An organization’s core capabilities are those activities that, when performed at the highest level, enable the organization to bring its where-to-play and how-to-win choices to life. They are best understood as operating as a system of reinforcing activities— a concept first articulated by Harvard Business School’s Michael Porter. Porter noted that powerful and sustainable competitive advantage is unlikely to arise from any one capability (e.g., having the best sales force in the industry or the best technology in the industry), but rather from a set of capabilities that both fit with one another (i.e., that don’t conflict with one another) and actually reinforce one another (i.e., that make each other stronger than they would be alone).
For Porter, a company’s “strategic position is contained in a set of tailored activities designed to deliver it.” He calls the visual depiction of this set of activities an activity system. Since “competitive strategy is about being different … [and] means deliberately choosing a different set of activities to deliver unique value,” an activity system must also be distinctive from the activity systems of competitors. In his landmark 1996 article “What Is Strategy?,” Porter illustrated his theory with examples from Southwest Airlines, Progressive Insurance, and The Vanguard Group, articulating the way in which each organization made distinctive choices and tailored an activity system to deliver on those choices. The activity system is a visual representation of the firm’s competitive advantage, capturing on a single page the core capabilities of the firm. Articulating a firm’s core capabilities is a vital step in the strategy process. Identifying the capabilities required to deliver on the where-to-play and how-to-win choices crystallizes the area of focus and investment for the company. It enables a firm to continue to invest in its current capabilities, to build up others, and to reduce the investment in capabilities that are not essential to the strategy.