Developed by John Kay, the Distinctive Capabilities Framework captures those capabilities our organization has, which cannot be replicated by competition. Through his research, he identified 3 such “Distinctive Capabilities:”
These 3 capabilities are the source of superior performance and sustainable competitive advantage for successful firms.
This framework was developed after extensive research by Kay into the origin of corporate and industrial success. He interviewed many successful business owners and analyzed corporate earnings, annual reports and case studies. Through his research, he determined success is dependent on the relationship a business maintains with its suppliers, customers, shareholders, and employees. Continuity and stability in these relationships is essential for a flexible and collaborative response to change.
Note that Key’s strategy framework differs from traditional Resource-based Strategy theory, which focus on establishing competitive advantage by commanding strategic assets. The Distinctive Capabilities Framework, rather, takes a Relationship-based Strategy view.
This framework can be used in the process of defining a company’s strategy, to broaden awareness of the sources of competitive advantage, and to find ways to sustain them.
Let’s take a deeper look at each of the 3 distinctive capabilities.
Architecture refers to the structure of relational contacts within or around the organization with customers, suppliers, and employees. Architecture can add value with organizational knowledge and routines, flexible response to change, and an easy and open exchange of information.
Distinctive Capabilities related to Architecture depend on relational contracting. There is a collective interest in coordinating efforts for the benefit of the organization. The structure relies on continued mutual commitment to monitor and enforce its terms
An organization with distinctive architecture gains strength from the ability to transfer firm product and market specific information within the organization and to its customers and suppliers.
If we have possess the Architecture Distinctive Capability, we can respond quickly and flexibly to changing circumstances.
Reputation is the most powerful method of conveying information to consumers in a business relationship and includes customers’ own experience, quality signals (e.g. price, promotion), guarantees, warranties, word of mouth, association with partner brands, etc. When customers search for and experience goods and services, the seller wants to signal quality and to start a sequence of transactions on which to build a relationship.
If a seller has an established reputation, it will help assure the buyer of high quality when unfamiliarity with the product or service means that an informed decision cannot be made.
Reputation is built over time. It is much easier to maintain, than to create.
Innovation is an obvious source of Distinctive Capability. In fact, it is often the most innovative companies who are proven to be the most successful in the long run. However, innovation is less often a sustainable or appropriable source, because successful innovation quickly attracts imitation.
Typically, transforming an innovation into a competitive advantage requires the development of a powerful range of supporting strategies. This is especially true due to the uncertainty of whether demand for a product will remain and whether there will be an increase in competition within the marketplace as a result of the original innovation.
Many successful companies have transformed of an initial Distinctive Capability based on Innovation or Architecture to a more enduring one derived from Reputation.
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