Will Your Company's Capabilities Lead Directly to Profits? Think Again (page 1 of 3)

Plus, Y2K paranoia (remember that?) spurred many firms to look to India and other offshore sites as they outsourced the tedious task of bringing their stodgy computer systems into the new century.

Simple, right? Well, not quite. In a recent study, Wharton management professor Jitendra Singh, along with Sendil Ethiraj, Prashant Kale and M.S. Krishnan from the University of Michigan Business School, make the case that such country-level advantages don't tell the whole story.

So if it isn't just the "India effect," what is it, exactly, that makes certain software services firms overtake the rest? "If macro labor-force factors explained everything, you would expect to see many Indian software services firms doing very well," says Kale. "But when you look closely, that's not the case. Some 25 companies out of the 3,000 or more in that industry are doing the bulk of the work. Obviously, then, the explanation also has to take into account what individual companies have done to build relevant capabilities to compete."

Their report, based on several years' worth of project-level data from a leading Indian software services firm, suggests that a firm's capabilities (its core competencies) are largely context-specific, and that they should be studied both at the level of the firm and the industry. The research paper, titled "A Study of Firm Capabilities and Performance in the Software Services Industry," also demonstrates that not all capabilities are equal in their consequences - that is, some do more for a company's bottom line than others.

Singh points out that in the past, much of the academic literature about core competencies has been theoretical, and relatively few attempts have been made to explore the link between a company's capabilities and its performance. "Our research goes beyond past studies and provides clear-cut evidence of the fact that companies have a variety of capabilities that have different kinds of impact on their bottom-line," he explains.

Beyond the Big Picture
Just about everyone agrees that capabilities - competencies built by a firm that have the potential to generate value - can be a source of competitive advantage in the marketplace. While all firms in an industry may have access to similar resources, exactly how they use these resources can vary as a result of many factors -- company history, experience, management style, etc. -- all of which combine to make up the "secret sauce" of capabilities.

These competencies come in various flavors and vary by industry. Most airline passengers, for instance, necessarily fly on similar aircraft, usually made by Boeing, Airbus, or McDonnell-Douglas. What gives an airline competitive advantage or disadvantage, explains Singh, isn't found in the manufacture of its wings (unless, of course, the equipment is particularly crash-prone), but rather in the way cabin crew members and customer service personnel respond to a consumer's needs and create the unique service experience. "Once you've checked in and you're on the plane, the longest contact you have with the airline is while you're in your seat dealing with cabin crew. So for airlines, one important capability is providing a memorable experience to passengers during flight."

Identifying Key Drivers
Prior research on capabilities has shown that yes, capabilities matter; in other words, what a firm does well is indeed critical to whether the firm does well.