Resource Based View (RBV) defines capability as the ability of a bundle of resources to perform an activity. It is a way of combining assets, people and processes to transform inputs into output. Physical assets, financial resources, human skills are of no use unless these are put to good use, in order to produce results. This can be represented mathematically thus:
C= F (TA, IA, S)
Where C= capability TA = Tangible assets, IA = intangible assets and S = Skills
Capabilities thus, reflect a firm’s capacity to deploy resources that have been purposefully integrated to achieve a desired end state. They emerge over time through a complex process of interactions between tangible and intangible resources. The whole purpose is to create and exploit external opportunities and develop sustained advantages over rivals in the field. Through repetition and constant practice capabilities become stronger and more valuable strategically.
The term competency refers to the ability of an organization to achieve its purpose. It is the ability to perform exceptionally well and increase the stock of targeted resources of an organization. Hamel and Prahalad coined the term core competence to distinguish those capabilities fundamental to a firm’s performance and strategy.
Core competencies are the activities that the firm performs especially well compared to competitors and through which the firm adds value to its goods and services over a long period of time. Core competencies serve as a source of competitive advantage for a firm over its rivals. They emerge over time through an organizational process of accumulating and learning how to deploy organizational resources and capabilities. When developed, nurtured and applied appropriately throughout a firm, core competencies serve as the basis for a firm’s competitive advantages, its strategic competitiveness (strategic competitiveness is achieved when a firm successfully formulates and implements a value – creating strategy – the benefits of which other firms are unable to duplicate or find them too costly to imitate) and its ability to earn above average returns. The important issue here is not capabilities per se, but capabilities relative to others. Experts therefore look at competitive advantage as a firm’s ability to outperform in the industry, to create more value to its customers by running that extra mile. In the present day world simply giving customers what they want is not enough any more to gain an edge firms must help customers learn what they want. For example many consumers did not know much about cellular phones when they were first introduced. Nokia and Ericsson fought to shape consumer perceptions of cellular phones (like other products — fax machines, copiers at home, CD players, ATMs hand held global satellite positioning receivers, multi valve automobile engines, or the Home Shopping Network etc). Consumers were in a learning mode and companies forged strategies like HDFC in home loans, LG in electronics and home appliances market in India, Asian Paints in decoration and industrial paints business to shape their wants. Customers generally want services that are (1) Better and (2) cheaper and they want them to be (3) Faster. We refer to corresponding forms of competitive advantages as (1) Differentiation (2) Cost leadership and (3) Quick response. These different forms of competitive advantages offer critical impetus to a firm’s financial performance.
Skills, capability and competencies:
1) Core Competencies
2) Organizational Capabilities
3) Individuals skills
Competencies: Ability of an organization to increase the stock of targeted resources and achieve its purpose.
Capability: Ability of set of resources to integratively perform a task or an activity.
Skill: Ability of individuals
Source: strategic Management