COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation
Subject COMMERCE
Paper No and Title 12: Strategic Management Module No and Title 31: Resource Allocation
Module Tag COM_P12_M31
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation
TABLE OF CONTENTS
1. Learning Outcomes 2. Introduction
2.1 Types of resources 3. Resource Allocation
3.1 Resource Allocation Process
3.2 Aligning Resource Allocation to strategy 3.3 Using resources to gain competitive advantage 4. Resource Based View of the firm
5. Resource Allocation Decision
6. Factors affecting resource allocation
7. Problems in resource allocation
8. Summary
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation 1. Learning Outcomes
After reading this module, you will be able to
Understand the value of aligning resource allocation to strategy
Know the factors that affect resource allocation
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation 2. Introduction
The dynamic and ever changing global environment poses many challenges for an organization.
A successful organization scans and analyses the external environment for opportunities and threats to develop a competitive advantage. Environmental Scanning provides with the necessary knowledge to compete efficiently in the market place. Scanning of the internal environment is also crucial as it helps in identification of the company’s strengths and weaknesses to be able to grab the opportunities present in the market as well as overcome threats. Scanning the internal environment requires identification and development of organization’s key resources and competencies. One of the biggest challenges is to use the resources of the company effectively. A company should know where to use the available resources. To be successful, a strategic plan has to be devised to allocate resources in the most effective manner.
Resources are an organization’s assets and are thus the basic building blocks of the organization.
Resources create competencies for the organization. Resources are valuable when they enable a company to create a strong demand for its products and lower the cost of production. They include tangible assets, such as its plant, equipment, finances, and location, human assets in terms of the number of employees, their skills, and motivation, and intangible assets, such as its technology (patents and copyrights), culture, and reputation (Wheelen and Hunger).
2.1 Types of Resources
Broadly, there are four types of resources namely financial resources such as capital, Physical resources such as assets, and human resources such as skills; competencies and technological resources such as sophisticated IT.
2.1.1 Physical Resources- Physical resources are the backbone of an organization. Physical resources include land, machines, equipments, building, furniture etc. An organization needs adequate infrastructure to function effectively.
2.1.2 Financial Resources- Financial resources are the lifeline of an organization. An organization will need money to maintain adequate working and fixed capital. Effective management of financial resources is necessary for smooth functioning of the business.
2.1.3 Human Resources- Employees are the assets of an organization. The survival and success of any organization depends upon the quality of human resources. In such a global scenario, where human resources provide a competitive advantage to the organization, scanning of internal environment can provide insight about the strengths and weaknesses of human resources and how to use them effectively.
2.1.4 Technological Resources- Technology is fast becoming an important asset of the organization. Technological Resources are intangible and include patents, copyrights, skills, intellectual property. An organization is required to upgrade and protect their technology to stay competitive.
If used properly, resources can also be served as strengths to carry out value-added activities.
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation 3. Resource Allocation
3.1 Resource Allocation Process
Resource allocation is a process and strategy involving a company deciding where scarce resources should be used in the production of goods or services. A resource can be considered any factor of production, which is something used to product goods or services. Resource Allocation deals with the procurement, commitment and distribution of financial, human and physical resources to strategic tasks for the achievement of organizational objectives. It is both a one time and a continuous process. When a new project is implemented, it requires allocation of resources whereas an existing project will also require resources. Resource Allocation process helps to understand how organizations decide to commit their resources, the factors that impact such decisions and the strategic outcome of the resource commitments made.
Resource Allocation process acts like a filter that determines which initiatives of an organization will get approved or rejected. Resources are allocated to products, processes and services and a company’s strategy is demonstrated through them. Therefore only those strategies will be accepted which will pass through the resource allocation process.
Resource allocation process is a complex and scattered process that occurs at every stage of decision making by the organization. Top management on the basis of the available company’s resources decide which projects and capital investments to invest and which ones to reject. A company through the capital budgeting process accepts only those projects with the available resources (capital) which can generate a high return on the investment.
3.2 Aligning Resource Allocation to Strategy
Strategy is a way in which a firm works hard to differentiate itself positively from its competitors using its strengths to better satisfy its customers’ needs. Strategic management is a set of managerial decisions and actions that determines the long run performance of a corporation.
Strategic management enables resources to be allocated according to priorities established by annual objectives set by the company.
Resource Allocation begins at strategic planning when the company sets its vision and goals for the future. The strategic goals of the company are fulfilled through the achievement of objectives.
For example- A FMCG Company’s goal is to become a market leader in rural market. An objective towards this goal is the promotion of the company’s product according to the needs of rural consumers. After setting up of the objectives, the next step is to allocate sufficient resources to achieve it. In the example given, the company will allocate money for market research to decide the needs of rural consumers, money for promotional activities such as advertising and funds for product design. The real value of any resource allocation plan lies in the resulting attainment of a firm’s objectives.
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation
3.3 Using resources to gain competitive advantage
Resources are the key to the company’s sustained competitive advantage. Grant has proposed a five step resource based approach to strategy analysis.
1. Identification and classification of the firm’s resources in terms of strengths and weaknesses.
2. Combine the firm’s strengths into specific capabilities and core competencies.
3. Estimate/Evaluate the profit potential of these specific capabilities and core competencies in terms of their prospects for sustainable competitive advantage and the potential to yield the profits resulting from their use. Are there any distinctive competencies.
4. Choose that strategy that best exploits the firm’s capabilities and competencies relative to external opportunities.
5. Identify resource gaps (if any) and invest in upgrading weaknesses.
It is imperative to evaluate the importance of a company’s resources to check whether they are the internal strategic factors i.e. strengths and weaknesses that will help determine the future of the company. This can be done by comparing measures of resource endowments with measures of
The company’s past performance
The company’s key competitors
The industry as a whole
Any resource such as (firm’s cash situation, asset, and patent) is likely to be a strategic factor and should be considered in strategic decisions if a resource is significantly different from the firm’s own past, its key competitors or industry as a whole.
4. Resource Based View of the firm
Apple and Samsung are two strong competitors in the mobile market, but Apple is a clear winner.
Why? Analysts cite Apple’s superiority over Samsung in its innovation capabilities. Apple’s focus on innovation has helped it maintain a competitive advantage over its rival Samsung. The above example presents a typical illustration of the Resource Based View of the firm. The Resource based view (RBV) is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities and intangibles as an organization (Pearce et al, 2012). It is a model that sees resources as key to superior performance by a company. RBV’s underlying idea is based on the fact that each firm possesses a distinctive bundle of resources such as tangible and intangible assets and organizational capabilities (skills). Firms build up competencies out of these resources and thus they become the source of firm’s competitive advantages. Competitive advantages are advantages gained by an organization against its competitors.
RBV is an approach to achieving competitive advantage that emerged in 1980s and 1990s after the major works published by Wernerfelt, B (The Resource-Based View of the firm). RBV is based on two important assumptions i.e. heterogeneous and immobile. The first assumption is that the skills, assets and capabilities that organizations possess are different from one another. If
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation
organizations would have the same type and amount of resources, they will not be able to plan out different strategies
to outperform each other. The second assumption talks about the immobility feature of resources i.e. resources are not mobile and do not from organization to organization. Due to this characteristic, organizations cannot imitate their competitor’s resources.
First, Resource Based View categorizes the organizational resources into Tangible assets, intangible assets and organizational capabilities.
Tangible Assets- Tangible assets are the physical and financial resources easily identified in a company’s balance sheet. They include raw materials, financial resources, real estate, machinery etc. Examples include Tata Motors cash reserve, Spicejet fleet, DLF’s Land reserves.
Intangible Assets- Intangible assets are non-physical assets that are created by managers and other employees. They are assets that cannot be touch or seen but are often important in creating competitive advantage for a company. They include brand names, company reputation, organizational morale, patents and trademarks and technical knowledge. Examples include Apple’s brand name, Tata’s reputation.
Organizational Capabilities- Organizational capabilities are not particular inputs like tangible or intangible assets but they refer to skills. It refers to the company’s ability and way of combining assets, people and processes to convert inputs into outputs. Examples include Google’s product development processes, Wal-Mart purchasing and inbound logistics.
In Resource based view, once the strategists have identified their company’s tangible assets, intangible assets and organizational capabilities, The RBV applies a set of guidelines to decide which of the identified resources will be strengths or weaknesses for the company. RBV provides the following set of four guidelines.
1. Are the resources important to be able to meet a customer’s need better than other competitors- Resources that contribute to competitive advantage of an organization are valuable. For example- Starbucks brand recognition.
2. Are the resources scarce-When a resource is scarce; it is more valuable and becomes the basis of a competitive advantage for a company who possesses these resources. Examples include limited natural resources, an exclusive location.
3. Are the resources durable and sustainable over time- The slower a resource depreciates, the valuable it is. Durability is a vital test of the value of an organization’s key resources and capabilities. For example- The Pepsi brand has continued to appreciate.
4. Are the resources necessary for a key share of company’s profits- Companies generate sizeable amount of profits based on resources (skills, contacts). For example- Consulting businesses earn substantial profits from their skilled personnel.
The objective for strategists is to identify the “valuable” resources after applying the above set of principles. The strategists should then build the organization’s competitive advantage on these valuable resources.
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation 5. Resource Allocation Decision
In strategic planning, a resource-allocation decision is a plan for using available resources to achieve company goals in future. It is a process of allocating resources among the various projects and business units. The plan has two parts:
a) Basic Allocation decision b) Contingency Mechanisms
Basic Allocation decision is the choice of which items to fund in the plan and the level of funding the items will receive whereas the contingency mechanisms is used to rank the items both included and excluded from the plan to ascertain which items to include in the plan if more resources become available and which to exclude/sacrificed if funds are reduced.
Strategic management enables resources to be allocated according to importance established by annual objectives. Allocation of resources to particular divisions and departments does not imply that the company’s strategy will be implemented successfully.
Number of factors that hinder effective resource allocation-
Overprotection of resources
Greater emphasis on short run financial criteria
Organizational politics
Vague Strategy targets
Risk Aversion
Lack of sufficient knowledge
6. Factors affecting Resource Allocation
Resource allocation is not an easy task. Resource Allocation to different functions and activities depend upon many factors enumerated below.
1. Objectives/ Goals – Allocation of resources depends on the objectives set by a company.
There are a number of objectives; some are explicit while others are implicit. Resource Allocation should be directed towards the achievement of objectives. Objectives direct the course of action taken by the management after prioritizing the objectives. For example- the management wants to maximize the shareholder’s return, the financial resources (profits) have to distributed to the shareholders rather than retain them as reserves.
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation
2. Managerial preferences- Dominance of top
management in strategy formulation and implementation affect resource allocation. Most often, the Chief executive officer tend to affect the process of resource allocation.
Projects which are likely to generate substantial profits for them are allocated most of the resources.
3. External Factors- The external factors include the various stakeholders. Stakeholders along with the shareholders are suppliers, Government, employees, customers, bankers and community. The different needs of the various stakeholders affect resource allocation. For example- Financial Institutions may ask the companies to invest in technology up gradation, the environmental regulators may impose restrictions on the amount of Green House Gas emissions, thereby investment by companies in energy conservation measures.
4. Internal Factors- Resources are synonymous with power. Internal policies based on negotiations affect resource allocation. Some departmental heads get more funds for their departments due to their power or influence over top management or they are in good terms with them. For example-Finance department can obtain more funds than the marketing department due to internal negotiations and bargaining with the management.
5. Nature of strategies- Resource Allocation also depends upon various types of strategies of a firm. Some strategies require huge capital, more human resources and some strategies may require less capita and less human resources. Accordingly the resources are allocated depending upon the requirement of the strategy. For example-Developing and designing a new product requires more resources as compared to marketing the product.
6. Availability of resources- Another factor that affect resource allocation is the availability of resources. If a firm is in a position to procure funds easily or has substantial funds than the resources can be allocated for various activities. But if the firm has limited funds than the resources has to be allocated according to the priority ranking of activities.
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation 7. Problems in Resource Allocation
Since Resource Allocation is a complex process, it creates difficulties for strategists to allocate resources to tasks for the fulfillment of objectives. The following are the difficulties that strategies encounter while dealing the resource allocation process.
1. Lack of resources- The major hurdle to efficient allocation of resources is the lack of resources. Financial, physical and human resources are difficult to find. Companies face problems in procurement of finance at a reasonable cost of capital, capital goods and skilled human resources. In a developing country like India, many capital goods have to be imported placing a burden on the company’s finances.
2. Limitation on generating resources- There are several difficulties during allocation of resources within an organization. Restrictions on generating resources for newer units or departments that require urgent need for resources mostly occurs in Government Undertakings where the usual way of allocation is a fixed percentage of increase over the previous year’s budget allocation, irrespective of the current need and great potential for growth of the departments.
3. Overstatement of needs- Another problem encountered in the process of resource allocation is the overstatement of the need for the resources by the powerful units or departments of the organization. The budgeting department faces problems in the efficient allocation of resources due to the vested interests of the dominant units.
4. Tendency to imitate competitors- Organizations in the same industry tend to imitate their competitors in terms of resource allocation. It becomes difficult for companies to develop their own competitive advantage if different companies following different strategies have the same resource allocation process.
COMMERCE PAPER No.12 : Strategic Management MODULE No.31 : Resource Allocation 8. Summary
It is very important for an organization to manage and allocate the resources effectively as it improves the performance of the business, increases profits and reputation of the firm.
Scanning of internal environment provides valuable insights about the strengths and weakness of the firm. It helps in the identification of key resources.
Resources include physical, financial, human and technological resources.
Resource allocation process is a process of allocating key resources to the activities of the firm, how to allocate and how much to allocate to activities and departments.
A firm should align resource allocation to strategy to gain competitive advantage in the long term.
Resource based view of the firm argues that organizations possesses resources that facilitate them to create competitive advantage and lead them to superior performance vis-a-vis their competitors.
Resources have to be continuously developed due to development of technology and changes in competition levels to secure and sustain competitive advantage.
A resource-allocation decision is a process of allocating available resources among the various projects and business units to achieve company goals in future. The plan has two parts: Basic Allocation decision and Contingency Mechanisms.
Factors that affect resource allocation are objectives of the firm, internal policies, and external factors, availability of resources, managerial preferences and nature of strategy.
The difficulty in the process of resource allocation arises due to the lack of resources, limitation on generating resources, overstatement of needs and tendency of competitors to imitate the resource allocation process. The CEO of the company plays an important role in the resource allocation process through the communication of the strategic plan to all the executives. Thus, it creates a favorable environment so that resource allocation decisions are taken in agreement of all the departments.
