Kay's Distinctive Capabilities Framework
Using Relationships to Build Competitive Advantage
What makes an organization successful?
You can get a real mixture of answers to this question, such as high profitability, a strong market share, the right scale, great intellectual property, innovative capabilities, quality, customer focus, and a dedicated team.
However, according to economics professor, John Kay, there are three key sources of distinctive capability that ultimately predict an organization's success.
In this article, we'll look at Kay's Distinctive Capabilities Framework, a model that helps you identify and strengthen these three sources of competitive advantage.
Understanding Kay's Framework
John Kay, professor of economics at London Business School, developed the Distinctive Capabilities Framework and published it in his 1993 book, "Foundations of Corporate Success."
Kay created the model after spending several years studying the origins of industrial and corporate success. After interviewing many of the world's most successful business leaders, and after analyzing case studies, business histories, and corporate earnings, he concluded that success depends on the quality of the relationships that an organization creates with its employees, shareholders, customers, and suppliers. When built correctly, these relationships become a strong and enduring source of competitive advantage.
According to Kay's theory, organizations can't succeed in the long-term simply by selling more effectively, by producing better products, or by having better processes than their competitors, as these approaches can be copied quite easily. To succeed in the long-term, they must use at least one of the three distinctive capabilities.
In his book, Kay refers to commercial relationships as "contracts," instead of using the word to imply a more traditional "legal contact" between two parties.
The three sources of distinctive capability are:
- Relationship Architecture ("Architecture"): This refers to the system of relationships, or "contracts," that your organization has in place. These relationships can be with employees, investors, suppliers, customers, or with other collaborating firms. People operating within a good relationship architecture communicate well, learn quickly because of this, and react flexibly to change. This makes the organization agile, and means that it can quickly take advantage of new opportunities.
- Reputation: This refers to how people see your organization. If you have a good reputation, you can build good relationships – often on terms not available to other competitors. It takes time to build a reputation, but you can do this by caring about quality; by showing integrity; by having an open, positive corporate culture; and by behaving honorably.
- Innovation: This is the process of introducing a new product or service to the market, and of gaining competitive advantage by doing so. This is the hardest capability to build and maintain, because it's so easily duplicated. Often, it's a firm's relationship architecture that creates success, rather than innovation.
We will discuss each of these distinctive capabilities in detail, below.
These three sources of distinctive capability are unique and they are difficult to build, which is why they're so important. If you can build and use these elements successfully, you'll have a distinct advantage over your competitors, because they can't easily be replicated, bought, or substituted.
Kay's Distinctive Capabilities Framework is one of a number of approaches that you can use to help your organization stand out from your competitors. Other tools, such as USP Analysis and Core Competence Analysis , can also help you differentiate your organization.
Applying the Model
Let's look at each source of distinctive capability in detail, and discuss how you can strengthen each one within your organization.
The architecture of your organization is built on the relationships that exist between employees, shareholders, customers, and suppliers. Essentially, you approach these relationships from a long-term perspective, and you nurture them as such, meaning that you build them on trust, mutual respect, and commitment.
Your organization's corporate culture reflects this architecture, and this affects how easily and effectively people share knowledge, and how well the group as a whole responds to changing circumstances.
Strengthening Your Relationship Architecture
To build the best relationships, internally and externally, you need to have great employees and great business partners. Learn the skills that you need to recruit the best people for your team, and use tools like the 10 Cs of Supplier Selection to choose the best suppliers.
When you've selected the best people, make sure that each person is fully engaged by focusing on building morale, helping them develop, and motivating them effectively. Emphasize the importance of everyone's contributions to the group: each team member should understand that group successes are more important than individual wins.
Use the Cultural Web and the Competing Values Framework to analyze your current corporate culture. Does it support your people, or does it hinder their effectiveness? If your current culture isn't positive and empowering, start taking steps to change it to reflect your organization's core values. Your goal is to create a culture that people want to be a part of.
Everyone in your organization should have the knowledge necessary to excel. Put systems in place to ensure that team members share essential information. Manage knowledge actively, use team briefings to keep communication lines open, and do everything in your power to support your team with training and with additional resources.
Trust is an important element in your organization's relationship architecture. Build trust within your team and with business partners by helping people get to know one another personally, and make sure that you lead by example. The more that your team members trust you and trust one another, the more effectively you will work together.
Your organization's architecture also depends on external relationships, such as those with your customers and suppliers. Think carefully about these two groups.
What can you do to strengthen these relationships? Start by using Customer Experience Mapping to find out how your customers see your organization. Consider using customer surveys, and monitor social media to get deeper insights into what your customers think. Then, improve these relationships by focusing on improving quality and customer service.
Think about the quality of supplier relationship management that you provide, including the levels of courtesy that you demonstrate, and whether you provide prompt payment to suppliers.
Your reputation reflects how others see your organization, and how much they trust you to meet their needs. Several factors influence reputation, including customer experience, guarantees or warranties, product quality, media and social media coverage, word of mouth, online and offline advertising, and your history.
An important benefit of having a good reputation is that it allows you to build unique relationships, using terms that might not be available to organizations with lesser reputations.
Strengthening Your Reputation
It's often said that reputations can take a lifetime to build, and just a few seconds to lose. There's no quick way to improve your organization's reputation, which is why you need to build yours steadily and consistently, and protect it carefully.
Start by understanding your organization's current reputation. What is your company best known for? What makes people trust your firm? If you're not sure how to pin this down, conduct a USP Analysis; often, an organization's biggest strength drives its reputation.
Quality is an important element in your reputation. What feedback are you getting from your customers? How can you improve your product or service to address any complaints?
To build your organization's reputation, it's important to focus on value, customer service, refunds, and guarantees, as well as many other factors. (If you have problems in this area, use approaches such as Six Sigma or Total Quality Management to improve the quality of your offering.)
Beyond this, your organization needs to behave honorably, and needs to do its best to be a good "corporate citizen".
Innovation quickly attracts imitators, which is why this last capability is the hardest to maintain successfully over a long period of time. As such, it's important to work hard to develop and defend your Unique Selling Proposition and Core Competencies, so that competitors struggle to keep up. However, Kay stresses that, often, only patents, intellectual property law, and legal contracts will fully protect innovation over time.
When looking at innovation, it's important not to focus solely on products and services; your organization can innovate in many ways. For example, you can find new ways to search for – and attract – top talent, or ways that you can address customer complaints positively, so that you can leave a really good impression. These "out of the box" innovations are often closer to the Architecture capability, because you're using them to strengthen relationships. (Innovative relationships are often easier to maintain successfully over the long term, compared with other sources of innovation.)
Kay states that innovation is most successful when it's embedded in your organization's culture. This means that your organization sees innovation as a core value, and it does whatever it takes to support and encourage this capability.
Google® is a great example of a company that supports innovation. Famously, the organization allows every employee to devote 20 percent of their work time – or one day a week – to their own side-projects. The company has rigorous processes in place to find the best of these projects, and everyone who is hired is comfortable with change, and can adapt flexibly to new projects and initiatives.
There are a number of steps that you can take to support practical innovation in your organization. Introducing rewards or incentive schemes is a great way to encourage your people to start coming up with innovative ideas.
It's important that innovations or solutions address clear business needs; the Four-Step Innovation Process is a useful framework for innovating in a business context, and Doblin's 10 Types of Innovation help you explore a wide range of areas where you can innovate, beyond just product development.
Also, make sure that you have processes and tools in place to manage ideas effectively. For example, put into place systems to encourage idea sharing, let people know that all ideas will be considered, and reward people for behaving in an innovative, creative way. Consider using social networking or a company intranet forum to encourage people to submit new ideas, and to share their ideas with others.
John Kay developed the Distinctive Capabilities Framework and published it in his 1993 book, "Foundations of Corporate Success." The model identifies three sources of distinctive capability that are essential for organizations to succeed. These three sources are:
- Relationship Architecture.
The model is useful because it helps you get a deeper understanding of these sources of distinctive capability. You can use this information to shape your business strategy, and to strengthen each source within your organization.