THE THIRD DIMENSION OF SVM, CAPITAL DRIVEN BY RESOURCES

Resource strategies are the single most important dimension of SVM to predict the future success or failure of an organization. Many times you can observe a paradox: the current financials of a firm and all current indicators are in good shape; however, the stock value of the firm has a poor performance. There seems to be no explanation until you look at the resources: they are like a crystal ball, they help you to predict the future.

An example is Dell. During the 1990s, Dell had unique resources that provided them an outstanding stock value performance, with the highest EVAs in the history of corporate America. However, during the last few years, several other firms began to imitate them. Dell responded by outsourcing manufacturing, with the result that its unique delivery system stopped being unique, which in turn led to intense competition with other firms. Although Dell's financials were still good, its stock value had a very poor performance because the giant computer maker had lost its unique position in the market.

Resources are the backbone of both the competitive and growth strategies that we discussed before. How can they help to predict the future?

Resources Part 1: Physical versus Intellectual Capital

Managers face pressure to create stock value. Even if they do their best, it is difficult in some industries to create stock value for the type of capital they use, no matter what managers might try.

Some industries require large amounts of physical capital. According to Leif Edvinsson, the European IC giant, physical capital has several problems: it follows the law of decreasing returns (the more you invest, the lower the profits), it wears out and deteriorates, and it can be imitated easily leading the industry into perfect competition.

The opposite is true if your industry is based on IC. IC can be reproduced without new investments (the cost to produce a new MS Word program, sold for several hundred dollars, is merely the cost of a CD and the box), whereas the cost to reproduce a ton of steel, with high physical capital, is very close to its price). IC can grow steadily with investments (that is why Microsoft stock is 20 times larger than its book value, whereas for U.S. Steel the relationship is close to 1:1). IC does not wear out like physical capital. On the contrary, knowledge and customer relationships can grow with no limit. When Rover and Honda signed a strategic alliance some decades ago, Honda acquired Rover's IC, knowledge, and relationships about the European market.

Figure 12.5 shows these two types of capital and links them to the first two dimensions of stock value creation: the higher the IC, the higher the profits and sales growth. This links the strategic environments that we saw in Figure 12.2 with the resource strategies and the financial results. Clearly, for industries that require large amounts of physical capital, this has a negative impact on their ability to create stock value.

Resources Part 2: Unique, Inimitable and Rare Resources to Boost Market Power and Innovation

Resources are a critical economic concept because they are responsible for creating future cash flow.

There are two separate economic theories that explain higher profits. Industrial economics theory suggests that industries have high profits when their entry barriers are high. The Resource view of the firm posits that profits are the consequence of unique, inimitable, and rare resources.

Figure 12.6 shows how SVM integrates both: high entry barriers or the uniqueness of the resources produce market power. Here it is the combination of barriers and resources, which is responsible for the high profits.

Figure 12.5. Resources and Growth

Resources and Growth

Figure 12.7 portrays how resources can be used to support competitive and growth strategies. Most managers and business people have used the SWOT analysis (strengths, weaknesses, opportunities, and threats) in their careers, ignoring that the SWOT is a powerful conceptual piece for understanding how firms' internal resources are critical for developing market power and innovativeness. As we saw earlier, internal resources are responsible for market power and sales growth, the two pillars of stock value creation.

Strengths and weaknesses (SW) emerge from unique resources that make the firm stronger than its competitors. Such unique resources provide a firm with higher profits than its competitors. To understand strengths you need to visualize both demand and supply: customers expect certain specific attributes from their suppliers and are willing to pay a higher price to the firms that supply such attributes. Some firms, based on their unique resources, can provide such attributes. This is the origin of differentiation strategies. Without differentiation prices would be similar for all firms. For example, some customers are willing to pay a higher price for a Toyota because Toyota provides the attributes that the customers expect, based on Toyota's unique resources. This enables Toyota to charge higher prices, which leads them to a positive EVA in an industry where many competitors have negative EVAs.

Figure 12.6. Resources and Entry Barriers

lO's strategies (entry barriers)

RVF's resources

Experience, technology, innovation

Organizational resources, knowledge, routines, processes, dynamic capabilities

Capital requirements

Physical and financial resources

Switching costs, customer relationship

Relationships

Scale economies, predatory price discrimination

Financial and physical resources

Blocking distribution channels

Licenses, relationships

Differentiation, advertising, image, public approval

Ability to satisfy stakeholders, ability to communicate

Government policy

Patents

Opportunities and threats (OT) emerge from the ability of a firm to take advantage of factors or actors in the external environment: economics, political, regulations, demand, technology, etc. For example, in a recession, a firm that supplies systems which help to reduce cost can be extremely successful: the internal resources of that firm permit

Figure 12.7 Resources and SWOT

Resources and SWOT

it to transform an external factor such as a recession into a business opportunity.

In summary, firms with adequate resources can generate profits (or losses) based on their strengths (or weaknesses), and can raise (or reduce) their sales by transforming external environmental factors into business opportunities (or threats).

This approach is extremely valuable; the SWOT stops being just an analytical tool, it goes a step further, and helps to produce a synthesis, a practical conclusion, in terms of the future ability of the firm to create stock value and in terms of profits and sales growth, based on its unique resources. In addition, the SWOT is not an abstract thinking tool, as it is now strongly connected with the strategic environment (internal and external), the firm strategies, and the financial results. In conclusion, firm resources become central to determine future success in terms of its ability to create stock value.

 
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