MEASURING RESOURCES FOR SUPPORTING RESOURCE-BASED COMPETITION
Measuring resources for
supporting resource-based
competition
Giovanni Azzone, Umberto Bertel and Andrea Rangone
Critical resources are scarce, defendable, difficult to market and to imitate, and can form the basis for
long-term competitive advantage
Introduction
In recent years, a new model of how firms compete,
known as the resource-based approach (RBA), has begun
to emerge[1-3]. It views the firm as a set of critical
resources, that, if they are scarce, defensible, hard to
market and imitate, can form the basis for competitive
advantage over the long term.
The RBA seems to be especially suitable for companies
which operate in turbulent environments, where changes
in customer tastes, technological innovations, and social
and political discontinuities make it impossible to predict
the future portfolio of product and market segments, even
in the short term. For this reason, managers should shift
the focus of their attention from products and markets to
critical resources. In a turbulent environment a
companys long-term competitiveness does not depend on
the performance of current products, but on the ability of
the firm to identify, build, manage and exploit critical
resources, which will be the basis for developing new
products and entering new markets.
Although the RBA is still in the development stage, some
authors have pointed out its implications for corporate
and business strategy[4-8]; however, little attention has
been paid, so far, to determining how to measure critical
resources.
On the principle that you cannot manage what you cannot
measure, a company which is willing to adopt the RBA
needs to have specific measures of resources, i.e. a
resource measurement system (RMS). The choice of the
resource measures to be included in a RMS should
explicitly consider the overall performance measures of a
company. In fact, it is evident that a resource is
worthwhile for a firm only if it contributes to the
achievement of its overall goals. In this article we assume
Management Decision, Vol. 33 No. 9, 1995, pp. 57-62 MCB University Press
Limited, 0025-1747
57
that the overall performances of the company are
measured according to shareholder value, recognized by a
number of authors as the most correct performance
indicator[9-11].
This article is aimed at providing some guidelines to
assist managers to create a resource measurement system
and to link it to the overall performance of the firm
expressed in terms of shareholder value. The article
comprises four sections, the first of which gives a
theoretical framework that integrates the resource-based
approach and the shareholder value approach. The
second section gives a reference framework of the
different types of measures that can be used to assess
and control critical resources. The third section suggests
some methodologies which can support the process of
linking resource measures to shareholder value, by
assessing the impact of resources on the fundamental
value drivers (profitability and growth). The final section
discusses how to include resource measures in the
performance measurement system of a company.
Integrating the shareholder value approach and
the era
Shareholder value measures the discounted value of all
cash flows expected from both current and future
products, theoretically over an infinite horizon, i.e.
NCF(t )
V (0 ) = (1)
t =1 (1 + k )t
where:
NCF(t) = net cash flow of year t;
k = discount rate, measuring the companys cost
of capital.
For companies which act in turbulent environments, it is
impossible, as already pointed out, to know the
characteristics of the product and market segments
where the firm will act in the future, and consequentially
58 MANAGEMENT DECISION 33,9
net cash flows: hence, shareholder value cannot be
calculated using equation (1). Some authors have
proposed a modification of this formula using strategic
option models[11,12] which allow assessment also of the
future opportunities of the company in terms of launches
on the market of new products. But such models require
cash flows to be predicted in probabilistic terms, and this
is often impossible in highly turbulent environments.
In such cases it can be useful to resort to a simplified
expression of equation (1), i.e. according to Hax and
Majluf[13]:
V (0 ) ROE / k g / k
= (2 )
E 1 g /k
where:
E = equity;
ROE = return on equity, that measures the average
long term expected profitability of the
company;
g = growth rate, that measures the average long
term expected growth of the company;
k = cost of capital.
Equation (2) makes it possible to arrive at an estimate of
shareholder value on the basis of the assessment, at least
approximate, of the fundamental value drivers,
profitability and growth rate (besides the cost of capital
and equity).
Equation (2) is also important because it gives some
guidelines which can support the design of a RMS.
Looking at equation (2), shareholder value can be
interpreted as the economic value of a firms strategic
infrastructure, i.e. a firms endowment of critical
resources. In fact, the future profitability and growth of a
company ultimately depend on its critical resources,
which are the basis for developing new products and
entering new markets. More precisely:
(1) the long-term profitability of a company depends
not only on the available stock of each resource
(quantity), but also on the qual ity of each
resource[14];
(2) the long-term growth rate depends on both the
current available stock of resources and the
possibility of the company to extend it in the
future, by internal development and/or external
acquisition (accessibility).
Hence, equation (2) establishes a linkage between
shareholder value and resources measures, by
introducing an intermediate level of performance
measures: profitability and growth rate (see Figure 1).
The resource measurement system: a reference
framework
Several authors have suggested to group critical
resources into several classes (see, for instance [2,3]). In
this article we adopt the following taxonomy, which in
our opinion corresponds fairly well to the managers way
of classifying critical resources: technology, brand, people
and organization and capital. Figure 2 shows, together
with the resources mentioned above, a fifth set of
measures (integration), which has to do with the firms
ability to combine different types of resource, which can
lever the value of each.
Note that each category can include both resources that
are assets, i.e. tangible and intangible things that the
company owns, and resources that are capabilities, i.e. are
concerned with the organizational learning (see, for
example[2]). For instance, in the resource category
technology, there may be assets such as patents,
registered designs and advanced manufacturing
technologies, and technological capabilities.
Obviously these five classes of resource do not play the
same strategic role in all firms. For instance, a firm which
works exclusively as a subcontractor may disregard the
creation of a well-known brand. Furthermore, each class
of resource can be broken down into more detailed
resources. Critical human resources for instance can be
Figure 1. Linking shareholder value and resource measures
Shareholder value Cost of capital
Equity
Profitability Growth rate
Resource measures
Figure 2. The resource measurement system: a reference
framework
Measures
Quantity Quality Accessibility
Resources
Technology
Brand
People and
organization
Capital
Integration
 MEASURING RESOURCES FOR SUPPORTING RESOURCE-BASED COMPETITION 59

divided into sales employees and technical employees,
while technology can be disaggregated into R&D
capacity and manufacturing capacity.
According to the above, to evaluate the impact of the
companys critical resources on shareholder value, a RMS
should include three different classes of measures,
respectively related to quantity, quality and accessibility of
resources (see Figure 2).
Figure 3 illustrates an example of RMS, worked out by
the managers of a chemical company. They have singled
out five resources as the most critical for the companys
long-term profitability and growth: R&D capability,
technical employees, brand, capital and integration.
Five resource measurements are chosen by managers.
First, the number of patents and the number of their
quotations in patent databases allow for the quantity and
quality of R&D capability. The budget allocated for
researchers and engineers taking part in congresses,
workshops and other training activities measures the
accessibility of the R&D capability.
that if they disregard this objective, the company may
have problems in the future in recruiting high-quality
people, and this can result in the impoverishment of
technical human resources in the long term.
Fourth, the amount of capital assets, the average cost of
capital and the financial leverage (i.e the debt/equity
ratio) assess respectively quantity, quality and
accessibility of capital; and finally, integration is
measured by the number of interfunctional teams, time to
market and the functional versus process organizational
culture.
Note that the above list does not want to be normative,
being only an example of the indexes that the managers
have chosen, considering the specific features of their
companys critical resources. Nevertheless it allows us to
show that measuring resource indexes can present big
problems, since it requires determining adequate
measurement scales (financial, non-financial physical and
qualitative) and, in some cases, testing the reliability of
the measures.

Second, the brand awareness rating and the customer

retention rate are respectively the quantity and the Linking resource measures to shareholder value
quality indexes of the brand. The accessibility index is As pointed out earlier, resource measures can be used to
the number of new market segments where the company arrive at an estimate of shareholder value, using equation
brand may be effectively adopted[5] in relation to the (2) which expresses shareholder value in terms of value
number of current market segments. drivers, profitability and growth rate.
Third, the number of highly skilled people and their
Converting resource measures into profitability and
excitement (estimated by a survey) are the quantity and
quality of technical employees. The accessibility measure growth rate requires the following steps: aggregating
is expressed by the reputation of the company in resource measures in two subsets, related respectively to
technical universities and schools. In fact managers feel profitability and growth, and integrating them
hierarchically into two tree structures. It is to be noted
that quality measures affect mainly profitability, while
quantity and accessibility measures act mainly on growth
Figure 3. An example of a resource measurement system for rate. Figures 4 and 5 show the results in the case of the hi-
a high-tech company
tech company of the example; translating the linkages
Measures shown in the tree-structures into the assessment of
Quantity Quality Accessibility profitability and growth rate.
Resources
This second step is difficult for three main reasons:
R&D capability Number of Number of Training
patents quotations budget (1) The heterogeneity of the indicators used to
estimate critical resources (as previously
Brand Customer
Number of new illustrated, they can be expressed in financial, non-
market segments
Brand awareness retention financial quantitative, and qualitative metrics).
rating rate Number of current
market segments (2) The different impact which each resource can have
Technical Number of Employee Firm's reputation on profitability and growth rate, depending on the
employees skilled people excitement in schools and expected critical success factors of the sector.
rating universities
(3) The low relevance of historic data in forecasting
Capital Cost of capital Financial future events in turbulent environments. Making
Capital
assets leverage predictions based solely on historic information, in
fact, means assuming that the future will be the
Number of Functional mere repetition, or at most the extrapolation, of the
Integration interfunctional Time to market versus process
teams culture past. In a turbulent environment this is generally
not true.
 60 MANAGEMENT DECISION 33,9

Figure 6 shows different methodologies that can be used
to assess profitability and growth starting from resource
measures, depending on two variables: the firms
uniqueness, i.e. the difficulty in finding other firms
sufficiently similar to the one considered, in terms of
critical resources and external competitive position; the
types of data available. When the firms uniqueness is low,
it is possible to link resource measures, profitability, and
growth rate, using cross-sectional approaches, i.e. looking
at the values assumed by the same variables in
comparable companies. In particular, if the available
information is quantitative, it is possible to make use of
regression models such as PIMS[15], which is based on
an extensive database. It must be underlined that PIMS is
a static model, because it finds historical correlations
between the relevant variables. These correlations are not
supposed to be true in the long run and so must be
considered simply as a reference point for more specific
predictions.
If the available information is mainly qualitative, owing
to the complexity and unpredictability of the
Figure 4. An example of the tree structure of the resource
measures affecting profitability of a high-tech firm
Profitability
environment, regression models are not applicable. A
methodology which seems to be more suitable in this case
derives from the fuzzy sets theory: in fact, using the fuzzy
sets theory, we can deal with evaluations expressed in
verbal language, by using mathematical operators.
Zimmer[16] assessed that humans are more prone to
make qualitative rather than quantitative predictions in
particularly complex contexts. In these cases, people who
are forced to provide numerical estimates are more likely
to make mistakes and inconsistent evaluations than
people who provide evaluations based on the natural
language.
Implementation of fuzzy methodology
The implementation of the fuzzy methodology involves
three steps.
Step 1 converting all resource measures, both
quantitative and qualitative, into suitable l inguistic
expressions. In Figure 7 an example of conversion is
shown: the resource measure time-to-market is divided
into five segments; each segment is labelled as a linguistic
value (indeed superior, superior, average, below average,
poor) which shows the verbal qualitative evaluation of the
segment. This linguistic evaluation should explicitly
consider the competitors behaviour in terms of time-to-
market, using for instance benchmarking techniques. A
normalized trapezoidal fuzzy number is then defined for
each linguistic value (for more details on normalized
trapezoidal fuzzy numbers, see for instance [17]).

Step 2 aggregating the resource measures, expressed in

R&D Technical Brand Capital Integration terms of linguistic values, to arrive at the l inguistic
capability employees evaluations of growth and profitability. To achieve this
aim, different numeric operators can be used. In
particular, averaging operators seem to be suitable
since they realize the ideas of trade-offs between different
Number of Employee Customer Cost of Time to and sometimes conflicting measures (for a
quotations of
patents
excitement
rating
retention rate capital market description of the main averaging operators, see[17]). A
number of authors empirically demonstrated that the
averaging operators are adequate models for human
aggregation procedures in multi-criteria decision
Figure 5. An example of the tree structure of resource environment[18].
measures affecting the growth rate of a high-tech firm
Growth
Step 3 translating the linguistic values of profitability
and growth into numerical ranges to arrive at a

Capital Figure 6. Linking resource measures to profitability and

R&D growth
capability
Capital Financial
assets leverage Types of data available
Brand Qualitative Quantitative
Number of Training
patents budget High
Integration
Awareness Number of Synthetic measures
rating new
markets/ Number of Functional
Technical current Uniqueness
employees interfunctional versus
markets teams process of the firm
culture
Number of Reputation
skilled in schools Fuzzy models PIMS
employees and Low
universities
 MEASURING RESOURCES FOR SUPPORTING RESOURCE-BASED COMPETITION
quantitative estimate of shareholder value. Table I shows
an example of scale mapping which converts the
linguistic values of profitability and growth into
corresponding numerical values. The scale mapping of
course is based on the values of profitability and growth
of the other companies in the industry.
According to the framework of Figure 6, when the
uniqueness of the firm is high, and hence it is not possible
to make a comparison between the resource measures of
the company and the values of the same measures in
other companies, formal methodologies cannot be
applicable. In this case, managers can do no more than
obtain some indications about the future profitability and
growth of the company, starting from the analysis of
resource measures. Let us consider again the example of
the high-tech firm and assume that the quality indicators
of the critical resources score high in average, while the
accessibility and quantity indexes of capital, technical
employees and R&D capacity show rather low values.
Hence, managers can evince that the companys
profitability is likely to be high in the future, while its
growth could be limited by the shortage of the above-
mentioned critical resources. The main shortcoming of
this approach is that it is highly subjective, as the
evaluation of profitability and growth tends to be strictly
related to the mental model of the single manager/
decision maker.
Including resource measures in a performance
measurement system
Because resource measures (e.g., employee excitement
rating and brand awareness rating) are not generally
related to short-run returns, it is not advisable to utilize a
RMS to assess and control short-term performance.
Hence, the RMS should does not replace the performance
measurement system of a company, but integrates it.
More precisely, for a company which wants to adopt the
resource-based approach, a performance measurement
system (consistent with shareholder value) should be
composed of two subsets of measures, respectively
Figure 7. An example of conversion of a resource measure
(time-to-market) into normalized trapezoidal fuzzy numbers
6 9 12
TTM < 6 6 < TTM < 9 9 < TTM < 12 12 < TTM < 15 TTM > 15
Indeed
superior Superior Average Below
average
1 0
61
Table I. An example of reconversion of the linguistic values
of profitability and growth into numerical ranges
Linguistic values Profitability (ROE) (%) Growth rate (%)
Indeed superior > 25 > 15
Superior 1825 1115
Average 1224 710
Below average 511 36
Poor <4 <2
related to the firms portfolio of products and markets and
to critical resources.
The former, aimed at controlling cash flows in the
forecast period (i.e. the period when it is possible to make
reliable predictions), provides up-to-date information on
the short-run performance; the latter, used to evaluate the
companys strategic infrastructure in terms of critical
resources, monitors the potential for creating shareholder
value over the long term.
The relative importance of each subset depends on the
predictability of the environment: in predictable
environments, when the forecast period can be long, net
cash flow measures are predominant, while in turbulent
environments, when the forecast period can be very short,
resource measures become more important.
In any case, a RMS enhances the performance
measurement system, by favourably affecting its main
objectives: long-term orientation, i.e., considering the
impact on the long-term performance; completeness, i.e.,
monitoring all the critical factors of a firm; controllability,
by which we mean that the performance indicators
should be measurable in a rather objective way and that
the specific contribution of each person on the indicators
should be clearly distinguishable; timeliness, i.e., the
capability of the performance measurement system of
signalling as soon as possible long-run trends.
With reference to long-term orientation and completeness,
the benefits of a RMS have been already pointed out: it
allows control of all the firms critical resources, which are
fundamental for the long-term performance.
Time to
market (TTM)
in months Regarding controllabil ity, a RMS makes the control
15
process more effective. By monitoring the consistency
between the planned and actual values of resource
indicators, it is possible to control better the behaviour of
managers in terms of long-term performance. In this way,
Membership a RMS avoids managers destroying the potential of
function
creating shareholder value over the long-run by
1 impoverishing the firms critical resources. For instance,
cutting yearly marketing expenses increases short-run
Poor cash flows but, at the same time, harms the brand value,
as shown by a decrease in brand measures (for instance,
awareness rating and retention rate).
62 MANAGEMENT DECISION 33,9
Finally, resource measures help improving timeliness. A
decrease in the measure of the quantity of R&D, for
example, is a timely signal of possible future decrease in
the firms growth.
According to the above, different sets of measures can be
used in the control process, depending on the frequency of
the reports and on the level in the organizational structure
of the responsibility unit to be controlled. More precisely,
with reference to frequent reports (as for instance
monthly), it is sufficient to monitor net cash flows, to
provide up-to-date indications on the companys
performance and to make online control possible.
For yearly reports, together with net cash flows, two other
kinds of index should be used depending at the
organizational level of the unit. First, for organizational
units at lower levels, it is sufficient to monitor the
resource measures of the unit, as it is generally not
feasible to evaluate the impact which a single resource
can have on the companys profitability and growth.
Second, for aggregate units, such as companies or
business units, it is important to monitor not only the
consistency between actual and planned values of
resource indicators but also the performance of the firm
(or business unit) in terms of long-run profitability and
growth rate. So it is possible to modify, if necessary, the
expected reference-points of profitability and growth,
according to the changes in the environment and/or in the
state of the companys resources. Finally, the yearly
reports should summarize the information given by all
the indicators related to net cash flows and resources
in the evaluation of the global shareholder value of the
firm (or business unit).
References
1. Amit, R. and Schoemaker, P.J.H., Strategic assets and
organizational rent, Strategic Management Journal,
Vol. 14, 1993, pp. 33-46.
2. Hall, R., A framework linking intangible resources and
capabilities to sustainable competitive advantage,
Strategic Management Journal, Vol. 14, 1993, pp. 607-18.
Giovanni Azzone, Umberto Bertel and Andrea Rangone are Researchers in the Department of Economics and Production
at Milan Polytechnic, Milan, Italy.
Application questions
(1) Do you think that the resource-based approach can improve the management of a company?
(2) You cannot manage what you cannot measure: do you agree that also resources have to be managed and, thus,
measured?
(3) The shareholder value ultimately depends on the companys endowment of resources that are superior to those of
the competitors. Do you agree?
3. Petefar, M.A., The cornerstones of competitive
advantage: a resource-based view, Strategic
Management Journal, Vol. 14, 1993, pp. 179-91.
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pp. 67-81.
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capabilities: the new rules of corporate strategy,
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NJ, 1984.
14. Hamel, G. and Prahalad, C.K., Strategy as stretch and
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