Capability management is an approach to organizational management, typically applied to business organizations or firms. It is based on the theory of the firm as a collection of capabilities that may be developed to generate revenue in the marketplace and compete with other firms in the industry. Capability management focuses on managing a firm's portfolio of capabilities to maintain its competitive performance and long-term profitability.
Before the emergence of capability management, one of the dominant theories explaining the existence and competitive position of firms was the resource-based view of the firm. Based on Ricardian economics, this theory holds that firms derive profitability from their control of valuable, rare, and hard-to-imitate resources, and compete to acquire and protect those resources.
Capability management may be seen as both an extension of and an alternative to the RBV, proposing that profitability is not derived primarily from control of physical resources but from the ability to create and leverage knowledge; in this view, companies compete through their capacity to generate and apply knowledge.Leonard, 1998 Firms are understood to compete based on technical know-how embedded in their capabilities—that is, their ability to perform activities that are valued in the market.
Types of business capabilities Dorothy Leonard defines three types of business capabilities 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 capabilities 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-term 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 that 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 the 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, processes, and technology for a specific purpose.Ric Merrifield, Jack Calhoun, and Dennis Stevens "The Next Revolution in Productivity", (Harvard Business Review, June, 2008)
Capability management has been described as an approach for aligning an organization's resources and activities with its strategic objectives. According to proponents, it may be used to identify areas of operational overlap or underutilization and to inform decisions about resource allocation. Some authors suggest that this approach can support the prioritization of activities based on their perceived contribution to organizational performance, including financial outcomes and long-term development.
In this context, capability management is a means of distinguishing between capabilities considered central to an organization's strategy and those that are not, with the aim of guiding investment or restructuring decisions. However, the extent to which these outcomes are achieved can vary depending on implementation and organizational context.
Distinctive capabilities
Oxford economist John Kay defines Distinctive Capabilities as capabilities a firm has that other firms cannot replicate, even after they realize what the benefits of using them are. These distinctive capabilities are the source of the 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 its 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 its 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 capabilities that meet the additional criteria. Three are said to recur in the analysis: Innovation, Architecture, and Reputation.
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), or 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 Prahalad go on to assert that core competencies are the result of "collective learning across the corporation".
Since that publication, there has been an 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 customer and product 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: Physical technical systems – machinery, databases, software systems etc. Managerial systems – systems for the management of operations, including operation of technical systems Skills and Knowledge (systems) – systems for the maintenance of personal and team skills and knowledge Values and Norms – systems for the regulation of behaviors and objectives in organizations
Around this complex of systems that realize a core capability, Leonard situates a loop "Capability-Creating Activities" that comprises "Shared Problem Solving" and encompasses 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: Problem Solving (in the context of the PRESENT) Implementing and Integrating (in the INTERNAL context) Experimenting (in the context of the FUTURE) Importing Knowledge (from the EXTERNAL context) 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.