Question

Why is it important for a firm to study and understand its internal orgtanization? What are capabilities and what is a core competency?

Answer 1

A firm need to study its internal organization to understand its areas of strengths and weaknesses with respect to the challenges and opportunities in the market. The market can pose challenges or opportunities. However, a firm needs to have internal capabilities to effectively and efficiently deal with the challenges or exploit the market opportunities. For example, if there is a new trend in the market, a firm needs to be sure whether it has the internal capabilities to exploit the new trend and deal with the challenges posed by it. So, firms must understand their internal organizations to survive and grow in the market.

Capabilities are the capacities of firms to strategically use resources to fulfill the desired objectives. Therefore, capabilities lie in the organizational systems, processes, know-how, expertise, etc. For example, having a robust supply chain to reduce costs and increase efficiency is an example of capability.

Core competency refers to an effective combination of various capabilities and resources of a firm which distinguishes it in the market. Therefore, core competence is the unique strength which arises from a harmonized combination of various capabilities. In general, core competencies:

• provide a firm access to a wide range of markets
• help in adding value to customers and develop better products
• cannot be easily imitated

For example, Apple has a unique combination of capabilities like designing ground-breaking products, marketing products, creating brand loyalty, managing a robust supply chain, etc, which provide it core competence.