In business management, capability refers to the company’s ability to empower its resources to achieve goals. Some resources, such as brand equity and reputation, do not contribute to value creation when the company cannot maximize it.
As a parable, you have money (resources) but can’t manage it. Say you don’t know how to allocate it to some investment instruments. Then, you put all the money into one cyclical stock. Then, economic conditions worsened, and company stock prices fell lower than the purchase price. Now, you experience a loss without knowing when the stock price will rise again.
Where do we find the capabilities of a company?
The skill to coordinate company resources is within the organization’s routines, rules, and procedures. They are present in a style or way to make decisions and manage internal processes. Furthermore, they exist in the way individuals interact and work together and are not attached to specific individuals. Therefore, when several individuals leave, the company still maintains its capabilities.
How capability can produce a competitive advantage
Capabilities represent the way people and systems in an organization work together using resources. An example is the company’s capability to bring products to market faster through an effective and efficient distribution system. Another example is the company’s ability to produce sophisticated products thanks to the encouragement of organizational culture to innovate. Such abilities are embedded in organizational routines.
Whether a company can produce a competitive advantage or not, it depends on its capabilities (along with resources) in creating value. Capabilities and resources complement each other to create value. Why is that? Let’s take the parable once more.
You have the resources in the form of raw materials and the production capability of the latest technology machines. However, the quality of your raw materials is inferior and below standard. Will you produce a good output?
For this reason, we say capabilities and resources complement each other. And, in strategic management, the combination of the two forms core competencies. Having excellent resources and capabilities is not enough to make a company valuable. Both will be valuable if:
- Providing competitive advantage to companies
- Competitors are hard to imitate