Strategic capability building: How companies create unbeatable competitive advantage
Strategy is essentially about determining what you want to do, and matching your capabilities and core competencies to the needs of the environment. Dr Vivek Suneja, Dean, FMS and Member, Committee for Advanced Trade Research, TPCI, cautions that no matter where they are positioned on the competitive landscape, companies are likely to get run over if they do not evolve their competencies dynamically with the business environment.
At its very core, strategy is about long term goals and how you get there. There is one meta goal that’s implicitly common to every organization – be it a public sector, private firm, NGO, or even a family. And the common meta or strategic goal of any organization is value creation.
How does one define value? And how does one measure it? So value is basically the value of output minus the cost of purchased inputs. So nobody produces everything on its own. Organizations are not ‘Robinson Crusoe entities’; they buy certain things from outside. And then they work on them and transform them to outputs. And the effectiveness and efficiency that’s involved in this transformation is the key strategic objective. So if you have a value of output, and you can value your purchased inputs, you subtract the input value from output value, and the difference gives you a measure of value created.
But things are not always as simple when it comes to this measurement. So there is a distinction between entities which produce for the market – let’s call it the private or for-profit sector, and the not-for-profit sector. When it comes to measurement, things are simpler in the for-profit sector. Suppose you have the example of Tata Steel as a private company. Value created or added in this case will be the revenue minus the cost of purchased inputs (everything Tata Steel bought from outside) – raw materials, power, and so forth. And the difference is the value produced. You need to maximize that value, and this is the strategic objective.
When it comes to the not-for profit sector – a public education institution, health institution, Indian army, civil service, trade promotion council, etc – you don’t have a ready measure of revenue, as these entities do not generate revenue based on market prices. You might sell something or charge something, but it is not often at market determined prices.
So in such cases, how do you evaluate output? You assess it through multiple measures. In the case of FMS, for instance, we will be rated on the number of people we trained, number of students that graduated, how productive they were, etc. Other measures could be placement salaries or research output. For a public hospital like All India Institute of Medical Sciences, again, multiple measures like number of patients treated, complications, research done etc, become relevant.
How value gets distributed
Then what does one do with this created value? Well, you distribute it to your stakeholders. In economics, we say there are four factors of production – labour, capital, land and entrepreneurship. And so, say an organization generates a certain amount of value in a year, suppose Rs 100 crore, just a hypothetical figure. That needs to be divided as wages to labour (white or blue collar), rent to land, interest payments to debt capital, and residual profits to equity capital. So after you create value, you need to distribute it to stakeholders, who were involved in creating this value.
And that, again, is a key strategic decision. If you don’t distribute value created in a way that keeps all stakeholders happy, then they will cease to cooperate with each other. Next time around, they may become sullen. They may not contribute their best. Of course, it can be difficult to keep everybody happy. So distribution is a key strategic decision, which sometimes is not paid the careful consideration it deserves.
Take Tata’s development of the Jamshedpur township, for example. The area called Sakshi was just brushwood and jungle as of 1907. In ten years, it had a population of 50,000 residents. While the factory required around 1,500 acres of land, Tata managed to take up a township of over 15,000 acres. They treat the labour in a manner that’s quite different from some of the other companies. The whole city is managed by the Tatas. You have houses for workers, free education for the kids, good sanitation, etc.
This is likely to push up the wage bill. And everything else equal, it will leave less for shareholders. But then, everything is often not equal. If you look after your workers, they will perform for you better than they may otherwise and that might lead to greater value creation. For instance, they might help improve quality and give you constructive suggestions. Therefore, distribution and value creation are interdependent.
Virgin Group Founder and serial entrepreneur Richard Branson has put it aptly: “By putting the employee first, the customer effectively comes first by default, and in the end, the shareholder comes first by default as well.”
Key learnings for Indian firms
Okay, coming to value creation itself, how does one decide where to create value? So the scale and scope of the business, what products one produces, what part of the value chain one engages in, etc become important.
The first thing one needs to determine is the value proposition. We call this the strategic architecture, or what does a firm want to do. That depends essentially on two things and Indian companies can sometimes be a little weak on this aspect. It depends on your core competencies, and on what the market wants.
What kind of things you do well – core competencies and essential capabilities, which others don’t have. These give you a distinctive competitive advantage because if everybody has these capabilities, they’ll do exactly what one does and then there’ll be massive price competition – a commodities market.
You get your core competencies in two ways – learning or experience curve and acquisition. When you learn, whether it’s bicycling, swimming, producing chips, or engaging in consulting advice, you’ll make some errors. As long as you’re learning from them, that helps you build your capabilities.
You can of course acquire capabilities – buy firms, startups and so on. But then you have to assimilate them. If you can’t assimilate those capabilities, they’re not really part of your core competence. Indian firms sometimes struggle with the business of core competence creation, because they get caught up with the demands of the environment. So we all get engaged in firefighting on a day-to-day basis. Thinking becomes short-term, as there’s limited time and energy.
Also we get locked into functional areas. A lot of companies don’t do enough cross-functional integration, partially because of the incentive structures, partially because there’s too little cross-functional talk. So marketing people look at marketing, HR look at HR functions and finance looks at finance.
But strategy is cross-functional, and unless you bring people together you cannot move strategically. There’s also an innate fear of change and vested interest in maintaining the status quo because change might demand you to develop new capabilities. So all that can get in the way of strategy making.
Strategy is essentially about determining what you want to do, and matching your capabilities and core competencies to the needs of the environment. The very nature of strategic capability building is dynamic. No matter where they are positioned on the competitive landscape, companies are likely to get overtaken if they do not evolve their competencies dynamically with the business environment.
Dr. Vivek Suneja is Professor of Strategy, and Head and Dean of the Faculty of Management Studies (FMS), University of Delhi. As a Felix Scholar, he studied for his doctoral degree from the University of Reading in the United Kingdom. For over a decade, he taught at various premier Universities in Britain including at the University of Salford, Manchester and at the Open University Business School, Milton Keynes. Upon his return to India, he joined FMS as Professor.
He has served as Dean of Planning in the University of Delhi and as Pro-Vice-Chancellor of the University of Delhi. Prof Suneja has published several books and papers in the areas of Strategy, Marketing, Entrepreneurship, Economics, Ethics, Culture and Public Policy. Among his prominent books are “Markets: A Multi Dimensional Approach to the Market Economy” published by Routledge, U.K.; “Policy Issues for Business” published by Sage, U.K.; and the “Economics of Marketing” published by Edward Elgar, U.K.
His most recent book “Economic Theory and Policy amidst Global Discontent” has been published by Francis & Taylor, U.K. Prof. Suneja has done consulting and training work for several prominent international and national organisations and firms. He is deeply committed to furthering societal well-being.