Capability management in business

Capability management is an approach to organizational management, typically applied to business organizations or firms. It is based on the theory of the firm as a collection of capabilities that may be exercised to generate revenue in the marketplace and compete with other firms in the industry. Capability management focuses on managing a firm’s portfolio of capabilities in order to maintain its competitive performance and long-term profitability.

Before the emergence of capability management, the dominant theory explaining the existence and competitive position of firms was the resource-based view of the firm (RBV). Based on Ricardian economics, this theory holds that firms derive profitability from their control of resources and compete to acquire and protect those resources.

"Capability management" may be seen as both an extension of and an alternative to the RBV, proposing that profitability derives not primarily from control over physical resources but from the ability to create and leverage knowledge; in this view, companies compete on the basis of their capacity to generate and apply knowledge. Firms are understood to compete on the basis of technical know-how embedded in their capabilities—that is, their abilities to perform activities that are valued in the market.