Slide 3.

The Strategic Position

3: Strategic Capabilities

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.2

Learning outcomes

• Identify what comprises strategic capabilities in terms of

organisational resources and capabilities and how these
relate to the strategies of organisations.
• Analyse how strategic capabilities might provide
sustainable competitive advantage on the basis of their
value, rarity, inimitability and organisational support
(VRIO).
• Diagnose strategic capability by means of
benchmarking, VRIO, value chain analysis, activity
mapping and SWOT analysis.
• Consider how managers can develop strategic
capabilities for their organisations.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.3

Strategic capabilities: the key issues

Figure 3.1 Strategic capabilities: the key issues

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.4

Resource-based strategy

The resource-based view (RBV) of strategy

asserts that the competitive advantage and
superior performance of an organisation is
explained by the distinctiveness of its
capabilities.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.5

Resources and competences

• Resources are the assets that organisations

have or can call upon (e.g. from partners or
suppliers),that is, ‘what we have’ .
• Capabilities are the ways those assets are
used or deployed effectively, that is, ‘what we
do well’.

• Typically Related

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.6

Components of strategic capabilities

Table 3.1 Components of strategic capabilities

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.7

Capabilities

• Capabilities, however effective in the past, can

become less relevant as industries evolve and
change.
• Such ‘capabilities’ can become ‘rigidities’ that
inhibit change and become a weakness.

• Dynamic capability is the ability of an

organisation to renew and recreate its strategic
capabilities to meet the needs of changing
environments.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.8

Threshold and distinctive

capabilities (1)

• Threshold capabilities are those needed for an

organisation to meet the necessary requirements to
compete in a given market and achieve parity with
competitors in that market – ‘qualifiers’.
• Distinctive capabilities are those that critically underpin
competitive advantage and that others cannot imitate or
obtain – ‘winners’. To achieve competitive advantage.

• A bundle of constituent skills and technology?

• Core competences

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.9

Threshold and distinctive

capabilities

Table 3.2 Threshold and distinctive capabilities

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.10

Core competences

Core competences1 are the linked set of

skills, activities and resources that, together:
• deliver customer value
• differentiate a business from its competitors
• potentially, can be extended and developed as
markets change or new opportunities arise.
1G. Hamel and C.K. Prahalad, ‘The core competence of the
corporation’, Harvard Business Review, vol. 68, no. 3 (1990),
pp. 79–91.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.11

Strategic capabilities and

competitive advantage

The four key criteria by which capabilities can

be assessed in terms of providing a basis for
achieving sustainable competitive advantage
are:
• value,
• rarity, VRIO1
• inimitability and
• Organisational support

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.12

VRIO (1)

V – Value of strategic capabilities

Strategic capabilities are of value when they:
• take advantage of opportunities and
neutralise threats, (IKEA)
• provide value to customers
• provide potential competitive advantage
• at a cost that allows an organisation to realise
acceptable levels of return

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.13

VRIO (2)

R – Rarity
• Rare capabilities are those possessed uniquely
by one organisation or by a few others only.
(E.g. a company may have patented products,
have supremely talented people or a powerful
brand.)
• Rarity could be temporary.
(Eg: Patents expire, key individuals can leave
or brands can be de-valued by adverse
publicity.)
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.14

VRIO (3)
I – Inimitability
Inimitable capabilities are those that competitors find
difficult to imitate or obtain.
• Competitive advantage can be built on unique
resources (a key individual or IT system) but these
may not be sustainable (key people leave or others
acquire the same systems).
• Sustainable advantage is more often found in
competences (the way resources are managed,
developed and deployed) and the way
competences are linked together and integrated.
- Internal Linkages
- External Interconnectedness
- Culture and History
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.15

Criteria for the inimitability of

strategic capabilities

Figure 3.2 Criteria for the inimitability of strategic capabilities

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.16

VRIO (4)

O – Organisational Knowledge
Organisational-specific, collective intelligence,
accumulated through formal systems and
people’s shared experiences
- As organisations grow bigger, how do you share
knowledge?

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.17

Criteria for the inimitability of

strategic capabilities
V: Do resources and capabilities exist that
are valued by customers and provide
potential competitive advantage?
R: Do resources and capabilities exist that
no (or few) competitors possess?
I: Are resources and capabilities difficult and
costly for competitors to imitate?
O: Is the organisation appropriately
organised to exploit the resources and
capabilities? Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.18

Organisational knowledge

Organisational knowledge is the collective

intelligence, specific to an organisation,
accumulated through both formal systems and
the shared experience of people in that
organisation.

Some of this knowledge is ‘Tacit’ knowledge

that is, more personal, context-specific and
hard to formalise and communicate – so it is
difficult to imitate, for example, the knowledge
and relationships in a top R&D team.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.19

Benchmarking

Benchmarking is a means of understanding

how an organisation compares with others –
typically competitors.
Two approaches to benchmarking:
• Industry/sector benchmarking - comparing
performance against other organisations in the
same industry/sector against a set of
performance indicators.
• Best-in-class benchmarking - comparing an
organisation’s performance or capabilities
against ‘best-in-class’ performance – wherever
that is found even in a very different industry.
(E.g. BA benchmarked its refuelling operations
against Formula 1). Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.20

The Value Chain

• The value chain describes the categories of

activities within an organisation which,
together, create a product or service.
• The value chain invites the strategist to think of
an organisation in terms of sets of activities –
sources of competitive advantage can be
analysed in any or all of these activities.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.21

The Value Chain

Figure 3.4 The value chain within an organisation

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.22

The value network

• The value network comprises the set of inter-

organisational links and relationships that are
necessary to create a product or service.
• Competitive advantage can be derived from
linkages within the value network.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.23

The value network

Figure 3.5 The value network

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.24

Uses of the value chain

• A generic description of activities –

understanding the discrete activities and how
they both contribute to consumer benefit and
how they add to cost.
• Identifying activities where the organisation
has particular strengths or weaknesses
• Analysing the competitive position of the
organisation using the VRIO criteria – thus
identifying sources of sustainable advantage.
• Looking for ways to enhance value or
decrease cost in value activities (e.g.
outsourcing) Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.25

Uses of the value network

• Understanding cost/price structures across

the value network – analysing the best area
of focus and the best business model .
• Identifying ‘profit pools’ within the value
network and seek to exploit these.
• The ‘make or buy’ decision: deciding which
activities to do ‘in-house’ and which to
outsource.
• Partnering and relationships – deciding who
to work with and the nature of these
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.26

SWOT analysis

SWOT summarises the strengths,

weaknesses, opportunities and threats likely
to impact on strategy development.

INTERNAL STRENGTHS WEAKNESSES

ANAYSIS

EXTERNAL OPPORTUNITIES THREATS

ANALYSIS

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.27

Uses of SWOT analysis

• Key environmental impacts are identified using the

analytical tools explained earlier.
• Scoring (e.g. + 5 to - 5) can be used to assess the
interrelationship between environmental impacts
and the strengths and weaknesses.
• SWOT can be used to examine strengths,
weaknesses, opportunities and threats in relation
to competitors.
• SWOT can be used to generate strategic options–
using a TOWS matrix.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.28

The TOWS matrix

Figure 3.6 The TOWS matrix

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.29

Dangers in a SWOT analysis

• Long lists with no attempt at prioritisation.

• Over generalisation – sweeping statements
often based on biased and unsupported
opinions.
• SWOT is used as a substitute for analysis – it
should result from detailed analysis using the
frameworks in Chapters 2 and 3.
• SWOT is not used to guide strategy – it is
seen as an end in itself.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.30

Developing strategic capabilities (1)

Internal capability development:

• Leveraging capabilities – identifying capabilities
in one part of the organisation and transferring
them to other parts (sharing best practice).
• Stretching capabilities - building new products
or services out of existing capabilities.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.31

Developing strategic capabilities (2)

• External capability development – adding

capabilities through mergers, acquisitions or
alliances.
• Ceasing activities – non-core activities can be
stopped, outsourced or reduced in cost.
• Monitor outputs and benefits – to understand
sources of consumer benefit and enhance
anything that contributes to this.
• Managing the capabilities of people – training,
development and organisation learning.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.32

Chapter summary (1)

• Strategic capabilities comprise both resources and

competences.
• The concept of dynamic capabilities highlights that
strategic capabilities need to change as the market
and environmental context of an organisation
changes.
• Sustainability of competitive advantage is likely to
depend on an organisation’s capabilities being of at
least threshold value in a market but also being
valuable, relatively rare, intimable and organisational
fit.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.33

Chapter summary (2)

Ways of diagnosing organisational capabilities

include:
• Benchmarking as a means of understanding the
relative performance of organisations.
• Analysing an organisation’s value chain and value
network as a basis for understanding how value to
a customer is created and can be developed.
• Activity mapping as a means of identifying more
detailed activities which underpin strategic
capabilities.
• SWOT analysis as a way of drawing together an
understanding of strengths, weaknesses,
opportunities and threats an organisation faces.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.34

Tutorial Class Next Week

1. Key market segment (or an example)

2. VRIO
3. SWOT

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011