The Strategic Position

3: Strategic Capability
 Learning Outcomes (1)

Distinguish elements of strategic

capability in organizations.

Recognize the role of continual

improvement in cost efficiency as a
strategic capability

Analyze how strategic capabilities might

provide sustainable competitive
advantage.
Exploring Corporate Strategy 8e, © Pearson Education 2008 3-2
 Learning Outcomes (2)

 Diagnose strategic capability by means of

value chain analysis, activity mapping,
benchmarking, and SWOT analysis

 Consider how managers can develop strategic

capabilities of organizations.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-3

 Three key concepts

 Organizations are not identical, but have

different capabilities;
 It can be difficult for one organization to obtain
or copy the capabilities of another.
 If an organization is to achieve competitive
advantage, it will do so on the basis of
capabilities that its rivals do not have or have
difficulty in obtaining.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-4

 Core Concepts in
Strategic Capability

Foundations Cost efficiency

Sustainability Development

Analysis

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 What is Strategic Capability?

Strategic capability refers to the

resources and competences of an
organisation needed for it to survive and
prosper.

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 Foundations of Strategic Capability

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 Strategic Capabilities and
Competitive Advantage

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 What are Resources?

Tangible resources are physical assets

of an organisation such as plant, and
finance.

Intangible resources are non-physical

assets such as information, reputation,
and knowledge.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-9

 Resource Categories

Physical Financial
resources resources

Human Intellectual
resources capital

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 What are Competences ?

Competences are the skills and

abilities by which resources are
deployed effectively through an
organization's activities and processes.

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 What are threshold capabilities?

Threshold capabilities are those

capabilities needed for an organization
to meet the necessary requirements to
compete in a given market

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 What are the threshold resources?

The resources needed to meet

customers’ minimum requirements
and therefore to continue to exist

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 What are threshold competences?

Activities and processes needed to

meet customers’ minimum
requirements and therefore to continue
to exist

Exploring Corporate Strategy 8e, © Pearson Education 2008

 Identifying and managing threshold capabilities
raises at least two significant challenges:

Threshold levels of capability will

change as critical success factors change
or through the activities of competitors
and new entrants.

Trade-offs may need to be made to

achieve the threshold capability required
for different sorts of customers.
Exploring Corporate Strategy 8e, © Pearson Education 2008 3-15
 What are
Core Competences?

Core competences are the skills and

abilities by which resources are deployed
through an organisation’s activities and
processes such as to achieve competitive
advantage in ways that others cannot
imitate or obtain.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-16

 What are unique reseources?

Unique resources are those resources

that critically underpin competitive
advantage and that others cannot
easily imitate or obtain

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-17

 What are core competences?

Core competences are the skills and

abilities by which resources are
deployed through an organization's
activities and processes such as to
achieve competitive advantage in
ways that others cannot imitate or
obtain

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-18

 The summary argument (1)

To survive and prosper an organization

needs to address the challenges of the
environment that it faces.

It must be capable of performing in terms

of the critical success factors that arise
from demands and needs of its customers.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-19

 The summary argument (2)

The strategic capability to do so is

dependent on the resources and the
competences it has.

These must reach a threshold level in

order for the organization to survive. The
further challenge is to achieve
competitive advantage.
Exploring Corporate Strategy 8e, © Pearson Education 2008 3-20
 The summary argument (3)

This requires it to have strategic

capabilities that its competitors find
difficult to imitate or obtain.

These could be unique resources but are

more likely to be the core competences.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-21

 Cost Efficiency as Strategic
Capability
The management of the cost base of an
organization could also be a basis for
achieving competitive advantage.

Customers can benefit from cost

efficiencies in terms of lower prices or
more product features for the same price.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-22

 Cost Efficiency as Strategic
Capability
For many organizations the management
of costs is becoming a threshold strategic
capability for two reasons:

 Customers do not value product features

at any price.
 Competitive rivalry.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-23

 Sources of Cost Efficiency

Economies
Experience
of scale

Cost
efficiency

Supply Product
costs design

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 The Experience Curve

Competences in activities develop over

time based on experience, resulting in
cost efficiencies
Growth may not be optional
Unit costs should decline year on year
First mover advantage is important

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-25

 Exhibit 3.4 The Experience Curve

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 Capabilities for achieving and sustaining
competitive advantage

Value of strategic capabilities.

Rarity of strategic capabilities
Inimitable strategic capabilities
Non-substitutability of strategic
capabilities

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 Value of strategic capabilities

Having distinctive capabilities is not, of

itself, a basis of competitive advantage.
 The capabilities should be of value to
customers.
Managers should consider carefully
which of their organisation’s activities
are especially important in providing
such value, and which are less valued.
Exploring Corporate Strategy 8e, © Pearson Education 2008 3-28
 Rarity of Strategic Capabilities

Ease of transferability

Sustainability

Core rigidities

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 to achieve competitive advantage, the core
competences must fulfill the following criteria

They must relate to an activity or process

that underpins the value in the
product/service features
They must lead to levels of performance
that are significantly better than
competitors
They must be inimitable.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-30

 Criteria for Inimitability
Complexity Culture and
• Internal linkages History
• External linkages • Taken for granted
• Path dependency
Robustness
of strategic
capability

Causal
Ambiguity

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 Non-substitutability of strategic
capabilities

Product or service substitution.

Competence substitution.

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 What are Dynamic Capabilities?

Dynamic capabilities are an

organisation’s abilities to renew and
recreate its strategic capabilities to
meet the needs of a changing
environment.

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 Diagnosing Strategic Capability

Value chain

Benchmarking SWOT analysis

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 What is a Value Chain?

A value chain describes the

categories of activities within and
around an organisation, which
together create a product or
service.

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-35

 Exhibit 3.6 The Value Chain

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 Benchmarking

Benchmarking a way of
understanding organization's strategic
capability, in terms of internal
processes, and compare with other
organizations.

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 Approaches to Benchmarking

Historical benchmarking
Industry/sector benchmarking
Best-in-class benchmarking

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 SWOT

SWOT summarizes the key issues from

the business environment, and the strategic
capability of an organization, that are most
likely to impact on strategy development

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 SWOT Analysis

Strengths Weaknesses

Opportunities Threats

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Exploring Corporate Strategy 8e, © Pearson Education 2008 3-41
 Developing
Strategic Capabilities

Exploit
Add and change

Cease
Extend

Develop
Stretch externally

Exploring Corporate Strategy 8e, © Pearson Education 2008 3-42