Strategic view of performance
Strategic view of performance

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Strategic view of performance

3.2 Building capabilities and relationships

So, from the resource-based perspective, an important area of strategic choice concerns how to recognise and build relevant, inimitable, durable, and appropriable capabilities.

First, it is important that the building of capabilities does not occur in a vacuum. The resource-based view accepts the importance of understanding the near environment. For example, Collis and Montgomery (1995) describe how Masco Corporation invested heavily in building a strong capability in metalworking, as a basis for diversification into closely related industries. However, buyers were highly price-sensitive, suppliers were powerful and entry barriers were low in these industries. Consequently, Masco made low returns on their investment in building capability.

Second, capabilities that confer genuine competitive advantage often take a long time to build. They require organisations to show persistent intent over an extended period. Many organisations find it hard to take a sufficiently long-term view to build such capabilities.

Box 2 Marks and Spencer's capabilities in a changing environment

Marks and Spencer (a UK retail chain) has been a highly profitable organisation. Its profitability has been founded on a unique set of resources and capabilities that together have given it significant competitive advantage.

  • A base of properties in prime retail locations which help M&S achieve occupancy costs well below sector averages.

  • A brand reputation with a wide base of customers which has not required reinforcement or building through advertising or promotions.

  • Employee loyalty leading to lower than average turnover and retention of employee skills.

  • Close and effective management of supply chains leading to lower costs and higher quality.

  • Flat management structure combined with effective management systems.

(Source: Collis and Montgomery, 1995)

Despite these strengths, Marks and Spencer's performance declined at the end of the 1990s. It became increasingly apparent that these capabilities were no longer sufficient to maintain competitive advantage. In particular the reliance on own-brand goods, and on a brand reputation unsupported by advertising, were creating difficulties. Consumer tastes had changed, and the target market was placing increased value on named clothing brands. At the same time competitors were increasingly sourcing goods overseas while M&S had relied on a high proportion of UK suppliers, so driving up its relative cost base. It became clear it would have to develop new capabilities if it were to survive and prosper.

Activity 3

Consider the Marks and Spencer example just given. Categorise M&S's resources and capabilities in terms of John Kay's categories, leading to competitive advantage and later to their down turn.You can use Table 1 to help you think about these issues.

Contribution of organisational capabilities to competitive advantage

Organisational capabilities Leading to competitive advantage Contributing to down turn Information not available
Innovation
Architecture: Relationships within firm
Architecture: Relationships between firm and suppliers
Architecture: Relationships between firm and customers/ buyers
Reputation

Discussion

A base of properties in prime retail locations which help M&S achieve occupancy costs well below sector averages.

This property base can be seen as a resource that translates into a particular capability (the ability to present goods to the customer in a wide range of locations they want to shop, consistently and at low cost). In itself this does not translate into a competitive advantage – other retailers can purchase prime locations. However, over time the persistent effect of this widespread network of retail locations has been to help build reputation.

A brand reputation with a wide base of customers which has not required reinforcement or building through advertising or promotions.

Again, this is about reputation – although, as Kay points out, this reputation is at heart about the long-term relationships Marks and Spencer has built up with its customers (who are also an important referral market).

Employee loyalty leading to lower than average turnover and retention of employee skills.

This concerns the relationships M&S has built up over time with its employees. We might call this the human resource architecture.

Close and effective management of supply chains leading to lower costs and higher quality.

Again this concerns architecture: this time, the network of relationships with suppliers.

Flat management structure combined with effective management systems.

This final point again concerns architecture: the routines and systems for managing internal relationships.

The downturn in the fortunes of M&S rests on two main problems with the relevance of its traditional capabilities to a changing environment. First, it suffered a decay in reputation as M&S lost track of what was required to maintain its customer and reference market architecture. Second, the relevance of its supply chain architecture was lost in the face of competitive cost pressures.

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