We all know that ‘soft’ factors are important – we need motivation amongst our staff, reputation with potential customers, effective processes to get things done, good data that is up to date, and powerful capabilities for developing products, for example. Unfortunately, there is little agreement in strategy books and articles on what those soft items actually are, the categories into which they fall, or how they can be specified and measured.

We will spare you the review and analysis of all the many alternative explanations on offer, and go straight to a set of definitions that seem to be clear, useful and amenable to measurement, whilst at least being somewhat consistent with how other writers describe things (see Figure 1).

Figure 1: A classification of resources and capabilities. (Click image to view larger)

The tangible resources listed at left have dominated Briefings up to this point, and make up the core of an organization’s strategic architecture. These are analogous to the physical components that makeup the working ‘machine’ of the business or organization. Not all apply in every case – companies selling into commodity markets have no identifiable customers, for example. Some situations require additional specific items of their own, such as “projects” in contract-based firms, or “reserves” for oil and gas companies.

What we have not mentioned before is that there are some other tangible items that behave as asset-stocks (they fill and drain over time), but are not important enough to affect strategic performance. Few firms, for example, can claim that their inventory level makes a significant difference to their medium – to long-term performance, even though it observes the bathtub behavior of all asset-stocks. Some such items, however, though not usually relevant, are of strategic importance in specific cases – an “order book” is not usually significant, but certainly matters to firms like Boeing and Airbus.

Attributes form the second category of resources. Products bring some number of potential customers who might want to buy them, and distributors bring the attribute of the number of end-customers they can reach. The extra clarification added here is that some of those attributes are intangible – e.g. staff possess skills, and each of a bank’s loans carries a risk it will not be repaid. Attributes were dealt with in Briefings from number 24 onwards.

Intangible resources can be identified and specified by reasoning from first principles, supported by testing in a wide variety of different contexts. This has led to identification of the three groups in the third column:

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1. Psychological factors, concerning the state of mind of customers, staff, investors and other stakeholders
2. Information-based resources, include data, technology, knowledge
3. Certain quality factors that must be built up and sustained over time

Some types of quality do not accumulate, however, so are not asset-stocks at all. Service quality, for example, can in some cases simply reflect an instant balance between the demand for service and the capacity to fulfill that demand (e.g. quality of mobile phone calls on a heavily loaded network) – if demand goes up, service quality drops, and if demand falls back, service quality instantly improves. Such items may be important, to be sure, but are not ‘resources’ and should not be modeled as such.

The next few Briefings will look in more detail at how intangible resources behave, how they affect other items and thus influence performance outcomes, and how they can be managed.

This just leaves capabilities, which combine the skills of individuals and teams with knowledge that may have been captured, and routines and procedures for getting things done. Capabilities will be dealt with in later Briefings.

Until next time…

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Measure the thing itself, not proxies

A common danger to be avoided is the temptation to measure proxies for intangible resources, not the item itself. Asked about staff morale in their organization, many people reply with information about staff turnover rates. Asked about their company’s reputation, others may talk about their sales growth. But these are consequences of the intangible item, not the item itself.

Such responses are hardly surprising, given the difficulty that exists in properly detecting and measuring intangible resources. But it’s important to try.

First, the proxy may be caused by something else entirely – staff may be leaving because of better pay rates, not poor morale, and sales may be growing because current customers are buying more, not because a strong reputation is bringing in new customers. The second reason to identify and measure the resource itself is that it is changing because things are causing it to fill up or drain away, and it is only by knowing those causes that you can identify what to do about it.

This briefing summarises material from chapter 9 of Strategic Management Dynamics, pages 576-583.

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