chapter_2.pdf

Strategic HRM: Pulak Das 1
Resource Driven Strategy:
An introduction
Lecture slides for Chapter 3

Objectives
• To understand how higher profitability of a
firm vis-à-vis its competitors could be
explained as an outcome from better
deployment of its productive resources
and what long term business policies it
can adopt to maintain its competitive
positions.

Two approach to business
strategy
• Market Driven Strategy:
• Resource Driven Strategy:
• Fundamental Difference between the
two
– What explains the high difference in
profitability between two companies ?
• Example: In 2006-7, the profitability of
BHEL was 22% while that of BEML was
just 12%

Annual Report of BHEL
• 2005-6 2006-7 2007-8
• Value of (RsCr)13675 17324 20090
• Production
• Profit before tax 2564 3636 4430
• Profit/ VOP 19% 21% 22%

Annual report of BEML
• 2005-6 2006-7 2007-8
• Value of (RsCr)2181 2591
• Production
• Profit before tax 285 316
• Profit/ VOP 13% 12%

Business Strategy: Two options
Factor
Market
Product
Market
Company

Market Driven Strategy
• The main reasons for difference in
profitability is due to their doing business
in two different industries.
• Product market characteristics are the
principal driver for profit.
• The principal contention here is that in the long run
all organizations operating in an industry will have
very similar production and marketing infrastructure
and they are going to earn long run profitability
corresponding to that industry. This long run
profitability of an industry depend on a few
characteristics of the industry.

Long run conditions of Factor
and Product Markets
Factor
Market
Product
Market
Company
Homogeneous Heterogeneous

Nature of Product Market
• Products can be classified into broad categories
of industries. The characteristics of these
industries are very different. If a firm is in the
right industry, then its profitability could be
higher than others who are operating in other
industries.
• Market driven strategy explains this profitability
difference based on the characteristics of the
industry.

Practical Problems of Using
Prescriptions of Market Driven Strategy
• Taking advantage of market opportunity coming from analysis of
industry characteristics will require adjusting internal resource
positions.
• This adjustment will be very hard if the change in industry is very
significant.
• There are major constraints in factor markets which a management
may not be able to get over through organizational power.
• More volatile the business environment become more a manager
will loose confidence on taking advantage of market based
opportunities.
• Market driven strategy is good for green field site business. For
brown field business sites, moving away from one industry to
another industry is an impossible task.
• For majority of organizations that are already engaged in a business
line, the market driven strategy may not provide very useful
guideline.

Vignette 3.1: Employees refused
redeployment
• Andrew Yule was having difficulty in running its
pollution control division for quite some time due
to lack of order. Many officers and employees
did not see much hope in the Air Pollution
division and started asking for VRS but
management was not willing to accept VRS of
the officers. Instead they built a new industrial
fan manufacturing plant in Kalyani near Kolkata.
But the employees and officers refused to
relocate.

Resource Driven Strategy
• Inter-firm difference in profitability is mainly
due to difference in the kind of resources
the companies have and use. The
resources across companies are not
homogeneous even when they are
working in the same industry.
• What is the source of this
heterogeneity ?

Long run conditions of Factor
and Product Markets
Factor
Market
Product
Market
Company
Heterogeneous Very
Heterogeneous

Nature of heterogeneity in
product and factors markets
Company
management
New age
Heterogeneity
In Product
Market
New age
Heterogeneity
In factor
market

Heterogeneity and profit
Revenue
Cost
Profit

Sources of resource
heterogeneity across firms
• Imperfect Market for resources;
• Mobility barriers of varying magnitudes for
different resources across industries;
• Managerial skills and competencies to
acquire, develop and deploy resources
differ across companies.

Profitability of a firm
• According to resource driven strategy, a firm’s profit
comes from the net gain or revenue available from
various resources including managerial expertise that it
posses and uses. Resource cost and potential revenue
available from various resources are very different
across firms.
• Profit = Revenue available from trade in a capability –
cost of resource uses.
• Example: If Hero cycle gets Rs20/- from Rs100/ sale
while Hercules cycle gets only Rs10/- from the sale of
same Rs100/- then among the various resources that
they use for generating the revenue, Hero must be using
that resources more where it’s net gain i.e. revenue
minus cost is higher than that of Hercules.

Type of resources
• Financial resources;
• Physical resources;
• Technological resources;
• Organizational managerial process resources;
• Organizational knowledge resources;
• Social network with suppliers, customer and
other social agents;
• Brand name, reputation and good will;
• Human Resources and organizational
competencies.

Organizational resources
• Financial resources: Proprietary access to cheap
financial capital ex. MNC from their operation in other
countries, Highly diversified business houses could
source fund requirement at short notice from their other
businesses.
• Physical resources: Big plant requirement may work as
an entry barrier to others.
• Technological resources: Proprietary access to
important technology either due to own R & D or due to
external supply.
• Organizational process resources: Managerial
behavior and organizational culture could be a source of
higher productivity and efficiency.

Vignette 3.2: No guaranteer, no
fund
• In 2009 there was news that Tata’s
wanted to borrow working capital of about
Rs2500 crores from European banks for
running their Corus Steel plant in
Netherlands and Jaguar Land Rover in
UK. The banks asked for Governmental
guarantee for selling the money. But UK
Govt. refused to bail it out. Working capital
cost rises as the lender perceive high risk
in running the business.

Vignette 3.3: Social relations and
cost of capital
• In 2009, there was a news that Shipping company of
Great Offshore borrowed some money from IL&FS and
Motilal Oswal which fell due in December 2008. But in
the height of economic recession Great Offshore could
not pay and as per contract they were about to loose
their controlling share to IL&FS and Motilal Oswal. The
share price of Great Offshore dropped from its peak of
Rs1100/- to just Rs240/- a piece. Naturally, it would have
been a terrible loss to Great offshore if they went for
closure of the loan by trading their shares. Instead of
closing its loan by selling its share to IL&FS and Motilal
Oswal Great Offshore approached Bharti Shipyard and
borrowed fresh loan of Rs240 crore by keeping 15%
share as collateral.

Organizational resources ……
• Organizational knowledge resources: Past projects, past
business practices, managerial experiences on supplier and
customer behavior could be powerful source of innovation in present
time;
• Social network with suppliers, customers and regulators: A
good network with these agents may allow one to overcome sudden
spurt in demand or supply failure or regulatory excess.
• Brand name, reputation and goodwill: It builds over a period of
time;
• Human resource: The presence of some experts could be a
source of competitive advantage if there are
• i. Exit barrier;
• ii. Not much facility for skill broadening for specialized experts;
• iii. Reservation wage is low due to availability of low cost education;
• iv. Labor demand from partner industry is not high;
• v. Rivalry among existing employers for getting the best employees
is low.

Creating Competitive Advantage
Using Resources
• Resources are not exchanged with market for
making revenues. They are used to create
organizational capabilities at various
departmental and divisional levels which are
exchanged with customers and suppliers to
generate revenue.
• What is a capability?
• It is a department or a group ability to produce
certain types of goods or services repeatedly.

Measure of Competitive Advantage
• A ratio : Resource cost to revenue
attributable to that resource;
• For externally traded services it is relatively easy
to calculate output but for internally traded
services, it is a difficult issue. You may use
various kinds of surrogates.
• You may use ratio of functional employment to
total output, total employment etc. The choice
comes from the need of comparability across
companies. And, sometime you may have to use
a number of such indices to see the presence of
underlying competitive advantage.

Choice of strategy
• Choose a business policy that require use
of those capabilities more where you have
competitive advantage over your
competitors.

An Example
• Two companies working in the manufacture of Oil
Tanker
• A B
• Output 43136 18593
• Output/Employment 20.03 29.94
• Employment in Production 1120 451
• Employment in Support 1033 160
• Production Employment cost/output 0.025 0.024
• Support Employment cost/output 0.024 0.01
• Where lies the competitive advantage of A ?

Evaluating the Sustainability of Resource
based Competitive Advantage
• In order that your competitive advantage
does not go away easily to your
competitors, the source of your
competitive advantage should have the
following characteristics
– Durability;
– Non-visibility;
– Non-transferability;
– Non-replicability;
– Appropriability.

Sustainability….
• Durability: A source that is developed in-house
is more durable than a source that is acquired
from outside;
• Non-visibility: The source of advantage should
be such that a casual visitor would not be able to
make out where it lies.
• Non-Transferability: Geographical, or cultural
attachment or firm specific human capital.

Sustainability…..
• Non-replicability: A Competitive advantage that
comes from internal routines that are historically
developed and imbedded in a tacit form inside
the organization.
• Appropriability: A resource based advantage is
useful only if the company can appropriate the
surplus. Human resource based competitive
advantage is appropriable but supply chain
based competitive advantage is not fully
appropriable. Why ?

Advantage of Intangible asset as
a competitive advantage
• Rate of return on tangible assets will be
higher if a company has a lot of intangible
asset that increases its revenue income.
The source of advantage comes from their
absence in the accounting records.

Formulation of long term
business strategy
• Thumb rule:
• Rank order the volatility or mobility of various resources
that you use for your current business. This analysis
should be done at least over five years on the stock of
resources and their change due to own, natural or
actions of external forces e.g. competitions, trade union
or Government.
• Identify the resources that are least susceptible to
external market and other institutional influences.
• Among the stable resources find out the resources that
are intensively used in your current business. Expand
your business in such a way that your expanded
business uses these resources more intensively.

Vignette 3.4: Joint venture to
expand business
• In 2007, BEML entered into joint venture
with Midwest Granite pvt ltd and PT
Sumber Mitra Jaya of Indonesia. The
objective was to enter into contract granite
mining with existing mining companies
which in turn would demand more of its
mining and earth moving machineries.

Key learning
• Company profitability depends on acquisition
and deployment of resources for which net gains
are high;
• Competitive advantage is achieved by creating
capabilities out of key resources;
• A company pursues its strategy in such a way
that it uses those capabilities more for which it
has competitive advantage over its competitors.

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