184.108.40.206: What Makes a Resource Valuable?
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The idea that resources are important in business performance goes back more than 40 years but took hold strongly during the 1980s. Today, most strategy books for business students include a chapter on analyzing resources (Grant, 2008). Capabilities and competences are related, but different issues. Think of capabilities as “activities we are good at doing,” whereas resources are “useful things that we have, or can use, even if we don’t own them” (Mainardi, Leinwand, & Lauster, 2008; Stalk, Evans, & Shulman, 1992).
Generally, managers focus on the truly strategic resources in their business—those few special items that might explain why one firm is more profitable than another. It is widely accepted that resources contribute to sustained competitive advantage only if they score well on most of the following questions (Barney, 2006; Collis & Montgomery, 1994).
- Is the resource durable? A resource that quickly deteriorates or becomes obsolete is unlikely to provide sustainable advantage. The more durable the resource, the better.
- Is the resource mobile? Many resources are so easily moved between firms that they provide little sustainable advantage. People are a clear example. The less mobile the resource, the better.
- Is the resource tradable? Resources are particularly mobile if they can be bought and sold. The less tradable the resource, the better.
- Is the resource easily copied? Many resources are easy for competitors to copy, leaving little scope for competitive advantage. The less easily copied the resource, the better.
- Can the resource be substituted by something else? Even if a resource cannot be bought or copied, an alternative serving the same purpose can erode any advantage. Dell Computers, for example, has negligible presence in retail stores, but its direct supply system is a great substitute. Video conferencing and collaborative working over the Web are substitutes for business air travel. The less easily substituted the resource, the better.
- Is the resource complementary with other resources? Some resources work well to support one another. The more complementary the resource, the better.
Of course, any resource you have that is difficult to copy, buy, substitute, and so on can give you an advantage, but these accepted criteria are neither necessary nor sufficient to explain why one firm beats others.
Consider this situation. You and I run competing restaurants that are next door to each other and identical in almost all respects: same size, same menu, same number of staff with the same experience, and the same likelihood that a passing customer will drop in. The only difference is that you have a million dollars in the bank and I do not.
Now, resources do not get more tradable than cash. I could go and raise a million dollars, but it would cost me more in interest than you will make in interest on your million. It would also take time and effort to obtain, assuming, that is, that I could raise the money at all. What could you do with your million dollars? Develop new products, hire more staff, do more marketing, cut your prices for a while. You have a range of options, any one of which could start winning you more customers and sales than I have. Then you can plough back that extra income to build still more advantage.
Moreover, even if I had one of those supposedly strategic resources, you could still beat me. I might have a secret recipe, for example, or exceptionally skilled and loyal staff. All the same, you could quite feasibly overwhelm me simply by spending your extra money on some mundane resources.
This is not just a theoretical game; there are plenty of examples of firms winning with little evidence that they rely on such special resources. Consider McDonald’s: Its operating system is crystal clear. Thousands of executives have been through the company and know its operating manuals from cover to cover. Many have used what they learned to start their own fast-food operations. Yet none has come close to overtaking the leader.
Similar observations apply to Southwest Airlines and Ryanair. The day Ryanair started, any one of thousands of airline executives could have set up the same business. There is nothing mysterious about its operating methods. So the only criterion for strategic resources that remains from the list above is, are your resources “complementary”? In other words, do they work well together?