Resources, capabilities and core competencies are the foundation of competitive advantage. Resources are bundled to create organizational capabilities. In turn, capabilities are the source of a firm’s core competencies, which are the basis of competitive advantages. Here, we define and provide examples of these building blocks of competitive advantage.
Broad in scope, resources cover a spectrum of individual, social and organizational phenomena. Typically, resources alone do not yield a competitive advantage. In fact, a competitive advantage is generally based on the unique bundling of several resources. For example, www.Ocado.com combined service and distribution resources to develop its competitive advantages. The firm started as an online retailer, directly shipping orders from the product range of Waitrose, a leading UK retailer to customers. It quickly grew and established a distribution network through which it could deliver groceries to customers’ doorsteps. With its 2010 initial public offer (IPO) to employees, managers and customers who spent more than £300, Ocado has opened retail furthermore to the internet. Lacking Ocado’s combination of resources, traditional bricks-and-mortar retailers initially found it difficult to establish an effective online presence.
These difficulties led some of them to experimenting and to developing partnerships with Ocado. Through these arrangements, Ocado now handles the online presence and shipping of goods for several firms, including Waitrose – which can now focus on sales in its stores. These types of arrangements are useful to the bricks-and-mortar companies because they have little experience in shipping large amounts of diverse merchandise directly to individuals. Some of a firm’s resources (defined as inputs to the firm’s production process) are tangible, while others are intangible. Tangible resources are assets that can be observed and quantified. Production equipment, manufacturing facilities, distribution centres and formal reporting structures are examples of tangible resources. Intangible resources are assets that are rooted deeply in the firm’s history and have accumulated over time. Because they are embedded in unique patterns of routines, intangible resources are relatively difficult for competitors to analyse and imitate.
Knowledge, trust between managers and employees, managerial capabilities, organizational routines (the unique ways people work together), scientific capabilities, the capacity for innovation, brand name, and the firm’s reputation for its goods or services and how it interacts with people (such as employees, customers, and suppliers) are intangible resources. The four types of tangible resources are financial, organizational, physical and technological (see Table1). The three types of intangible resources are human, innovation and reputational (see Table 2). Tangible resources As tangible resources, a firm’s borrowing capacity and the status of its physical facilities are visible.
The value of many tangible resources can be established through financial statements; but these statements do not account for the value of all the firm’s assets, because they disregard some intangible resources. The value of tangible resources is also constrained because they are difficult to leverage–it is difficult to derive additional business or value from a tangible resource. For example, an airplane is a tangible resource, but “You can’t use the same airplane on five different routes at the same time. You can’t put the same crew on five different routes at the same time. And the same goes for the financial investment you’ve made in the airplane.”
Although production assets are tangible, many of the processes necessary to use these assets are intangible. Thus, the learning and potential proprietary processes associated with a tangible resource, such as manufacturing facilities, can have unique intangible attributes, e.g., quality control processes, unique manufacturing processes and technology that develop over time and create competitive advantage. Intangible resources Compared to tangible resources, intangible resources are a superior source of core competencies. In fact, in the global economy, “the success of a corporation lies more in its intellectual and systems capabilities than in its physical assets. Moreover, the capacity to manage human intellect – and to convert it into useful products and services – is fast becoming the critical executive skill of the age.”
Because intangible resources are less visible and more difficult for competitors to understand, purchase, imitate or substitute for, firms prefer to rely on them rather than on tangible resources as the foundation for their capabilities and core competencies. In fact, the less a resource can be observed (i.e., intangible), the more sustainable will be the competitive advantage that is based on it. Another benefit of intangible resources is that, unlike most tangible resources, their use can be leveraged. For instance, sharing knowledge among employees does not diminish its value for any other person. To the contrary, two people sharing their individualized knowledge sets often can be leveraged to create additional knowledge that, although new to each of them, contributes to performance improvements for the firm. This is especially true when members of the top management team share knowledge with each other to make more effective decisions.
The new knowledge created is then often shared with managers and employees in each of the units managed by executives in the top management team. With intangible resources, the larger the network of users, the greater the benefit to each party. As shown in Table 2, the intangible resource of reputation is an important source of competitive advantage. Indeed, some argue that “a firm’s reputation is widely considered to be a valuable resource associated with sustained competitive advantage”. Earned through the firm’s actions as well as its words, a value-creating reputation is a product of years of superior marketplace competence as perceived by stakeholders.A reputation indicates the level of awareness a firm has been able to develop among stakeholders and the degree to which they hold the firm in high esteem.
A well-known and highly valued brand name is an example of reputation as a source of competitive advantage. A continuing commitment to innovation and aggressive advertising facilitate firms’ efforts to take advantage of the reputation associated with their brands. Because of the desirability of its products and its reputation, Hermes, the French fashion house’s brand name, for example, has such status that not only limited editions are very sought after but also the number of counterfeit products is large. Even established firms need to build their reputations in new markets. For example, Ford hired a well respected Indian actor, Suneil Shetty, to serve as the brand ambassador for the Ford Endeavour launched in India. The Endeavour had the highest sales of SUVs in 2008. Similarly, Studio Ghibli, the Japanese animation company that has produced films including Princess Mono-noke and Ponyo has successfully exploited blockbusters, especially after forming an alliance with Pixar and Walt Disney to distribute Ghibli products.
Capabilities exist when resources have been purposely integrated to achieve a specific task or set of tasks. These tasks range from human resource selection to product marketing and research and development activities. Critical to the building of competitive advantages, capabilities are often based on developing, carrying and exchanging information and knowledge through the firm’s human capital. Client-specific capabilities often develop from repeated interactions with clients and learning about their needs. As a result, capabilities often evolve and develop over time. The foundation of many capabilities lies in the unique skills and knowledge of a firm’s employees and, often, their functional expertise. Hence, the value of human capital in developing and using capabilities and, ultimately, core competencies cannot be overstated.
While global business leaders increasingly support the view that the knowledge possessed by human capital is among the most significant of an organization’s capabilities and may ultimately be at the root of all competitive advantages, firms must also be able to utilize the knowledge they have and transfer it among their business units. Given this reality, the firm’s challenge is to create an environment that allows people to integrate their individual knowledge with that held by others in the firm so that, collectively, the firm has significant organizational knowledge. As noted in the earlier Strategic Focus, GE has been effective in developing its human capital and in promoting the transfer of their knowledge throughout the company. Building important capabilities is critical to achieving high firm performance.
3. Core competencies
Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals. Core competencies distinguish a company competitively and reflect its personality. Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. As the capacity to take action, core competencies are the “crown jewels”: the activities the company performs especially well when compared with competitors, and through which the firm adds unique value to its goods or services over a long period of time. How many core competencies are required for the firm to have a sustained competitive advantage? Responses to this question vary. McKinsey & Co. recommends that its clients identify no more than three or four competencies around which their strategic actions can be framed. Supporting and nurturing more than four core competencies may prevent a firm from developing the focus it needs to fully exploit its competencies in the marketplace.
1. Explain the difference between tangible and intangible resources.
2. Which type of resources are most valued by information based industries and why might thios be so?
3. Why can some resources be lveraged but others not?
4. Define capabilities and discuss their development.
Undertake research on four corporations and contrast their resources, capabilities and core competences focussing on both strengths and weaknesses. Choose from Microsoft, Apple, Amazon, BP, The Walt Disney Company, McDonald’s, Pepsi Co, Tesco, Bang and Olufsen.
This is an extract from a Chapter in Strategic Management: Competiveness and Globalization by Volerda et al. To find out more about this book, to purchase it as a hardcopy or as an e-book or to buy eChapters please select Cengage Brain