The firm’s most important resources and capabilities are those which are durable, difficult to identify and understand, imperfect transferable, not easily replicated, and in which the firm possesses clear ownership. These are the company’s ‘most important assets’ and need to be protected; and they play a pivotal role in the competitive strategy which the company pursues. The essence of strategy formulation, then, is to design a strategy that makes the most effective use of these core resources and capabilities.

Consider, for example, the remarkable turnaround of Apple, the computer company behind the Macintosh computers, between 2000 to date. Fundamental was Steve Job’s recognition that the company’s sole durable, non-transferable, irreplicable asset was Apple image and the loyalty that accompanied that image. In virtually every other area of competitive performance-production cost, quality, product and process technology, and global market scope-Apple was greatly inferior to its other rivals, such as IBM. Apple’s only opportunity for survival was to pursue a strategy founded upon Apple’s image advantage, while simultaneously minimising Apple’ disadvantages in other capabilities. Apple’ new marketing strategy involved extending the appeal of the Apple image of individuality from its traditional customer group (tech savvy, graphic designers) to more a general, young professional types. Protection of the Apple name by means of tougher controls over dealers was matched by wider exploitation of the Apple name through entry in other industries such as the portable music business.

Apple’s share of the computer market went from 15% in 1985 to 4% in 2005 and lost around 0 million in only three months in 1997.
However, thanks to the iPod and to the Apple’s iTunes music stores, its shares grew 90% between 2001 up until today, i.e. from a mere /share. Apple is today the premier provider of MP3 players.

Designing strategy around the most critically important resources and capabilities may imply that the firm limits its strategic scope to those activities where it possesses a clear competitive advantage. The principal capabilities of Apple, are in design and new products development; it lacked both the manufacturing capabilities to compete effectively in the world’s computer market. Apple’s turnaround from year 2000 followed it decision to specialise upon design and new product development.

The ability of a firm’s resources and capabilities to support a sustainable competitive advantage is essential to the time frame of a firm’s strategic planning process. If a company’s resources and capabilities lack durability or are easily transferred or replicated, then the company must either adopt a strategy of short-term harvesting or it must invest in developing new sources of competitive advantage.

These considerations are critical for small technological start-ups where the speed of technological change may mean that innovations offer only temporary competitive advantage. The company must seek either to exploit its initial innovation before it is challenged by stronger, established rivals or other start-ups, or it must establish the technological capability for a continuing stream of innovations.

The main issue for Apple is to make sure that it takes advantage of this window of opportunity. Because there are tougther competitors down the road and the more money it makes, the more companies will enter the market making harder for Apple to sustain this new found competitive advantage.

In industries where competitive advantages based upon differentiation and innovation can be imitated (such as financial services, retailing, fashion clothing, toys), firms have a brief window of opportunity during which to exploit their advantage before imitators erode it away. Under such circumstances firms must be concerned not with sustaining the existing advantages, but with creating the flexibility and responsiveness that permits them to create new advantages at a faster rate than the old advantages are being eroded by competition.

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