Recently we have written about the external aspects of strategic analysis through the use of SWOT, PESTEL and Porter’s Five Forces analysis. Now, we will turn our attention inwards to look at the importance of analysing resources to its strategy.
Strategy, in its simplest form, involves the use of an organisation’s resources and capabilities to take advantage of opportunities that exist in the external environment. It is therefore important to understand what resources and capabilities exist, and how they may be leveraged.
Also, some strategists believe that it is more useful to base a company’s strategy around its resources and capabilities rather than around its external market. This is because they believe that, given the volatility caused by the competitive forces at play in any market, resources and capabilities provide a more secure, stable base for formulating strategy. This is known as the resource-based view of the firm.
An example often cited is that of Honda. Honda Motor Company is the world’s biggest motorcycle manufacturer and a leading supplier of automobiles, but it has never defined itself as either a motorcycle company or a motor vehicle company. Since its founding in 1948, its strategy has been built around its expertise in the development and manufacture of engines; this capability has successfully carried it from motorcycles to a wide range of gasoline-engined products.
It is important to distinguish between the resources and capabilities of the firm; resources are the assets owned by the firm; capabilities are what a firm can do. Individual resources do not give competitive advantage; they must work together to create organisational capability. It is capability that is the source of superior performance.
In order to identify a firm’s capabilities however, one must first identify its resources. In order to do this successfully, it is useful to view a company from a wide perspective by considering the three principal types of resource:
- Tangible resources – for example, financial resources and physical assets etc.
- Intangible resources – for example, brand names and intellectual property etc.
- Human resources – the expertise and effort offered by employees.
Once the resources have been identified, an organisation is then equipped to identify and classify its organisational capabilities.
Resource and capability analysis are covered in depth in our ‘Tools and Techniques of Strategy Analysis‘ and ‘Company and Industry Analysis for Investment Professionals‘ courses.