Capability management in business

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Capability management is the approach to the management of an organization, typically a business organization or firm, based on the "theory of the firm" as a collection of capabilities that may be exercised to earn revenues in the marketplace and compete with other firms in the industry. Capability management seeks to manage the stock of capabilities within the firm to ensure its position in the industry and its ongoing profitability and survival.

Prior to the emergence of capability management, the dominant theory explaining the existence and competitive position of firms, based on Ricardian economics, was the resource-based view of the firm (RBVF). The fundamental thesis of this theory is that firms derive their profitability from their control of resources – and are in competition to secure control of resources. Perhaps the best-known exposition of the Resource-based View of the Firm is that of one of its key originators: economist Edith Penrose.^[1]

"Capability management" may be regarded as both an extension and an alternative to the RBVF, which asserts that it is not control over physical resources that is the basis for firm profitability but that "Companies, like individuals, compete on the basis of their ability to create and utilize knowledge;...".^[2] In short, firms compete not on the basis of control of resources but on the basis of superior Know-How. This Know-How is embedded in the capabilities of the firm—its abilities to do things that are considered valuable (in and by the market).