Resources, capabilities and core competencies are the characteristics that make up the foundation of competitive advantage.Resources are the sources of a firm’s capabilities.Capabilities in turn are the sources of a firm’s competencies, which are the basis of competitive advantages.
As shown in the figure combination of resources and capabilities lead to create core competencies. Source: Hitt, Ireland & Hoskisson ‘Strategic Management-Competitiveness and Globalization’ p75 Strategic Capabilities
Capabilities are the firm’s capacity to deploy resources purposely integrated to achieve a desired end state. The organization should have the internal capability of using its resources and competencies in overcoming the negative impact of the external forces and exploiting the positive impacts. Strategic capability is therefore about the organization its capacity to put its resources and capabilities to best advantage. This implies the options of the organization to exploit its internal strengths.
The basic for strategic capability is the organization’s ability to differentiate itself from others who are offering similar products and services. Three main factors relate to strategic capability (Hitt et al, 2005). (i) Consider whether the organization has the resources necessary and available to deliver the new strategy, In respect of O2 Telefonica, the acquisition of O2 in the year 2006 has reinforced the leadership of Telefonica in terms of growth and shareholder returns. The company has emerged as the largest provider of digital communication, information and entertainment solutions within Europe.
By integrating the UK operator, the company could achieve higher revenue growth than its peers, maximize the profitability of its operations and maintain a high flow conversion ratio. This has given the company the required strategic capabilities to offer best combination of growth and profitability (O2Telefonica, 2006). (ii) Identify competencies in relevant areas – these represent expertise and knowledge available within the system that will enable the strategy to be shaped during the policy development phase to capitalize on existing resources
Another strategic capability in terms of commercial efficiency and scale, by combining commercial efficiency in each local market with a larger scale the company has gained necessary capabilities to cater successfully to the current environment of the telecommunications industry. Increased globalization, convergence and competition characterize the industry, in which O2 Telefonica has gained sufficient strategic strength by its move to combine the operations (O2Telefonica, 2006). (iii) Generate an understanding of the governance system structure to examine whether or not the organization has the capacity to implement change.
In order to meet the new requirements in the context of enlarged operations the company made two strategic changes; (i) strengthening the result-oriented management in its entire business lines and (ii) reinforcing the integrated management of all its operations and markets. This gave the strategic capability to the company to maximize the benefits resulted from the operating scale, positioning and leadership of the Group (O2Telefonica, 2006). Resources Unique bundling of several resources normally creates competitive advantage for a firm.
Some of the firm’s resources are tangible and some are intangible. Assets that can be seen and quantifiable are “tangible resources”. Production equipment, manufacturing plants, and formal reporting structures are examples of tangible resources. Intangible resources are those assets, which are rooted typically deeply in the firm’s history. These assets have accumulated over time. Because intangible resources embed themselves in unique patterns of routines, intangible resources are relatively difficult for competitors to analyze and imitate.
The value of tangible resources like borrowing power of the company or its plant and machinery are established through financial statements. The financial statements however, do not account for the value of all of a firm’s assets because they disregard some intangible resources (Hitt et al, 2005). “O2 Telefonica is one of the largest telecommunication companies in the world in terms of number of clients and market capitalization” (Press Release, 2008). The company has expanded its operations in 24 countries around the world and has a customer base of 218 million people.
In the context of resources, O2 Telefonica runs its operations within a framework of financial discipline and balance sheet strength representing its tangible resources. Telefonica had rolled out Euro 20 million per year programme for making investments in companies embarking on innovative technologies. This will add up at least 10 to 12 companies in the strategic portfolio of Telefonica (Press Release, 2008). For the year 2007 the company’s net profit rose by 43% to Euro 8,906 millio ansith an operting revenue of 56,441million euros.
The operating cash flowfor 2007 increased to 14,797 million euros which recorded an increase of 33% over the previous year (Annual Report, 2007). In terms of intangible resources, the company has enlarged its total addressable market to more than 700 million people. This results in the addition of more than 27 million customers in Europe alone. The company also has gained sizeable scale in 3G business to exploit its full potential in the areas of communication, leisure and entertainment business, which is a substantial addition to its intangible resources.