3 Resource-based approach to strategy
3.1 Understanding organisational capabilities
Corporate success … is not the realisation of visions, aspirations, and missions – the product of wish-driven strategy. It is the result of a careful appreciation of the strengths of the firm and the economic environment it faces. But nor is success often the realisation of a carefully orchestrated corporate plan. The strategy of successful firms is adaptive and opportunistic. Yet in the hands of a successful company an adaptive and opportunistic strategy is also rational, analytic, and calculated. Adaptiveness does not mean waiting for something to turn up. Opportunism is only productive for a firm which knows which opportunities to seize and which to reject…
Corporate success derives from a competitive advantage which is based on distinct capabilities, which is most often derived from the unique character of a firm's relationships with its suppliers, customers, or employees, and which is precisely identified and applied to relevant markets.
In the previous section, we discussed how organisations fit into their competitive environment. In this section, we shift the emphasis from the external to the internal context of strategy: the resources that an organisation possesses, or needs to possess, as the basis for a robust strategy. We shift from the sector to the organisation, by looking at:
what are the organisation's capabilities, and its important networks of relationships
how relevant they are to the objectives of the organisation
what new capabilities and relationships may be needed over time
how these should be built or acquired.
Organisational capabilities are also often referred to as organisational competences, although strictly a capability refers to the potential and competence suggests an applied and well-practised capability.
By capabilities we mean an organisation's capacity to engage in a range of productive activities. All organisations possess unique bundles of resources, and it is how these resources are used that determines differences in performance between organisations. Resources are not productive in themselves – they need to be converted into capabilities by being managed and co-ordinated.
It is these resultant capabilities that, if hard to imitate, are the main source of competitive advantage. Strategy, from the resource perspective, is therefore about choosing among and committing to long-term paths of capability development. Figure 4 summarises the relationship between resources, capabilities and competitive advantage.
To confer competitive advantage on an organisation, capabilities need to have a number of properties:
Inimitability – They should be difficult for other organisations to imitate or acquire. For example, if key capabilities rest on the competence of particular individuals, other organisations may tempt them away with a better offer. By contrast the capability to generate effective learning within the organisation may be rather harder to copy or buy.
Durability – They should be durable. For example, many technological innovations are quickly superseded by new developments. An individual technological innovation may be too short-lived to confer real advantage. However, the capability to generate technological innovations may confer a more lasting advantage.
Relevance – They should be relevant. For example, in the banking sector, the size of the branch network used to be a key source of strategic advantage. Those banks that were able to deliver services geographically close to the customer were more likely to secure their business. As telephone and Internet banking become more prevalent, branch networks become less strategically relevant.
Appropriability – Not all profits generated by a resource flow to the owner of that resource. The division of the value generated is subject to negotiation between the organisation, its employees, customers, suppliers, distributors and partners. For example, a farming business that develops a capability to produce more cheaply may reap some benefits in increased profitability but, faced with powerful retail chains as its customers, it may come under pressure to pass on much of the cost savings to them. This will result partly in increased profits for the retail chains and partly in reduced prices for the consumer. Similarly, capabilities that rest on the skills of individual employees may result in the organisation having to pay a large proportion of the value generated to those employees in order to keep them from taking jobs elsewhere.
John Kay (an influential economist and writer on business strategy) identifies three main classes of organisational capability that meet the above criteria: innovation, architecture and reputation.
Innovation is an obvious source of distinctive capability, but it is much less often a sustainable or appropriable source because successful innovation quickly attracts imitation. Maintaining an advantage is most easily possible for those few innovations for which patent protection is effective. There are others where process secrecy or other characteristics make it difficult for other firms to follow. More often, turning an innovation into a competitive advantage requires the development of a whole range of supporting strategies.
What appears to be competitive advantage derived from innovation is frequently the return to a system of organisation capable of producing a series of innovations. This is an example of a second distinctive capability which I call architecture. Architecture is a system of relationships within the firm, or between the firm and its suppliers or customers, or both. Generally the system is a complex one and the content of the relationships implicit rather than explicit. The structure relies on continued mutual commitment to monitor and enforce its terms. A firm with distinctive architecture gains strength from the ability to transfer information which is specific to the firm, product or market within the organisation and to its customers and suppliers. It can also respond quickly and flexibly to changing circumstances. It has often been through their greater ability to develop such architecture that Japanese firms have established competitive advantage over their American rivals.
A third distinctive capability is reputation. Reputation is, in a sense, a type of architecture but it is so widespread, and so important, that it is best to treat it as a distinct source of competitive advantage. Easier to maintain than create, reputation meets the essential conditions for sustainability. Indeed an important element of the strategy of many successful firms has been the transformation of an initial distinctive capability based on innovation or architecture to a more enduring one derived from reputation.