A capabilities analysis focuses Ricardian rather than Monopoly rents, each of which is a types of economic rents, referring to how excess profits are earned.
- Monopoly rents: are caused by barriers of entry which prevent competition from entering the market, such as patents, exclusive licenses, control over scarce resources, or government intervention.
- Ricardian rents: are caused by advantages or resource endowments, such as fertile land, access to water, mineral deposits, superior manufacturing, superior quality, marketing, etc.
- Cost advantage: an organisation can provide their product or service in a cheaper way without compromising their product or service.
- Demand advantage: the market is willing to pay more for a product or service of a particular organisation.
A capabilities analysis reflects a resource-based perspective that focuses on barriers to imitation, rather than competition. These barriers to imitation whether through cost or demand advantages, are the primary drivers of profits.
There are three main steps in analyzing an organisations capabilities:
- Value-chain analysis: Identify the value chain and specific resources and capabilities.
- Alignment analysis: Assessing the alignment of capabilities both internally and externally
- Sustainability analysis: Determine the degree to which any capability advantage is sustainable over time.
Value chain analysis
The value chain is a classic idea in strategy based on of how an organisation brings a product or service to fruition. The value chain describes all necessary steps to bring a product or service to market. A traditional value chain for a good or service can look something like below.
Generally an organisation, fits into one the above stages, the first step is to identify where in the value chain our organisation sits. Once an understanding where in the value chain the organisation resides, we next want to unpack the value chain within the organisation. How does the organisation deliver value from within itself, the primary activities that deliver value as well as the secondary activities which enable the primary ones.
Primary Activities are the ones that are involved in the direct value chain, the stages in generating revenue. The secondary activities, support the primary ones in generating value.
Now that we have identified the value capabilities of the organisation we need to identify the resources which support those capabilities.
| Tangible | Intangible | |
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| People/Assets |
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| Systems/Processes |
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It important to unpack the value chain, in order to understand the people, processes, and systems that, combined, form the core capabilities of the organisation.
Value network
The value network model is a more appropriate representation for service based industries such as Consulting, Healthcare, Financial, Communication or Airline services. Such services, do not follow a supply chain model in which materials from a supplier are transformed and then sold to a customer. Service based industries, instead have interconnected nodes that interact with one another. This network of nodes has both primary and secondary nodes, much like the Primary and Secondary activities of a value chain model, however these nodes are interconnected to a lesser or greater degree to one another.
<<insert example here>>
A value network model is far less generic than a value chain model; value networks are very specific to each individual organisation and how it operates, with varying levels of connections between nodes.
Internal and External alignment.
Internal alignment is focused on the degree which internal processes, people and systems align with one another, to generate value and deliver capability. Do the ways of working support the companies mission statement and value proposition.
External alignment is focused on the capabilities and how aligned they are with the organisations value proposition. Are the external capabilities of the organisation aligned with the industry or market demands, does our organisation provide value to the customers. How well do the capabilities align with customer needs.
VIRN Analysis
One way to assess capabilities is through an VIRN Analysis, which stands for Valuable, Inimitable, Non-substitutable
- Valuable: does the market want this capability, are their customers willing to pay for it.
- Rare: a capability that is uncommon and only our organisation can provide.
- Inimitable: is it unique and impossible to copy by competition.
- Non-Substitutable: there is no other product or service similar enough that a competitor could offer at a lower rate which would affect the demand.
A true competitive advantage capability satisfies all four of the above, It is sought by the market, it is scarce,, difficult to imitate and there are no direct substitutes. What we try to establish is how valuable is the capability that the organisation provides.
| Valuable | Yes | Yes | Yes | Yes |
| Rare | No | Yes | Yes | Yes |
| Inimitable | No | No | Yes | Yes |
| Non-Substitutable | No | No | No | Yes |
| Advantage | Competative parity | Temporary Advantage | Conditional Advantage | Compatative Advantage |
An organisation can succeed in a highly competitive market when its people, processes, and systems are aligned both internally and externally with the value proposition of the organisation.
Sustainable advantage
A competitive advantage is sustainable to the degree which it is captured as well as maintained. There are two main factors when it comes to advantage sustainability: Imitability and Durability.
Imitability: If a firm's capability is inimitable, its capability can't be imitated, this allows the firm to maintain superiority in an area relative to its competitors. This aligns to the Rarity and Inimitability aspects of our VRIN analysis.
There can be a large number of barriers to imitation, preventing competitors from eroding a competitive advantage:
- Legal barriers: there may be a bi-law or licence to operate that gives the organisation an advantage. There could be a patent, or copywrite that protects your competitive advantage.
- Scarce supply: Access to a particular natural resource, or a geographic location.
- Unique historical path: Learning hard lessons over time, giving an organization unique industry knowledge and expertise.
- Social complexity: the culture of the organisation is too unique to replicate, for example Disney.
- Tight combination: the more people adopt a service or product, the more valuable it becomes, for example social media or the telephone, if only one person has it, it's useless, but the more users adopt it the more entrenched and valuable it becomes.
- Credible commitment: An organisation doubles down on a course of action, discouraging competitors from fighting a battle they may not win.
Durability: Can an organisation maintain their competitive advantage over time, there are a number of factors that determine the durability of a competitive advantage:
- Human capital: People grow old and retire, if an organization's competitive advantage stems from leadership, then eventually when that leader retires if they haven't trained a protégé, then that competitive advantage may retire with them.
- Physical assets: Equipment and facilities degrade over time, if they are not maintained and upgraded appropriately, an organisations competitive advantage can deprecate over time.
- Rigidness: A competitive advantage can become a disadvantageous rigidness, that is something that worked in the past may no longer serve as a competitive advantage and can even become a hindrance, this could be due to outdated technology or thinking.
- Value exchange: An organizations asset, though valuable, maybe even more valuable to a competitor or an organisation in a different industry and it may be more valuable to lease or outright sell that asset.
How does an organisation build Capabilities.
There are two ways to build capabilities:
- Fast way: an organisation can buy them (purchasing capabilities is only possible if factor markets are imperfect, that is the capability is undervalued)
- Hire more expertise
- Purchase an existing patent
- Acquire or merge with another organisation
- Partner strategically with another organisation.
- Licence technology from another organization.
- Slow way: an organisation can develop them over time.
- Leverage R&D to create a new product.
- Knowledge management & training.
- Superior leadership.
In either case for an organisation to develop internally or acquire externally any capability that could lead to a competitive advantage needs to have superior information or be able to capitalize on existing capabilities (some complementary capability that will enhance the value from the purchased or developed capability) to build their capabilities, or alternatively they can get lucky.
