There are 2 tools to help the firm to identify and build its core competencies.
- 1st Tool: consists of 4 specific criteria of sustainable competitive advantage that firms can use to determine those capabilities that are core competencies.
- 2nd Tool: is the value chain analysis. Firms use this tools to select the value-creating competencies that should be maintained, upgraded, or developed and those that should be outsourced.
In this article, we will only discuss about the first tool only.
4 Criteria of Sustainable Competitive Advantage
1. ValuableValuable capabilities allow the firm to exploit opportunities or neutralize threats in its external environment. By effectively using capabilities to exploit opportunities, a firm creates value for customers.
2. RareRare capabilities are capabilitiesthat few, if any, competitors possess. A key question to be answered when evaluating this criterion is, “How many rival firms possess these valuable capabilities?” Capabilities possess by many rivals are unlikely to be sources of competitive advantage for any one of them. Instead, valuable but common (i.e., not rare) resources and capabilities are sources of competitive parity. Competitive advantage results only when firms develop and exploit valuable capabilities that differ from those shared with competitors.
3. Costly to Imitate Costly-to-imitate capabilities are capabilities that other firms cannot easily develop. Capabilities that are costly to imitate are created because of one reason or a combination of three reasons:
a) Unique historical conditions. As firms evolve, they pick up skills, abilitise and resources that are unique to them, reflecting their particular path through history. A firm with unique and valuable organizational culture that emerged in the early stages of the company’s history may have an imperfectly imitable advantage over firms founded in another historical period - one which less valuable or less competitively useful values and beliefs strongly influenced the developmentof the firm’s culture. An organizational culture is a source of advantage when employees are held together tightly by their belief in it.
b) Causally ambigous. This occurs when the link between the firm’s capabilities and its competitive advantage is causally ambigous. In these instances, competitors can’t clearly understand how a firm uses its capabilities as the foundation for competitive advantage. As a result, firms are uncertain about the capabilities they should develop to duplicate the benefits of a competitor’s value-creating strategy.
c) Social complexity. Social complexity means that at least some, and frequently many, of the firm’s capabilities are the product of complex social phenomena. Interpersonal relationships, trust, friendship among managers and between managers and employees, and a firm’s reputation with suppliers and customers are example of social complex capabilities.
4. NonsubstitutableNonsubstitutable capabilitites are capabilities that do not have strategic equivalents. This final criterion for a capability to be source of competitive advantage is that there must be no strategically equivalent resources that are either not rare or imitable. Two valuable firm resources (or two bundles of firm resources) are strategically equivalent when they each can be separately exploited to implement the same strategies. In general, the strategic value of capabilities increases as they become more difficult to substitute.The more invisible capabilities are, the more difficult it is for firms to find substitutes and the greater the challenge is to competitors trying to imitate a firm’s value-creating strategy. Firmspecific knowledge and trust base working relationships between managers and non-managerial personnel are capabilities that are difficult to identify and for which finding a substitute is challenging. However, causal ambiguity may make it difficult for the firm to learn and may stifle progress, because the firm may not know how to improve processes that are not easily codified and thus are ambiguous.