Chapter 3 - Strategic Capabilities

Fall 2021 - ULS
Strategic Management
Chapter 3: Strategic Capability
Johnson, Whittington, Scholes, Angwin, and Regner. Exploring Strategy, 10 th Edition, Pearson
Fred David, 12th Edition, Pearson
Strategic Management Fall 2021 - ULS
Learning outcomes
• Identify strategic capabilities in terms of organizational
resources and competences and how these relate to
the strategies of organisations.
• Analyse how strategic capabilities might provide
sustainable competitive advantage on the basis of their
Value, Rarity, Inimitability and Organizational support
(VRIO).
• Diagnose strategic capability by means of VRIO
analysis, benchmarking, value chain analysis,
activity mapping and SWOT analysis.
• Consider how managers can develop strategic
capabilities for their organizations.
Strategic Capabilities, Key Issues and Definition
Strategic Capabilities: the key issues

i on
ni t
efi How do strategic
D What are strategic
capabilities contribute
capabilities? to competitive
advantage and superior
performance?
How to diagnose
strategic capabilities?
How to manage the
development of
strategic capabilities?
Important notes about key issues in strategic capabilities (1)
• All organizations are not

identical and usually have
different capabilities.
Therefore they are called
heterogeneous.
• It can be difficult for one

organization to copy the
capabilities of another.
Important notes about key issues in strategic capabilities (2)
Therefore, based on what preceded
1) Managers need to understand how their respective

organizations are different from their rivals in
order to achieve competitive advantage and
superior performance.
2) The competitive advantage and superior performance

of an organization are explained by the
distinctiveness (specific) of its capabilities.
What are Strategic

Capabilities About?
Strategic capabilities are the capabilities of an

organization that contribute to its long-term survival
due to a competitive advantage. (tangible)
However, to understand and to manage strategic
capabilities it is necessary to know what are they
and explain their components.
There are two components of strategic capabilities:
Resources
Competencies
Resources are the assets that organizations have or

can call upon. (what an organization can rely on)
A solid partner, a professional supplier, a well-known
distributor, a well equipped plant, etc…
Competences are the ways those assets are used or
deployed effectively. (What an organization does well)
What are Resources and

Competencies?
Resource-based strategy
The resource-based view (RBV) of strategy asserts that

the competitive advantage and the superior performance
of an organisation are explained by the distinctiveness of
its capabilities.
It is sometimes also called the ‘capabilities view’.

ave
n h
t i o W
i z a ha
g an t
or an
an or
at
More Examples of components of strategic ga capabilities
W h ni
za
t io
n
do
es
we
ll
Components of strategic capabilities (1)

But, what do we need more than

having resources and competencies?
We need to ameliorate our resources, improve our

competencies in order to keep our competitive
advantage stronger and stronger over time.
David TEECE Concept About Capabilities

David TEECE Concept About Capabilities (1)
David TEECE from the University of Berkeley has introduced

the concept of Dynamic & Strategic Capabilities, by which
he means that:
An organization's ability to renew and

recreate its strategic capabilities to meet
the needs of changing environments.
David TEECE Concept About Capabilities (2)

More specifically, David TEECE considers that:
The capabilities that are necessary for efficient

operations, like owning tangible assets, controlling costs,
maintaining quality, optimizing inventories, etc., are not
sufficient for sustaining superior performance.
Ordinary capabilities allow companies to be

successful by producing and selling a similar product or
service to similar customers over time, but are not likely
to provide for long-term survival and competitive
advantage in the future.
WHY IS THAT?
Because organizations are evolving in a turbulent /

changing environment which requires to go beyond
regular capabilities which are the organization’s
ability to perform a set of routine activities to
dynamic ones which call upon necessary
modifications to cope with new market situations.
It is the capacity of the organization to create,

extend or modify its resource base.
Components of Strategic Capabilities

Components of Strategic Capabilities
1
Redundant
Capabilities
2 3
Generic
Dynamic
Dynamic
Capabilities
Capabilities
1
Redundant capabilities (1)
• Capabilities, however effective in the past, can become

less relevant as industries and markets evolve and
change.
• Such ‘capabilities’ can become ‘rigidities’ that inhibit
change and become a weakness.
In such a situation what to do?

1
Redundant capabilities (2)
We need to change our mindset, improve our
capabilities and skills, be open to new ideas and
possibilities to better cope with market’s evolution and
environmental changes.
Rigid
mind
2
Dynamic capabilities
Dynamic capabilities are the means by which an

organisation has the ability to renew and recreate its
strategic capabilities to meet the needs of changing
environments.
Such capabilities are distinct from ordinary capabilities

that may be necessary to operate efficiently now but that
may not be sufficient to sustain superior performance in
the future.
3
Generic dynamic capabilities
Teece suggests the following three generic types of

dynamic capabilities:
Re-
Sensing Seizing
configuring
capabilities capabilities
capabilities
3
Sensing implies that organizations must

constantly scan, search and explore
opportunities across various markets and
technologies.
Sensing Research and development and investigating
capabilities customer needs are typical sensing activities.
For example, companies in the PC operating
systems industry, like Microsoft, have clearly
sensed the opportunities in and threats from
tablets and smart phones.
3
Once an opportunity is sensed it must be

seized and addressed through new products
or services, processes, activities etc.
Seizing
capabilities Microsoft, for example, has started to seize
opportunities by developing its own tablet
device and software and by acquiring the
mobile company Nokia.
3
To seize an opportunity may require renewal
and reconfiguration of organizational
capabilities and investments in
technologies, manufacturing, markets, etc.
Re-
configuring For example, Microsoft’s inroad into tablets
capabilities and smart phones requires major changes in
its current strategic capabilities. The
company must discard some of its old
capabilities, acquire and build new ones and
recombine them.
David TEECE Concept Conclusion
If capabilities are to be effective over time they need

to change; they cannot be static.
Dynamic capabilities are directed towards that
strategic change.
They are dynamic in the sense that they can create,
extend or modify an organization's existing operational
capabilities.
Threshold and Distinctive Capabilities

Threshold and Distinctive Capabilities (1)
What do we mean by threshold capabilities?
Capabilities an organization needs to have at the beginning

to be able to operate and to sustain.
What capabilities
are we talking about?
Resources + Competencies
Threshold and distinctive capabilities (2)
• Threshold capabilities are those needed for an

organisation to meet the necessary requirements to
compete in a given market and achieve parity with
competitors in that market – ‘qualifiers’.
• Distinctive capabilities are those that are required to
achieve competitive advantage. Distinctive or unique
capabilities that are of value to customers and which
competitors find difficult to imitate – ‘winners’.
Threshold and distinctive capabilities (3)

Identifying Threshold Requirements
Identifying threshold requirements is, also important for businesses.
Example:
Threshold resources required to meet minimum customer need.
The increasing demands by retailers to their suppliers to possess a
quite sophisticated IT infrastructure simply to stand a chance of
meeting retailer requirements.
Threshold competences required to deploy resources so as to meet
customers’ requirements and support particular strategies.
Retailers do not simply expect suppliers to have the required IT
infrastructure, but to be able to use it effectively so as to guarantee the
required level of service.
Core competences
Core competences are the linked set of skills, activities

and resources that, together:
• deliver customer value
• differentiate a business from its competitors
• potentially, can be extended and developed as markets
change or new opportunities arise.
G. Hamel and C.K. Prahalad, ‘The core competence of the corporation’, Harvard Business Review, vol. 68, no. 3
(1990), pp. 79–91.
Need of Distinctive Competencies
Strategies designed to improve on

a firm’s weaknesses and turn to
strengths that cannot be
matched or imitated
END OF PART 1
Strategic Capabilities and Competitive Advantage

Strategic Capabilities and Competitive Advantage (1)

Key Criteria
The four key criteria by which capabilities can be

assessed in terms of providing a basis for achieving
sustainable competitive advantage are:
•Value
•Rarity
VRIO
•Inimitability
•Organisational support
VRIO
1
Organization’s Strategic Capabilities
Reality or myth?
Do capabilities
exist within the Can competitors
organization? acquire capabilities or
imitate them easily?
Is the organization
the only one to Can the organization
possess these manage capabilities
capabilities? well?
VRIO
2
V – Value of strategic capabilities
When are strategic capabilities

providing value to customers ?

VRIO
2
V – Value of strategic capabilities
When the organization

Takes advantage of opportunities and neutralise threats.
Insure tangible value to customers
Provide at a cost that still allows to make an acceptable
return.
VRIO
R – Rarity 3
• Rare capabilities are those possessed uniquely by one
organisation or only by a few others. (E.g. a company
may have patented products, have supremely talented
people or a powerful brand.)
BUT
Rarity could be temporary.
Why is that?
VRIO
3
R – Rarity
Rarity could be temporary because

Patents expire.
Key individuals can leave the organization.
Brands can become obsolete.
Brands can be de-valuated by adverse publicity
etc…
VRIO
4
I – Inimitability (1)
Inimitable capabilities are those that competitors find difficult and costly to
imitate, or to substitute.
• Competitive advantage can be built on unique resource (a key individual or
IT system) but this may not always be sustainable (key people leave or others
acquire the same systems).
• Sustainable advantage is more often found in competences (the way
resources are managed, developed and deployed, and the way competences
are linked together and integrated)
I – Inimitability (2) VRIO

4
Criteria for the inimitability of strategic capabilities

4
Complexity There may be linked
External Internal activities and processes
Interconnectedness Linkages that, together, deliver
Organizations can make it customer value.
difficult for others to imitate or Mkt. &
obtain their bases of competitive Customer
Sales
Production
advantage by developing activities Service
together with customers or Suppliers
partners such that they become Distributors
dependent on them. Interaction

4
Causal ambiguity Characteristic
Linkage
Ambiguity
Ambiguity
Where the significance of the Where competitors
characteristics of buying itself is difficult cannot discern which
to discern, perhaps because it is based on activities and processes
tacit knowledge of the buyer. are dependent on which
For example, the know-how of the buyers others to form linkages
in a successful fashion retailer may be that create distinctive
evident in the sales achieved, but difficult competences.
to understand for the competitor.

4
Culture & history competence
It involves complex social interactions and

interpersonal relations within an organization. It
can be difficult and costly for competitors to
imitate systematically and manage.
For example, competences can become embedded
in an organization's culture.
VRIO
5
O – Organisational support
The organisation must be suitably organised to support
the valuable, rare and inimitable capabilities that it has.
This includes appropriate processes and systems.
VRIO
Conclusion
The VRIO framework

Source: Adapted with the permission of J.B. Barney and W.S. Hesterly, Strategic Management and Competitive Advantage, Pearson, 2012.
Are VRIO key criteria a

myth or a reality?
Are VRIO key criteria hard to apply?

The Concept of Benchmarking

The Concept of Benchmarking

Benchmarking is a way of understanding how an
organisation compares its performances with others.
Two approaches to benchmarking:
• Industry/sector • Best-in-class
benchmarking benchmarking –
Comparing Comparing an
performance against organisation’s
other organisations performance or
performance in the capabilities against
same industry/sector, ‘best-in-class’
with regard to a set of performance even in a
performance very different industry.
indicators
The Value Chain

The Value Chain Concept

The value chain describes the categories of activities
within an organization together in the intent to
create a quality product or service.
Most organizations are part of a wider value system,
the set of inter-organizational links and relationships
and support activities that are necessary to create a
product or service.
A value chain helps to improve the effectiveness or
efficiency of primary activities and create a
competitive advantage.
Effectiveness vs Efficiency
What is the difference between each and

how can effectiveness and efficiency impact
the organization’s performance and image?
Effectiveness vs Efficiency
Effectiveness is about doing Public transportation can be very
the right task, (not any task) effective since it helps moving people
completing activities and across long distances to specific places
achieving goals. and reduce car pollution. However,
It refers to how useful busses might not transport people
something is for the efficiently due to many delays or
organization. because the excess use of fuel due to
initial wrong routing.
Efficiency is about doing Busses can circulate according to a

things in an optimal way. very tide timetable trying to stay away
from crowded places, so that they can
avoid delays and complaints from
. unsatisfied customers.
The Value Chain Set of Activities (1)
Primary activities
are directly concerned
with the creation or
Each of these groups
delivery of a product
of primary activities
or service. For
is linked to support
example, for a
manufacturing activities which
business. help to improve the
inter-organizational links and effectiveness or
efficiency of primary
relationships activities
What are primary activities and support

activities about in the value chain?

5 Primary Activities
● Inbound logistics are activities concerned with receiving, storing and
distributing inputs to the product or service including materials handling, stock
control, transport, etc...
● Operations transform these inputs into the final product or service: machining,
packaging, assembly, testing, etc.
● Outbound logistics collect, store and distribute the product or service to
customers; for example, warehousing, materials handling, distribution, etc.
● Marketing and sales provide the means whereby consumers or users are
made aware of the product or service and are able to purchase it. This includes
sales administration, advertising and selling.
● Service includes those activities that enhance or maintain the value of a
product or service, such as installation, repair, training and spares.
4 Support Activities
● Procurement . Processes that occur in many parts of the organization for
acquiring the various resource inputs to the primary activities. These can be
vitally important in achieving scale advantages. So, for example, many large
consumer goods companies with multiple businesses procure advertising
centrally.
● Technology development . All value activities have a ‘technology’, even if it
is just know-how. Technologies may be concerned directly with a product (e.g.
R&D, product design) or with processes (e.g. process development) or with a
particular resource (e.g. raw materials improvements).
● Human resource management . This transcends all primary activities and
is concerned with recruiting, managing, training, developing and rewarding
people within the organization.
● Infrastructure . The formal systems of planning, finance, QC, MIS, etc…
Value Chain & Strategic Capabilities (1)
Description
of activities
The value chain can be addressed to
understand the strategic position of
an organization and analyze strategic
Analyzing the
competitive
capabilities.
posture
HOW?
Analyzing the cost &
value
?
OW
H
Value Chain & Strategic Capabilities (2)
it can help managers understand if there is a

Description cluster of activities providing benefit or issues
of activities to customers. (Logistics, after-sales, etc…
Analyzing
the competitive In analyzing the competitive position of the
posture organization using the VRIO criteria
Analyzing the
Analyze the cost versus the value of
cost & value each activity
Questions to Ask About Value and VRIO

V Which value -creating activities are especially significant for an
organization in meeting customer needs and could they be usefully
developed further?
R To what extent and how does an organization have bases of value
creation that are rare / unique ? Or conversely are all elements of
its value chain common to its competitors?
I What aspects of value creation are difficult for others to imitate?

Perhaps because they are embedded (part of) in the activity
systems of the organization
O What parts of the value chain support and facilitate value

creation activities in other sections of the value chain?
The Cost Parameter – Internally & Externally

The Cost Parameter – Internally & Externally (1)
A-Relative importance of activity costs internally

• Which activities are most significant in terms of the
costs of operations?
• Does the significance of costs align with the

significance of activities?
• Which activities add most value to the final product

or service (and in turn to the customer) and which
do not?

B-Relative importance of activity costs externally
How does the value and the cost of a set of activities

compare with the similar activities of competitors?
Case of BP & Shell (global oil business)

BP and Shell are different in terms of the significance of their
value chain activities and competitive advantage.
BP has historically outperformed Shell in terms of
exploration, but the reverse is the case with regard to refining
and marketing.
Can costs be reduced?
HOW?

Can costs be reduced?
It should be possible to ask some important questions
about the cost structure of the organization.
• Is the balance of cost in line with the strategic
significance of the elements of the value chain?
• Can costs be reduced in some areas without affecting
the value created for customers?
• Can some activities be outsourced?
• Can cost savings be made by increasing economies of
scale?
SWOT ANALYSIS
SWOT ANALYSIS (1)
Definition
SWOT provides a general summary of the Strengths and Weaknesses
explored in an analysis of strategic capabilities and the Opportunities
and Threats explored in an analysis of the environment.
This analysis can also be useful as a basis for generating strategic

options and assess future courses of action.
The aim is to identify the extent to which strengths and

weaknesses are relevant to, or capable of dealing with the
changes taking place in the business environment.
SWOT ANALYSIS (2)
INTERNAL ANALYSIS = STRENGTHS & WEAKNESSES
EXTERNAL ANALYSIS = OPPORTUNITIES & THREATS
SWOT can be used to generate strategic options – using a

TOWS matrix.
SWOT ANALYSIS (3)
The TOWS matrix

Developing strategic capabilities

----------Internal & External----------
Developing strategic capabilities (1)
Internal
• Building and recombining capabilities – this requires
creative entrepreneurial skills (e.g. a culture that promotes
capability innovation)
• Leveraging capabilities – identifying capabilities in one
part of the organisation and transferring them to other
parts (sharing best practice)
• Stretching capabilities – building new products or
services out of existing capabilities.
Developing strategic capabilities (2)

External
• Adding capabilities through mergers, acquisitions or
alliances
• Ceasing activities – non-core activities can be stopped,
outsourced or reduced in cost
• Monitor outputs and benefits – to better understand
sources of consumer benefit and enhance anything that
contributes to this
• Awareness development – recognising what enhances
strategy. Training, development and organisation learning
are important.
End of Chapter

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Fall 2021 - ULS

Strategic Capabilities: the key issues

Important notes about key issues in strategic capabilities (1)

• All organizations are not

• It can be difficult for one

Important notes about key issues in strategic capabilities (2)

Therefore, based on what preceded

1) Managers need to understand how their respective

2) The competitive advantage and superior performance

What are Strategic

Strategic capabilities are the capabilities of an

There are two components of strategic capabilities:

Resources are the assets that organizations have or

What are Resources and

The resource-based view (RBV) of strategy asserts that

It is sometimes also called the ‘capabilities view’.

Components of strategic capabilities (1)

But, what do we need more than

We need to ameliorate our resources, improve our

David TEECE Concept About Capabilities

David TEECE Concept About Capabilities (1)

David TEECE from the University of Berkeley has introduced

An organization's ability to renew and

David TEECE Concept About Capabilities (2)

The capabilities that are necessary for efficient

Ordinary capabilities allow companies to be

Because organizations are evolving in a turbulent /

It is the capacity of the organization to create,

Components of Strategic Capabilities

Components of Strategic Capabilities

• Capabilities, however effective in the past, can become

In such a situation what to do?

Dynamic capabilities are the means by which an

Such capabilities are distinct from ordinary capabilities

Teece suggests the following three generic types of

Sensing implies that organizations must

Once an opportunity is sensed it must be

David TEECE Concept Conclusion

If capabilities are to be effective over time they need

Threshold and Distinctive Capabilities

Threshold and Distinctive Capabilities (1)

What do we mean by threshold capabilities?

Capabilities an organization needs to have at the beginning

Threshold and distinctive capabilities (2)

• Threshold capabilities are those needed for an

Threshold and distinctive capabilities (3)

Core competences are the linked set of skills, activities

Need of Distinctive Competencies

Strategies designed to improve on

Strategic Capabilities and Competitive Advantage

Strategic Capabilities and Competitive Advantage (1)

The four key criteria by which capabilities can be

Strategic Capabilities and Competitive Advantage (2)

Organization’s Strategic Capabilities

Strategic Capabilities and Competitive Advantage (3)

When are strategic capabilities

Strategic Capabilities and Competitive Advantage (3)