Resources and Capabilities

When we talk of market position and competitive advantage and how businesses achieve them, it is important to learn about the underlying resources and capabilities. Resources and capabilities of an organization have a central role in helping the business achieve sustainable competitive advantage. A sustainable source of competitive advantage helps the company build and sustain its market-leading position.  The industry environment today is highly competitive and companies need to have several sources of competitive advantage to stay in a market-leading position and sustain their growth momentum. However, resources and capabilities help companies acquire a competitive edge compared to their rivals in the market. It is why companies are focusing on acquiring strong resources and capabilities more than ever. It helps them grow their market position stronger and overcome rising competitive pressure.

Brands like Apple, Microsoft, Google, Amazon, Starbucks, and Nike have achieved market-leading positions in their respective industries because they have built strong core competencies by bundling several resources and capabilities. Here we will discuss the role of resources and capabilities in helping companies acquire a source of competitive advantage in this post.

What are organizational resources?

Resources are quite broad in scope and cover a large spectrum of individual, social and organizational phenomena. However, if you expect a single resource to generate a source of competitive advantage then it is generally not possible. It is so because single resources generally do not yield some unique advantage that is sufficiently strong to overcome the competitive pressure. However, when you bundle several resources together, you will see you have generated a unique advantage that is bigger in scope compared to a single resource. This is how business firms like Amazon have acquired their core competencies.  Now, you cannot bundle just any resource with any other to generate a core competency. Instead, it takes a unique bundling of resources to generate a core competency.

 For example, let’s take the case of Amazon. The e-commerce giant has developed its competitive advantage by bundling service and distribution resources. 

Amazon started as an online bookseller but found very fast growth because it developed service and distribution capabilities that enabled the digital retail giant to ship millions of different products to millions of customers from its online marketplace worldwide. This helped the company achieve a core competency that could not be matched by any other technology or retail brand. In this way, Amazon developed a strong and unique source of sustainable competitive advantage that has continued to grow stronger with time.

Many brick and mortar companies throughout the world that do not have as string resources as Amazon also benefit from its core competencies. Several brick and mortar businesses use the Amazon platform to sell their products to a global customer base. There are many large and small businesses that do not have a global sales and distribution network like Amazon but using the e-commerce platform, they ship their merchandise to customers across the world.

Tangible vs Intangible Resources:

A firm’s resources can be tangible or intangible. Assets that can be seen and quantified are tangible resources. For example, the equipment used in production, manufacturing plants, or the formal reporting structures within a company are examples of tangible resources. On the contrary, intangible resources are difficult to quantify. They are generally the assets that have accumulated over time and are rooted deeply in a company’s history. Competitors cannot easily identify and imitate the intangible resources and it is because they are embedded in various unique patterns of organizational routines. You can easily come across several examples of intangible resources when analyzing large firms like Amazon and Apple. The knowledge base of Apple, the trust between managers and individual employees, ideas, Apple’s capacity for fast innovation, the reputation of the company for the quality of its goods and services as well as its scientific capabilities and how the company interacts with its stakeholders are all examples of Apple’s intangible resources.

There are four main types of tangible resources and three types of intangible resources. The four types of tangible resources include financial, organizational, physical, and technological. On the other hand, the types of intangible resources are human, innovation, and reputational.

Whether you are a business manager or an entrepreneur, one leading challenge before you will be to understand the strategic value that the tangible and intangible resources of your firm hold. The degree to which a firm’s tangible and intangible resources contribute to the development of its core competencies and finally the competitive advantage indicates their strategic value for the firm. In simpler words, it is the proportion of the contribution of each resource to the development of a competitive advantage that indicates its strategic value. For example, a distribution facility is a tangible resource. On the balance sheet, it is assigned a monetary value. However, the true value of the resource depends on several factors that include its proximity to raw materials, and customers as well as some other intangible factors like how workers work together or engage with stakeholders including suppliers and distributors. 

What are organizational capabilities?

Organizational capabilities indicate the firm’s capacity to deploy resources that have been integrated together purposefully to achieve the desired end result. Capabilities take time to emerge and they emerge through complex interactions of tangible and intangible resources. They are the glue holding an organization together. They can be tangible like the automated business processes but mostly they are tacit and intangible. Capabilities are critical to developing competitive advantages. However, often the capabilities are based on how knowledge and information are developed, carried,and exchanged through the firm’s human capital. The knowledge base of an organization is often grounded in action that all employees cannot understand explicitly. However, the value of a firm’s capabilities increases through repetition and practice.

Human Capital and organizational capabilities:

Several of the leading organizational capabilities have their foundation in the human capital of the firm. These capabilities are founded in the skills and knowledge of the employees and often in their functional expertise. It is why an organization’s human capital has a central role in the development and use of the capabilities and finally the core competencies. It is why all the leading firms in the technology as well as other industries are more committed than ever to the development of their human capital. 

Increasingly, companies around the world are adopting strategic human resource management to develop their human capital. A growing number of business leaders now accept the fact that their human capital plays a central role in the development of their organizational capabilities. Ultimately, their human capital lies at the root of all their critical sources of competitive advantage. However, it also depends on the firm’s ability to utilize its knowledge base and transfer it among its operating businesses. 

Research suggests that in the information age, knowledge is central to everything and a company’s value derives from its knowledge, intellectual assets, know-how, and competencies, all of which are embedded in its people. Since, this is the reality, one major challenge before every company is to create an environment that encourages knowledge sharing and collaboration. 

In this race to develop a knowledge-driven work culture and environment, several companies created the position of Chief Learning Officer which is an upper managerial level position. The main idea behind creating the position of the CLO is to manage a firm’s creativity and the pace at which ideas are learned and shared within the organization. Firms must be able to manage their knowledge and know-how in a manner that supports their efforts to generate value for their customers. 

Most often companies develop capabilities in specific functional areas like manufacturing, marketing, research and development or a part of a specific functional area like advertising. The value chain popularized by Michael E Porter is a great tool for measuring and understanding an organization’s capabilities. The value chain is actually a chain of activities that includes both primary activities or the ones that add direct value to the product and support activities that support the primary activities. 

One Final Word

This is the era of information technology and the level of competition in each industry is a lot higher than two decades ago. With the growth and evolution of information technology and the spread of the internet, a very large number of companies have found faster growth. However, developing core competencies and competitive advantage is more important than ever to win in the race. As a manager, or even as a business owner, you need to develop a keen understanding of your organizational resources and capabilities to exploit them for the development of competitive advantage. Moreover, your focus must remain on strengthening your competitive advantage continuously in order to retain your market position. However, you will also see that most of your organizational capabilities are rooted in your human capital. Therefore, your focus on managing your human capital as well as your employees’ knowledge and skills strategically must be higher. While this will enable your business to acquire higher productivity, it will also help you gain a competitive edge against your closest rivals in the market.