In 1997, three business school economists published the paper that named the asset. Teece, Pisano and Shuen argued that competitive advantage does not sit in market position or in clever play. It sits in processes, shaped by what a firm owns and by the road it has already travelled. They called it dynamic capabilities. It has been cited more than fifty thousand times.
They also wrote the sentence that should have restructured industrial finance. Firm capabilities, they said, are not balance sheet items. They are organisational structures and managerial processes. And then, flatly, that “the balance sheet is a poor shadow of a firm’s distinctive competences.”
A footnote takes it further. The assets that decide competitive advantage are rarely on the balance sheet. The ones on the balance sheet are largely the ones that do not decide anything.
The nine words
Read the paper looking for the factory and you will be reading a while. Twenty-five pages on where capability lives, and the shop floor gets a single clause. Some competences may be on the factory floor, some in the R&D labs, some in the executive suites.
That is it. Nine words for the place where the capability is either real or absent, then straight back to abstraction.
The rest is not wrong. The paper is careful about replication, about tacit knowledge, about why a competitor who copies half a coherent production system gets nothing at all for the effort. Those are manufacturing observations. They are just made from a distance, by people who were not going to spend a fortnight watching a line to find out whether the routine survives a shift change.
Why capital ignored it
The usual telling is that investors are short-termist and do not understand industry. That is comfortable and mostly wrong.
Capital allocates against comparable, attestable numbers. Credit has ratings. Companies have audited accounts. Carbon has protocols. Technology has readiness levels, nine of them, understood identically at NASA, in Brussels and in a Series B data room.
Capability has an adjective. Strong capability. World-class manufacturing. Best-in-class operations. Where a scale does exist it sits inside one firm’s aerospace practice, unissued and unattested. There is no public register, no expiry date, no named person who signed the assessment and can be held to it.
Faced with a rich qualitative construct and a poor quantitative one, an allocator picks the quantitative one every time. Not from stupidity. From procedure. A committee cannot vote on an adjective.
Every asset class an allocator trusts has an instrument and a signatory.
| Asset class | Instrument | Scale | Who signs |
|---|---|---|---|
| Credit | Rating agency methodology | AAA to D | A named analyst at the agency |
| Accounts | Statutory audit | True and fair, or qualified | The audit partner, personally |
| Carbon | Greenhouse Gas Protocol | Scopes 1, 2 and 3 | The assurance provider |
| Technology | Readiness levels | TRL 1 to 9 | The programme’s technical authority |
| Capability | None issued | An adjective | Nobody |
Four rows an investment committee can vote on. One it cannot, which is why it does not.
The asymmetry that follows
Technology readiness has a public grammar. Making readiness does not. So a company can pass TRL 7 on the strength of a demonstrator built by four people in a lab, present that number to a board, and never be asked the corresponding question about whether anyone can make it twice.
The gap between those two positions is where the money goes. Not in the invention. In the distance between the invention and the ability to repeat it at rate, at yield, at cost, with people who were not there when it was invented.
That distance has a size. It is measurable. It is measurable by exactly the test Teece put in the paper and then did not operationalise: can the firm replicate its own performance somewhere else, and if not, does it even understand its own process well enough to try. An organisation that cannot repeat what it does cannot improve it either. Repetition is not a proxy for capability. It is the evidence.
The turn
The failure here is not that capability is unmeasurable. It is that measuring it requires people who can walk a line, read a control plan, interrogate a supplier qualification and tell the difference between a process that is understood and a process that has been survived so far.
Those people exist. They are Manufacturing Engineers. They have been systematically excluded from the room where capital decisions are made, which is why the theory of capability was written without them, and why the theory produced no instrument.
An asset that cannot be scored cannot be priced. An asset that cannot be priced does not get funded. That is not a failure of theory. It is a failure of instrumentation, and instrumentation is an engineering problem.
The interface
Manufacturing engineers qualify supply chains. They validate processes and prove them at the second site with the second team. They grade evidence by source and refuse the claim that rests on a single golden line. They convert an adjective into a gate, and a gate into a number that someone signs.
Kaipability works at this interface. The coupling between what a company says it has invented and what it can actually make is the only measurement that reconciles a technology story with an industrial outcome, and it is the one nobody has been issuing.
If you are allocating capital against a manufacturing claim, the question is not whether the technology works. It is who scored the making, and what they signed.
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