What Are Capabilities?

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What are capabilities? What must firms do to create capabilities?

Capability is a capacity for a set of resources to integratively perform a stretch task. It represents the identity of the firm as perceived by both its employees and customers. It is the firm’s ability to perform better than competitors using a distinctive and difficult to replicate set of business attributes. The organization’s capability is comprised of three core assets – physical capital, including all tangible assets; technology capital, including product technology, R&D, information technology and process technology; and human capital, including employees and contract staff.  In order to create capabilities, there are three approaches that firms can use as a framework. First, capability as resources: this includes obtaining more finance, how and where to obtain more staff; capital works, procuring up-to-date equipment, training, compliance and management procedures. Second, capabilities as integration abilities: this includes partnerships/alliances, new HR practices to extend individuals, performance management, working in industry, changing organizational structures and management leadership. Third, capability as innovative learning processes: this includes innovation, taking risks, allowing mistakes, continuous improvement and renewal, learning culture, self-managed/cross-functional teams, knowledge generation at all levels and leadership at all levels. In general, it is integration that presents greatest challenge. For example, Johnson & Johnson obtains finance on their R&D and trains new professional experts for their new products invention; then they oversee the production and marketing of pharmaceutical and medical goods as well as consumer hygiene and beauty products; finally they receive the feedback from customers and make innovation and improvement to their products.
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