What is Capabilities ?
Capabilities can be defined as the ability and capacity to utilize the organisational resources in an efficient manner. Having appropriate capability is necessary to effectively utilize an organisational resources. The capabilities of an organisation are more firm-specific than resources. They cannot be easily copied, traded or measured and hence act as very good barriers against competition thereby helping the organisation in attaining sustainable competitive advantage.
Some examples are technological knowledge, production skills, managerial ability, experience in business activities, etc. Most of the capabilities of an organisation have human foundation. The capabilities of an organisation facilitate the managers in utilizing the resources in an efficient and effective manner.
People based capabilities in an organisation are related not only to the staff members, but also to the external entities such as suppliers, customers, government, financial institutions, etc., who provide support to the organisation. Capabilities are developed when the organisational resources are combined to perform a specific task or multiple tasks. These tasks can be anything ranging from recruitment and selection of employees to conducting research and development activities. Most of the capabilities are generated from the unique skills and knowledge of the organisational employees.
The employees of the organisation interact with the clients and gather information about their needs. This helps them to fulfill the demands of the clients in an efficient manner. This in turn gives rise to organisational capabilities. The most critical aspect to the building of competitive advantage based on developing. exchanging information is carried out by the human resource capital of an organisation. In other words, the contribution of human resources in developing the capabilities of an organisation cannot be undermined.
Types of Capabilities in Various Functional Areas
The capabilities of an organisation depend upon the functional areas of the firm. Different functional areas have different capabilities. Some of the capabilities of the major functional areas of an organisation are explain below. Types of capabilities in strategic Management are as follows :
1) Marketing Capability :
Marketing is one of the major functional areas in an organisation. The capabilities of an organisation related to marketing are :
i) Product :
The capability factors in product are product positioning, product mix, product line (length and breadth), branding, etc.
ii) Pricing :
Value-based pricing, cost-based pricing and competition-based pricing ability to maintain a margin with dealers providing products on credit terms, etc.
iii) Promotion :
Preparing efficient budgets preparing creative advertisements, maintaining the size of sales force, building long-term relationships with the advertising agencies, etc.
iv) Place :
Various capability factors in the market place are location of warehouses strong relationship with channel member efficient distribution network, strong outbound logistics, etc.
v) Marketing Intelligence :
Adequate research and development facilities, availability of accurate market data, market and competition awareness, implementation of marketing intelligence system, etc.
2) Financial Capability :
Financial capability refers to the efficient allocation and utilization of funds. Various financial capability factors are as follows :
i) Sources of Funds :
Here, the task of the management is to merge the sources in such a way that the inflow of funds is not interrupted. Some of the factors that jointly act as capability factors efficient capability structure, good relationship with financial institutions, availability of working capital, ability to negotiate with the buyers etc.
ii) Usage of Funds :
Efficient utilization of funds can be done with proper acquisition of fixed assets, appropriate investment strategy proper allocation of funds in various activities, paying appropriate dividends, etc.
iii) Management of Funds :
Proper management of funds can be carried out with the help of appropriate tax planning, efficient management of risk and return, formulation of budgets, managing inflow and outflow of funds, etc.
3) Operations Capability :
Capability factors related to operations deal with the production and research activities, It includes following factors :
i) Production Function :
Various factors that lead to production capability include location, size, and layout of the plant, relationship production with vendors, increasing efficiency and capacity, controlling cost of production, managing quality in production system, etc.
ii) R&D :
This category includes adequate funds for R&D, relationship with research institutions, implementation of latest technologies, proper collection of market data, awareness of consumer needs, etc.
4) Human Resource Capability :
One of the most important functions of an organisation is to manage its human resource in an efficient way. Capability factors in relation with human resource include following heads :
i) Personnel System :
Planning for recruitment and selection of employees, providing adequate training and development, ensuring good work environment, satisfying employees by following unbiased an appraisal system, compensation, reward, and recognition, employee motivation, etc.
ii) Industrial Relations :
Having good industrial relations can also act as a major capability factor. Some of the important factors contributing to the improvement of industrial relationships are interrelationship between management and union, bargaining power of management, healthy and sustainable relationships with suppliers. vendors, buying organisations, etc.
5) Information Management Capability :
The information management capability factors are concerned with processing, management, dissemination, relay, acquiring, accumulation, and storage of information within or across the organisations. Some of the factors that contribute to form information management capability are as follows :
i) Integrative and Support System :
Budgets for IT investment, modification of present information infrastructure, availability and training of IT professionals, etc.
ii) Retrieval and Usage :
Data integration, retrieval, and application of formats for proper data usage.
iii) Acquisition and Retention :
Data security. sources, punctuality, retention capability.
iv) Transmission and Dissemination :
Speed and coverage of data, and ability to provide exact and timely information to various users of data.
v) Processing and Synthesis :
Database Management Systems (DBMS), managing hardware and software.
6) General Management Capability :
Capability can also be generated in the area of general management. Various factors that are responsible for generating capability in this domain are as follows :
i) General Management System :
The corporate mission statement, vision of top management, setting-up of goals and objectives, developing and implementing strategy, evaluation and control mechanism for business activities, etc.
ii) General Managers :
Developing the skills of improving performance consistently, courage and ability to take risks, overseeing the entire organisation, etc.
iii) External Relationship :
Management of relationship with general public, government and other regulatory bodies.
iv) Organisational Climate :
Maintaining organisational culture, power equations in the organisation, and ability of the management to bring about a change in its organisation structure.
Relationship Between Resources and Capability
The resources and capabilities of a company are interdependent on each other. If utilized properly, they directly support and increase the value of one another directly. Resources and capabilities interact with each other in the following way as depicted in the figure :
1) Measurement :
Resources are the assets that enable an organisation or firm to carry-out its activities. Resources can be both tangible as well as intangible. In case of tangible resources, they are valued with the help of organisation's balance sheet. On the other hand, capabilities are organisational expertise or ability to combine one or more resources productively in such a manner that the end result is more than the value of the individual resources. Hence, they have more worth than their values in the accounting books.
2) Market Exchange :
Intangible resources make it hard for the organisation to assess their values. As a result, resources are hard to purchase and sell. With the possible exception of patents which are based on intellectual property rights and have a legal basis, other intangible resources like reputation for quality, repute due to skilled manpower, etc., are hard to trade. These resources are dependent on the policies of the organisation. Similarly, organisational capabilities are built over time with practice, which make them difficult to trade and hard to transfer.
3) Difficult to Imitate :
Many facets of an organisation are derived from its ability to combine resources successfully through different capability factors. These are not easily imitated by others. Some of the factors that make the organisational aspects hard to imitate are as follows :
- Various marketing capability factors to come up with unique or new product features, pricing, advertising story, packaging, etc. For example, Fevicol's unique advertisements cannot be easily copied.
- Methods and strategies adopted by a firm for its products and services.
- Ways and methods of recruiting new employees.
- Maintenance of relationships that the organisation has with its suppliers and customers.
Utilizing capabilities to employ resources so that above conditions can be met reflects the importance of capabilities and resources for successful business activities, Relationship that exists between resources and capabilities is not easy to understand. As the link between them is confusing and difficult to follow, it cannot be imitated by the competitors.
4) Barriers to Entry :
The physical and material resources like, plant and machinery, land and equipment, do not pose an entry barrier as these resources can be purchased from the market. The prices of these resources are known and standard. What is difficult to purchase is the ability to combine these resources meaningfully. The resources that cannot be purchased easily and whose worth cannot be analysed create the barriers for entry. These resources are related to the capabilities. For better survival and success over competitors, it is very important for the organisation to acquire rare, hard to imitate, valuable, and organised resources.
5) Competitive Position :
Real success can be achieved in the long-run by maintaining the competitive position of the firm in the market. For this, the firms require capabilities which cannot be purchased from market. These take a lot of organisational hard work and learning over time. Any competitor that tries to copy or imitate the market leader will find it a very costly and time-consuming exercise with minimum possibility of success. The follower will have to spend more on advertising or quick-start the R&D process both of which are often risky activities, when carried out over a longer period in a planned manner.
Therefore, it can be concluded that, although resources are necessary for a firm to achieve its objectives, but until and unless the distinctive resources are fused with the organisational capabilities, business cannot achieve success and competitive advantage over its rival firms.