Capability management is the approach to the management of an organization, typically a business organization or firm, based on the "theory of the firm" as a collection of capabilities that may be exercised to earn revenues in the marketplace and compete with other firms in the industry. Capability management seeks to manage the stock of capabilities within the firm to ensure its position in the industry and its ongoing profitability and survival.
Prior to the emergence of capability management, the dominant theory explaining the existence and competitive position of firms, based on Ricardian economics, was the resource-based view of the firm (RBVF). The fundamental thesis of this theory is that, firms derive their profitability from their control of resources – and are in competition to secure control of resources. Perhaps the best-known exposition of the Resource-based View of the Firm is that of one of its key originators: economist Edith Penrose.
"Capability management" may be regarded as both an extension and an alternative to the RBVF(Resource-based view of the firm), which asserts that it is not control over physical resources that is the basis for firm profitability but that "Companies, like individuals, compete on the basis of their ability to create and utilize knowledge;...". In short, firms compete not on the basis of control of resources but on the basis of technical Know-How. This Know-How is embedded in the capabilities of the firm—its abilities to do things that are considered valuable (in and by the market).
Types of business capability.
Dorothy Leonard defines three types of business capability that a firm might possess: Core Capabilities, Enabling Capabilities and Supplemental Capabilities.
Core Capabilities are defined as those "built up over time", that "cannot be easily imitated" and therefore "constitute a competitive advantage for a firm". They are distinct from the other types of capability and sufficiently superior to similar capabilities in competitor organizations to provide a "sustainable competitive advantage". It is implied that such core capabilities are the product of sustained, long organizational learning.
Supplemental Capabilities are defined as those that "add value to core capabilities but that could be imitated".
Enabling Capabilities are defined as those that "are necessary but not sufficient in themselves to competitively distinguish a company." In other words, enabling capabilities are those which a firm has to do, in support of its normal operations and core capabilities, but which are not themselves core capabilities (because they could be imitated, developed quickly or would not be very different from competitors' capabilities). Enabling capabilities are distinguished from supplemental capabilities in that they are required, but do not necessarily add value to core capabilities.
A business capability is "what" a company needs to do to execute its business strategy (e.g., enable e-payments, tailor solutions at point of sale, demonstrate product concepts with customers, combine elastic and non-elastic materials side by side, etc.).
Another way to think about a capability is that it is an assembly of people, process and technology for a specific purpose.
Capability Management is the active management, over time, of the portfolio of capabilities in a firm – their development and depreciation in conscious response to changes in the business environment.
Capability management is an approach that uses the organization's customer value proposition to establish performance goals for capabilities based on value contribution. It helps drive out inefficiencies in capabilities that contribute low customer impact and focus efficiencies in areas with high financial leverage; while preserving or investing in capabilities for growth.
Distinctive capabilities.
Oxford economist John Kay defines Distinctive Capabilities as those capabilities a firm has which other firms cannot replicate even after they realize what the benefits are that owning the capability confers. These distinctive capabilities are the source of superior performance of successful firms. Kay's Distinctive Capabilities may be identified with Leonard's inimitable and hard-won "Core Capabilities". However, Kay goes further in arguing that in order for a capability to be truly distinctive and the basis for competitive advantage it must meet two further criteria: sustainability and appropriability.
Sustainability refers to the firm maintaining the distinctiveness and superiority of the capability relative to other firms despite their efforts to imitate or replicate it. One approach to sustainability is for the firm to develop the capability faster than the competitors through learning and innovation.
Appropriability refers to the firm securing the benefits of the capability – or the exercising of its capability – for itself as opposed to those benefits accruing to the firm's customers, its staff – management or employees, or its shareholders, regulators or other stakeholders. Intellectual Property Rights are one means for securing appropriability.
On the basis of analysis of empirical data regarding the performance of companies Kay argues that there are only a few types of distinctive capability that meet the additional criteria. Three are said to recur in the analysis: Innovation, Architecture and Reputation. These are briefly discussed below.
Capability or competency.
In a 1990 edition of the Harvard Business Review, Gary Hamel and C.K.Prahalad published an article entitled "The Core Competence of the Corporation" which defined the notion of a "core competency". Core Competencies are identified by three criteria: 1) they are difficult for competitors to imitate 2) they make a substantial contribution to a number of the firm's products (or services) they give the firm access to several markets and 3) they make a substantial contribution to the perceived customer-value of the products (or services). The (superior) competitive position of the firm's products (or services) in its markets is thought to be the expression of the firm's competitive advantage. Hamel and Prahald go on to assert that core competencies are the result of "collective learning across the corporation".
Since that publication there has been active debate in the academic literature as to whether (the concept of) "core competencies" is the same notion as core capabilities. Several authors consider that the concepts are the same, the differences purely terminological, and use the terms interchangeably while others insist there is a substantive distinction. Given the similarities in their definitions it is a reasonable position to think they are the same. However, neither Leonard, nor Hamel and Prahalad (nor indeed Kay) were philosophically precise enough in their definitions and expositions of the concepts for the identity to be definitively established. One reasonable position is that "core competencies" are a view of "core capabilities" from a customers and products perspective while "core capabilities" are a view of "core competencies" from the perspective of knowledge and skills and staff and suppliers in firms. This may reflect the philosophical biases of their respective institutions.
Others, such as Max Boisot, take the view that competence or competency is some measure of the level of performance in a capability or that competence is a much narrower concept than capability. Hence a firm may have a high or low level of competence in a particular, notional, abstract capability. There is some evidence that general managers often fail to appreciate the subtlety of the definition of "core competencies" and over-estimate the degree of their firm's competence in common capabilities. Consequently, they over-identify "things the firm is good at" as core competencies – which falls foul of the distinctiveness criterion for a core capability (and/or the inimitability criterion of core competencies and core capabilities). Hence some things managers mistakenly identify as "core competencies" may be more properly considered as Enabling or Supplemental Capabilities.
When applying the concepts of "core competence" or "core capability" academics and practitioners should be clear and precise as to their intended semantics for these ambiguous terms.
Structure of a capability or dimensions of a core capability.
Leonard analyzes the nature of a (business) capability and concludes that core capabilities "comprise at least four interdependent dimensions" (pp. 19) as follows:
Around this complex of systems that realize a core capability Leonard situates a loop "Capability-Creating Activities" that comprise "Shared Problem Solving" and encompass Present and Future and Internal and External Perspectives (see Leonard, 1995, chapter 3). This capability development loop, is considered a system of organizational learning (knowledge-creating and knowledge-diffusing activities) and comprises the following activities:
These activities, however, do not form a simple cycle or sequence and may be conducted in any order and several "in parallel" around any particular capability. It is these knowledge-creating and knowledge-diffusing (or knowledge-acquiring and knowledge-sharing) activities that make the capability dynamic (change over time) in the Leonard model.
Clearly, Leonard takes a System-of-Systems perspective on organizational or business or enterprise capabilities – and this establishes the link to the notion of a Capability in Systems Engineering. Given that the Leonard model of a capability incorporates elements of skills and knowledge, and is adaptive and intelligent in the sense of importing knowledge from the external context, experimenting and problem-solving, while moving from present to future, it may be considered an ICASOS – an Intelligent Complex Adaptive System-of-Systems – model of an enterprise or firm. Note that the knowledge created and diffused in the Leonard model is organizational knowledge, not personal knowledge and is Know-How, not Know-That, that is often Tacit Knowledge.
According to Hadaya and Gagnon, in their book "Business Architecture - The Missing Link in Strategy Formulation, Implementation and Execution", a business capability is an integrated set of resources designed to work together to achieve a particular result. A capability is always made up of one or more business functions, business processes, organizational units, know-how assets, information assets and technology assets. ″For example, to have the capability to Fabricate Metal Parts, an organization must have the necessary machines (technology assets), the knowledge of how to operate them (know-how assets), the specific sequence of activities needed to fabricate the parts (process), the drawings of the parts to be fabricated (information assets), and the teams of people (organizational units) specializing in the various types of fabrication required to make the parts (business functions)″. According to these authors, some capabilities also include one or more brands or natural resource deposits. Indeed, ″the Coca-Cola Company could not sell 1.9 billion servings a day in more than 200 countries were it not for the power of its brands″. In turn, for a farmer to be able to Produce Vegetables, he must have not only the right business functions, business processes, organizational units, know-how assets, information assets and technology assets, but also a piece of land (natural resource deposit) on which to grow his vegetables. A business capability can also be made up of lower-level capabilities. For example, to have the capability to manufacture cars, an organization must have several lower-level capabilities, including the capability to manufacture engines and the capability to fabricate and assemble the bodywork of the cars.
The consideration of a portfolio of capabilities in an enterprise in the context of the PRESENT and FUTURE contexts, with the Importing of Knowledge from the EXTERNAL context and the Implementing and Integrating of Knowledge in the INTERNAL context, establishes the link to Enterprise Architecture. In Enterprise Architecture this knowledge and planning of present-to-future evolution is diffused through the medium of models shared and used throughout the enterprise.
Dynamic capabilities theory.
The Leonard model of a Capability is a dynamic model at the micro-level; focused on the detailed mechanisms for development and change of individual capabilities. Building on the work of Hamel and Prahalad, and others David Teece and colleagues developed a macro-level theory of Dynamic capabilities and framework for their management. In this theory a (or perhaps "the") "Dynamic Capability" is defined as "the firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments."
Building on earlier work from the 1960s, the central thesis of the Dynamic Capabilities theory is that "... the real key to a company's success or even to its future development lies in its ability to find or create a competence that is truly distinctive". In this literature the term "competence" is used in both the sense of degree of performance in some capability and as a low-level, short-term capability. Competence in the latter sense echoes the concepts from Hamel and Prahalad, but may also be identified with Leonard's Enabling and Supplemental Capabilities as well as the short-term Core Capabilities of a firm. The term "capabilities" is also used somewhat interchangeably with "competencies".
The competencies or low-level capabilities are regarded as assets or knowledge-resources of the enterprise, alongside physical assets and other resources that are difficult for competitor firms to acquire. In this sense Teece's Dynamic Capabilities Theory is a move back towards the Resource-Based View of the Firm, but with a broader notion