Resources
Resources are an organization asset and are the basic building blocks of the organization.
By themselves, resources do not allow firms to create value for customers as the foundation for earning above-average returns. To fulfill this purpose, resources must become inputs for firms to form capabilities.
Firms should understand that having a significant quantity of resources is not the same as having the right resources. The right resources are those with the potential to be formed into core competencies and develop competitive advantages as a result of doing so.
Resources can be grouped in (1) tangible resources and (2) intangible resources; (1) human resources, (2) organizational resources, and (3) physical resources; and (1) strategic resources, and (2) common resources.
Tangible Resources vs. Intangible Resources
Tangible resources are resources that can be observed and quantified.
The value of many tangible resources can be established through financial statements, but these statements do not account for the value of all of the firm’s resources because they disregard some intangible resources. As tangible resources, a firm’s borrowing capacity and the status of its physical facilities are visible.
The value of tangible resources is also constrained because they are hard to leverage. It is difficult to derive additional business or value from a tangible resource.
Although production assets are tangible, many of the processes necessary to use them are intangible. Thus, the learning and potential proprietary processes associated with a tangible resource, such as manufacturing facilities, can have unique intangible attributes, such as quality control processes, unique manufacturing processes, and technologies that develop over time.
The tangibility of a firm’s resources is an important consideration within the resource-based theory.
Land, buildings, plant, inventory, production equipment, manufacturing facilities, distribution centers, and formal reporting structures are some examples of this type of resource.
Intangible resources are quite difficult to see, touch or quantify.
Intangible resources are assets that are rooted deeply in the firm’s history, accumulate over time, and are relatively difficult for competitors to analyze and imitate.
Because they are embedded in unique patterns of routines, intangible resources are difficult for competitors to analyze and imitate. Knowledge, trust between managers and employees, managerial capabilities, organizational routines (the unique ways people work together), scientific capabilities, the capacity for innovation, brand name, the intellectual property of the company, the firm’s reputation for its goods or services, and how it interacts with people (such as employees, customers, and suppliers), and organizational culture are intangible resources.
Because intangible resources are less visible and more difficult for competitors to understand, purchase, imitate, or substitute for, firms prefer to rely on them rather than on tangible resources as a foundation for their capabilities. The more unobservable a resource is, the more valuable that resource is to create capabilities.
Another benefit of intangible resources is that, unlike most tangible resources, their use can be leveraged. For instance, sharing knowledge among employees does not diminish its value for any one person.
On the contrary, two people sharing their individualized knowledge sets often can be leveraged to create additional knowledge that, although new to each individual, contributes potentially to performance improvements for the firm.
A reputation indicates the level of awareness a firm has been able to develop among stakeholders and the degree to which they hold the firm in high esteem.
A well-known and highly valued brand name is a specific reputational resource. A continuing commitment to innovation and aggressive advertising facilitates firms’ efforts to take advantage of the reputation associated with their brands.
Reputational resources are important sources of a firm’s capabilities and core competencies. A positive reputation can even be a source of competitive advantage. Earned through the firm’s actions as well as its words, a value-creating reputation is a product of years of superior marketplace competence as perceived by stakeholders.
Intangible resources are more likely, compared to tangible resources, to be a superior source of capabilities. In fact, modern firms’ intellectual capital often plays a more critical role in corporate success than do tangible resources.
Firms should therefore place a premium on trying to nurture and develop their firms’ intangible resources. Being able to effectively manage intangible resources is an increasingly important skill for today’s leaders.
Intangible resources require nurturing to maintain their ability to help firms engage in competitive battles.
Organizational vs. Physical vs. Human Resources
Resources can also be grouped into 3 categories: organizational resources, physical resources, and human resources.
Organizational resources include firm structure, culture, reputation, planning processes, information systems, patents, trademarks, copyrights, and databases.
Physical resources include all plant and equipment, finances, location, technology, raw materials, machines.
Human resources include all employees, training, experience, intelligence, knowledge, skills, abilities.
Strategic Resources vs. Common Resources
It is important to distinguish strategic resources from common resources, as strategic resources assist directly in the process of building competitive advantage.
The term resources can be confusing because it is used in many different ways within everyday common language. To most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital resources.
When analyzing organizations, however, common resources such as cash and vehicles are not considered to be strategic resources. Resources such as cash and vehicles are valuable, but an organization’s competitors can readily acquire them. Thus, an organization cannot hope to create an enduring competitive advantage around common resources.
Strategic resources are important because they are the source of sustainable competitive advantage for a firm.
Sustainable competitive advantage is the one that will endure over time and help the firm stay successful far into the future.
Valuable resources must be either (1) rare, (2) hard to imitate, or (3) not easily substitutable.
Often called empirical indicators, these 3 characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to not only a competitive advantage but also a very sustainable one.
Resources that do not have all 3 qualities can still be very useful, but they are unlikely to provide sustainable competitive advantages. A resource that is valuable and rare but that can be imitated might provide an edge in the short term, but competitors can overcome such an advantage eventually.
Thus, the more a resource(s) is rare, non-imitable, and non-substitutable, the stronger a firm’s competitive advantage will be and the longer it will last.
Resources that are rare are resources that other competing firms do not possess.
If many firms have the same resource, then those firms will likely implement similar strategies, thus giving no one firm a competitive advantage. This is not to say that resources that are common are not valuable; they do aid the firm in its chance for economic prosperity. However, to sustain a competitive advantage, it is more advantageous if the resource(s) is rare.
Resources that are hard to imitate are resources that cannot be easily gained.
If firms cannot easily gain the resources, then those resources will lead to a competitive advantage more so than resources easily imitable. Even if a firm employs resources that are rare, a sustainable competitive advantage may be achieved only if other firms cannot easily obtain these resources.
It is important to recognize that strategic resources can be created by taking resources and bundling them together in a way that cannot be imitated.
Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate resources are protected by various legal means, including trademarks, patents, and copyrights. Other resources are hard to copy because they evolve over time, and they reflect unique aspects of the firm.
Resources that are not easy to substitute are resources that cannot be easily replaced.
A resource is non-substitutable when competitors cannot find alternative ways to gain the benefits that a resource provides. To the degree that there are no viable substitutes, a firm will be able to sustain its competitive advantage.
Capabilities
Generic Capabilities
Capabilities are the abilities of an organization to exploit and utilize its resources.
They consist of business processes that manage the interaction among resources to turn inputs into outputs. More generally, a company’s capability is the product of its organizational structure, processes, and control systems.
In turn, capabilities are used to complete the organizational tasks required to produce, distribute, and service the goods or services the firm provides to customers for the purpose of creating value for them.
A good and easy-to-remember way to distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities refer to what the organization can do.
Capabilities are important in part because they are how organizations capture the potential value that resources offer.
Customers do not simply send money to an organization because it owns strategic resources. Instead, capabilities are needed to bundle, manage, and otherwise exploit resources in a manner that provides value-added to customers and creates advantages over competitors.
The value of human capital in developing and using capabilities and, ultimately, core competencies cannot be overstated.
As a foundation for building core competencies and hopefully competitive advantages, capabilities are often based on developing, carrying, and exchanging information and knowledge through the firm’s human capital.
Capabilities are often developed in specific functional areas or in a part of a functional area.
A capability is functionally based and is resident in a particular function. Thus, there are generally marketing capabilities, manufacturing capabilities, and human resources management capabilities.
Some firms develop a dynamic capability.
This means that a firm has a unique capability of creating new capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its array of capabilities to keep pace with changes in its environment.
Sustainable Capabilities
Capabilities of a firm may last for a relatively long period of time when as many of these 3 of the criteria are satisfied: (1) rare, (2) costly to imitate, and (3) non-substitutable.
Only using rare, costly-to-imitate, and nonsubstitutable capabilities has the potential for the firm to create sustainable competitive advantages. Capabilities yielding competitive parity and either temporary or sustainable competitive advantage should be supported.
Firms will nurture these capabilities while simultaneously trying to develop capabilities that can yield either a temporary or sustainable competitive advantage.
Criteria 1: Rare capabilities are capabilities that few, if any, competitors possess.
Understand how many rival firms possess these capabilities is the key question to be answered when evaluating the rare criteria of a capability. Capabilities possessed by many rivals are unlikely to become core competencies for any of the involved firms.
Criteria 2: Costly-to-imitate capabilities are capabilities that other firms cannot easily develop.
Capabilities that are costly to imitate are created because of one reason or a combination of three following reasons.
The first reason is that a firm sometimes is able to develop capabilities because of unique historical conditions.
A firm with a unique and valuable organizational culture that emerged in the early stages of the company’s history may have an advantage over firms founded in another historical period. As firms evolve, they often acquire or develop capabilities that are unique to them.
Organizational culture is a set of values that are shared by members of the organization. Organizational culture is a source of advantage when employees are held together tightly by their belief in it and the leaders who helped to create it.
The second reason is that the link between a firm’s core competencies and its competitive advantage is causally ambiguous.
In these instances, competitors aren’t able to clearly understand how a firm uses its capabilities that are core competencies as the foundation for competitive advantage. As a result, firms are uncertain about the capabilities they should develop to duplicate the benefits of a competitor’s value-creating strategy.
The third reason is that capabilities may be a product of social complexity within the firm.
Social complexity means interpersonal relationships, trust, friendships among managers and between managers and employees, and a firm’s reputation with suppliers and customers.
Criteria 3: Nonsubstitutable capabilities are capabilities that do not have strategic equivalents.
Two valuable firm capabilities are substitutable, or strategically equivalent when they each can be separately exploited to implement the same strategies.
In general, the strategic value of capabilities increases as they become more difficult to substitute. The more intangible, and hence invisible, capabilities are, the more difficult it is for firms to find substitutes, and the greater the challenge is to competitors trying to imitate a firm’s value-creating strategy.
Core and Distinctive Competences
Competencies
Competency is a cross-functional integration and coordination of capabilities.
Competency in the new product development of the organization may be the combination and integration of information systems capabilities, marketing capabilities, R&D capabilities, and production capabilities.
The distinction between resources and capabilities is critical to understanding what generates competency. A company may have firm-specific and valuable resources, but unless it has the capability to use those resources effectively, it may not be able to create a competency.
In sum, for a company to have a competency it must at a minimum have either (1) a firm-specific resource and the capabilities (skills) necessary to take advantage of that resource or (2) a capability to manage resources.
Core Competencies
Core competency is a collection of competencies that are widespread across different divisions within the organization and that the organization can do exceedingly well.
Core competency emerges over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.
Core competency is valuable because it does not wear out with use. Instead, it gets better and more refined the more it gets used.
An organization must continually invest in a core competency or it will become a core deficiency, which means a strength over time matures and turns into a weakness.
Typically, events occurring in the firm’s external environment create conditions through which core competencies can become core deficiencies.
Often the flip side of core capabilities is revealed due to these external events when new competitors figure out a better way to serve the firm’s customers, when new technologies emerge, or when political or social events shift the ground underneath.
Firms should make sure their core competencies do not turn into core deficiencies.
Distinctive Competencies
A distinctive competency is a core competency that is superior to those of the competition.
As the capacity to take action, distinctive competency is the competencies the organization performs especially well compared to competitors and through which the firm adds unique value to the goods or services it sells to customers, compared to its rivals in the industry.
Thus, a distinctive competency is a unique firm-specific strength that allows a company to better differentiate its products and/or achieve substantially lower costs than its rivals and thus gain a competitive advantage.
Being able to develop distinctive competencies, firms will be armed with sustainable competitive advantages over their rivals.
Distinctive competencies are core competencies that are valuable, rare, costly to imitate, and nonsubstitutable.
Core competency becomes distinctive competency when it (1) provides customer value and competitive advantage superior to that provided by competitors, (2) is not easily possessed and performed by other competitors, (3) is costly to imitate, and (4) is ready to be exploited using the organization resources.
Building competitive advantage is one of the reasons why a firm needs to understand its distinctive competencies.
Distinctive competencies shape the strategies that the company pursues, which build superior efficiency, quality, innovation, or customer responsiveness. In turn, this leads to competitive advantage and superior profitability.
It is important to realize that the strategies a company adopts can build new resources and capabilities or strengthen the existing resources and capabilities of the company, thereby enhancing the distinctive competencies of the enterprise.
The relationship between distinctive competencies and strategies is not a linear one; rather, it is a reciprocal one in which distinctive competencies shape strategies, and strategies help to build and create distinctive competencies.
Resources
Further Reading
- Organization Resources and Their Utilization with Management, Manpower, Money, Materials, and Machines (hyattractions.wordpress.com)
- A Guide to Organizational Resources and How to Manage Them (grantham.edu)
- Steps to Define your Internal Resources: What Can You Sell? (mageplaza.com)
- Internal firm analysis: Understanding a firm’s resources and capabilities (startupsloth.com)
- Core Competencies Definition (strategiccfo.com)
- Core Competencies (investopedia.com)
- Resources, Competencies and Distinctive Capabilities (managementstudyguide.com)
- Capabilities and Competences (ifm.eng.cam.ac.uk)
- Distinctive Competencies Vs. Core Competencies (bizfluent.com)
Even More Reading
- Distinctive Competencies: Examples, Explanation and Advantages (advergize.com)
- Distinct Competencies Related to Value Proposition (smallbusiness.chron.com)
- Capabilities vs. Business Functions: Same Difference? (bizzdesign.com)
Related Concepts
- Business Internal Environment Analysis
- Organizational Capabilities
- Functional Resources and Capabilities
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
- Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.
- Mastering Strategic Management. (2016, January 18). Open Textbooks for Hong Kong.