The Essential Business Resources - Essay Example

Business resources xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Abstract Business resources are paramount ingredients to the success of a business. They include both tangible and intangible assets. Tangible assets are those that have physical form while intangible assets are not physical in nature. Research has shown that intangible assets are much more valuable towards the success of an organization than tangible assets. They have hidden returns that cannot be actually quantified but they are clearly manifested in the long run. The resource-based theory is used widely by strategic managers to plot ways of effective resource management within the firm. The aim of this report is to provide a conceptual understanding of the role of business resources towards the attainment of competitive advantage and/or the success of the organization. The introductory part gives an overview of business resources, the objectives and scope of the report. The second part gives basic theories of business resources management specifically resource-based theory and market-focused approach. The third part gives major differences between tangible and intangible resources in the business context. The fourth part gives detailed description of the nature and the roles played by intangible assets. Table of Contents Abstract 2 Table of Contents 3 1.1 Introduction 3 2.0 Theories of organizational resources 4 2.1 Resource-based theory 4 2.2 Market-focus approach 8 3.0 Tangible and intangible resources 10 4.0 Nature and Role of intangible resources 11 4.1 Knowledge 13 4.2 Strong leadership and effective communication 13 4.3 Culture and values 14 4.4 Reputation and trust 14 4.5 Skills and competencies 15 5.0 Conclusion 15 References 16 1.1 Introduction Studies of organizational resources have a long history in organizational studies particularly in strategic management. More importantly, the resource-based theory has surfaced and triggered major concerns with regard to resource endowment within firms (Easing 2007). Organizational resources vary from firm to firm and this is basically determined by production factors. Resources are in many cases scarce, imperfectly imitable, valuable and unique to organization which therefore, gives them the capable of sustained performance in competing with other firms in the industry. As a matter of fact, resources should be prominent figures in strategy formulation. This calls for managers in organizations to identify, nurture and protect these unique resources and distinctive competencies that underlie their organizations. The ultimate goal of any organization is to achieve its goals and earn a competitive advantage in the industry. This can only be achieved by employing all the organizational resources which include financial, human and physical assets. These resources are usually classified into two broad categories; tangible and intangible resources. This report seeks to explore the contributions of organizational resources to organizational success and sustainability. It will begin by exploring two main theories in organizational resources which are resource-based theory and market-focused perspective. It will further explain what tangible and intangible are in order to provide a clear distinction between the two types of resources. More importantly, the report will comprehensively discuss the nature and role of intangible assets as their crucial role overrides that of tangible assets in ensuring success of a business. 2.0 Theories of organizational resources 2.1 Resource-based theory The field of strategic management has adapted a new model of competition within organizations known as the ‘Resource-Based View’. Some describe this model as a paradigm in the field of management which possesses momentous potential while others doubt if it will actually provide additional insight against former understandings (Alvarez and Busenitz 2001). Admittedly, this theory is squarely rooted and consistent with the research policy. Indeed, the reality that the organizations are fundamentally heterogeneous with regard to their internal capabilities and resources has formed the platform in the field of strategic management for many years. For instance, the traditional approach to strategic formulation begins with the firm’s appraisal of its existing resources and competencies. Those that are superior or distinctive relative to those rivals may be matched properly with environmental opportunities to gain a competitive advantage. These notions are the basic principles in which the resource-based theory is constructed. It provides a broad understanding concerning several issues that underpin the success of an organization such as how resources can be properly applied and combined, origins of heterogeneity, nature of rents and how a firm can make its competitive advantage sustainable. A basic assumption in the resource-based theory is that capabilities and resource bundles used in production are quite heterogeneous across the firm. Productive factors are those resources used intrinsically at different levels of efficiency. They differ in terms of superiority. Organizations endowed with these kinds of resources are in better economic positions and satisfy customer needs in a holistic manner. Heterogeneity enhances competition among firms with varying capabilities. Those with superior resources earn rent while those with marginal resources can only breakeven. By and large, superior resources come are in limited supply, fixed and are impossible to expand. In many cases, they are quasi-fixed implying that their supply cannot be rapidly expanded. Their insufficiency in satisfying service demands justifies their scarcity. Therefore, inferior resources are included in production as well to fill this gap. This concept is known as the Ricardian argument. It assumes that firms with superior resources operate at low costs relative to others firms. Low cost firms have inelastic supply curves such that they cannot rapidly expand even when prices are extremely high. On the hand, less efficient firms will be induced to enter the industry when prices exceed the Marginal Cost (MC). The result is that in equilibrium, the industry supply and demand will be in equilibrium causing the less efficient firms to breakeven while the low cost firms make supranormal profits hence rents for their scarce superior resources (Alvarez and Busenitz 2001). Figure 1 Scarcity rents with heterogeneous factors .Key: P” = Equilibrium Price, O = Rents to Efficient Producer. Figure 2 Imitation (expansion) of low cost firms causes rents to dissipate and high-cost firms to exit. Key: P** = New Equilibrium Price The Ricardian model is not only used in resources that are strictly fixed in supply but also in quasi-fixed resources. These are resources of greater importance and even though they are limited, they may be incrementally expanded and renewed within the firm. For instance, core competencies and especially those involving knowledge-based and collective learning provide direction for sustainable growth of a firm if they are appropriately applied. In order to sustain competitive advantage, heterogeneity must be preserved. Heterogeneity that is short-lived implies fleeting rents. Therefore, firms that are interested in long-term rents must ensure that heterogeneity is relatively durable so as to add value. This can only be achieved if the ex post limits to competition are put in place. This means that subsequent to a firm earning rent and gaining superiority in the industry, forces must exist to limit competition for the rent. Another concept underlying the resource-based theory is imperfect mobility of resources. These are resources which can be traded but their value is much more in the firm they are currently employed than in any other they would be traded to. Therefore, these resources cannot easily bid away from their employer hence can be considered as sources of sustained advantage. The resource-based theory also suggests that there must be ex ante limits for a firm to gain competitive advantage. This means that prior to earning a superior position; competition for that position must be limited. This can only be achieved if the firm is ready to engage in above normal competition with its rivals who probably had the foresight of getting the position without competition. In sum, the resources-based theory proposes four main conditions that have to be met if the firm intends to enjoy sustained competitive advantage; resource heterogeneity, ex post limits to competition, ex ante limits to competition and imperfect mobility of resources. Figure 3 Cornerstones of competitive advantage 2.2 Market-focus approach Johnson et al (2003) asserts that unlike the resource-based theory, the market-focused approach emphasizes on the assessment of a firms strengths and weaknesses to ensure sustained growth process. Given such knowledge, the organization is able to identify the key markets and future market opportunities that can be captured. Therefore, development of processes and structures to enhance core capabilities within the firm becomes essential considerations. Once this is accomplished and long term plans put in place, the firm can make future predictions and probably plot strategies for building future growth. The first step in ensuring sustained growth is strategic targeting of customers. This entails identification of the market that will earn the firm maximum returns. Thereafter, the firm should assess potential of the markets and allocate resources accordingly. The market-focused approach proposes that a market with a high potential should be allocated a larger portion of resources relative to other markets. Surprisingly, a firm cannot meet demands of the entire population but it can inclusively satisfy the need of customers within its target. Consequently, the firm must decide which of its current resources provide best prospects for customer satisfaction and value creation. The second step in the market-focused approach is to assess customer need using market research methods. According to Mills et al (2002), the role of customers in the success of a business is pivotal hence priority should be accorded to their needs. The key issue in this process is identification of possibilities and future opportunities that will place the firm on a competitive edge. The firm is able to identify value exchange options and cost effective offerings like service arrangements, product features and discounts among others. This is known as the discovery approach and enables the firm to mobilize resources so as to satisfy customer needs in terms of quality and quantity. Ultimately the firm attains a financial breakthrough and a superior position in the competitive market. Another step in the market-focused approach is customer segmentation. Benefit-based segmentation involves converting customer groups into well defined value propositions. At this point, the firm needs to narrow down its focus and resources into specific target. In simpler terms, customers’ values are matched with specific business activities. Therefore, specific capabilities and resources are employed in specific business operations depending on their needs. 3.0 Tangible and intangible resources Tangible resources are defined as resources within an organization that have a physical form. They include both fixed assets such as buildings, land and machinery, and current assets like inventories. Intangible assets on the other hand are not physical in nature. They include brands, goodwill and corporate intellectual property such as trademarks, patents, business methodologies and copyrights. Another major distinction between the two types of assets is the manner in which their costs are calculated over a period of time. Tangible assets get depreciated over time, that is, their value reduces or gets eroded. However, land is an exception in this rule as it appreciates rather than depreciating contrary to other tangible assets. Intangible assets are on the other hand, amortized. Although tangibles assets are important, intangible assets are much more valuable to a business more so with regard to competitiveness of a firm. They do not have obvious physical returns to the organization and such can only be realized in the long term. For example, Coca Cola would not be as successful as it is if not for its powerful brand name that is recognized the world over. Other aspects such as reputation can are a major determinant to the value of the company towards its stakeholders as well as outsiders. A good example is the Nike scandal of human rights violation which besides causing it a tainted public image lost a great deal of employees and customers. Another key property that distinguishes intangible assets from tangible assets is that the owners of these assets have less ability to exclude the assets from non-owners. The non-owners are excluded from having the benefits that are basically associated with the assets. Hence, the intangible assets are said to be more susceptible to spillover as compared to tangible assets. In addition, the belief created that an entity cannot control its intangible assets as compared to the tangible assets has greatly contributed to the fact that the non-owners should be readily excluded from the assets. Spillovers of the intangible assets are found to be pronounced among industries that are in the same geographical location than those which are geographically distant. On the other hand, geographical proximity do not necessarily influence the spillover found in the tangible assets. This suggests that tangible assets are not subject to equal forces of diffusion (Skinner 2007). Tangible assets are knowledge –based while tangible assets are not. In fact, economists argue that knowledge-intensity of the intangible assets make them economic properties and therefore, susceptible to appropriation by those resources that are external to the firm. It is important to note that the economic property of the tangible resources as a result of the knowledge intensity, make them non-rival. This implies that an originating industry’s use of any intangible assets does not essentially impair the usefulness of the exact asset to those that are external to the originator. In actual fact, intangible asset experience an increase in returns to scale. In contrast, an individual using tangible asset prevents others or non-owners from using the resources. 4.0 Nature and Role of intangible resources Evidence from a number of nations suggests a tremendous growth in the investment of intangible assets as compared to that of tangible assets. In the United States, for instance, unmeasured intangible assets accounted for about 18% of the entire growth of the multi-factor productivity in the early 2000s. Recent studies reveal that an estimated value of USD 800 billion to USD 10 trillion is invested in intangible assets each year. The World Bank states that the preponderant form of wealth in the globe is intangible assets (Nakamura 2003). Figure 4 investments in tangible and intangible assets as a share of GDP (2006). These statistics underscore the important role of intangible resources in businesses. Intangible assets are frequently overlooked but they are the main source of sustainable competitive advantage. Prominent position and customer awareness within the market place are key components to the success of any business, whether small or big. Value attached to intangible assets such as relationships, people, knowledge and intellectual property should by far override that placed in tangible assets which are basically equipment and machinery. Creation and management of intangible assets is a long-term investment. Although manufacturing in many companies is driven by economies of scale, size advantages of a company are not necessarily the core determinants of successful innovation-based economies. It is possible for large centralized companies to have limited contribution in the global market in comparison to small organizations. This is so because rapid technology and science is now flourishing more in well integrated and coordinated relatively smaller enterprises that are more flexible rather than in the larger more rigid organizations. The intangibles of innovation-based relationships or know-how are now acting as the driving force of operational decisions in the rapidly thriving paradigm of competitive advantages. As a result, these intangible assets are gaining more popularity than never before. 4.1 Knowledge The way which a company utilizes and manages its knowledge base greatly determines its success or failure. However, against a concrete background of increasing electronic commerce and technology as well as massive competition is prompting many firms to effectively use its expertise and knowledge. Gardberg and Fomibrun (2006) maintain that survival in this kind of an environment can only be achieved through constant development of knowledge and ensuring that knowledge is effectively shared throughout the organization. Usually, codified or explicit knowledge is written down to enhance replication while tacit knowledge is aired out during discussions since it is in the minds of individuals. Knowledge is paramount in identification and fast response to the dynamic consumer demands. 4.2 Strong leadership and effective communication Another important intangible asset is effective communication and strong leadership. Steenkamp and Kashyap (2010) advice that achievement of full growth and economic success of a firm is embedded upon clear strategic goals and aims that are well understood by everyone in the organization. This is only possible through strong management and well established communications lines. These qualities are possessed by successful companies in which employees are aware of the part they play in the success of the organization. A culture of customer priority is established where there is clarity of purpose. This is because employees are conversant with the balance between the organizational goals and day to day which are all aimed at sustaining customer goodwill. In addition, everyone becomes motivated and encouraged to use creative and innovative thinking in order to enhance brand value and competitive advantage. 4.3 Culture and values Allee (2008) suggests that a key component in an organization’s ability to reach its goals is based upon its ability to create outstanding services and products, inspire its staff and effectively connect with values and aspirations of all important external and internal relationships. This means having a deep understanding of the minds and the hearts of people who differ in their perception of value. These components are key intangible assets and a cornerstone to the success of the business. Motivation for innovation and creativity as well as desired behavior needed to sustain the organization in the dynamic environment is a factor linked to culture. Increasing competition between and within economic sectors has underscored the importance of responsiveness towards cultural diversity and change. Investing in the right values and cultures opens up an organization to a wide range of opportunities and allows it to face and conquer challenges. 4.4 Reputation and trust The role of trust and reputation cannot be overemphasized as a tool for effective competition. Therefore, significant investment should be directed towards developing trust and enhancing reputation both externally and within the organization. A good reputation and trust in the brand tends to attract talents, knowledge and new relationships and also inspires loyalty. In addition to that, it is a vital tool for attracting financial resources and adds the company’s value more so when it comes up for sale (Salanova and Agut 2005). 4.5 Skills and competencies According to Hoffman (2001), skills, competencies and talents of the workforce together with the outsourced partners fall under the realm of human resources fundamental in the survival of the organization. Development and continued learning of members of an organization determines its ability to reach full potential. Recognition and rewarding of employees increases their motivation to obtain more competencies and skills required for current and future success. 5.0 Conclusion Evidently, organizational resources play a crucial part in the success of a business. The resource-based theory is a concept that is gaining much popularity among organization today. The four conditions underlying the resource-based theory are heterogeneity, imperfect mobility, ex post and ex ante limits to competition. A firm that applies all these conditions in resource management will indeed enjoy sustained competitive advantage. The market-focused perspective on the other hand, uses approaches in market orientation such as target market identification, segmentation, identification of customer needs and assessment of competitor to determine allocation of resources. Tangible assets are those that have physical appearance and they include machinery and equipment used in production of goods and services. On the contrary, intangibles assets are invisible assets but play a fundamental role in the success of a business. Research indicates that more and more organizations are investing in intangible assets relative to tangible ones. They include knowledge base, culture and values, competencies and skills, reputation, communication and leadership. Effective creation and management of these factors ensures sustained competitive advantage and success of organizations. References Allee, V. 2008. 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Accounting for intangibles- a critical review of policy recommendations. Working paper, Universuty of Chicago. Read More