‘Resources underlie competencies, whereas competencies build resources’ Discuss this statement and explain under what conditions both resources and capabilities can create a competitive advantage for a company Introduction This essay will discuss how resources and competences are linked with regards to a firm’s performance and under what conditions they can be fully utilized to create a competitive advantage for the company in question. Main Generally it can be found that in a particular industry some firms will out- perform other firms usually to do with their internal environment.
The main reason for this is due to the resources and competences, or capabilities that a firm possesses. Resources refer to ‘inputs to an organisation’s production or operating processes’, and they can either be tangible or intangible. In the business industry it is generally thought that intangible resources tend to be more valuable than tangible ones, the reason for this being that you cannot just buy intangible resources, they are hard to acquire and are built up over time, with time being an important aspect of strategic management.
For example, a company such as The Body Shop has spent many years building up their brand image and forming relationships with suppliers and customers, meaning they possess very valuable, intangible assets. Whittington (2005) said ‘in a knowledge-based economy, intellectual capital is likely to be a major asset of any organisation’, further illustrating the importance of intangible resources. Characteristics of tangible resources, such as equipment, are that they are easily traded, ownership is generally easy to specify, and they need to be maintained to stop them from degrading over time with over use.
Competencies, on the other hand, refer to the skills or capabilities that a firm has acquired. Grant (1991) defines competencies as ‘the capacity of a set of resources to interactively perform a task or activity’. This definition shows how resources and competencies are linked together, as the skills are required to build the resources, yet the competencies could not be demonstrated without the relevant resources. To add value to the firm in general, both resources and competencies are required and they must work together in union or their full advantage to be seen. Competencies differ from resources as they refer to what you are capable of doing with the resources that you already possess. They are learnt, and they develop over time along with their value. An example of a firm with significant competencies is Apple computer, as they are known for their innovation and forward thinking into the market. Competencies help to maintain and create new resources, whilst the resources are the underlying system beneath the competences.
Competencies are intangible as they are information based and they are embedded within the organisation. Unlike resources, they diffuse over time, making ownership difficult to identify, and they are also difficult to trade or copy as they are embedded within the particular firm, making them valuable. Resources and competencies are important for a firm striving to achieve a competitive advantage because if a firm has specific, difficult-to-imitate resources, along with resources that help create high demand for their product, this may result in core or distinctive competencies.
Similarly, if a firm has specific capabilities to effectively manage their resources, this will also lead to distinctive competencies. Henry (2008) described core competencies as ‘cluster of attributes that an organization possesses which in turn allow it to achieve competitive advantage’. They do this because they provide potential access to a wide variety of markets, and they significantly contribute to perceived customer benefits of the end product.
Hill and Jones identified what they called ‘Generic Competencies’ which included efficiency, quality, innovation and customer responsiveness. These four factors are all ways of creating added value, as they may result in either lower unit costs or higher unit prices, and as a result of this a company may achieve a competitive advantage. Superior efficiency helps a company attain a competitive advantage through a lower cost structure. Superior quality means that a customer perceives greater value in attributes of the product therefore will be willing to pay a higher price.
Successful innovation provides a company with something unique that another firm may be lacking in. Superior responsiveness to customers differentiates a firm’s products and services and can lead to brand loyalty and premium pricing. However resources and competencies are not always strengths to the company, for example if the resources are not efficient or up to date with current technology, then no matter how strong the competencies, the resources will have a negative effect on the quality or production rate.
Inefficient resources may also result in high costs and take up space. To asses an organisations resources and therefore determine its possibilities and strengths, Porter’s Value chain analysis (1985) can be used, which determines which activities add value to the product or service. Porter identified primary and support activities, and the firm’s profit depends on the effectiveness in performing these activities efficiently so the customer is willing to pay more for the product than exceeds the cost of the activities in the value chain.
It is in these activities that a firm has the opportunity to generate superior value and a competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. To conclude, resources and competencies are closely linked and can only be efficiently used when both assets work in union. If utilized to their fullest advantage, core competencies may be created, which in turn can lead to a competitive advantage which makes the firm in question superior to other firms in the same industry.
A resource based view of competitive advantage emphasises the need for valuable, rare and non-substitutable resources, whereas a generic strategic view emphasises the importance of cost, leadership, differentiation and focus within the organisation. If a firm does succeed in obtaining a competitive advantage, they must then proceed to evaluate their dynamic capabilities to provide theoretical insight into understanding how they may achieve and maintain superior performance.