Strategy Dynamics Briefing 24: Resource quality: understanding attributes

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The briefings up to this point have put together the basic elements of the simple core system of how an organization functions and delivers performance that changes over time. This picture with numerical information on its performance is often enough to see big improvement opportunities. However, there is much more opportunity to use strategy dynamics to improve performance…

The basic elements of the simple core system of how an organization functions and delivers performance that changes over time are:

  • performance at all times depends on some simple, tangible resources, such as customers, staff, capacity and cash
  • these resources have a unique, defining characteristic – they accumulate and deplete over time – which means that their scale cannot be caused by anything other than their own history of gains and losses
  • these flow-rates at which resources are won and lost depend on existing resource levels, as well as on management decisions and external factors

Putting these causal relationships together leads to a rigorous diagrammatic representation of how the system works – its strategic architecture – in which controlling resource flow-rates is the critical means by which management controls performance.

This picture with numerical information on its performance is often enough to see big improvement opportunities. A business may be working hard to win customers but losing customers it is failing to look after, another may be struggling to grow without realizing that the opportunity has been used up, and a voluntary organization may be better able to fulfill its aim by trying to do less, because over-load on its staff is causing high turnover.

However, there is much more opportunity to use strategy dynamics to improve performance if this core insight by extending the issues it covers. The principal extensions are:

  • dealing with differing ‘attributes’ or qualities of resources
  • understanding how resources develop through stages
  • managing competition for resources
  • working with intangible factors, such as reputation and staff motivation
  • building the capabilities of groups and of the organization as a whole

Note that each of these frameworks can be useful on its own, as well as when added into the core architecture. Let’s start with the first of these extensions – the attributes or qualities that a resource possesses.

Most tangible resources have some quality or characteristic that affects their impact on the business system and its performance. These qualities are referred to as “attributes” and it is just as important to define and quantify these as it is for the resources themselves (see table 1).

Table 1: Examples of attributes for tangible resources

Tangible resource Measure for the resource Attribute Measure for the attribute
Customers People or companies Sales value $/month per customer
Staff People Experience Years per person
Products Number Customer appeal Rating 0–1 for each product
Distributors Companies Potential end-customers End-customers per distributor
Equipment Units Reliability Failures per unit per year

To see why attributes are so important, look at a simple manufacturing company (table 2). In the left-hand column, it has 80 customers each buying 105 units per month, to give total sales of 8400 units per month. It could, though (right column) get the same sales from three times as many customers (240), each buying one-third of the quantity, or 35 units per month. The company’s revenue is the same, and most of its costs do not change. But both distribution costs and service costs are both higher. Table 2 shows the impact on profits if distribution costs double to serve three times the number of customers, and if service costs increase by 50%.

These financial consequences still reflect our principle that “resources drive performance“. The distribution costs are higher because more delivery vehicles and staff are needed, and the service costs are higher because more service personnel are required. Those additional resources are only required because of the larger number and lower quality of customers.

The issue of customer quality differences also adds to the list of reasons given in an earlier briefing for being wary of market share as a performance indicator or objective. This company may have the same market share regardless of whether it has few large customers or many small ones, but its current performance is quite different. Its potential future performance will differ too, if its lower cash flows in the latter case limit its ability to invest in growth.

Few, large customers Many, small customers
Customers 80 240
Sales per customer 105 35
Sales 8400 units per month$000 per month 8400 units per month$000 per month
Revenue $000 1008.0 1008.0
Sourcing cost 58.8 58.8
Production costs 310.0 310.0
Distribution costs 122.0 244.0
Sales and marketing spend 100.0 100.0
Service costs 80.0 120.0
Overhead cost 100.0 100.0
Total costs 770.8 932.8
Operating profit 237.2 75.2

If this company wants to grow profits from the right-hand situation, it could do so by trying to grow the number of customers – but it could also do so by replacing its small customers with large ones. Which of these it should focus on depends on various details. Large numbers of easily-won, smaller customers might encourage pursuit of simple growth. On the other hand, the company might pursue the quality improvement option if its customers are actually quite large, but only enjoys a small share of their purchases.

The key message here, then, is that:
Resources have quantifiable attributes that must be known and managed to ensure the organization’s system is effective and to drive performance.

Until next time…

 

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Sector-specific resources and attributes

Earlier briefings explained that firms in the same or similar industries feature resources that are quite characteristic of those industries. Retailers have stores and oil companies have oil reserves, for example. These industry-specific resources also have important attributes. Each store in a retailer’s portfolio gives access to a certain number of consumers; each oil field has a certain volume of oil in it, and so on.

Resources in public service and voluntary organizations also carry important attributes. In policing, criminals differ in the frequency and seriousness of the offences they commit. Schools differ in the learning abilities of their students. Strategic Management Dynamics book coverVoluntary organizations are often concerned with the value of their donors; some deliberately focus on a few rich individuals, whilst others adopt a policy of “every little helps” and seek donations, no matter how small, from as many people as possible.

Such attribute differences can complicate policy, and give rise to unintended consequences. In the United States, for example, care for the terminally ill is funded on the basis of a fixed rate per patient-day. This puts providers of care in the difficult position of favoring patients with relatively simple needs for palliative relief, rather than those with more complex needs, such as cancer sufferers.

Read more about the book on our website

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