Resources and their flexibility

In the resource-based view, the firm is viewed as a bundle of resources that management must deploy systematically to add value. A firm’s resources can be defined as all tangible and intangible assets that are tied to the firm in a relatively permanent fashion (Wernerfelt 1984). Resources refer to both physical, concrete resources and intangible, invisible resources i.e. capabilities. Also, resources can be divided into human, social, physical, organizational, and financial types (Greene et al.

1997b). They can yield sustained competitive advantage when they are relatively scarce, hard to imitate, and hard to replace (Mahoney & Pandian 1992; Peteraf 1993;

Collins & Montgomery 1995; Lubit 2001; cf. Miller & Whitney 1999). Flexibility of resources refers to a firm’s ability and way to respond to environmental changes. It increases the compatibility between a firm and its environment.

Resources have a central role in gaining a competitive advantage (see e.g.

Praest 1998: 178; Greene et al. 1997b). Both the strategic choice approach and population ecology approach emphasize the role of the nature of resources. In the resource-based view, firm performance is based on firm-internal resources (e.g. Powell

1992a). Firms may start with a similar resource base, but with time they become differentiated such that their resources cannot be perfectly imitated (Rumelt 1984).

Competitive advantage is seen to be based on the combination of the firm’s tangible resources and capabilities. Capabilities refer to knowledge-based tangible or intangible processes, and by combining them the firm can attain its goals and objectives. For generating a sustainable competitive advantage, four criteria to assess the economic implications of resources have been suggested by Barney (1991): value, rareness, inimitability, and substitutability (cf. Grant 1991). However, the entrepreneur’s limited perception may be a central bottleneck factor, and a management team can significantly improve management performance. The knowledge-based view emphasizes top management’s ability to select, retain and develop critical capabilities.

In the firm, there are usually few core capabilities which are difficult to imitate (see Prahalad & Hamel 1990: 83-84; Aaker 1989). The firm’s core capabilities are usually created by the firm, and they promote its ability in adapting to the needs of a rapidly changing environment (Prahalad & Hamel 1990: 81). In particular, taking advantage of the firm’s unique nature is emphasized. Moreover, as e.g. Hamel and Prahalad (1989) point out the management’s visionary skills and vision for the future in which the firm is unique are important. Management’s task is to create the future, which should be fitted to the strengths of the firm in a unique way (see also Mintzberg 1994; Heene & Sanchez 1997). The core capabilities which are created in the firm serve as a basis for its growth. Business processes based on core capabilities can be transferred both into new geographical and business contexts (Stalk et al. 1992: 65-67). In such cases, the unique elements of the firm, the personnel’s qualifications, and the flexibility of business processes play important roles.

Strategic core capabilities start with customer, the identification of their real needs, and stop at customers, the satisfaction of their real needs (Stalk et al. 1992: 62;

see also Long & Vickers-Koch 1995; Miller et al. 2002). An important success factor is the firm’s ability to respond to changes in customer needs. Five dimensions characterizing successful firms are (1) speed, i.e. the ability to respond quickly to customer or market demands and to incorporate new ideas and technologies quickly into products; (2) consistency, i.e. the ability to produce a product that unfailingly satisfies customers’ expectations; (3) acuity, i.e. the ability to see the competitive environment clearly and thus to anticipate and respond to customers’ evolving needs and wants; (4) agility, i.e. the ability to adapt simultaneously to many different business environments; and (5) innovativeness, i.e. the ability to generate new ideas and to combine existing elements to create new sources of value (Stalk et al. 1992:

63).

Due to the scarcity of resources, firm performance is built on two principles.

First, allocating resources to objectives which will provide the maximum benefit will

lead to effectiveness. Second, the firm should develop resources into a resource pool characterized by continuous learning, inimitability and attractiveness in the market (see e.g. Montgomery & Wernerfelt 1991: 955; Kay 1995: 23, 272; Barney 1991; see also Foss 1996; cf. Hofer & Schendel 1978). The term resource pool here refers to a learning organization. In this task, top management’s role is significant. In particular, the role of owner-manager is emphasized in small firms more than in large companies.

Moreover, personal networks of top management may play a critical role in firm success (see e.g. Johannisson 2000; Ostgaard & Birley 1994).

Flexibility of resources affects the success rate of responding to environmental changes. The more flexible the resources, the better chances for the implementation of changes. Flexibility can be divided into internal and external types. Wiklund and Karlsson (1994: 109) has further made a more fine-grained classification by dividing firm flexibility into four types which they call input, output, and internal flexibility, and flexible network relations. Internal flexibility refers to the firm’s resources as a source of flexibility, e.g. flexibility of factors of production or the structure of the firm.

External flexibility refers to the firm’s relations with its stakeholders: for instance, a firm’s cooperation through networks can be a source of competitive advantage (Isaksen 1994: 35-36; Dyer & Singh 1998). However, network relations may also cause dependency on other actors, which may have negative effects for the business (see Pfeffer & Salancik 1978). Determining which business activities to bring inside a firm and which to outsource is a critical strategic decision. Failure in this decision may lead to either losing strategic focus or losing competitive advantage (Barney 1999).

The concept of flexibility is closely related with that of slack. The difference between total resources and total necessary payments, or between potential and actual performance, is described as organizational slack (Cyert & March 1963: 36). Also, slack has been more broadly considered as a ‘cushion of actual or potential resources’

(Bourgeois 1981). There are different kinds of organizational slack: economic, political and managerial. Economic slack refers to liquid financial assets, easily convertible assets, and generalizable capital assets. Political slack encompasses goodwill and consumer loyalty, for example. Managerial slack refers to a surplus of managerial resources and capabilities. Moreover, slack related to the firm’s network relations may be extremely important particularly for small firms (see e.g. Johannisson 1990).

For the creation of slack resources, operation in growing and developing markets is seen to be important (Cyert & March 1963: 278; Covin & Slevin 1989).

Firms commonly use slack resources for developmental actions. On the other hand, slack resources are the outcome of a firm’s strategic behavior (Peltoniemi 1993).

During growth, firms can use uncommitted resources to maintain their adaptability.

Operating in a market characterized by stiff competition often means that the net cash

flow is used for running the every-day business. When no slack exists, as often in times of decline, the positive organizational processes dependent on slack resources are inhibited. However, the existence of slack resources is a necessary condition for adaption to environmental changes and firm development.

SMEs are regarded as flexible because of their simple organizational structures. They are characterized by a small number of hierarchical levels and short chains of command, and decision making in them is rapid and uncomplicated. In many SMEs, the personnel is a central resource. Unionism of personnel may be rarer in small firms than in large companies, and employees may see the link between their personal contribution and firm performance more clearly than in the case of a large company. Consequently, employees may be more motivated and committed in working for SMEs than for large companies. As Peters and Waterman (1982) have put it, “small in almost every case is beautiful”, referring to the efficiency of a small facility based on turned-on, motivated, highly-productive workers, who outproduce workers in big facilities.

Firm development is determined by firm-internal and firm-external factors.

The sources of internal inertia include investments, information, power relations and culture. The firm’s renewal can be restricted as a results of sunk costs or routines (e.g.

Dutton 1993: 340), which can also be important factors for the transfer of the firm’s accumulated know-how to new employees, and therefore, for firm success in the long run (e.g. Nelson & Winter 1982). SMEs may have rigidities because of their old-fashioned, inflexible and inefficient resources and loose network relations. Hence, some resources may acquire negative value by creating core rigidities. Possible causes of inertia related to the external environment include legal restrictions, insufficient legitimation, or financial- or information-related restrictions.

Changes in the environment cause more uncertainty in SMEs than in large companies. SME’s resources for acquiring information about the market and changing the course of the firm are more limited. Often, SMEs do not know their customers and their real needs as well as large companies do. This may cause tension between the firm and its environment. Moreover, the firm’s inertia may restrict its ability to mitigate this friction. However, there is much variation in the liquidity of resources.

Monetary resources are highly liquid. Their continuous adequacy is necessary for maintaining the liquidity of the firm. Underestimation of the need for working capital may lead the firm into liquidation, for example in the case of high growth caused by a big investment in production equipment.

It is characteristic of SMEs that their operation is closely related to the person who is the entrepreneur. In the resource-based view, the entrepreneur is a critical firm resource, but it might also be that s/he is an important factor which limits the achievement of firm success (see Whittington 1988: 524; Dutton 1993: 340; Spender

1989). The entrepreneur’s interpretations and limited ability to see new business opportunities and the boundaries set by him/her may limit firm development more than the boundaries set by the external environment (see Barr et al. 1992; Barr 1998).

Moreover, the firm’s manager is often also the owner of the firm. Thus, ownership, management and the person of an entrepreneur may be combined in an SME.

Firms, like other organizations, are apt to retain the established ways of thinking and action, especially if there is no direct pressures for change in the environment (e.g. Koberg 1987; see also Burgelman 1990). As Miller (1994) argues in his study of how past performance influences the way a firm evolves, makes decisions, and adapts to its environment, after a long successful period firms are especially apt to (1) exhibit inertia in many aspects of structure and strategy-making process; (2) adopt extreme process orientations; (3) reduce intelligence gathering and information processing activity; and (4) demonstrate insularity by failing to adapt to changes in the environment. In an analysis of why good companies go bad, Sull (1999) claims that the causes of failure are associated with four inertial factors: (1) strategic frames, i.e.

the set of assumptions that determine how managers view the business; (2) processes, i.e. the way things are done, (3) relationships, i.e. ties to stakeholders, and (4) values, i.e. the set of shared beliefs that determine corporate culture. Proactively changing a tradition which has been successful may be too challengi ng a task for management.

Strategically, one of the most important environments for the firm is the customer environment (Johnson & Scholes 1993: 10; see also Vesper 1990: 55).

Adequate demand is one of the most critical conditions which affect other conditions significantly. Also, in population ecology, customers are the firm’s most important resource and a factor determining the carrying capacity of the environment. It has been shown that growth of the industry is one of the most important factors facilitating firm growth (Lumme 1994: 3). Growth of the industry sector is a critical condition for venture capitalists’ investment decisions (MacMillan et al. 1985; Bygrave & Timmons 1992: 8-10). Also, growth in demand is one of the most significant factors for the intensity of competition which the firm faces in the market (Porter 1980).

Intensity of growth in demand refers to the stage of development of the industry sector (e.g. Porter 1980). Strong growth in demand is related to the growth stage which is characterized by expanding customer segments, product improvements and differentiation, strong marketing, lack of capacity, increase in the number of competitors, bigger profits and opportunities for acquisitions (Porter 1980). Stable demand is related to mature industry sectors which are characterized by mass consumption, high quality, standardization, market segmentation, over-capacity, long production series, importance of service and low costs, and price competition.

The population ecology approach explai ns organizational change by examining the nature and distribution of resources in organizations’ environments

(Aldrich 1979: 27-28). Environmental pressures make competition for resources the central force in organizational activities, and the resource dependence perspective focuses on tactics and strategies used by actors in seeking to manage their environments as well as their organizations. Environmental niches are distinct combinations of resources and other constraints that are sufficient to support an organizational form. The niche is assumed to have a particular carrying capacity.

Organizational forms – specific configurations of goals, boundaries, and activities – are the elements selected by environmental criteria, and change may occur either through new forms eliminating old ones or through the modification of existing forms.

Organizational forms, then, are organized activity systems oriented toward exploiting the resources within a niche. Selection pressures may favour or eliminate entire groups of organizations, such as industries, and the changing population distribution of organizations in a society reflects the operation of such selection pressures.

Organizational evolution is a consequence of the opposing force of two sociological processes: legitimation and competition. Legitimation of an organizational population means that its organizational form acquires the status of a

“taken-for-granted” solution to given problems of collective action. Competition refers to constraints arising from the joint dependence of multiple organizations on the same set of finite resources for building and sustaining organizations.

Selection of new or changed organizational forms occurs as a result of environmental constraints. Environments are described in terms of either the resources or the information they make available to organizations (Aldrich 1979: 29-30). The information approach relies heavily on theories of perception, cognition, and decision making, with organizational members acting on the information they glean from typically incomplete searches of their environments. A major factor explaining organizational change is thus variation in information. The resource approach treats environments as consisting of resources for which organizations compete, highlighting the amount of resources and the terms on which they are made available. An effective organization is one that has achieved a relatively better position in an environment it shares with others. There are six dimensions that are used to characterize the way in which environments make resources available to organizations: environmental capacity, homogeneity/heterogeneity, stability/instability, concentration/dispersion, domain consensus/dissensus, and degree of turbulence.