The European Commission draft Merger Guidelines reorient merger analysis to focus on “capabilities”: how firms compete in current markets and pivot to future ones. However, the Guidelines combine “capabilities” with what strategic management scholars call “resources.” This erroneous amalgamation oversimplifies merger assessment and risks inaccurate analysis, writes Selçukhan Unekbas.
This article is part of a symposium on the European Commission’s draft Guidelines on the assessment of mergers under Council Regulation. The new merger guidelines mark their first systemic update since their first release in two parts in 2004 and 2008. You can read the rest of the contributions to the symposium as we publish them here. We encourage responses to our symposium, which can be submitted to promarket@chicagobooth.edu.
The European Commission’s draft Merger Guidelines, published last month, place firm capabilities—the organizational processes of a firm to achieve its goals—at the heart of merger control. Where the previous Merger Guidelines, published in the mid-2000s, mentioned the term once, the 2026 draft does so sixty-eight times, across discussions on market power, competitive effects, theories of harm, and efficiency defenses. This is a significant and overdue development. Strategic management scholarship has spent four decades exploring how capabilities allow firms to compete, innovate, and adapt. Importing that vocabulary into merger review aligns the framework with how firms actually operate.
There is one fundamental problem. The draft Guidelines uses the word capabilities to describe what the strategic management literature calls resources. The distinction is not just academic. Resources and capabilities behave differently across firms and markets and carry different practical implications for merger review. Collapsing them into a single concept hampers the analytical depth that strategic management literature provides.
The Commission can improve the draft Guidelines by distinguishing capabilities from resources and applying the distinction consistently across the text. This would sharpen the competitive assessment of mergers and strengthen the Guidelines’ precision. In turn, that would contribute to legal certainty and make merger review more effective in protecting competition and promoting innovation.
Resources differ from capabilities
Revisiting the “resource-based view of the firm” allows us to see how the draft Guidelines confuse capabilities for resources. The resource-based view defines firms as bundles of resources. These resources may be tangible, such as R&D laboratories, and intangible, such as technical know-how.
Capabilities are different. A capability refers to “the ability of an organization to perform a coordinated set of tasks, utilizing organizational resources, for the purpose of achieving a particular end result.” In other words, capabilities enable firms to put their resources to use.
Importantly, capabilities are organizationally embedded. They reside in an individual firm’s unique routines, in tacit knowledge, and in the accumulated learning of teams that have worked together over time. They cannot be detached from the organization that developed them and slotted into another firm’s operations. Even within the same firm, transferring a capability across units faces difficulties, often requiring the movement of personnel who carry the relevant tacit knowledge in their heads.
Capabilities are even harder to replicate across firms. There is a reason no other car company has reproduced Toyota’s reliability in design and manufacturing despite decades of effort and the availability of Toyota’s production system in published form. The capabilities involved depend on things that cannot be imported by reading a manual.
This is where the draft Guidelines’ approach becomes challenging. When the text speaks of “innovation capabilities,” it describes assets like patents, know-how, specialized technologies, laboratories, or infrastructure. Footnote 265 makes this explicit: the “innovation capabilities stricto sensu” and the “innovation resources” are, on inspection, two flavors of the same dish. Both describe what firms own. Neither describes what firms can do with what they own. The same pattern recurs throughout the text. For instance, “scarce and unique” capabilities are modeled on data reserves, intellectual property, and financial resources. This ignores the fundamental lesson that resources without capabilities are insufficient for innovation and remaining competitive.
Applying the distinction
Distinguishing resources from capabilities does more than tidy up the Commission’s vocabulary. It produces different analytical implications for the central questions merger review has to answer. Two applications—based on theories of harm and benefit—illustrate the discussion.
First, theories of harm. Acquiring a competitor’s resources may not always durably reduce competition, especially if rivals can replace the resources of the acquired firm through their own making or buying. As the Guidelines note, “[e]ntry or expansion is considered more likely where potential or existing competitors already possess, or can readily acquire, the necessary assets, capabilities, or regulatory approvals required to compete effectively.”
By contrast, acquiring a competitor’s capabilities is a different matter. If the acquired firm was an important competitive (or innovative) force, such as through a unique R&D process or a logistics capability that no rival can match, its successful absorption into a larger firm may generate long-run harm. These are capabilities that new competitors entering the market will not be able to feasibly recreate. The draft Guidelines’ entrenchment theory of harm approximates this concern when it identifies acquisitions of “unique, scarce, or otherwise strategically important” assets as more likely to create durable barriers to entry. But the analysis is, again, built around assets that describe resources, not capabilities. Sharpening the underlying conceptual framework would let the entrenchment standard do its work more reliably.
Second, theories of benefit. The draft Guidelines state that a theory of benefit “sets out how specific merger efficiencies occur and maintain or enhance effective competition, to the benefit of consumers.” One way this may happen is by combining firms with complementary capabilities. Such a theory may save a merger by demonstrating its pro-competitive effects, but the assessment depends on whether what is being combined is resources or capabilities. If the parties are combining resources, the Commission can ask whether internal development or contracting could achieve the same result. The threshold to approve the merger increases because resources may be available by other means. By contrast, the calculation would shift if the parties wished to combine capabilities. Capabilities cannot be transferred easily across firms. Internal development is slow and uncertain. This makes the merger-specificity claim that only a merger can achieve the proposed efficiencies more plausible. The current draft’s confusion of resources and capabilities means that the Commission cannot apply the merger-specificity test with precision.
What about dynamic capabilities?
The draft Guidelines specifically mention dynamic capabilities as well (four times). Strategic management literature describes dynamic capabilities as organization-specific processes through which firms alter their resource base in response to changing conditions. They are, in a sense, higher-order processes that allow firms to remain competitive when their environment shifts. Honda’s movement from motorcycles into outboard motors and small engines, or the New York Times’s pivot from advertising to digital subscription, are illustrative examples.
The literature analyzes dynamic capabilities as sensing, seizing, and transforming activities. Sensing refers to identifying business opportunities and threats by engaging with customers, monitoring technological developments, and analyzing competitive dynamics. Seizing means committing resources to address these opportunities through various means, including acquisitions. And transforming involves reconfiguring the firm’s assets and routines to maintain competitive alignment with the environment.
Dynamic capabilities matter for merger review because they are central to how firms compete in innovation-intensive sectors. Firms with strong dynamic capabilities are more skilled at adapting to changing conditions of competition. This means that mergers affecting dynamic capabilities (by acquiring or eliminating them or disrupting their operation) can have effects that extend well beyond the parties. The draft Guidelines acknowledge this, but they currently associate dynamic capabilities only with a firm’s business model. That is an important link, especially when value capture—the profits firms retain from innovation instead of passing it on to consumers— is concerned, but it falls short in addressing value creation. The insights from the broader literature can help the Commission anticipate these other types of dynamic capabilities, such as post-merger integration, internal resource allocation, and resource redeployment.
It bears emphasizing that dynamic capabilities defy clean delineations. Many capabilities are “dual purpose”: a manufacturing capability that supports current operations may also be the foundation for product innovation, and customer-management capabilities that run sales may also generate market intelligence from which the firm can sense innovation opportunities. But the Commission does not need a sharp categorical distinction between different types of capabilities to conduct rigorous merger analysis. What it needs is to recognize that capabilities are distinct from resources: they are organizationally embedded and harder to replicate, even when they look routine on the surface.
The Commission has done this before
The conflation of resources and capabilities is not new. In some of its past decisions, the Commission adopted an idiosyncratic view of capabilities. This approach tended to infer capabilities from firms’ resource positions, such as R&D laboratories or patent portfolios. The draft Guidelines risk codifying that error into the guidance framework.
But all is not lost. An encouraging feature of the Commission’s decisional history is that it also contains the kind of analysis that comes close to distinguishing capabilities from resources. In the 2022 case Meta/Kustomer, for example, the Commission assessed the parties’ “data collection capabilities” separately from their data reserves. Similarly, the Commission distinguished a pharmaceutical firm’s “clinical development capabilities” from its IP libraries. The Commission also came close to examining dynamic capabilities. For example, in GE/Alstom (2015), it noted that establishing tight relationships with customers creates “a direct link” with innovation. This could be an example of how firms “sense” innovation opportunities (by integrating knowledge from customers). Other cases talk of firms’ “technical capability to redeploy capacity” or the ability “to flexibly allocate resources to different projects” and “reposition into new market segments.” These statements approximate “transforming” in dynamic capabilities vocabulary.
These analytical moves did not appear in the Commission’s decisions because of guidance from courts or previous practice. They appeared because the case teams understood that mergers reshape what firms can do, not only what they own, and that a competitive assessment limited to the latter would miss most of the action. The new draft Guidelines could codify this practice, and make it more consistent across cases, more transparent to parties, and more defensible on review. But to do so, the framework needs the intellectual architecture that understands resources and capabilities as complementary but distinct concepts.
What could such a distinction look like in practice? One starting point is to recognize that the Commission already conducts capability assessments in another part of merger law: approving divestiture purchasers. The Commission’s own guidance requires it to examine the capabilities of buyers acquiring divested assets, with a view to ascertaining whether they will be able to use those assets to compete and innovate. One can analyze these “purchaser approval decisions” to gain insights into how capability evaluations could be done in merger review.
A useful measurement anchor is prior experience. Capabilities cannot be observed directly on a balance sheet, but they can be inferred from a firm’s track record. When faced with a theory of benefit based on scaling, the Commission could ask whether the acquirer has previously transferred manufacturing capacity across plants, or has a proven record of developing acquired businesses. Similarly, when facing a pharmaceutical merger, the Commission could scrutinize the acquirer’s experience in assuming existing regulatory approvals and securing new ones in a timely manner. And if the merger’s benefit concerns a specific project, then the Commission could see if the acquirer successfully executed comparable projects in the past.
Two recent transactions illustrate suggestively what is at stake. Amazon/iRobot, abandoned in 2024 following signals from several competition authorities that they would intervene, is plausibly a case in which sharper attention to the capabilities at issue would have changed the analysis. The transaction’s rationale (integrating iRobot’s robotics and product-design capabilities into Amazon’s logistics and supply-management operations) was the kind of capability combination the draft Guidelines recognize as a “theory of benefit.” Amazon’s track record of integrating prior acquisitions could have provided an empirical anchor to assess the merger’s benefits. And if found to outweigh the potential harms, such benefits could have saved the merger.
Adobe/Figma, by contrast, is a potential example of an accurate intervention grounded on capabilities. Some merger agencies have examined whether Figma had the experience in developing, scaling, and monetizing a new product to continue constraining Adobe absent the merger. Despite some indications that Figma had resource challenges compared to Adobe, the judgment that Figma had the capability to address these challenges, attract funding, and deliver new products appears to have been borne out. The company’s subsequent independent trajectory, including a successful public listing, is consistent with the regulators’ assessment of its standalone viability. An assessment based solely on Figma’s resources could have portrayed it as a weak competitor with little dynamic potential. By contrast, assessing firms’ capabilities can help merger agencies clear or intervene more accurately.
One final point. Much of the underlying information needed to conduct such capability assessments will need to be articulated by the merging parties. But this need not be a barrier to proactive analysis. It is not unheard of for the Commission to visit firms’ premises to observe first-hand their manufacturing and R&D operations, and the same investigative tools are available to the case teams reviewing capability claims in merger review. Overall, a capability-based analysis would make merger review more “participatory,” continuing the trend in European antitrust enforcement and digital regulation.
Conclusion
It is worth recalling how the Commission’s previous merger guidelines were built. The 2004 horizontal guidelines were preceded by a commissioned expert report written by leading economists. Their analysis of merger effects formed much of the substantive backbone of the final text. The 2008 non-horizontal guidelines drew on a similar study on the economics of vertical and conglomerate mergers. In both cases, the Commission grounded its guidance in systematic engagement with the state of the art. The current draft has not had that benefit, and the absence shows. Capability terminology is present in the text, but the conceptual architecture that should support it is not.
The consultation period offers an opportunity to close the gap. The Commission could strengthen the draft Guidelines by two modest moves. First, adopt a consolidated definition of capabilities (as analytically distinct from resources), and apply it consistently across the text. Second, engage more directly with the strategic management literature so that the Guidelines’ analytical apparatus reflects what is known about how firms compete and innovate.
These changes require only that the Commission’s vocabulary catch up with its own decisional practice and with the body of scholarship the new draft has begun to incorporate. Doing so would equip the framework to address the central operational question that the Mario Draghi’s economic agenda has placed at the heart of European merger policy: stopping transactions that threaten dynamic competition and clearing those that advance it.
Author’s Note: The author is grateful to Connie Helfat and Nicolas Petit for helpful comments on an earlier draft.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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