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In addition to organizational structure, an organization’s strategy is influenced by
its core competencies. A core competency is any critical function or activity in
which one organization seeks a higher proficiency than its competitors, making it
the root of competitiveness and competitive advantage. “Core competencies are
different for every organization; they are, so to speak, part of an organization’s
personality.”15 Technological innovation, engineering, product development, and
after-sale service are some examples of core competencies. The Japanese electronics
industry is viewed as having a core competency in miniaturization of electronics.
MCI and Disney believe they have core competencies, respectively, in communications
and entertainment. The accompanying News Note further examines
core competencies.


But core competencies are likely to change over time. Consider that Rolls-
Royce plc, once one of the most respected names in luxury automobiles, sold its
motorcar division in 1972. Company management decided its priority should be

products resulting from its core gas-turbine technologies. Thus, the company began
focusing on civilian and military aircraft engines and power generation and
improving its service, parts, and repair business. Business boomed for Rolls-Royce:
in 1987, RR engines were used on only six types of civil airframes; in 1999, they
were used on 30 types, deployed in 37 of the top 50 airlines.16
Organizational Constraints
Numerous organizational constraints may affect a firm’s strategy options. In almost
all instances, these hindrances are short-term because they can be overcome by
existing business opportunities. Two common organizational constraints involve
monetary capital and intellectual capital. Decisions to minimize or eliminate each
of these constraints can be analyzed using capital budgeting analysis, which is covered
in Chapter 14.
MONETARY CAPITAL
Strategy implementation generally requires a monetary investment, and all organizations
are constrained by the level and cost of available capital. Although companies
almost always can acquire additional capital through borrowings or equity sales, management
should decide whether (1) the capital could be obtained at a reasonable
cost and (2) a reallocation of existing capital would be more effective and efficient.
INTELLECTUAL CAPITAL
Another potentially significant constraint on strategy is the level of the firm’s intellectual
capital (IC). Many definitions exist for IC, but all have a common thread
of intangibility. Intellectual capital reflects the “invisible” assets that provide distinct
intrinsic organizational value but which are not shown on balance sheets.


One expansion of the definition is that IC encompasses human, structural, and
relationship capital.17 Human capital is reflected in the knowledge and creativity
of an organization’s personnel and is a source of strategic innovation and renewal.
Human capital may provide, at least until adopted by others, the company a core
competency.
Structural capital, such as information systems and technology, allows human
capital to be used. Structural capital “doesn’t go home at night or quit and hire on
with a rival; it puts new ideas to work; and it can be used again and again to create
value, just as a die can stamp out part after part.”18 Acquiring new technology
is one way to create new strategic opportunities by allowing a company to do
things better or faster—assuming that the company has trained its human capital
in the use of that technology.
Relationship capital reflects ongoing interactions between the organization and
its customers and suppliers. These relationships should be, respectively, profitable
and cost-beneficial. In many respects, the customer element of relationship capital
is the most valuable part of an organization’s intellectual capital: without customers
to purchase products and services, an organization would have no need to employ
human or structural capital.