The development of organizational capabilities can be better understood through an emergent and diligent learning process
One question immediately comes to mind: “Yes, but what capabilities should our corporation be developing? Are all capabilities equally relevant?”
The short answer is that capabilities need to be aligned to strategy. We should focus on developing those capabilities that are strategically relevant because they drive the corporation to reach its strategic goal of stakeholder (customer, employee, society, and shareholder) value creation.
This simple concept has evolved over the years …
In the early days of strategic management, SWOT analysis was the dominant strategic thinking framework. Factors that help/inhibit attaining corporate objectives where classified as Opportunities, Threats (environmental factors), Strengths and Weaknesses (internal factors). The concept of capability was there, albeit implicitly. Some strengths are indeed superior capabilities, whereas some weaknesses refer to capabilities’ deficiencies. Competitors´ capabilities are threats, and their deficient capabilities are opportunities. To gain focus in resource allocation, corporations started to ask themselves which their distinctive competences were, i.e. those capabilities that are both superior to competitors’ and have high impact on business results.
When Michael Porter proposed (1979) his famous 5 forces framework to analyze industry attractiveness, the focus of strategy skewed to the firm’s environment. Corporations rushed to analyze the industries (economic sectors) where they competed, gaining insight into the specific factors that affected industry profitability. The focus then was on selecting the right industry for diversification, and defending the industry structure and/or strategic group where the core business was located.
Corporations were conceived as a portfolio of businesses, each one of them competing in a specific industry through a specific type of strategic positioning. This approach to strategy was labeled as “structuralist” and the businesses were considered the corporation’s strategic positions. We can think of it as a general who views his (military) strategy as an effort to build a portfolio of fortified cities (positions), carefully chosen because of their inherent attractiveness (resource availability, ease to defend).
Some dissidents voiced their worries with this approach to strategy: “What about the capabilities? So, distinctive competences are not needed anymore?”
In 1985, Porter’s Competitive Advantage took a complementary approach to industry analysis. It focused on the firm’s level and connected the external and internal perspectives originally introduced by SWOT. Only this time, the concept was a lot more powerful. Firms were recommended to choose among generic strategies, resulting from selecting a type of competitive advantage (cost leadership, differentiation of customer value) and applying it to a competitive scope (focus vs. broad, in terms of geography, product and market segments). The concept of capability re-emerged in this strategic framework: competitive advantage needs to be built into the firm’s value chain through value and cost drivers, and these drivers are enabled by capabilities.
As the pendulum moved from one extreme (external perspective, industry analysis) towards the center (balanced internal-external perspective, competitive advantage), it gathered momentum, and at the early 90s the other extreme was prevalent. The resource-dependency school of thought viewed the corporation as a portfolio of capabilities. The focus was now on the superior resources and competences controlled by the corporation. Coming back to the military metaphor, the general has changed perspectives. Instead of selecting, gaining control, fortifying and defending attractive cities (positions), he now views his strategy as dynamically building and deploying superior capabilities in and out of key positions (products-markets-geographies-channels), more like a Mongol army. A new dynamic view of strategy was opposed to the structuralist view and considered more appropriate for the very competitive, unpredictable, global business landscape that was emerging in the 90s.
Over the last couple of decades, strategic thinking frameworks have been refined and extended. The value chain of activities, inherited from the functional division of labor, has been complemented with the perspective of horizontal coordination processes. Between the industry level and the firm level of analysis, we now consider the important business (eco)system of key suppliers and distributors, outsourcers, complementors, and allies. Stable competitive environments are now treated differently from hyper-competitive contexts. Competition is now combined with cooperation. Trade-off between cost and value is not as clear-cut, as many corporations have been able to built capabilities that provide for both cost and value superiority in some business segments. Business concept innovation (blue ocean) has been opposed to traditional fierce competition (red ocean). And perhaps, the most important of all, shareholder capitalism is evolving into stakeholder capitalism, where the corporation is challenged to find ways to simultaneously create customer, employee, societal and shareholder value.
As new strategic frameworks are proposed and integrated into the strategic arsenal, corporations are now considered a portfolio of business (strategic positions) AND a portfolio of capabilities, connected through a corporate business model, which is configured to dynamically apply capabilities to businesses, creating superior value for key stakeholders (customer, employee, society, and shareholder).
After a long journey, capabilities have found their way and solidify their role in corporate and business strategy.
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