Capabilities are a firm’s capacity to deploy resources. A firm creates value by utilizing its organizational and managerial skills to identify, prioritize, and orchestrate a diverse set of resources to achieve a common objective. A hammer and a blueprint might be tangible resources, but a house would not get built without the intangible capabilities to coordinate, problem solve, and organize and without the resourcefulness and the ability of a firm to overcome obstacles as they arise.

Capabilities are categorized in three different ways. First, static capabilities reflect an ability to perform efficiently a basic business function (e.g., distribution, marketing, operations, logistics) when compared with rivals. For example, Coca-Cola and Pepsi have significantly better global distribution and brand management capabilities than their carbonated soft drink competitors. They ...