An important part of business strategy is concerned with ensuring that resources and competences are understood and evaluated - a process that is often known as a "Strategic Audit". The process of conducting a strategic audit can be summarised into several stages including Resource Audit, Value-Chain Analysis, Core-Competence Analysis, Performance Analysis and Portfolio Analysis.
One of the main goals of business strategy is to achieve sustainable competitive advantage. Michael Porter (1985) identified two basic types of competitive advantage – cost advantage and differentiation advantage. A resource-based view developed by Jay Barney (1991), puts emphasis on the resources and capabilities of a company which are superior to those of competitors, that create competitive advantage.
As Collis and Montgomery (2008) suggest, “valuable resources must still be joined with other resources and embedded in a set of functional policies and activities that distinguish the company’s position in the market”. Johnson stated (2014) “strategic capabilities are the capabilities of an organisation that contribute to its long-term survival or competitive advantage”. The components of strategic capabilities are resources (what the firm has) and competences (what the firm does well). According to Michael Hitt (2011), resources alone typically do not yield a competitive advantage. In fact, a competitive advantage is generally based on the unique bundling of several resources.
Drawing up an inventory of a firm’s resources can be difficult. The resource audit is an attempt to assess the ability or capacity of the existing resources available to the organisation to contribute to or detract from the organisation’s goals and objectives. A resource audit will help in the identification of the strengths and weaknesses of the organisation. Using the resource audit involves identifying various elements. The first step includes physical resources like machine equipment, facilities, or location and financial resources such as the ability to obtain capital, cash flow control, and shareholders interest. The next steps would be to identify the more intangible resources, including human resources, goodwill, reputation, and organisational culture.
Threshold capabilities refer to competences that are needed for the organisation to meet the necessary requirements to compete in a given market, and distinctive capabilities look into competences that are required to achieve competitive advantage (2014). Fred David (2011) refers to ‘core competencies’ that may evolve into distinctive competencies, and some of these may generate a sustainable competitive advantage. This model, originally developed by Hamel and Prahalad (1994), points out that a core competency is a central value creation capability of a company. Hunger and Wheelen (2011) expressed that “core competencies [that] are superior to those of the competition […] are called distinctive competencies”.
Although threshold capabilities are important, they do not create competitive advantage themselves. It is the distinctive capabilities that are valuable, rare and difficult for a competitor to imitate that create the sustainable competitive advantage (2014). The less valuable, rare or inimitable capabilities may only create temporary advantage, sometimes competitive parity.
Competencies are the knowledge, skills and attitudes used in carrying out the work of the organisation. Core competences are the essential knowledge, skills and attitudes that crucially underpin the organisation’s ability to achieve its goals and objectives.
Rigidities are potential barriers to the changes that may be needed to achieve the organisation’s goals and objectives. They may be activities that are deeply embedded and difficult to change. For example, engineers used to working in mechanically oriented environments may resist a computer-oriented environment.
There are 2 types of comparisons that can be used, historical and sectoral. Historical comparisons compare current deployment of resources and the performance of an organisation with resource deployment and performance in previous years in order to identify any significant changes or trends. Sectoral comparisons compare an organisation with the performance of organisations in the same sector against an agreed set of criteria. Benchmarking is another type of comparison that seeks to assess the competencies of an organisation against the best in the field. Benchmarking involves understanding what factors led to the organisation becoming the best in the field.
The profits that a firm obtains from its resources and capabilities depend on 3 factors: the ability to establish a competitive advantage, to sustain that competitive advantage, and to appropriate the returns to that competitive advantage. Each of these depends on a number of resource characteristics.
Although, having heterogeneous and immobile resources is critical in achieving competitive advantage, it is not enough alone if the firm wants to sustain it. Barney (1991) has identified a VRIN framework that examines if resources are valuable, rare, costly to imitate and non-substitutable. The resources and capabilities that answer yes to all the questions are the sustained competitive advantages. Barney’s framework was later improved from VRIN to VRIO by adding the question: “Is a company organized to exploit these resources?”
Resources are valuable if they help organizations to increase the value offered to the customers. This is done by increasing differentiation or/and decreasing the costs of the production. The resources that cannot meet this condition, lead to competitive disadvantage.
Resources that can only be acquired by one or few companies are considered rare. When more than few companies have the same resource or capability, it results in competitive parity.
A company that has valuable and rare resource can achieve at least temporary competitive advantage. However, the resource must also be costly to imitate or to substitute for a rival, if a company wants to achieve sustained competitive advantage.
The resources itself do not confer any advantage for a company if it’s not organized to capture the value from them. Only the firm that is capable to exploit the valuable, rare and imitable resources can achieve sustained competitive advantage.