Why are resources important?
The economic theory of perfect competition paints a picture of a bleak market most managers would want to avoid: many sellers selling identical products, many price-sensitive buyers, easy entry and exit, and perfect information across the lot. It´s a world of symmetry, and sameness, where anything one firm can do, others can do too.
Strategists prefer markets where asymmetries can be created, where, with distinctive strategies, firms have the potential to create value in unique ways. Yet, what supports those strategies and gives them staying power? What stops other firms from imitating them and dramatically eroding an early advantage?
Doing a classification of resources:
Firm resources can be defined as “all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness”.
Human capital resources include the training, experience, judgment, intelligence, relationships, and insight of individual managers and workers in a firm.
Organization capital resources include a firm´s culture; routines; formal reporting structure; planning, controlling, and coordinating systems; data and data management systems, as well as the relationship a firm has with its environment.
Physical capital resources encompass the physical technology in a firm, plant, equipment, location, data centers, access to raw materials, etc.
What makes a resource valuable?
Rarity: A resource that is rare or difficult to find is more valuable than one that is readily available. For example, a diamond is considered more valuable than a pebble because diamonds are rare and harder to find.
Demand: Is the resource important to a viable competitive advantage? Does the resource play a significant role in helping the firm drive a wider wedge between customers´ willingness to pay and the total costs of production? Many resources in an organization´s arsenal is pedestrian and easily acquired on an open market. Although these resources may be necessary, they rarely differentiate a firm in a meaningful way or become the cornerstone of competitive advantage.
Utility: A resource that can be used to create something useful is more valuable than one that cannot. For example, iron is more valuable than rock because iron can be used to make tools, weapons, and other useful items.
Durability: A resource that can be used for a long time without losing its value is more valuable than one that is quickly depleted. For example, a renewable energy resource like solar energy is more valuable than non-renewable resources like coal.
Accessibility: A resource that is easy to access and extract is more valuable than one that is difficult or costly to extract.
Scarcity: Elsewhere, is the resource in short supply? Can it be easily imitated? The importance of resource scarcity cannot be overstated. If the critical resources supporting a strategy are widely available, anything one firm does could be copied by countless others. Resources are often scarce if they are difficult to imitate. The exact recipe may not exist., or there may be considerable uncertainty, cost, or time lags in building or attempting to accumulate the resource. An example, Coca-Cola’s worldwide network got a huge boost from the US government during WWII when sugar rations were eased, and capacity was enhanced to serve troops overseas.
Substitutability: A resource that has no close substitute is more valuable than one that has close substitutes.
Stocks and flows
Over time, the resource stock grows, and resources are combined in a myriad of ways to support a firm´s efforts – guided and constrained by market competition and competitor dynamics. Nowadays, the source of valuable resources that contribute is not bought on the market but is something the firm itself creates, often through a time-consuming process, even if some of the resources are added through acquisition. It is the CEO´s job to make choices about the deployment of the resource stock, its development, and maintenance in the short and long run.
| Basis for comparison | Stock | Flow |
| Meaning | Stock is basically the accumulated or available quantity of any commodity at a particular moment. | Flow implies the movement of the commodity, from the source to the destination, over a period. |
| Nature | Static | Dynamic |
| Measurement | Quantity of economic variable, which is measured at a particular point in time. | Quantity of economic variable, which is measured at a particular period. |
| Indicates | Level | Rate |
| Reflects | State of the economy at specific time. | Changes in the economy, over an interval of time. |
| Measured in | Units | Per unit of time |
| Mutual interdependence | Stock influences flow | Flow influences stock |
The “dark” side of the resources
From the late 1980s to the early 1990s, the resource-based theory has begun to take a leading role in the field of strategic management, which considers the internal resources and capabilities of the enterprise as the source of its competitive advantage. In essence, the resource-based theory emphasizes that resources and capabilities are the genes of competitive advantage. As resources are heterogeneously distributed in an enterprise, valuable resources and capabilities are thus the sources of competitive advantage, and if such resources are difficult to replicate and replace, they become the source of sustainable competitive advantage. Yet, resource advantages are not enough. The enterprise must have the unique ability to take advantage of these resources. The proposal of the idea of core capacity in fact marks the deepening and perfection of the research on the resource-based theory.
Prahalad and Hamel (1990) first proposed the idea of core capacity. They suggest that core capacity is the specific expertise studied and accumulated by the enterprise through the continuation and perfection of products and technology (Prahalad and Hamel, 1990).
Given the rarity, ambiguity, and asset specificity that go along with these types of human and social capital, they are extremely valuable. However, individuals, some relationships with customers, and even some teams are mobile and can thus easily exit the firm unless safeguards, such as complementarities between them and the firm, are put in place.