Capabilities, Core Competencies and Competitive Advantage
On any given day in your business, there are likely a wide variety of things that you and your employees do. In Leadership, you completed a time tracking exercise that will attest to this fact. The things your business does are your Capabilities. Many of them are mundane things that most other businesses do. You may distribute a number of products, or you may perform a number of services. When we talk about capabilities, we are talking about simply that…stuff you do.
Capabilities
When your business was in its infancy, most of the capabilities and resources were things that you (or the original owner) brought to the table. As your business has grown, you have likely taken on other employees, and even created functional departments to take care of different activities like marketing, finance, operations and sales. In most businesses, capabilities are locked up, either in individuals (often the owner) or in departments. If key people leave, capabilities diminish, or sometimes are lost altogether. The goal of the Wardell Program is that the capabilities inherent in your organization would be passed on to others through systemizing your activities, and eventually carried on through your corporate culture.
Below are some examples of functional capabilities:
| Functional Area | Capability |
|---|---|
| Distribution | Effective Use of Logistics |
| Sales | Produce Qualified Leads |
| Marketing | Effective Product Promotion |
| Management | Motivating & Empowering Employees |
| R&D | Transformation of Technology into New Products |
Core Competencies
Of course, you don’t like to brag, but if you were pushed, you would be able to come up with a few things that your company does very well. You may be masters of Marketing, or you may have a secret blend of 11 herbs and spices that really set you apart. When people talk about your company, they talk about these things. These are your Core Competencies. They are the thing you do that makes you the most money. They make your company special, and your products desirable in the eyes of your customers. You will know which of your capabilities are Core Competencies if they are:
- Valuable – allows your company to exploit opportunities or neutralize threats in the business environment.
- Rare – capabilities that few, if any, competitors possess.
- Costly or difficult to Imitate – capabilities that competitors can’t easily develop either because they don’t have the ability, depth of understanding, or corporate culture to support.
- Non-substitutable – Your offering can’t be replaced by another.
In order to identify and develop the appropriate core competencies in your business, use the four criteria explained above as a screening process. If it doesn’t pass, it is not a core competency and can’t be developed into a competitive advantage. In other words, all core competencies are capabilities but not all capabilities are core competencies.
Be careful not to try to develop too many core competencies. You can get stretched thin, and have your focus divided. Invest your resources into a few areas where you know you can make a good return on them.
Now that you have spent some time thinking about your core competencies, are they what you had originally imagined? If there are any changes, make some notes below.
Competitive Advantage
The business world is tough. Business really is war, and you are constantly looking for an advantage that you can leverage to gain market share over your competitors. The place to look for competitive advantage is in your Core Competencies.
A capability becomes a core competency when it is valuable and unique from your customer’s point of view. That core competency then becomes a competitive advantage when it can’t be easily imitated and/or substituted by competitors.
Value Chain Analysis
Another means of identifying your core competencies is through Value Chain Analysis. Value Chain Analysis allows you to see which activities your business is involved in create value and which ones don’t.
A business’s value chain is divided into primary and support activities. Primary activities are involved with a product or service’s physical creation, its sale and distribution and its after-sale service. Support activities provide the necessary assistance so the primary activities can take place.
The essential idea of the value chain is to create additional value without incurring significant costs while doing so and to capture the value being created.
Outsourcing
In many circles “outsourcing” is almost a dirty word. But, not that you have a firm grasp on which of your capabilities are actual core competencies that create a competitive advantage for your company, there may be other activities that you currently do that do not create a lot of value. Especially if these are activities that require a lot of resources, these are prime candidates for outsourcing.
Outsourcing is the simply the purchase of a value-creating activity from an external supplier. It is one possible solution when you have identified primary or support activities that are not core competencies and therefore not a potential source of competitive advantage. Businesses that create successful outsourcing relationships increase their flexibility, mitigate risks and reduce their capital investment. However, outsourcing is one of the most significant strategic decisions a business can make and therefore it should not be taken lightly.
Outsourcing can be effective because few, if any, businesses possess both the resources and capabilities to achieve competitive superiority in everything they do. Furthermore, by attempting to develop all of your capabilities into competitive advantages, you may spread your resources too thin and therefore the resources and capabilities that were most likely to turn into competitive advantages would never have a chance to mature. By nurturing a smaller number of resources and capabilities, there is a higher probability they will turn into competitive advantages.
It is a good idea to outsource activities only in areas where you can’t create value or are at a significant strategic disadvantage compared to your competitors. For an outsourcing relationship to create actual value, your business will also need a special set of managerial skills to deal with the external relationship. Outsourcing comes with a its own set of pitfalls and drawbacks that include:
- Loss of jobs within organization
- Potential for intellectual property theft
- External suppliers with low quality
- Increase monitoring costs
- Loss of innovative ability
- High legal costs, especially when dealing with a foreign partner