Capabilities Approach

In general, organizational capabilities are categorized in one of three different ways. First, capabilities reflect an ability to more efficiently perform a basic business function (e.g., distribution, marketing activities, operations, logistics, etc.) compared with rivals. For example, Nike has significantly better global brand management than its competitors and has developed extensive competitive capabilities around its brand. Continuously improving the dynamics of interactions is a second type of capability—dynamic capabilities. These types of capabilities focus on the learning associated with repeated and recurring activities. For example, going beyond expectations in customer service responses by anticipating questions or designing next-generation products/services from information gleaned from customer responses is a dynamic capability. Another dynamic capability is the rapid development of bringing ideas to the marketplace. The third category of capabilities enables firms to recognize intrinsic value or develop novel strategies before others. Schumpeter's creative destruction is an example of the third type of capabilities, which is closely tied to cognitive and creative abilities of management and leadership.

Each of these three types of organizational capabilities (static, dynamic, creative) deploys resources to effectively compete against rivals and create a new vision of the future. The ability of competitors to learn and duplicate a firm's existing capabilities depends on the sustainability of the competitive advantage of the capability. A highly imitable capability such as outsourcing to lower-wage countries is not likely to create an advantage for a long period of time. Highly inimitable capabilities, such as personal networks among [Page 254]the top management with elite politicians or understanding the political relationships of employees or the commitment of retirees for effective grassroots lobbying, on the other hand, may create longer-term sustainable advantages. Overall, capabilities based on rare, valuable, or inimitable resources are best for creating sustainable competitive advantages.

For example, when John Deere, Caterpillar, or Komatsu are developing contracts with governments in developing countries, a capabilities approach for these manufacturers of large, earth-moving machines might emphasize infrastructure development. Infrastructure development reflects dynamic and creative capabilities. Dynamic capabilities can be derived from the web of networks and relations with rivals, nongovernmental organizations, and governmental officials for concomitant development of banks, legal systems, regulatory oversight, utilities, telecommunication systems, and so on. By creatively providing inimitable capabilities in addition to earth-moving tractors, John Deere, Caterpillar, or Komatsu can add value, distinguish themselves from competitor's bids, and bring better long-term consequences by creating and managing relationships with outside stakeholders. Rather than competing as manufacturers of earth-moving machines, these firms can extend their product offerings with relational and creative capabilities. Likewise, Cisco Systems or Microsoft uses a capabilities approach by building literacy and computer skills in local neighborhoods and by making computers and software systems available to developing countries. By extending their product offerings by building literacy and computer skills and interacting with policy makers on contentious topics such as privacy, Microsoft and Cisco Systems have the ability to improve living conditions, help eliminate poverty through jobs, and potentially increase demand for future generations of their products/services while creating more stable business conditions and employment opportunities.

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