This framework can be used to add value to your company by identifying your distinctive capabilities.
John Kay in his book The Foundations Of Corporate Success says that there are three distinctive capabilities that a company can use to achieve a competitive advantage.
According to Kay, the three capabilities within a company that can give it a distinctive capability are:
Architecture – by this Kay means the way that the company is organised. The company should have clear corporate objectives and people within the company should be focused on achieving these. Its distribution channels and networks are also part of the architecture.
Reputation – this is how customers and potential customers see the company. It is clearly important to companies that sell quality products and very often is determined by experience. Advertising messages will help as will warranties.
Innovation – innovation as a source of competitive advantage is quite rare. It is hard to constantly innovate and so improve products or reduce costs.
If these three capabilities are plotted in a Venn diagram, where they overlap are the distinctive capabilities of the company.
Kay makes the point that companies can achieve market dominance because they have ownership of a particular resource – such as a utility network, or a licence, or a very expensive asset. These are monopolistic companies that own a structural resource rather than because of their distinctive capabilities.
A company can beat the competition and prove successful even if it doesn’t fulfil the three capabilities. If it works harder, sells more efficiently, produces more efficiently, and advertises more profusely, it may well gain a competitive advantage. However, distinctive capabilities give a competitive edge that is likely to endure longer.
These three capabilities are difficult to build and maintain. This means that they are also hard for competitors to copy. For them to be effective they need to endure (Kay calls this "sustainability") and be "appropriable" in benefiting the company (Kay calls appropriability the capacity to retain the added value it creates for its own benefit).
John Kay's model has some similarities and some differences with those of Michael Porter. Porter argues that success comes from cost leadership, differentiation, and focus. Porter's generic strategies model is more based on strategic intent rather than building distinctive capabilities.
Kay’s framework is appealing because it brings our attention to just three important elements of a business. In practice it is more complicated. In order to understand the architecture of a company it will be necessary to investigate a large number of factors. For example its organisational structure, its special relationships with suppliers and partners, its geographical strengths and weaknesses, any unique and patented processes, its workforce. Its reputation also requires a thorough drill down showing strengths and weaknesses on various attributes with customers and suppliers. On examination of the innovation capability would need consideration of subjects such as the frequency of new product launches, the strengths of the new product development department, the number of patents. As is the case with many frameworks, Kay’s distinctive capabilities could be used with other frameworks such as the balanced scorecard.
Some things to think about.
What is your company known for that is better than the competition? What if anything is your company’s distinctive capability?
If you had to choose just one thing that made your company distinctive, would it be the structure of the company (its architecture), its reputation, or its innovation?
What can you do to build upon your distinctive capability to make it more difficult for the competition to copy?
To what extent does this distinctive position follow-through to produce a high market share, high profits, or good growth?