A company's business model and strategy must be well matched to its collection of resources and capabilities. A resource is a competitive asset that's owned or controlled by a company. and a capability is the capacity of a company to completely perform some internal activity. Capabilities are developed and enabled through the deployment of company resources. Long-term competitive advantage requires the ongoing development and expansion of resources and capabilities to pursue emerging market opportunities and defend against future threats to its market standing and profitability.
Organizational capabilities are developed and enabled through the deployment of a company's resources or some combination of its resources. Some capabilities rely heavily on a company's intangible resources such as human assets and intellectual capital. What is most telling about a company's aggregation of resources and capabilities is how powerful they are in the marketplace. The competitive power of a resource or capability is measured by how many of the four tests for sustainable competitive advantage it can pass. The tests are often referred to as the VRIN tests for sustainable competitive advantage, an acronym for valuable, rare, imitatable, and non-substitutable.
The first two tests determine whether the resource or capability may contribute to the competitive advantage. The last two determine the degree to which the competitive advantage potential can be sustained. Is the resource or capability competitively valuable?
All companies possess a collection of resources and capabilities. Some have the potential to contribute to competitive advantage, while others do not. Is the resource or capability rare, or is it something that rivals lack?
Resources and capabilities that are common among firms and widely available cannot be the source of competitive advantage. Is the resource or capability imitatable or hard to copy? The more difficult and the more expensive it is to imitate a company's resource or capability, the more likely that it can also provide a sustainable competitive advantage.
And finally, is the resource or capability non-substitutable or is it vulnerable to the threat of substitution from different types of resources and capabilities? Resources that are competitively valuable, rare, and costly to imitate may lose much of their ability to offer competitive advantage if rivals possess equivalent substitute resources. If management determines that the company doesn't possess a resource that independently passes all four tests with high marks, it may have a bundle of resources that can pass all of the tests. Resources and capabilities must be continually strengthened and nurtured to sustain their competitive power, and at times they may need to be broadened and deepened to allow the company to position itself to pursue emerging market opportunities.
Organizational resources and capabilities that grow stale can impair competitiveness unless they're refreshed, modified, or even phased out and replaced in response to ongoing market changes and shifts in the company's strategy. In addition, disruptive environmental change may destroy values of key strategic assets, turning static resources and capabilities from diamonds to rust. Management's organizational building challenge has two elements. Attending to ongoing recalibration of existing capabilities and resources and 2. Casting a watchful eye for opportunities to develop totally new capabilities for delivering better customer value and out-competing rivals.
Companies that know the importance of recalibrating and upgrading resources and capabilities make it routine management functions to build new resource configurations and capabilities. A company requires a dynamically evolving portfolio of resources and capabilities in order to sustain its competitiveness and position itself to pursue future market opportunities. A dynamic capability is the ability to modify, deepen, or reconfigure the company's existing resources and capabilities in response to its changing environment or market opportunities.