The concept of capabilities in strategic management is appealing because it suggests that a company’s competitiveness depends on how it does what it does, not only what market it is in. To me and most others with an engineering background this is totally obvious. Any theory that suggests otherwise seems highly implausible and is also rejected by numerous examples of companies with strong and unique engineering skills that manage to create a market for themselves based on their own capabilities.
That is not to say that choice of market is unimportant, but a brilliant plan can easily be ruined if the necessary capabilities are lacking. Similarly, a plan which may appear mediocre on paper may become highly successful if conducted by a team with excellent capabilities. Operations matter, and developing capabilities that make operations successful is a highly strategic issue.
A key element of the capabilities framework is identification of the foundations on which distinctive and difficult–to–replicate advantages can be built, maintained and enhanced (Teece et al. 1997). To my satisfaction, the cited authors also found that “The balance sheet is a poor shadow of a firm’s distinctive competences.” Instead, it is necessary to develop capabilities that help the company to create competitive advantage. This process takes time, and unique and deeply rooted capabilities cannot be bought off–the–shelf.
I would like to offer the following definitions:
Strategic capabilities: High–level routines, resources and competences that are recognised as important in order to create and sustain a competitive advantage.
Operational capabilities: High–level routines, resources and competences that yield the firms operational functions.
Dynamic capabilities: High–level routines, resources and competences that allows a firm to modify its existing operational capabilities.
I’m not taking these definitions out of thin air, please check out chapter 3 of my thesis (PDF, 931kB) if you’re interested in reading more. However, you should not take these definitions as carved in stone. My view, and others’ too I think, of this subject is constantly evolving.
Essentially, strategic capabilities express what a firm wants to be able to do, while operational capabilities determine what it is actually able to do. Dynamic capabilities express the capability to close the gap between existing operational capabilities and desired strategic capabilities.
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