1. Introduction

In strategic management, organisations seek to achieve and sustain competitive advantage in environments characterised by uncertainty, competition, and rapid change. While external analysis tools such as PESTEL and Porter’s Five Forces examine market conditions and industry pressures, internal analysis focuses on what an organisation can do well and how it can deploy its resources effectively. The concept of strategic capabilities lies at the heart of internal strategic analysis.

Strategic capabilities refer to the organisational abilities that allow a firm to use its resources efficiently and effectively in order to achieve strategic objectives (Johnson et al., 2017). They are not merely assets or skills in isolation but the combination of resources, processes, knowledge, and culture that enable organisations to create value for customers and outperform competitors.

In contemporary business environments shaped by digital transformation, sustainability challenges, and global competition, strategic capabilities have become more important than ever. Firms must not only possess valuable resources but also develop the capability to adapt, innovate, and reconfigure those resources over time (Teece et al., 1997).

This article explores the concept of strategic capabilities as a central element of strategic management. It examines theoretical foundations, key types of capabilities, and their relationship with competitive advantage. The article also discusses the role of strategic capabilities in startups and small and medium-sized enterprises (SMEs), their integration with tools such as SWOT, VRIO, and Value Chain analysis, and the limitations and challenges of capability-based strategy. Strategic capabilities are positioned as the link between organisational resources and sustainable performance.

2. Conceptual Foundations of Strategic Capabilities

Strategic capabilities are rooted in the Resource-Based View (RBV) of the firm, which argues that organisations differ in performance because they possess different resources and capabilities (Wernerfelt, 1984; Barney, 1991). While resources refer to assets owned or controlled by the firm, capabilities describe how these resources are combined and used.

Barney (1991) proposed that resources and capabilities must be valuable, rare, inimitable, and non-substitutable (VRIN) to generate sustained competitive advantage. Later developments added the organisational dimension (VRIO), recognising that capabilities must be embedded in organisational systems and routines to be effective (Barney and Hesterly, 2015).

Strategic capabilities are therefore higher-level constructs than individual resources. They represent organisational competences that emerge from coordinated action. For example, innovation capability depends not only on technology but also on leadership, culture, and learning processes.

The concept also draws on evolutionary economics and organisational learning theory, which emphasise path dependence and experience-based development of capabilities (Nelson and Winter, 1982). Capabilities are built over time and shaped by organisational history, making them difficult for competitors to replicate.

3. Strategic Capabilities and Competitive Advantage

Competitive advantage arises when an organisation creates more value for customers than its competitors or produces the same value at lower cost (Porter, 1985). Strategic capabilities are the means through which this value creation occurs.

Capabilities enable firms to:

  • innovate new products and services

  • deliver superior customer experiences

  • operate efficiently

  • adapt to environmental change

  • manage relationships with stakeholders

For example, a firm with strong customer service capability may differentiate itself through loyalty and trust, while a firm with operational excellence capability may compete on cost leadership.

From a strategic perspective, capabilities are more important than isolated assets because they are systemic and embedded. A competitor may acquire similar technology but cannot easily replicate organisational culture, routines, and accumulated knowledge (Teece et al., 1997).

Thus, strategic capabilities represent the foundation of sustainable competitive advantage.

4. Types of Strategic Capabilities

Strategic capabilities can be grouped into several categories. Johnson et al. (2017) distinguish between threshold capabilities and distinctive capabilities.

4.1 Threshold Capabilities

Threshold capabilities are the minimum capabilities required to compete in a market. Without them, an organisation cannot operate effectively. Examples include:

  • basic IT systems

  • standard production processes

  • regulatory compliance

  • customer service competence

These capabilities do not create competitive advantage on their own but are necessary for survival.

4.2 Distinctive Capabilities

Distinctive capabilities are those that differentiate an organisation from competitors and provide a basis for competitive advantage. They may include:

  • strong brand reputation

  • superior innovation processes

  • unique organisational culture

  • proprietary knowledge

  • advanced analytics capability

Distinctive capabilities are often intangible and socially complex, making them difficult to imitate.

4.3 Operational Capabilities

Operational capabilities relate to day-to-day activities such as manufacturing, logistics, and service delivery. These capabilities determine efficiency and reliability.

Examples include:

  • lean production systems

  • quality management

  • supply chain coordination

Operational capabilities are essential for cost leadership strategies.

4.4 Dynamic Capabilities

Dynamic capabilities refer to the organisation’s ability to integrate, build, and reconfigure resources in response to environmental change (Teece et al., 1997). They are especially important in turbulent industries such as technology and digital services.

Dynamic capabilities include:

  • sensing opportunities and threats

  • seizing opportunities through innovation

  • transforming organisational structures

They enable firms not only to compete but to adapt and renew their competitive advantage over time.

5. Strategic Capabilities and the Value Chain

Strategic capabilities are closely linked to Value Chain Analysis. The value chain identifies organisational activities, while capabilities explain how well these activities are performed (Porter, 1985).

For example:

  • a logistics capability enhances inbound and outbound logistics

  • a marketing capability strengthens promotion and brand positioning

  • a technology capability improves operations and innovation

Capabilities arise from the integration of multiple value chain activities rather than from isolated functions. Understanding these linkages supports holistic strategy development.

6. Strategic Capabilities and VRIO/VRIN Analysis

VRIO and VRIN frameworks are used to evaluate whether capabilities can generate sustained competitive advantage (Barney, 1991).

A strategic capability must be:

  • valuable – contributes to customer value or cost reduction

  • rare – not widely possessed by competitors

  • inimitable – difficult to copy

  • organised – supported by management systems

Capabilities that meet these criteria are strategic assets. For example, a culture of continuous innovation supported by leadership and incentives may satisfy VRIO conditions.

VRIO analysis therefore provides a diagnostic tool for assessing which capabilities should be developed and protected.

7. Strategic Capabilities in Startups and SMEs

For startups and SMEs, strategic capabilities often centre on founder knowledge, creativity, and flexibility rather than scale or capital (Blank and Dorf, 2012). These organisations typically lack threshold capabilities of large firms but may possess distinctive capabilities in niche markets.

Strategic capabilities in startups include:

  • rapid innovation

  • customer intimacy

  • agility and learning

  • entrepreneurial leadership

Lean Startup theory emphasises experimentation and adaptation (Ries, 2011), which aligns with the development of dynamic capabilities.

SMEs use strategic capabilities to defend against larger competitors by specialising in particular customer segments or technologies.

8. Strategic Capabilities and Organisational Culture

Organisational culture plays a central role in shaping strategic capabilities. Culture influences how employees learn, collaborate, and respond to change (Schein, 2010).

A culture that encourages innovation and risk-taking supports dynamic capabilities, while a rigid culture may hinder adaptation. Trust and shared values also strengthen coordination across organisational units.

Culture is therefore both a resource and a capability, reinforcing long-term strategic advantage.

9. Strategic Capabilities and Digital Transformation

Digital transformation has reshaped the nature of strategic capabilities. Data analytics, artificial intelligence, and digital platforms create new forms of value creation (Teece et al., 1997).

Digital strategic capabilities include:

  • data-driven decision-making

  • cybersecurity management

  • platform development

  • digital customer engagement

However, digitalisation also introduces risks related to privacy, ethics, and regulation. Strategic capabilities must therefore be aligned with corporate governance and CSR frameworks.

10. Limitations and Criticisms of Strategic Capability Theory

Capability-based strategy has been criticised for several reasons. First, identifying and measuring capabilities can be subjective (Priem and Butler, 2001). Second, capabilities may become rigidities if organisations rely too heavily on past strengths and fail to adapt.

Third, the RBV and capability approach may underemphasise the role of competition and industry structure (Porter, 1991). Finally, building capabilities requires time and investment, which may be difficult for resource-constrained firms.

Thus, strategic capabilities should be developed alongside external analysis and continuous learning.

11. Strategic Implications

Strategic capabilities shape long-term performance by determining how well organisations can create and sustain value. They influence:

  • strategic positioning

  • innovation strategy

  • organisational design

  • investment priorities

  • risk management

By focusing on capabilities rather than only on products or markets, firms develop resilience and adaptability.

Strategic capability analysis also encourages managers to think beyond short-term profits and invest in learning, culture, and systems.

12. Conclusion

Strategic capabilities represent the organisational abilities that enable firms to deploy resources effectively and achieve sustainable competitive advantage. Rooted in the Resource-Based View and dynamic capability theory, they explain why some organisations outperform others over time.

This article has examined the theoretical foundations, types, and applications of strategic capabilities. It has shown how capabilities integrate resources, processes, and culture to support strategic objectives. While limitations exist, the capability perspective remains central to modern strategic management.

As part of the Internal Analysis section of the Strategy Tools series, strategic capabilities complement SWOT, VRIO, and Value Chain Analysis by providing a deeper understanding of how value is created and sustained. Their continued relevance lies in their focus on adaptability, innovation, and long-term strategic success.

Executive Summary

Strategic capabilities are the organisational abilities that enable firms to deploy resources effectively and achieve competitive advantage. Unlike individual assets, capabilities arise from the integration of resources, processes, knowledge, and culture. They form the foundation of long-term strategic success.

This article explains the theoretical foundations of strategic capabilities based on the Resource-Based View and dynamic capability theory. It distinguishes between threshold capabilities, which are necessary for survival, and distinctive capabilities, which differentiate organisations from competitors. Dynamic capabilities are highlighted as essential for adaptation and innovation in changing environments.

The article also discusses the importance of strategic capabilities for startups and SMEs, which often rely on agility, creativity, and customer intimacy rather than scale. Strategic capabilities are shown to be closely linked to other strategy tools such as VRIO, Value Chain Analysis, and SWOT.

Despite challenges in measurement and implementation, strategic capabilities remain central to strategic management. They support long-term competitiveness by enabling organisations to sense opportunities, seize them through innovation, and transform themselves in response to change.

Overall, strategic capabilities provide a framework for understanding how organisations create value and sustain performance over time. When integrated with external analysis, they contribute to coherent, adaptive, and sustainable strategy development.

References

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Johnson, G., Scholes, K. and Whittington, R. (2017) Exploring Strategy. 11th edn. Harlow: Pearson Education.

Nelson, R.R. and Winter, S.G. (1982) An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press.

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