Capabilities-Based Competition Analysis

Introduction

Corporate strategy has become a widely applied term in management discourses. So far, we do not have a universally accepted definition of the term strategy. According to Johnston et al. (2005), strategy refers to the long-term “scope and direction of an organisation” (p. 9). Elsewhere, MacLennan (2013) has defined strategy as the long-term goals or objectives of an organisation. In other words, it is a means through which an organisation gets to fulfil its objectives. Nonetheless, the article by Stalk, Evans, and Shulman (1992) indicates a radical shift in the reason behind competition, wherein an organisation’s internal capabilities form the basis for the realization of a competitive advantage. Towards this end, the essay endeavors to explore the position taken by the article, along with the main weaknesses and strengths of the article. This article review seeks to establish whether the strategy is externally or internally motivated. In particular, the RBV (Resource-Based View) approach has been adopted, and will be compared with the Positioning approach.

Critical Analysis

According to Stalk et al (1992), an organisation’s success rests on the capability at its disposal to incorporate process into capabilities that cannot be easily imitated by competitors. The article by Stalk et al. (1992) is undoubtedly based on the RNV approach. Although the article clearly describes a ‘capabilities-based competition’ as a source of a firm’s competitive advantage, it is also important to realise that the approach in question is anchored in the wider RBV approach. Dransfield (2001) describes capability as the firm’s ability to mobilise human and material resources to undertake a given activity or task. Such resources are essential in promoting efficiencies in the process or task being undertaken, thereby making it harder for competitors to imitate. Armstrong (2011) is of the view that the RBV approach acts as the foundation to the claim that a firm’s key human resources acts as its main source of competitive advantage.

According to the RBV approach, a firm’s internal capabilities and resources are essential in its development of a competitive advantage. Consequently, the management of firms that adopt an RBV always aspire to improve the intellectual or human capital of the organization, ensuring more flexible and intelligent firms relative to those of their competitors (Armstrong, 2011). Consequently, a firm’s competitive advantage hinges on its internal capabilities and resources, and not the position that such a firm occupies in the external environment. In their article, Stalk et al. (1992) explain that the positioning approach is unsustainable when a firm is located in a dynamic market environment. The authors cite the case of Kmart, which had embraced a positioning approach but was soon overtaken by Wal-Mart because the former stuck to its conventional approach to strategy while the latter responded to the dynamic market by embracing internal capabilities as its competitive advantage.

One of the strategies of capabilities-based competition that Wal-Mart adopted, according to Stalk et al. (1992), is cross-docking. This is a supply chain strategy that has enabled Wal-Mart to realise economies of scale by purchasing full truckloads, thereby overcoming handling and inventory costs Stalk et al., 1992). Through cross-docking, Wal-Mart ensures that 85 percent of its goods reach stores via its warehousing system, while Kmart can only send 50 percent of its goods to stores. This way, Wal-Mart realises a 2-3 percent reduction in cost of sales relative to the industry average. Thus, the firm has managed to sustain its everyday low prices. The firm had to incur huge investment costs in installing this system, but its complex nature has made it hard for competitors to replicate, and hence Wal-Mart has established a competitive advantage.

The difference in performance between Wal-Mart and Kmart is also due to the two firms’ individual approaches to strategy. Whereas Kmart resorted to switching suppliers and subcontracting its fleet in pursuit of improved sales performance (López, 2005), Walmart was mainly concerned with long-term performance returns. Accordingly, the firm first took time to carefully understand the process, and then it invested heavily in infrastructure in a bid to support its internal resources and capabilities and hence realise a sustainable advantage (Hooley, Broderick & Möller, 1998). Additionally, the article appreciates the fact that the successful implementation of the RBV approach is not just restricted to the retail industry. For example, Honda managed to take advantage of the first-mover advantage to venture into new businesses and markets by embracing flexible and robust processes.

The article has also provided evidence of the use of capabilities-based strategies in the U.S. banking industry by Wachovia Corporation and Bank One. While the former capitalizes on community banking, the latter adopts a strategy of personalized banking services. Here, Stalk et al. (1992) demonstrate how the RBV approach enables firms to develop new productthereby creating a competitive advantage.

Strengths and Weaknesses

One of the identifiable key strengths of the article under review is that the authors have identified incorporating and sharing a firm’s internal capabilities across various functions and business units as a vital component of the RNV approach. A good example is the implementation by Wal-Mart of processes that cut across the firm’s entire value chain, thus affording it success. The authors further concede that a strategic capability starts and ends with the customer. Moreover, the article acknowledges that front-line staff play a key role in customer satisfaction, and it is important, therefore, to ensure they are fully receptive to customers’ needs, and that they are handsomely compensated, such as through the award of options, as is the case with Wal-Mart. On the other hand, the authors give the impression that the RBV approach acts as a substitute for the positioning approach, as opposed to building on it, which is not the case. Stalk et al. (1992) seem to postulate that strategy revolves around a firm’s behavioural dynamics, as opposed to the product and market structure.

Conclusion

In sum, firms must adopt the RBV approach to augment their positioning strategy, not to replace it. In this case, integrating the two approaches enables a firm to appropriately match environmental opportunities with its superior internal capabilities, thereby realizing a competitive advantage.

References

Armstrong, M. (2011). Armstrong’s Handbook of Strategic Human Resource Management.

Dransfield, R. (2001). Corporate Strategy. London: Heinemann.

Hooley, G. J., Broderick, A. J., & Möller, K. (1998),’ Competitive positioning and the resource-based view of the firm’, Journal of strategic marketing, vol. 6, no. 2, pp. 97-116.

Johnson, G., Scholes, K., Whittington, R. (2005). Exploring Corporate Strategy: Text and Cases. 7th ed. Essex: Prentice Hall, Pearson Education.

López, S.V. (2005), ’Competitive advantage and strategy formulation: The key role of dynamic Capabilities’, Management Decision, vol. 43, no. 5, pp. 661- 669.

MacLennan, A. (2013). Strategy Execution: Translating Strategy into Action in Complex Organizations. New York: Routledge.

Stalk, G., Evans, P., & Shulman, L. E. (1992) “Competing on Capabilities: The new rules of corporate strategy”, Harvard Business Review, March-April, pp. 57-69.