CHAPTER 9 – AUDITING RESOURCES

Objectives:

Define resources as consisting of assets and competences.

Discuss the role of management as a resource in making links
between business units.
Discuss the algorithmic procedure of a business unit.

In our view of strategic management, the resources of an organization are its assets
and competence. This avoids confusion as different authors have defined resources,
assets and competences in different ways (e.g. Wernerfelt, 1984; Prahalad and Hamel,
l990; Barney, 1991; Kogut and Zander, 1992; Amit Schoemaker, 1993; Grant, 1995).
For the purposes of our approach the key terms can be defined as follows:

Assets are the resource endowments the business has accumulated over time
and include investments in plant, location and brand equity (Day, 1994).
A unique asset is one that a firm has that has not been imitated by other firms
and allows the firm to carry out some activity or activities better than other
firms.
A competence encompasses the skill, ability and knowledge that organization
members have individually or collectively which allows them to undertake an
activity or activities to contribute to the transformation of inputs into outputs
directly or indirectly.
A threshold competence is one that all producers must have in order to make
and deliver a particular product.
A distinctive competence is one that allows a firm to carry out an activity or
activities better than competitors.
An organization exhibits capability in carrying out a range of activities. Thus, a
capability in marketing will include a range of competences in selling,
promotion, etc.
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Auditing resources at a business level

The value chain is the main analytical cool for analyzing resources at the business level.
It is described and discussed in the following algorithmic procedure:

Mapping a unit’s activities.

Auditing a unit’s resources (identifying a unit’s competences and assets).
Identifying a unit’s strengths and weaknesses.

Mapping a Unit’s activities using the value chain model

An organization can be modelled as a system that is concerned with the conversion of

inputs into outputs. Since organizations operate in dynamic environments, their
managers will be concerned with the continuing usefulness of these outputs, and how
they can provide the greatest possible utility through the continuing development of
business and/or corporate strategy.

The value chain concept depicts an organization as a transformation system made up of

different sub-systems, each of which performs a series of activities that contribute to the
organization’s outputs. Michael Porter (1985) was a key proponent of the value chain
concept, and his model clearly distinguishes primary and support type activities.

The analyst has to initially decide on their unit of analysis, conduct the analysis, and
make links between not only support and primary activities but also between value
chains. In the university example, human resources management will support the
different teaching departments and the difference research groups. In many
organizations functional units match specific parcs of the value chain but this may not
always be the case. Cost and value are added to the product as it passes along the value
chain, and the final margin is the difference between the cumulative added costs and the
cumulative added values.

Auditing a Unit’s Resources

Resource analysis at the business level has the following steps:

The use of the value chain model to identify the activities carried out by the
unit under consideration.
The identification of the costs associated with each activity. (The estimation of
costs when analyzing cases can be particularly difficult for students because
the data can be subsumed within consolidated corporate accounts and/or is
not provided.

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The identification of chose activities that add value to the product and/or
service compared to choose of their competitors. If some activities add less
cost than the equivalent activities of competitors then they may provide a
source of competitive advantage.

That we use this acquired information to identify distinctive competences

(competences in specific activities that give the firm competitive advantage)
and general, shared and threshold competencies (chose that provide parity
with competitors).
That we also identify assets that the organization uses in carrying out its
activities. A useful classification, and one that can be used to identify assets
within organizations, has been devised by Hooley et al. (1997).

Strength and Weakness Assessment

Examine the gathered information inductively to assess if:

There are any patterns of good/bad practice in activities?

Some activities are done well/badly?

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There are resources that are used in a number of activities?

Links between activities can be recognized?
There are unique assets and distinctive competences?
We can say what the strengths and weaknesses inherent in the resources
and activities are?

The most significant sources of advantages are chosen that are inimitable in the long
run. A firm that has an advantage has, by definition, some short-term inimitability, and
the key issue is how chis position can be maintained.

Auditing resources at a Corporate Level:

Portfolio models, such as the BCG Matrix and the GL Matrix, are useful devices for
examining multi-business organizations. Understanding how the businesses ‘fit’
together is important because it may be necessary, for example, to use money from a
cash-rich company to fund a growing and cash-hungry company.

In addition to analyzing each unit, the corporate level audit needs to analyze the
activities carried out by the center. Ideally a senior management team must itself be
assessed as a resource. This requires three principal types of assessments:

1. Links Between Units

• Are there linkages that exist across the units in a corporate portfolio? Do
these links suggest that there is synergy between units? Does the center
effectively manage the whole organization so the benefits available from links
are maximized? Is there evidence that capability is used across units as well
as within individual value chains?

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2. The Overall Role of the Centre

• Is there evidence that central general management is a significant
strength to all units, some units, or no units? This then leads to a
discussion/assessment of the effectiveness of the parenting, synergy
creating, role of the center (Camp- bell et al., l995).

3. The Strength and Weaknesses of the Corporation

Consider issues such as:

• Is this a good/bad parent for each business, why/why not?

• Are there businesses that fic well/badly with the organization as a whole?
• Are there businesses that would be better off with other parents or by
being independent?

Additional Auditing Technique

Bottom-up and Top-down Approaches

An alternative way to identify the competences of an organization is to systematically

analyze a company from either a bottom-up or top-down direction. In a bottom-up
approach the raw material and process inputs are followed through to completed
products or services, while for a cop-down approach the finished products and services
are broken down into their constituent parts. The two approaches are outlined in
Figures 9.4 and 9.5.

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Although there appears to be little difference between the two methods, the bottom-up
approach may overlook or under-represent the customer, whereas for the top-down
approach it is the starting point. The top-down approach looks at the overall picture and
then seeks to identify the main revenue screams associated with the products or
services that it provides for its markets? The answers to these questions can then be
tested against the three criteria set out by Prahalad and Hamel in Stage 5 of Figure 9.4.

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The Hall and Andriani approach

A more detailed methodology for identifying the resources that underpin competitive
advantage has been put forward by Hall and Andriani (1999). This is also a Top-down
approach because it focuses on the identification and assessment of competitive
advantage from the customers’ point of view. The first stage involves identifying what
customers value. Checklists for ascertaining this in the product and delivery areas are
shown in Figure 9.6.

These attributes are then weighted by importance in Figure 9.7 and it is then possible
to identify the strength of the advantage by comparing the ‘quality’ of the attribute with
the company’s main competitor.

The second stage involves identifying the intangible resources that produce the
weighted sales advantage attributes. Hall and Andriani suggest that you select the
intangible resources from the ‘four capabilities framework’ shown in Figure 9.8 because
it ensures that a full range of resources are considered. The attribute and its linked
resource type are then entered into Figure 9.9.

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The strategic issue of how these intangible resources can be developed for competitive
and market advantage can now be addressed. This involves consideration of how
intangible resources can be protected, sustained, enhanced and exploited. An example
of the types of actions that can be undertaken to protect and develop the key intangible
resources are shown in Figure 9.10.

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By progressively narrowing down and ranking these capabilities we can more clearly
identify a company’s strengths, and this is pivotal for a strategy that seeks to maintain or
expand the market share of a company.

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From a strategic perspective, capabilities can be inputted into investment decisions,

portfolio analysis, value chain analysis and decisions regarding strategic acquisitions,
alliances and disposals.

We have defined resources as consisting of assets and competences. This led to an

outlining of techniques for analyzing the activities and resources of an organization at a
business level. It also involved a discussion of the relationship between inimitable
resources as distinctive competences and unique assets, and competitive advantage.

Bottom-up and top-down techniques for auditing resources have also been discussed.
Top-down techniques are important because they emphasize the primacy of the
customer. The Hall and Andriani approach for making links between resources, product
features, product benefits and competitive advantage was outlined to show how
organizations might go about the task.

To know more information about Resource Audit The 9 M’s framework

Please click the link: https://www.youtube.com/watch?v=SVXrL9TqgJo

To know more information about Top Down and Bottom Up in Decision Making
Please click the link https://www.youtube.com/watch?v=WLDp82vwVkk

To know more information about The Audit Process

Please click the link: https://www.youtube.com/watch?v=cODdJvE1RCE

Strategic Management and Business Analysis / David Williamson, Wyn Jenkins,

Peter Cooke and Keith Moreton

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