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Monday, May 14, 2012

Organisational Capability Analysis

Analysis of Organisational Capability

In order to develop successful strategies to exploit the external opportunities or control the external threats(Due to  continual changes in external environment) , analysis of an organisation’s capabilities is important for strategy making which aims at producing a good fit between a country’s resource capability and its external situation. Internal analysis helps us understand the organizational capability which influence the evolution of successful strategies.

Many of the issues of strategic development are concerned with changing strategic capability better to fit a changing environment. However, looking at strategic development from a different perspective i.e. stretching and exploiting the organizations capability to create opportunities, it again becomes important to understand these capabilities. The above two perspectives together are called the Resource Based View (RBV) of strategy.

Professionals from different organizations suggest that a firm’s overall strengths and weaknesses and its ability to execute are often found more important to its performance than environmental factors. Internal capabilities and process execution at times allow firms to gain competitive edge over competitors even with relatively lesser resources and lesser advantageous position.


There are three types of resources – Assets, Capabilities and Competencies, which have been  identified under Resource Based View of the firm (RBV). Strategic thinkers explaining the RBV suggest that the organizations are collections of tangible and intangible assets combined with capabilities to use those assets. These help organizations develop understanding these three types of resources and help us to know how a firm’s internal strength and weaknesses affect its ability to compete.

Assets :

The factors of production used by firms in providing its customers with valuable goods and services are called assets. These assets are of two types- tangible assets and intangible assets. Any physical means a firm uses to provide value to its customers form its tangible assets. Similarly, intangible assets are equally valuable for firms but their physical presence cannot be felt or seen. For example, a brand name is a very important resource for any organization even though it is intangible. 

Few examples of Tangible and Intangible Assets :

Capabilities : 

In order to take full advantage of its assets the organization needs to develop skills, as experience suggests that with similar assets two different firms may add value of different amount for themselves. This difference can only be explained by the differences these organizations carry their capabilities in utilizing these assets. For example, in a sector like management education, in a typical segment you will find institutions more or less with similar resources and infrastructure, however, the quality of their output in terms of new professionals for business may be starkly different for different institutions. This is greatly reflected in the type of organizations that pick them up for employment and the kind of job responsibilities they are offered. This difference in output can be explained on account of the skills which these institutions carry with themselves. This position has been found true in case of many Indian companies as well as the multinational corporations.


Most simply put, it refers to the ability to perform. Experts from field of strategy, using the term ‘distinctive competencies’ refer to the critical bundle of skills that an organization can draw on to distinguish itself from competitors. However, in order to have a better understanding of the concept, you need to understand first the resources, which are available to an organization and how they differentiate themselves as competencies or core competencies.

Strategic Importance of Resources  :

1) Available Resources: are those resources that are basic to the capability of any organization which can be listed broadly as: 

Physical Resources: Few examples may be buildings, machinery or operational capacity. However, the specific condition and capability of each resource determines their usefulness.

Human Resources: Traditionally or in today’s knowledge economy both, people are considered as ‘the most valuable asset’ of an organization. Knowledge and skill of people together prove to be a great asset.

Financial Resources of an organization may lie in capital, cash, debtors and creditors and providers of money.

Intellectual capital: Intangible resources include the knowledge that has been captured in patents, brands, business systems and relationships with associates. In knowledge economy intellectual capital is considered as a major asset of many organizations.

Figure-I Shows a relationship between the resources, competencies and the competitive advantage:

2) Threshold Resources 

Organizations need a set of threshold resources to perform in any market and there is a continuous need to improve such resources to stay in business. This becomes inevitable because of the competitors and sometimes the new entrants. We can think of many industries in India like automobile, durable goods, telecom etc. which with the foreign players had to acquire new sets of resources as their threshold resources to survive.

3) Unique Resources 

Unique resources as defined in strategy texts are those resources, which critically underpin competitive advantage. Their ability to provide value in product is better than competitor’s resources and are difficult to imitate. Just think of a big music stores like Planet M or the ones from RPG group, the scale and range of collection of music provides uniqueness to these stores as compared to any of the traditional music shop. Some organizations have patented products or services that give them advantage for some service organizations, unique resources may be particularly the people working in that organization.

4) Core Competencies 

Above, we learnt that competencies refer to the ability to perform. The difference in performance between organisations in the same market is rarely explainable by differences in their resource base, since resources can usually be imitated or traded. Superior performance are actually determined by the way in which resources are  deployed to create competences in the organisation’s activities. An organization needs to achieve a threshold level of competence in all of the activities and processes.

Core competencies are activities or processes that critically underpin an organization’s competitive advantage. They create and sustain ability to meet the critical success factors of particular customer groups better than other provides ways that are difficult to imitate. Again as put forward by the resource based view, a series of guidelines are discussed below, which you can use to asses what constitutes a valuable asset capability or competence.

Scarcity : This is a very basic test to understand its resource value. Just in case any resource is widely available, then it’s not likely to be a source of competitive advantage. 

Inimitability : A resource that is easy to imitate is of little competitive advantage because it will be widely available from a variety of sources. e. g. services / design etc. Inimitability however does not last for long and at some point competition matches or even betters any offering. However, firm’s should make an effort which may temporarily limit imitation. Physical uniqueness, causal ambiguity or scale deterrence are few ways how organizations attempt doing this. 

Durability : Hyper competitive market conditions have a tendency to make competitive advantage less and less sustainable. Durability in such situations become a more stringent test for valuing resources, capabilities and competencies. 

Superiority : Competencies are valuable only if they manifest themselves as competitive advantages and this means that they are superior to those held by rivals. Being good is not enough and a firm must be better than its competitor. The above points lead to determining how a firm’s internal resources might be linked to producing a competitive advantage and which resources actually fit in so as to produce a competitive advantage.


Critical success factors are those which contribute to organization’s success in a competitive environment and therefore the organization needs to improve on them since poor results may lead to declining performance. Organizations depending on the environment they operate in and their own internal conditions can identify relevant critical success factors. However, literature on strategy suggests few general sources of critical success factors that have been identified based on empirical research. They are as follows: 

Industry Characteristics: Industry specific critical success factors are factors critical for the performance of an industry. For example in hospitality industry excellent and customized service, wide presence and an excellent booking and reservation system is critical. Similarly for an airline industry fuel efficiency, load factors and an excellent reservation system are critical.  

Competitive Position: Critical success factors for a firm may also be determined by its relative position with respect to its competitors. In some instances, industry is dominated by few large players and their actions lead to determining the critical success factors for the industry which smaller players have to ensure for their success. For example, for the pathological laboratory centers earlier the CSF was authentic, hygienic and scientific testing facilities until few big players added service features like door to door sample collection or home delivery of reports. Very soon approachability and ease became the additional CSFs for the players. 

General environment viewed from any of the dimensions may determine the CSFs. Most simply put in years of drought, availability of water is at premium and having access to assured source of water can become the critical success factor for many industries like tanneries etc. For the same industry considering environmental norms, adhering to anti pollution standards becomes critical success factor.


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