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Competing On Capabilities
Shantanu Dutta
– Understanding Company Capabilities
– P&G
– My research and findings on capabilities and firm
performance in the semiconductor industry
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Sustainable Competitive Advantage and
Company Capabilities
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Firms within the same industry vary
significantly in their performance.
This occurs because firms differ in their ability
to maintain sustainable competitive
advantage.
A key component which enables firms to
maintain sustainable competitive advantage
is their organizational capabilities.
We will explore the notion of capabilities
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Role of Capabilities and Resources In
Profitability
Imperfect
Imitability
Imperfect
Mobility
Firm A
Superior Resources
Superior Capabilities
Firm B
Firm C
…
…
Firm N
Competitive Dynamics
Erodes Advantages
Competitive
Advantage
Firm’s
Profitability
Competing Firms
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Identifying Company Capabilities
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In a dynamic business environment marketing
strategy has to become more dynamic
Essence of successful strategy : Identify and develop
hard- to- imitate organizational capabilities that
distinguish a company from its competitors in the
eyes of customers
Three core features of such capabilities :
– they make a significant contribution to the perceived benefits
of the customer who consumes the end product
– they provide potential access to a wide variety of markets
– they are difficult for competitors to imitate
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P&G’s Organizational Capabilities
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Managing and organizing the marketing process
– P&G’s extraordinary depth of staff resources
dedicated to understanding consumers and other
market research was considered a key
competitive advantage
– The major strength of P&G’s consumer research
was the quality of interviewing and consistent
methodology among projects. This provided large
data bases of comparable research over several
years from which P&G could establish norms and
accurately track changing consumer perceptions
and habits.
Fortune 1998: P&G manages every element of its
business with a painstaking precision that most
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organizations fail to approach.
P&G: Results of Organizational Capabilities
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Thorough organization of the marketing activities
ensure that consumers perceive the benefits in the
manner that P&G would like them to perceive.
Brand equity for P&G
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Shantanu Dutta
Marshall School of Business, University of
Southern California
CONCEPTUALIZING & MEASURING
FIRM’S CAPABILITIES
Presentation To:
Marketing Science Institute Board of Trustees Meeting
November 4, 1999
Resources and Capabilities: Key
Concepts

Resources: are assets that are
 Externally available and not firm specific
 Owned or controlled by the firm
 Convertible to achieve the firm’s goals/objectives

Capabilities: are organizational processes used to
deploy resources and are
 Information-based and firm-specific (and hence
display imperfect mobility)
 Developed through complex interactions among
the firm’s resources (and hence display imperfect
imitability)
 Form the basis for the firm’s competitive
advantage
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Resources and Capabilities: The Case
of R&D
R&D Expenditure
R&D Capability
Technological
Base
Innovative
Output
Conceptualizing Firm’s Capabilities
Capabilities refers to a firm’s “[ability to] deploy
resources to effect a desired end”
A firm exhibits superior capability if it is able to
deploy its resources more efficiently than other
competing firms
A firm with a higher capability should be able to
achieve a higher level of objectives/goals for the
same set of resources
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Description of Data
 Secondary data on 92 firms, one SIC
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code (3674) from 1984-1994.
Some firms in the sample: Intel, Cirrus,
AMD
Business-to-business setting: Buyers are
firms like Compaq and Dell
Financial, Operations, Marketing data for
sample firms from Compustat
Patent data for firms from the USPTO
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Application To Semiconductor Industry
RESOURCES
Technical Base
Advertising Stock
Stock of Marketing Expenditure
Relationship Expenditure
Installed Base
FIRM
Marketing Capability
Marketing Function
Sales
R&D Capability
Technical base
Cumulative R&D Expenditure
Marketing Capability
R&D Function
QualityAdjusted
Technological
Output
Operations Capability
Output
Cost of Capital
Labour Cost
Technical Base
Marketing Capability
Operations Function
Cost of
Production
Firm’s
Financial
Performance
Findings: Role of Marketing In
Technological Innovation
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Marketing capability has a significant impact
on a firm’s ability to come up with
technological innovations
The impact of marketing capability on
innovativeness is greatest for firms which
already have a good technological base
A firm’s prior technological base has a
significant impact on its marketing capability
Impact of Firm’s Functional
Capabilities on Profitability
 Key Result:
 The most significant determinant of
profitability is the combination of R&D and
marketing capabilities
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Distribution of Marketing Inefficiency
Distribution of Marketing Inefficiency Across
Firms
30
No. of Firm s
25
20
15
10
5
0
0-5
5-10
10-15
15-20
Marketing Inefficiency (%)
20-25
Distribution of R&D Inefficiency
Distribution of R&D Inefficiency Across
Firms
No. of Firms
25
20
15
10
5
0
0-5
5-10
10-15
15-20
R&D Inefficiency (%)
20-25
Distribution of Capabilities:
Implications
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Average marketing capability lower than
average R&D capability
Implication: Lots of room for improvement in
marketing capability
More variance in marketing capability than in
R&D capability across firms
Implication: Greater bang for buck in
improvement in marketing capability
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Some Examples of Organizational
Capabilities
Logistics/Product Design/Manufacturing
-Ability to reduce manufacturing costs
-Ability to protect/exploit patents
-Ability to customize products
-Relationship with key suppliers
-Flexible and adaptive manufacturing
-Strong track record of innovative
R&D
Marketing
-Ability to manage collaborators
/channels
-Ability to develop creative market
communications
-Ability to develop strong/loyal
customers and relationships
-Ability to offer high quality service
(technical support, repair, returns, etc.)
-Ability to introduce stream of
innovative products quickly to market
-Ability to develop products that
embody ease of use’
-Ability to develop customized products
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