(January 5, 2011) Normally, for investors apprising the comparative strengths and weaknesses of a company’s resources and capabilities over its rivals is not an easy task. In fact, companies’ itself too can fail and have failed in assessing their own comparative advantages and competencies. Typically, history has seen companies falling to past glories, very optimistic view for the future, and its own unjustified decisions.  Hence, the tendency toward hubris among companies – and their senior managers- means that business success often sows the seeds of its own destruction.

This is very true in the case of many US and European firms whose success turned out to a curse in the long term as these firms were blinded by their stagnating capabilities. Some of the prominent examples include the integrated steel giants of the United States.

If investors have to appraise companies’ capabilities, then they must look both inside and outside. By looking “inside” investors can learn about company’s resources and capabilities profile. The evidence of history can be particularly reveling; it is helpful in reviewing deals and decisions where a company has performed well and where company has not performed well.

While evaluating a company from “outside”, benchmarking can be a powerful tool for investors.  Benchmarking is a tool that helps investors in quantitative assessments, useful in evaluating the performance relative to that of competitors.  It offers methodical framework that includes identifying and evaluating particular functions and processes then comparing the result with those of competitors’ performance.  In a nutshell, investors should know that appraising resources and capabilities is not about the data but insight and understanding.

 Every company has some areas where it excels, where it has potential to excel and where it struggles. For instance, consider logistics company FedEx, its strengths lies in its system of guaranteed delivering on the very next day, for automobile company BMW it is ability to integrate world class engineering with design excellence and highly effective marketing; for fast food leader McDonald’s, it is the operational ability to supply millions of hamburgers from thousands of worldwide outlets throughout the world. 

Therefore, next time you think of investing then don’t just think of fundamentals, financial statement analysis, but also try to identify the relative strengths of the companies which create shareholders’ value.