… customers, products, production capacity, staff and cash. Since organizations exist to “supply” some form of “demand,” let’s look at demand-side resources first…

The most obvious resource on the demand side of the relationship is “customers” – or clients, users or other terms, depending on the industry. Two important issues to consider are, first, that customers may come in multiple varieties (think consumer/business for telecoms, or leisure/business customers for hotels). Secondly, a company may supply one set of customers, who then have further customers of their own, and these may in turn have further customers. Whilst only the first group is strictly the company’s set of “customers” the other parties downstream in the chain are critical to driving the company’s sales. For a consumer brand such as Coca-Cola or Proctor & Gamble, the direct customers are retailers, such as Wal-Mart or Tesco, who then sell to consumers. So a full explanation of business performance requires information on final customers as well as about the direct customers or intermediaries involved.

Demand-side architecture for a consumer brand company.

Other special cases include:

• not-for-profit organizations, where “demand” still comes from individuals or groups served by the organization
• organizations that must serve the needs of two distinct groups, e.g. newspapers serve readers and advertisers, or eBay who must satisfy both buyers and sellers
• commodity markets, such as oil or agricultural products – where there is sometimes no identifiable customer

For “durable goods”, the customer resource is best described as an “installed base” – sales come from the rate at which new customers arrive, not from continuing existence of these customers. [Strictly, the installed base describes the goods themselves, rather than the owners]. Depending on the product it may be easy or difficult to keep in touch with the people who own the product – your sofa, for example does not need an annual service whilst you would be careless not to send your car to be checked over! In some cases, the installed base continues to generate a separate flow of sales, either from service (e.g. cars, elevators or aircraft engines) or from “consumables” (e.g. ink for printers or games for games consoles). The bottom line, though, is that in some way or other, sales nearly always depend directly on customer numbers.

SUPPLY-SIDE RESOURCES

All organizations need some form of production or service capacity – manufacturing capacity, shelf space in stores, airlines’ aircraft and seats. In some cases, capacity consists of people who provide service capacity, and this is a common feature of many public services and voluntary organizations. Organizations also need staff to undertake the various functions that have to be fulfilled (e.g. marketing, sales, product development, support, accounts and administration to name just a few). For a full analysis it is therefore helpful when thinking about staff to check that everyone associated with the organization’s “capacity” resource has been covered.

Next, all organizations have some range of products or services that they provide. If the range is too limited, they may miss out on substantial groups of consumers: too wide, and the sales they achieve may be fragmented into uneconomically small amounts. Product range can take a variety of forms – for airlines, it is the routes served, and for a TV or radio channel, it is the range of programs broadcast. Whatever its form, though, the range of products has implications for the numbers and skills of people needed to deliver them.

Although not directly associated with “supply” of products and services to customers, cash is an important resource that enables the other supply-side resources to be developed. It is important to note that cash has a negative counterpart – debt – that drives the cost of interest payments. However it is not always essential to include cash in the strategic analysis unless

• the organization is in financial difficulties
• the strategy requires costly initiatives
• the organization concerned is a new venture, which has access to only a limited pool of potential cash to fund its development

It might seem puzzling that “suppliers” themselves are not listed as a universally important factor. Supply can be a constraint in certain circumstances, usually where the physical source itself is limited. Some organizations – Toyota is a good example – have also made a powerful platform for their own performance by developing close relationships with supplier. In either case, it would be appropriate to include them in the analysis.

SUPPLY-SIDE RESOURCES

This table summarizes how the most common categories of tangible resources might appear for certain businesses. The list includes two items—intermediaries and cash—that may need to be added in a significant number of cases.

This table should provide a useful checklist for most situations.

Doing it right: give resources their proper names

To be useful for explaining performance and developing strategy, each resource will need to be used to calculate other items, so they must be properly defined. The most important guideline for this purpose is to specify a measurement for any resource in its own physical terms – do not use some proxy instead. “Staff” are people, “customers” are people or organizations, a “product range” consists of actual products or services. Using abstract terms makes it hard to quantify resources and to calculate or estimate their impact on other parts of the system.

The occasional exception to this rule concerns “capacity” which can arise from a complex mix of physical items and activities. This may mean that you have to define and measure “capacity” in terms of the potential output, e.g. a chemical plant’s physical capacity consists of its vessels and pipe-work, but it is more useful for strategy purposes to measure it in ‘tons per day’.

Until next time…

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SWOT analysis

If you have had any kind of general business course you have probably come across SWOT analysis—Strengths, Weaknesses, Opportunities and Threats. Whilst considered by many to be an outdated and simplistic approach, most managers still think of SWOT first when asked how they would go about assessing their strategy. So how can a resource appraisal clarify to a firm’s SWOT analysis?

The SWOT framework splits naturally into two halves:

Opportunities and Threats: features of the external environment, mostly competitors and other external pressures. Two formal methods in particular deal with these issues – analysis of the “five forces” of the competitive environment (competitors, customers, new entrants, substitutes, and suppliers) and analysis of “PEST” factors (political, economic, social, and technological forces).

Strengths and Weaknesses on the other hand are features of the firm itself, relative to competitors and success factors in the market, and have a closer connection with a resource-based approach. Strengths and weaknesses can be evaluated in terms of resources and capabilities that the firm has, or needs, for its system to work. These can then be compared to levels or qualities of resources available to actual or potential rivals.

We can therefore add to a SWOT analysis by carrying out a quantified, fact-based analysis of resources, including an evaluation of their relative strengths and weaknesses.

This briefing summarises discussion from chapter 2 of Strategic Management Dynamics, pp 95-110

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In very simple terms, the academic study of strategy and performance has shifted its attention in recent decades. From the early 1980s, people focused on how ‘industry forces’ [competitors, customers, new-entrants, suppliers and substitute products and services] impacted on the profits firms in an industry could achieve and how strategy could cope with those forces. 

By the 1990s, though, it looked like these issues did not explain much about why some firms perform better than others. Research identified that things about the business itself seemed to be more important, e.g. how much they spent on R&D or marketing. [Translation "You can do well in tough markets, and mess up in attractive ones!"] Further investigation suggested firms could sustain strong performance by developing ‘strategic‘ resources that others could not copy. This idea has crystallized into as the so-called ‘resource-based view‘ of strategy – affectionately known as RBV. 

Since we have repeatedly talked about the principle that resources drive performance, you might think that this idea and RBV are one and the same thing – they aren’t. 

An accepted definition of RBV resources is

“…all assets, capabilities, competencies, organizational processes, firm attributes, information, knowledge, and so forth that are controlled by a firm and that enable the firm to conceive of and implement strategies designed to improve its efficiency and effectiveness.“ 

Management often blames any shortfall in performance on “inadequate resources“, so it may seem self-evident that resources are important, but RBV claims that only certain special items matter. Since many resources are easy to get – cash can be borrowed, production capacity can be bought, staff can be hired – any firm that gets behind on such things simply copies what its competitors have. [Yes I know, if the academics think it's so easy, they should go try it!] So the RBV asserts that any resource can only give sustained advantage if it is valuable, rare, hard to imitate, and works with other organizational factors – the so-called “VRIO criteria.” 

To see if any resource will give you a competitive edge, RBV recommends you ask the following questions: 

• Is it durable? A resource that deteriorates or becomes obsolete quickly is not likely to provide sustainable advantage, e.g. production equipment wears out, and staff skills get out of date.
• Is it mobile or tradeable? Many resources are easily bought or taken from other firms. Equipment suppliers may sell the latest technology to your rivals as well as yourselves, customer lists can be purchased, and staff can be attracted by better salaries.
• Is it easy to copy? Many resources can be easily copied by rivals, so these too offer little scope for competitive advantage. You might launch a great new product but if it is easily copied the benefit will be short lived.
• Can the resource be substituted? Even if you cannot buy or copy your competitors? resources, you may still be able to challenge them by using something else. A common example is firms who can?t persuade retailers to sell their products can use telephone or Web sales channels instead.

So what kinds of things fulfil these criteria? – certainly not the simple tangible factors discussed in earlier briefings. RBV focuses instead on more subtle and complex things, especially intangible resources, e.g. reputation or staff morale, capabilities (or competences), knowledge and processes. We will get to those later in the strategy dynamics story, but earlier briefings explained how performance depends directly and unavoidably on resources that do not fulfil those criteria? e.g. customers drive revenue, staff and capacity drive costs. The abstract intangible factors of the RBV are important, of course, but they can only affect performance by influencing the simple, tangible resources at the core of the business system. 

DIFFICULTIES IN APPLYING THE RESOURCE-BASED VIEW  

It is hard to disagree that intangibles, capabilities and knowledge are important, but applying these things as RBV suggests is tough. As described in the literature, they are abstract, ambiguous and qualitative, so management debate degenerates into semantic discussions about what the words really mean – hardly a solid foundation on which to build a strong strategy with confident outcomes. And it?s going to be hard steering strategy and performance into the future if you can?t work out what difference a decision makes to these squishy things. 

There are even cases that don’t seem to need RBV-type resources at all. There is nothing unknown or mysterious about how Southwest, Ryanair or McDonald’s function. The two airlines pursue a completely transparent strategy, even signalling ahead how they intend to develop further. Just about every detail of McDonald’s operations is even written down and passed around in its franchise manuals! Many hundreds of executives have had experience in these companies during their long periods of success, and are deeply familiar with their inner workings. Why, then, have such individuals not been able to replicate that success elsewhere? The RBV says this is because of some still more abstract capabilities of the senior management – strategy dynamics says it’s because of the power of the system! So the approach differs from RBV in three main ways: 

• First, we don’t ignore the tangible factors that comprise the heart of any business or organization – we make them explicit, quantify them and connect them to the organization?s performance outcomes.
• Secondly, we go beyond resources that are “owned or controlled“. To influence performance, you only need a resource to be somewhat reliable – “If it is there today, it is likely to be there tomorrow.” This means in particular that “customers” become part of the business system – newspapers and TV channels keep customers for many years, and customers’ relationships with sports clubs and banks often last longer than their marriages!
• Thirdly, strategy dynamics makes explicit how exactly resources work together – but more on that in future briefings.

Until next time… 

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“Ockham’s razor” 

“What on earth is that?!” you may wonder. It is a rather simple idea, supposedly set out by a 14th-century friar, William of Ockham. 

All it says is that, given a number of possible explanations for something, the simplest and most concrete explanation is likely to be the best. At the very least, a simple, concrete idea needs to be disproved before we go looking for abstract and complicated answers. 

You might bear William in mind whenever you read articles and books about strategy and business. 

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And here are those references… 

Michael Porter (1980) Competitive Strategy, Free Press, New York is the seminal reference book on how external forces determine performance and how strategy can deal with them, or even exploit them.  

Jay Barney, J. (2002) Gaining and Sustaining Competitive Advantage, 2nd ed?n, Pearson, Upper Saddle River, NJ gives an eloquent explanation of RBV and its implications for strategic management, together with comprehensive coverage of the supporting literature.  

Robert Grant (2005) Contemporary Strategy Analysis, 6th ed?n, Blackwell, Oxford, Chapter 5 gives a managerial explanation of how to analyse resources and capabilities in the way RBV suggests. There is also a neat article on the idea ? David Collis and Cynthia Montgomery (1995) Competing on resources: Strategy in the 1990s. Harvard Business Review, Vol 73, No. 4, pages 118?128.  

The Motor-Neurone Disease Association (www.mndassociation.org) is a voluntary organization working to deliver the support needed by people living with MND (plwMND). MND, also known as Amyotrophic Lateral Sclerosis or ALS, is a degenerative affliction of the nervous system, that generally results in death within a few years of diagnosis. Similar support groups exist in other countries, such as the ALS Association (USA), www.alsa.org. There are over 3 000 sufferers in the United Kingdom. In addition to supporting medical research into MND, the association offers a range of services to people affected by MND, including a helpline, 14 care centers, equipment loan service, plus support, advice and information from 21 regional care advisors, and a befriending service from over 300 association visitors. Six regionally based volunteer development coordinators support additional volunteer and fundraising activity through a network of 95 branches. 

MNDA’s primary objective is to achieve a high level and quality of support. A similarity with business cases is that “demand” for its support is driven by “customers”, i.e. the number of people living with MND who are registered with the organization. The principal resources that determine how much support MNDA can give are the care advisers and visitors, plus the staff and physical resources associated with the helpline (Figure 1). 

Figure 1: Demand and supply drivers in MNDA 

Although MNDA is not concerned with profit, it does have to work within its financial means, so costs must be covered by donations and legacies. Raising these funds requires some spending, even though volunteers raise considerable amounts of cash. The association’s financial surplus or deficit is therefore the difference between income raised and the costs of both raising those funds and providing support to its registered clients. Apart from fundraising expenditure, the association’s costs are largely determined by its staff and physical assets, plus financial grants to research projects. The association visitors are volunteers, so do not drive significant continuing costs, although there is a cost for training them. 

MNDA’s income from donations is driven by the number of donors, most of whom are regular givers and therefore constitute another resource. Fundraisers – a further resource – also bring in income from the general public, and encourage giving from regular donors. Both sources of donations are boosted by money spent on promoting the association’s aims. 

Just as the previous briefing explained for the case of airline Ryanair, the resource-based representation of the association’s operations can be used to lay out what needs to happen to bring about improvements. A number of challenges facing the association could change its future substantially, and thus alter the time path of both its resources and performance outcomes. 

First, it is estimated that only half of the people registered with MNDA actually use its services. If the inactive cases were to become active cases quickly, the help- line could be overloaded, leading to long delays for callers’ needs to be resolved. If that bottleneck were removed, demands on the care assistants and visitors would escalate, and their ability to deliver quality care would be compromised. It takes time, however, to find and train these carers, and a further lead time as new staff learn processes, e.g. liaising with health service providers. All this requires a faster rate of fundraising, so more volunteers would be needed, and either the number of donors and/or their donation rate must increase. This would be challenging, since MND is something of an “orphan” affliction, and does not receive the public attention of high-profile diseases such as cancer. 

Secondly, the association is facing a likely rapid increase in demand, since the number of people with MND is rising as life expectancy and medical treatments of other ailments improve. This, plus the untapped population of people served by MNDA, indicates that rapid growth is needed in all the organization’s supply-side resources. 

Using the strategy dynamics approach allowed MNDA not only to identify where constraints were holding back its ability to deliver the quantity and quality of its service, but – crucially – what had to happen, by how much, and when in order to both deal with the short-term challenges and get the organization fit to cope with future demands. 

Until next time…

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Public service, voluntary and other non-profit organizations raise some interesting challenges not often found in commercial cases. First, while businesses generally have some financial objective, such as sustained growth in cash flows, such a single dominant aim is not always clear in these other situations. MNDA, for example, wants both to increase its coverage of people who need its help, and improve the quality of that support. It also wants to back research that would potentially eliminate the disease – effectively putting itself out of business [though that is not an immediately likely prospect]. 

Non-commercial cases can also feature multiple types of stakeholder, often with different aims and roles that they play in the overall situation. Reducing the number of homeless people in a city, for example, involves the social services, voluntary housing groups, organizations helping reduce drug dependence, and police, as well as the many organizations who previously touched on the lives of people who risk going on to become homeless, such as parents and children’s care homes. 

In all such cases, the strategy dynamics approach offers a single [if extensive!] picture of how the whole system fits together, enabling everyone involved to see their own role in that picture and to place their own aims in the context of what others are trying to do. 

This briefing summarises discussion from chapter 2 of Strategic Management Dynamics, p82 to 85

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