Chapter 05

Key Work feature: Kay's distinctive capabilities

In order to survive and grow all organizations are in search of a competitive advantage. The extent to which competitive advantage is sustainable is hotly debated. For example, some strategists argue that the increasing turbulence inherent in markets ensure that any competitive advantage can only ever be ephemeral, (D’Aveni, 1999). Or, put another way, organizations must constantly re-invent themselves if they are to stay one step ahead of their competitors.

In discussing the process by which competitive advantage is achieved Kay (1993) states that the most relevant factor is the distinctive capabilities of an organization’s resources. Kay’s work therefore sits within the resource-based view of strategy. The resource-based view of competition draws upon the resources and capabilities that reside within an organization, or that an organization might want to develop, in order to achieve a sustainable competitive advantage. Resources may be thought of as inputs that enable an organization to carry out its activities. Resources in and of themselves confer no value to organizations. It is only when they are put to some productive use that value follows. Resources can be categorised as tangible and intangible.

An organization’s capabilities are only distinctive if they emanate from a characteristic which other organizations do not possess. In this respect Kay argues that it is rather misguided to suggest that organizations should seek to imitate a distinctive capability, since by their very nature once other organizations acquire them they cease to be distinctive. To provide an organization with competitive advantage a distinctive capability must also possess the qualities of sustainability and appropriability. These elements are common to all theorists within the resource-based view of strategy. Sustainability refers to the distinctive capabilities of a resource being able to persist over time. Appropriability means the distinctive capabilities of a resource benefit the organization in contrast to other parties such as employees or customers.

These distinctive capabilities emanate from what Kay refers to as, architecture, reputation, and innovation. It is interesting to note that central to Kay’s notion of distinctive capabilities is the idea of stakeholders. The distinctive capabilities that derive from architecture, reputation, and innovation are part of a process that involves an organization’s employees, its customers, shareholders, and suppliers. Added to this are a number of relevant organizations to which the firm may network. An organization’s architecture therefore refers to the system of relational contracts that exist inside and outside the organization.

Where Prahalad and Hamel argue that many major corporations had the potential to build up core competencies but senior management lacked the vision to see the company other than as a portfolio of discrete businesses, Kay sees a more prominent role for an organization’s architecture. In common with Kay, Prahalad and Hamel recognise that core competencies (strategic capabilities) need to be protected in order to allow the organization to appropriate the value that derives from its use. This appropriability is made easier precisely because it derives from the work of all employees rather than a few individuals.

The same point holds true if we look at sustainability. If the different relational contracts that an organization enters into with its myriad stakeholders is difficult for its competitors to identify this limits their ability to imitate. As these relationships are implicit, complex, and embedded in and around the organization it ensures that architecture remains a source of competitive advantage. Similarly Kay’s concept of reputation is also sufficiently relational-based that it prevents easy identification and imitation. An organization can use its reputation to provide access to a wide variety of markets. We see this with Honda which uses its capabilities in engine design and production to leverage its core competencies in markets such as cars, powerboats and lawnmowers.

Distinctive capabilities that derive from innovation are linked to an organization’s architecture. For example, an organization’s ability to innovate may simply be part of the structure, processes and relationships that exist inside the organization – its routines. This is particularly evident in organizations such as 3i whose established routines ensure that innovation is part of the fabric of the organization. Kay’s notion of distinctive capabilities is much more inter-dependent recognising as it does the realities of organizational behaviour.

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Oxford University Press, Online Resource Centre, Chapter 05.

Chapter 05