Resources Part 3: Resources Developed Internally versus Acquired versus Shared

The decision to own, buy, or share resources is a critical factor in creating stock value.

During the last decade, Skandia, the Swedish financial and insurance group, turned their formerly poor financial performance into outstanding growth (almost 100% per year) by outsourcing the part of their operations that required high physical capital (tellers) and keeping for themselves the part that helped develop IC. This consisted of knowledge (product and business development) and relationships (alliances with partner firms to market their products).

Examples such as Skandia or Dell show that, on a first look, sharing resources is a very promising strategy. However, this approach also has serious problems. The introduction of economic analysis provides a very powerful insight into determining when sharing resources is convenient or not.

According to Torger Reve there are three ways to share resources and they all have large economic benefits. First, diversification alliances, wherein firms that provide different products or services (such as Amazon, which uses their channels to sell products from partners) provide economies of scope by sharing resources that help growth into new arenas. Second, horizontal alliances (e.g., VISA and Bank of America) provide economies of scale, by sharing resources with the competition, and boost profits by avoiding competitive wars. Third, upstream and downstream alliances (e.g., Amazon and LG) provide economies of integration, by sharing resources with customers and suppliers. Such integration leads to stronger market power through lower costs and higher quality as well as reinforcement of the relationships with buyers and suppliers and ability to develop joint resources.

Interesting, right? The magical words, sharing resources, are behind every aspect of alliances. Your conclusion will be: you must always develop partnerships with any stakeholder around. However, the reality shows that firms develop their own resources and acquire entire firms, which seems irrational. Have we missed anything?

Sharing resources has economic benefits and economic costs, known as "transaction costs." Transaction costs are the result of the opportunistic behavior of partners. You may find out that your supplier is not reliable, and this has an impact on your own production; a contractor receives your advance payment and then is declared insolvent. You may limit these problems by contracts, but contracts may not be complete; perfect opportunistic behavior cannot be eliminated (bounded rationality, difficulties specifying or measuring performance, and asymmetric information).

Organizational Resources

SVM also integrates into a single model the various types of organizations explained earlier. Figure 12.8 shows how Gareth Morgan provided some metaphors to understand different types of organizations.

Figure 12.9 paraphrases Morgan: commodity industries/perfect competition environments (at the left) require simple mechanistic organizations; however, more sophisticated competition and fast-moving

Figure 12.8. Images of Organizations

Images of Organizations

Figure 12.9. Strategy-Value Model and Organizational Types

Strategy-Value Model and Organizational Types

environments (at the right) require organizations that can react to the environment as organisms and can even lead the markets as brains.

Takeaways

This may be the first time that you have seen how resources strategies are critical in creating stock value and forecasting the future. This is because resources are the backbone of both competitive and growth strategies. More than that, you can now translate and convert everything that has been described into the dimensions of competition, growth, and resources, as well as profits, sales growth, and capital. The previous charts can be applied to your organization to help determine the viability of your current strategy. With this approach strategic management becomes a simple and powerful tool that can be used in the competitive enterprise. Now that you have the big picture, let's see some important applications.

 
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