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Resources and capabilities serve as the foundation upon which companies formulate and implement value creating strategies so that the company can achieve strategic competitiveness and earn above average returns.
However, not all of a company’s resources and capabilities represent strategic assets, assets that have competitive value and the potential to serve as a source of competitive advantage. If the company has a deficiency in some of its resources, it may not be able to achieve strategic competitiveness. For example, insufficient financial resources may prevent the company from implementing the processes or integrating the activities required to add superior value by limiting the company’s ability to hire workers with the necessary skills or to invest in the capital assets (facilities and equipment) that are needed.
Thus, companies not only are challenged to scan the external environment to identify opportunities that can be exploited, but also to have an in-depth understanding of company resources and capabilities. This will enable the company not only to develop strategies that enable it to exploit external opportunities but also to avoid competing in areas where the company’s resources and capabilities are inadequate. Some indicators of competitive strengths and weaknesses are shown below in Table below.
| Signs of strength and Weakness in Competitive Position | |
| Signs of Competitive Strength | Signs of Competitive Weakness |
| Important core competencies | Confronted with competitive disadvantages |
| Strong market share (or a leading market share) | Losing ground to rival companies |
| A pace-setting or distinctive strategy | Below-average growth in revenues |
| Growing customer base and customer loyalty | Short on financial resources |
| Above-average market visibility | A slipping reputation with customers |
| In a favorably situated strategic group | In a favorably situated strategic group |
| Concentrating on fastest growing market segments | In a strategic group destined to lose ground |
| Strongly differentiated products | Weak in areas where there is the most market potential |
| Cost advantages | A higher-cost producer |
| Above-average profit margins | Too small to be a major factor in the market place |
| Above-average technological and innovational capability | Not in good position to deal with emerging threats |
| A creative, entrepreneurially alert management | Weak product quality |
| In position to capitalize on opportunities | Lacking skills and capabilities in key areas |
When the company’s resources and capabilities result in a core competence, the company will be able to produce goods or services with features and characteristics that are valued by customers. This implies that companies can implement value creating strategies only when its capabilities and resources can be combined to form core competencies.
The question is asked: “How many core competencies are required for a competitive advantage?” McKinsey & Company recommends that companies identify 3 or 4 competencies around which to frame their strategic actions. For example, McDonald’s has exactly four competencies (in real estate, restaurant operations, marketing, and its global infrastructure).
