CHAPTER SEVEN – CREATING VALUABLE CAPABILITIES

Learning outcomes for this chapter:

1. Explain why strategic resources and capabilities are important in strategic management.
2. Describe strategic resources and capabilities.
3. Relate the resource-based viewed to the role of resources and capabilities in strategizing.
4. Identify strategic resources and capabilities of the organisation.
5. Explain how strategic resources and capabilities influence the strategy of the organisation.
6. Explain how strategic capabilities are created.
7. Explain what internal assessment is and its importance.
8. Critically evaluate the strategy of an organisation from a resource-based perspective.

 Strategy is the link between an organisation and its environment (OT’s need to be matched
with SW’s)
 Resources and capabilities need to be matched according to the SWOT analyses of an
organisation
 Resources and capabilities are regarded as the primary source of an organisations
competitive advantage and thus the basis of strategy development
 Resources and capabilities also serve as the basis for how an organisation differentiates itself

Resources are regarded as the productive assets owned by an organisation and can be grouped
into 5 categories:

1. Financial capital
2. Physical capital (equipment, location)
3. Human capital
4. Organisational capital (reporting structure, management)
5. Technological capital

Tangible resources – physical, observable and quantifiable assets such as equipment, money, plants,
technology, patents, etc.

Intangible resources – include knowledge, intellectual capital, structural capital, customer capital,
innovation capital, etc. An organisations reputation or brand are examples of intangible resources.
It is more difficult for competitors to copy intangible resources than tangible resources. There are 3
categories of intangible resources; human resources (trust and managerial resources), innovation
resources (scientific capabilities and capacity to innovate) and reputational resources (brand,
reputation, perceptions of product quality and reliability).

Capabilities are an organisations specific cluster of activities developed through complex

interactions between tangible and intangible resources over time that reflect what an organisation
excels at in comparison to its competitors. They are high level routines that result in significant
output. Capabilities are valuable across products, across markets, they are tacit and are embedded
in routine. Capabilities, unlike resources, increase with use and become more valuable, eg: consider
Nike as a brand name.

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 A distinction should be made between capabilities and dynamic capabilities.

Dynamic capabilities are those capabilities that allow organisations learn and adapt to
environmental changes. Absorptive capacity (ability to acquire, assimilate and use external info) is
an example of a dynamic capability. Some organisations are better at adapting to environmental
changes than others, consider Kodak for example.

What is a CORE COMPETENCY?

 Some authors say competencies and capabilities are the same thing but technically
capabilities feed into an organisations core competency
 Core competencies can also be referred to as distinctive capabilities
 They are those competencies that distinguish one organisation from another in a unique
way, normally based on a competitive advantage, strategy and/or performance
 Tangible and intangible resources combined with capabilities will lead to a core competency
 A core competency will then take the form of a strategy which will lead to a competitive
advantage, which in turn leads to value creation for customers and profitability

Appraising the value of resources and capabilities:

1. Value – organisations ability to transform a resource into something of value for a customer
(at a lower cost of course)
2. Rarity – valuable resources and capabilities are not common and competitors do not usually
have them
3. Inimitability – they are also difficult to copy (lack of understanding, unique historical
conditions or social complexities create the effectiveness such as trust, teamwork, etc)
4. Organisation – the way it is structured and its systems are suitable for such a competitive
advantage

THE RESOURCE BASED VIEW (RBV)

The RBV is a model for analysing the strengths and weaknesses of an organisation in terms of its
resources and linking these to opportunities in the external environment.

An internal assessment of the organisation generally starts with the following;

 The strategic direction (vision, mission, purpose and values)

 Key internal stakeholders (eg: managers)
 The owners of the organisation
 Operational issues such as sales, assets and location
 Type and level of employees and culture of the organisation

It can further be noted that resources and capabilities are determined by the value chain activities of
the organisation such as; supply chain, finances, R & D, HR, marketing and intangible resources
(brands, reputation, etc).

The RBV does have a few limitation such as; it has not been tested and proven empirically, it does
not address profitability or how to create new or further competitive advantages, lacks future
orientation and ability to differentiate between levels of value of resources.

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If an organisation identifies its capabilities and core competencies, it will be able to:

a) Determine how its value chain adds to its performance

b) Determine what forms the basis of its competitive advantage
c) Determine how good its financial performance is relative to competitors
d) Determine how much customers and employees benefit from these capabilities and
competencies

IT IS PROPOSED THERE ARE 5 STAGES IN TERMS OF SETTING STRATEGY ACCORDING TO THE RBV:

1. Identify and classify an organisations resources

2. Identify the capabilities of an organisation based on these resources
3. Appraise the value of the resources and capabilities
4. Select an appropriate strategy (relative to the organisation and the external environment)
5. Identify any resource gaps that need to be filled

An organisations resources can be classified in one of two ways: either via functional areas
(marketing, operations, finance, distribution, etc) or via a value chain analysis (see figure below)

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HOW DOES AN ORGANISATION GAIN A COMPETITIVE ADVANTAGE?

 It can produce superior products or services and charge more for them
 It can produce products or services at a lower cost and charge less and sell more

WHAT IS A SUSTAINABLE COMPETITIVE ADVANTAGE?

SCA’s are achieved by catering to 4 dimensions: durability (does the CA last over an lengthened
period of time), imitability (it cannot be copied easily by competitors or they too would be doing it
and it would not be an SCA), transferability (similar to imitability, focus on SCA’s like organisational
culture which cannot be transferred easily) and replicability (refers to the ability to use the SCA in
other settings, maybe other markets or countries)