Strategy Dynamics Briefing 11: Resource accumulation

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At one level, Resource Accumulation may seem rather simple and obvious.
So what?’ you may ask yourself.
Well, it’s monumentally, massively important, and while it may be obvious in itself, its consequences are truly staggering.

The next few briefings are going to talk a lot about ‘accumulating resources’.Just to recap, in earlier briefings I explained the importance of focusing on how organizational performance changes over time, and also how to trace the causal logic that explains this performance, until that chain reaches the underlying resources determining demand and capacity, revenue and costs – customers, capacity, staff, product range and cash.So the next logical question is “What determines the quantity of customers and staff (and every other resource) at any time?” This is where the unique characteristic of resources and other “asset-stocks” comes into play. So far all the causal relationships discussed are of the form:

X depends in some way on Y, Z, W etc.,
e.g. ‘Profit = revenue minus costs.’,
or ‘I can estimate the fraction of customers who can get my product if I know how many stores stock it.

However, the verbal explanation for resources is:

The quantity of resource X today is the total amount of X that has ever been added, minus the quantity that has ever been lost.

Let’s be clear what this implies:

  • The number of customers you have today is precisely the sum of every customer ever won, minus every customer that left, since the day your business started. It is the customer gains and losses that are explained by price, products, marketing and sales effort, not the quantity of customers itself.
  • The number of staff you have today is precisely the sum of every person you ever hired, minus every person who ever left or was fired. It is gains and losses of staff that are explained by salaries, career prospects, and so on.
  • The number of products offered today is the sum of all the products ever launched, minus every product discontinued.
  • The amount of cash you have today is the sum of all the cash that ever came into the business, minus all cash ever spent.

… but we generally don’t want, or need, to go right back to the beginning! So to understand what’s happening right now, we can start with how much resource we had at the start of last period (at the start of last month we had 50 staff). Then, just count what was added or lost during that period (we hired 5 staff, but 7 left), to know precisely how much resource there is at the end of the period (48 staff). That will then be how much there is to start the next period.

To know accurately how the quantity of a resource changes over a longer period, this calculation needs to be repeated sufficiently often. If we start the year with 100 customers, and add five every month, we will end the year with 160 customers, but if we add five in January, three in February, seven in March and lose two in April, we will need to know every month’s change in order to calculate the year-end number … and each month’s number may also be important in itself, of course. Anyone with a knowledge of accounts will quickly realize that the distinction between asset stock and other items is the same as that between balance sheet (reported at a point in time) and profit and loss items (totaled over a defined period) – it’s just that here we are extending the range of things we want to record.

So, since performance depends directly on the resources available at any time, the challenge for managers is how to build and maintain the quantity of each resource. To help understand this, think of a resource as behaving like water in a bathtub or tank. The inflow rate is how quickly water is flowing in through the faucet [tap’ in UK English] and the outflow rate measures how quickly water is running away through the drain hole. In just the same way, resources are built by the flow of new resource into the stock and depleted through losses – resources “flowing” out of the tank. This idea is captured for a staff resource in figure below. The “tank” in the middle holds the number of staff we have right now. To the left is the outside world, where there are many people, some of whom might become future staff. The big “pipe” flowing into the tank has a pump on it (the oval symbol) that drives how fast that stock of staff is being added. On the right, another pump on a pipe flowing out of the stock determines how fast we are losing staff, to the outside world.

Building, and losing, the staff resource.

This picture begins to show why the firm’s history is so important. The level of resource we have today is on a trajectory through time, reflecting how well we have been building it (and holding on to it!) in the past. This not only explains why the business is in its present state, but also its trajectory into the immediate future.

Returning to the idea that theory is an explanation of “what causes what, and how,” this is then the core theory that lies at the heart of how business and other organizations perform – that rates of gain and loss over time for any resource explains the quantity of that resource at every moment, and they do so by accumulating.

This second principle can be added to our emerging theory of performance, which will, when complete, becomes useful and powerful:

  • performance depends on resources, and
  • Resources accumulate and deplete

To complete the picture, we will also need to explain what causes those rates of gain and loss for each resource – a question we will look at in later briefings.

Until next time…

 

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Wings, aerofoils and theory.

Strategic Management Dynamics book coverIt is important to appreciate just how fundamental asset-stocks are to understanding and directing organizations’ performance. To take an analogy, feathers and flapping wings may be common among things that fly, but don’t ‘explain’ flight. That understanding made little progress until the properties of aerofoils were discovered. makes air passing over a wing move faster than air passing underneath, so the air on top is less dense. The wing is therefore subject to more pressure from below than from above, and experiences lift upwards. As far as winged flying things are concerned, it is the aerofoil (not feathers or flapping wings) that is the single vital component without which it is impossible to explain performance, whether of a plane, bird, insect or tree seed. It is also impossible to anticipate the behavior of any new wing or change of design without understanding how that component functions.

The accumulating asset-stock is as fundamental to the performance of organizations over time as the aerofoil is to the behavior of winged objects.

This briefing summarises discussion from chapter 3 of Strategic Management Dynamics, pages 121-124

Read more about the book on our website

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