What is it?
Capabilities analysis helps clarify the major sets of activities, skills, and resources that drive value to customers.
When do we use it?
Capabilities analysis can be useful at the time of strategy formulation—when firms are assessing which strategic options are currently feasible—and may be included in a broader process of determining strengths, weaknesses, opportunities, and threats (SWOT). In addition, capabilities assessment can be used as an initial step in strategy implementation. Assuming an appropriate time horizon, firms may use the analysis to ascertain which capabilities need to be enhanced or developed in order to execute a chosen strategy. As part of this, capabilities analysis can be used to determine which capabilities are perhaps non-core and therefore candidates for outsourcing or external partnering.
Why do we use it?
Truly understanding a firm’s competitive strengths requires more than just an understanding of that organization’s tangible assets. Indeed, the key building blocks of competitive advantage are often more likely to involve the firm’s intangible assets. Such assets can be understood as the resources that organizations tap in order to create value, such as a tacit understanding of a complicated market segment, trusting relationships with key suppliers or customers, or an efficient set of back-end processes that produce faster or more responsive products. Yet an intangible source of competitive success is not always by definition a capability. For instance, the “innovativeness” of a key product offering may indeed generate customer revenue and even capture sales that might have otherwise gone to a competitor. But what if that particular product was a fluke? Or what happens when that product no longer seems so innovative to customers? If a firm truly intends to compete on innovation, a more lasting source of competitive advantage may be the firm’s capability around innovation, better understood as the intangible and tacit elements that enable the firm to innovate in the first place.
T H E ST R AT E G I ST ’ S TO O L K IT
Successful companies are often those that develop strategies that align such capabilities with their plans for external positioning in the marketplace. Brilliantly formulated strategies mean little if the firm has not developed the capacity to execute against them. In this sense, capabilities place an upper limit on which strategies are viable.
Capabilities analysis is based on the resource-based view (RBV) of strategy that emphasizes the internal skills and resources of the firm. The RBV asserts that resources and capabilities can be a source of competitive advantage when they are (a) valuable, (b) rare, (c) inimitable, and (d) nonsubstitutable. Valuable capabilities must be rare, otherwise they would hardly be a source of differentiation. Valuable, rare capabilities must be difficult to imitate, otherwise any competitive advantage would be exceedingly fleeting. And the most enviable capabilities are ones for which there is no readily identifiable substitute. More generally, we can think of capabilities analysis as helping firms identify the specific ways in which they create value for their stakeholders and differentiate themselves from competitors.
How do we use it?
Step 1. Determine the value chain for your business.
First, draw the value network for the business being analyzed. This involves laying out the cluster of activities that creates value for a product or service, working backward from the end point of the value proposition delivered to customers. These clusters, taken together, form the basic architecture of the chain. It is important to note that a firm rarely participates in every cluster; it will outsource, relying on suppliers or distributors. A typical value chain might look like the following: