Core competencies are the foundation for competitive advantage and organization’s success. To reach for sustainable competitive advantage, companies need to identify their unique resources, capabilities and competencies by studying the internal environment of the firm. The Components of Internal Analysis will guide the company towards Competitive Advantage; first identify resources second split them into tangible and intangible, third define your core competencies and their development, forth use criteria to discover what resources and capabilities are your core competencies, fifth analyze the company’s value chain to determine where the resources, capabilities, and core competencies can create value. And finally this value will provide a base for creating strategies to develop competitive advantage.
The relationship between resources, capabilities and core competencies is linear; resources are the foundation of the capabilities and capabilities are the foundation of core competencies and the core competencies are the foundation for competitive advantage. When all resources are being used effectively and efficiently, the company will reach competitive advantage. This strategy is called RBV; Resource Based View.
Resources have two categories:
Tangible resources can be observed and quantified ex: financial resources (funds), organizational resources (reporting structures), Physical resources (location, equipments), technological resources (trademarks, copyrights)
Intangible resources are assets that are set profoundly in the firm’s history and have built up after a while ex: human resources (knowledge, trust, skills), innovation resources: (capacity to innovate), reputational resources (brand name, reputation). Intangible resources are not seen and it’s difficult for competitors to analyze or even to imitate.
In order to provide competitive advantage, the resources should be Valuable to Help a firm defuse threats or use opportunities, Rare which are not possessed by others, imperfectly imitable that are Costly to Imitate and non substitutable like organizational culture. But without organization the resources will not be exploited correctly. While deploying resources to reach an end result, they become capabilities because resources are not productive on their own and when they are used in the best way possible they become capabilities. Four Criteria that exists in competitive advantage can verify if capabilities can lead to a sustainable competitive advantage
Durability: if the resources can become depreciated or obsolete, because capabilities are usually durable
Non-Transparency: the strategy of the company shouldn’t be easy to imitate
Non-Transferability: the resources should be hard to transfer
Replicability: capabilities should be complex, not to be replicable
Usually, the base of most capabilities is in the skills and knowledge of the employees. Capabilities surface with time through complex connections between tangible and intangible resources which are unique skills and knowledge that are performed better than their competitors. Capabilities usually exist in specific functional areas like distribution, Human resources, and management information systems and many others.
When capabilities possess all above four criteria, they are effectively called core competencies. On the other hand, every core competence is a capability, but not every capability is a core competence. In operations, for a capability to be a core competence, it should be valuable and non substitutable from a customer’s opinion, however unique and inimitable from a competitor’s opinion. To assure success, there should be a link between capabilities and competitive advantage and the link should be ambiguous; Causal ambiguity is when the link cannot be easily shown or proven, so rivals can’t tell how the company uses the capabilities to achieve competitive advantage. Sustaining and developing more than four core competencies may affect negatively the firm from focusing on exploiting its competencies.
After identifying competencies, the value chain tool helps select the competencies that create value, competencies that should be preserved and improved or that should be outsourced. Each activity should be inspected in relation to rival’s talents and it should be rated as better, equal, or inferior. A capability to become a core competency and to provide competitive advantage it should allow the company to perform better than its rivals or to perform an activity that competitors cannot execute. Sustainable competitive advantage only exists until competitors learn or discover who to imitate it. A competitive advantage is better be relied on intangible resources to create more sustainability like the employees and a specific innovation, not like tangible resources.
Toyota applied the RBV to use their resources and capabilities and to sustain competitive advantage in the vehicle industry. Their resources include physical, technological, intellectual human capital, buildings, reputation and market resources that were built over the years. They used their resources and invested a lot of money in a very effective way to exploit all their resources in a way to create competencies. By supporting their physical production and the technology used in the production and the human resources working with this technology they created some flexible production methods to standardize production and to produce a cheap and reliable Toyota car in many market around the globe. To supply all the markets Toyota established many facilities in Africa, America, Europe, Asia, Japan and many others. Toyota knew that the intellectual resources are the hardest to find for competitors so they used their human resources with special knowledge and skills to excel in specific areas; lean production, supply chain management and inventory management. The implementation of intellectual capital was capable of transforming the resources into competencies especially in lean production, supply chain management and inventory management. Because financial issues are always arising, the economy is unstable and competition is very hustle Toyota relied on knowledge to enrich its resources to become capabilities. Their knowledge is mostly originated from their own experiences in problem solving and learning from their mistakes. They use a nonstop learning and nonstop improving strategy to stay ahead of competitors in the market. Toyota’s lean production is so specific and complex system that cannot be imitated by competitors and their low cost production and low cost product with high quality created a mix that cannot be understood by competitors, this situation in a market is casual ambiguity, and it’s very rare for companies to reach this level. Many automobile manufacturers are still trying their best to reach Toyota or to beat this company. Toyota, still going strong, they added to their collection the hybrid cars which were a huge success and they couldn’t have done this without all their resources and capabilities all combined and working together. Their sales force combined with their inventory helped the company to answer their customer needs faster than their competitors. Putting together their technological resources, heir financial resources, technological and machinery lead the company to their competence in lean production to reach a sustainable competitive advantage. Outsourcing was a very successful decision for Toyota, after studying their value chain they realized that outsourcing their productions will be a major help in reaching this competitive advantage, so they spend less time in designing the car and a faster way to deliver to the customers. They built a competence in supply chain by using outsourcing. With time they reach a point where they put their suppliers in an organized ladder to know exactly who to reach for what products in a specific time. This kind of directory and the relationship they built with their suppliers can only be done over many years in experience in the market. All this knowledge and experience and the decision to outsource are the competencies that helped Toyota to sustain their competitive advantage in the market today. Of course with the help of a marketing and advertising team who knew exactly how to build the company’s good reputation and when and how to satisfy the customers with new and innovative products. They also added a customer service department with warrantees and guarantees.
Resource based view is an excellent strategy and it is essential for a firm to complete a sustainable competitive advantage by underlining its resources, capabilities and competencies. However, it is not an exceptional way and a firm shouldn’t just focus on internal factors and abandon the external market.
Competitive advantages don’t last forever; in time the competition will use your resources and capabilities to duplicate your firm’s value. With globalization, reaching a sustainable competitive advantage is very challenging.
Companies must use their current advantages at the same time as using their resources and capabilities to outline new advantages that can lead to future competitive accomplishment.