an essential step in translating operating practices etc. into capabilities. Only by becoming routine do processes become efficient and reliable.