This concept was first introduced by Igor Ansoff. Whilst best known for his product-market, his contingency model also refers to firm level capabilities which includes organisational values, managerial competencies, organisational structure, processes and technology.
So the idea basically relates to the value of an organisation’s people and culture, and although there may be some overlap with core competencies there is a clear bias towards the organisation value chain whereas core competencies focus much more on the business excellence value chain.
More recently, most of the thinking around capabilities has take place in HR.
Dave Ulrich writes about things an organisation knows how to do well, suggesting that for any organisation to compete successfully in today’s market, it must focus on building not only from the outside but from the inside as well. Some of his earliest common examples of capabilities include those on the slide.
The idea is that businesses can compete on any of these, or other, capabilities. For example, take accountability. Diageo competes mainly on an organisational capability of accountability. Rather than asking people to agree to performance objectives or goals it asks people to make a performance promise, supported by a culture of commitment to deliver (“promises made, promises kept.”) This has given it a much greater ability to develop a strategy and know it will be able to execute this that most other companies - providing a huge competitive advantage (although I’ve heard recently that the culture has become so strong that employees are becoming reluctant to promise anything substantial.)
Ulrich also stresses that the key need is to focus on two or three of these - if a business tries to do everything it won’t become exceptional in any of them.
Business academics, consultants and commentators are increasingly interested in this form of competition too. In particular, though he doesn’t use the term, Gary Hamel has clearly moved on from core competencies to focus on capabilities - see his book, the Future of Management, his site, the Management Innovation Exchange (MIX) and my earlier notes on the new S curve and the changing nature of engagement.
I’m also going to post shortly on McKinsey’s recent interest in this approach as well - so it’s no longer (if it ever was) just an HR idea.
And the reason that both business and HR people are increasingly interested in capabilities is the based on the same logic that Hamel and Prahalad used to support the move to core competencies - that things are just changing too quickly and that competitive positioning is no longer sustainable - that competitors will copy any differentiated position you can find. Well this now applies to core competencies as well - competitors can also copy your businesses processes, technologies and intellectual capital e.g. with patent lifespans generally declining around the world.
But if you develop a differentiated set of organisational capabilities these are much more sustainable - we all know that no business can copy another’s culture even if it would ever make sense to try.