Leveraging Resources
Effectively managing your business during tough economic times
by: Ted Horton-Billard, Principal
t.h.b. consulting services
(424) 204-9036
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Leveraging Resources
DEFINITION:
The ability to influence a system,
or an environment, in a way that
multiplies the outcome of one's
efforts without a corresponding
increase in the consumption of
resources.
In other words, leverage is the
advantageous condition of having
a relatively small amount yield a
relatively high return.
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Leveraging Resources
When business people talk about “leverage” their most
typically talking about financial leverage. There are different
ways to look at a company’s financial leverage.
Leverage is the relationship
between debt financing and equity
financing, also known as the debtto-equity ratio.
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Leveraging Resources
• Generally, you may think of leverage as
shorthand for your business's ability to get
funding. Higher equity creates increased
leverage and vice-versa. If your business is
fully leveraged, it won't be able to borrow
money.
• Suppose you applied for a small business loan
of $60,000 and were prepared to make an
equity contribution of $20,000. This would be
a debt-to-equity ratio of 3:1.
• Whether or not this would be an acceptable
ratio to the lender depends on the lender and
your business' position. If, for example, you
are just starting out, a lender may require a
debt-to-equity ratio closer to 1:1.
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Leveraging Resources
Leveraging opportunities come in all shapes and sizes
• All companies, including the smallest ones, possess a variety of
resources and capabilities.
• A useful way to categorize these resources is to separate them in two
categories: tangible and intangible.
• Tangible resources and capabilities are assets that are observable and
more easily quantified.
• Intangible resources are assets that are not physical in nature.
Corporate intellectual property (items such as patents, trademarks,
copyrights, business methodologies), goodwill and brand recognition
are all common intangible assets in today's marketplace.
• An intangible asset can be classified as either indefinite or definite
depending on the specifics of that asset. A company brand name is
considered to be an indefinite asset, as it stays with the company as
long as the company continues operations. However, if a company
enters a legal agreement to operate under another company's patent,
with no plans of extending the agreement, it would have a limited life
and would be classified as a definite asset.
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Leveraging Resources
Some typical examples of business resources capable of being leverage
• Financial resources and capabilities—how deep is your company’s financial pockets?
• Physical resources and capabilities—plants, offices, and equipment, their geographic locations, real property, leases,
real property rights, and access to raw materials and distribution channels.
• Technological resources and capabilities—skills and assets that generate leading edge products and services
supported by patents, trademarks, copyrights, and trade secrets.
• Organizational resources and capabilities— your company’s planning, command, and control systems and structures.
In general, younger companies tend to rely more on the visions of managers (often founders), whereas more
established companies usually have more formalized systems and structures in place.
• Human resources and capabilities—this is about the knowledge, trust, and talents embedded within your company
which are not captured by its formal, tangible systems and structures.
• Innovation resources and capabilities—here we’re talking about your company’s assets and skills to:
(1) research and develop new products and services, and
(2) innovate and change ways
• Reputational resources and capabilities—this is your company’s abilities to develop and leverage its reputation as a
solid provider of goods/services, an attractive employer, and/or a socially responsible corporate citizen. Reputation
can be regarded as an outcome of a competitive process in which firms signal their attributes to constituents.
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Leveraging Resources
Resources versus Capabilities
• Some argue that capabilities are a
company’s capacity to dynamically deploy
resources.
• They suggest a crucial distinction
between resources and capabilities, and
advocate a “dynamic capabilities” view.
• In practice, these distinctions may be
more academic than practical.
• Personally, I subscribe to the notion that
your capability to exploit a resource is a
resource in and of itself and should be
treated as such.
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Leveraging Resources
Value Chain Analysis
• If your company is a bundle of resources and capabilities, how do they
come together to add value? A value chain analysis allows you to
answer this question.
• Most goods and services are produced through a chain of vertical
activities (from upstream to downstream) that add value—in short, a
value chain. The value chain typically consists of two areas: primary
activities and support activities.
• Given that no company is likely to have enough resources and
capabilities to be good at all primary and support activities, the key is to
examine whether the company has resources and capabilities to
perform a particular activity in a manner superior to competitors—a
process known as benchmarking in SWOT analysis.
• A Value Chain Analysis helps managers understand their company’s
strengths and weaknesses on an activity-by-activity basis, relative the
company’s rivals, using a SWOT analysis.
•
•
•
•
S.W.O.T.
Strengths: characteristics of the
business or project that give it an
advantage over others
Weaknesses: are characteristics that
place the team at a disadvantage
relative to others
Opportunities: elements that the
project could exploit to its
advantage
Threats: elements in the
environment that could cause
trouble for the business or project
• SWOT = Strengths, Weaknesses, Opportunities, and Threats
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Leveraging Resources
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Leveraging Resources
Hypothetical
Due to global events airlines around the world have had a hard time. An increasing number of them, such as Delta, Swissair,
and United, have sought protection from creditors by filing bankruptcy. In China, rapid growth has made the country the
second largest aviation market behind the United States. Reportedly, however, the growth has largely been profitless and the
Chinese airline industry, as a whole, supposedly manages to break even by the slimmest of margins. Yet, Chinese Airline XYZ
(XYZ), which started in the early 1990’s, managed to overcome these challenges and has not only risen to become the 4th
largest airline in China, but also the most profitable one (boasting net profits of 6%+ annually for the past several years).
In China, until the mid-1980s, there had been only one airline for the entire country, Chinese Airline ABC (ABC). As a stateowned monopoly, ABC was known for its arrogance, high price, sloppy service, and frequent cancellations, earning its
nickname as “Always Being Canceled.”
In the late 1980s, ABC reformed itself to become a government regulator. As a result, ABC formed three large airlines.
Through deregulation, ABC also allowed for the entry of other new, smaller airlines beginning in the early 1990’s, including
XYZ. In the crowd of new entrants (approximately 25 smaller airline companies) and the “Big Three” (still owned and
controlled by ABC), 15 years ago few people would have predicted that XYZ, headquartered in the remote southernmost part
of China, would emerge as a winner in this increasingly competitive industry. XYZ’s accomplishments are impressive: Every
year since 2000, it not only has the best profitability and best on time departure record in the industry, but also wins the
coveted “Best Airline Award” voted by passengers every year.
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Leveraging Resources
Hypothetical (continued)
Here are XYZ’s resources/capabilities for purposes of this hypothetical (you may infer all reasonable additional facts needed to help facilitate your discussions):
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A fleet of 30 aircraft (all in good condition); single type of aircraft, a Boeing 737 – greater economies of scale (Servicing, training, etc.);
XYZ’s routes are point-to-point, rather than hub-and-spoke routes (larger airlines); better economy of scale;
Low employee to aircraft ratio (80:1; versus Chinese industry average of 280:1; and worldwide average of 170:1);
Approximately 2,400 employees; Good employee moral; strong management team; overall high performance from company personnel;
The Company’s overall debt to equity ratio is .3 (total liabilities $24,000,000.00 divided by total shareholder equity $80,000,000 = .3 a particularly low ratio for this
industry which tends to have higher debts with ratios averaging closer to .7 - .8 for many airlines);
Headquartered in a remote region; XYZ deliberately avoids head-on competition and has previously “flown under the radar” of its competitors; XYZ’s main routes fly
into a newer, less popular airport – where there are mostly international flights, 1.5 hours from the city center of Shanghai; as opposed to the more popular domestic
hub only 30 minutes from the city center (analogous to Ontario or John Wayne airports compared with LAX);
XYZ has also just gone international (within the past year), by identifying unfilled gaps instead of going after popular but crowded markets (such as the US-China
routes). In Asia, it flies to Bangkok, Kuala Lumpur, Osaka, Seoul, and Singapore. It also flies to Budapest, becoming the first Chinese airline to offer nonstop service
to Central Europe;
XYZ established early on a corporate culture emphasizing customer service; passengers can participate in a fun-filled auction for a return ticket, with a flight attendant
serving as the auctioneer and game show host. For many passengers, a flight on XYZ becomes a chance to relax, unwind, and perhaps win a cheap ticket;
In addition, there are 25 full-time quality inspectors, who do nothing other than appearing as regular passengers to fly around and “crack the whip.” Every year, crews
rated at the bottom 10% of their peers are automatically fired, quite a (ruthless) change for this industry renowned for its “iron rice bowls” (job security);
In 1999, XYZ became the first Chinese airline to be ISO 9000 certified for excellent service quality;
Also, in 1995 XYZ attracted a strategic investor—a renowned global financier; the financier purchased $12 million dollars worth of XYZ (representing approximately
15% ownership in the company).
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Leveraging Resources
Hypothetical Discussion
• XYZ executives have now announced that their goal is to build a world-class
airline, literally doubling in size within 5 years (by mid-2018), by blending Chinese
culture and “Western” management.
• How can XYZ use its current resources to leverage that ambitious growth goal
into a reality?
• Which of XYZ’s resources are tangible, and which are intangible?
• Are the intangible assets definite or indefinite?
• How might XYZ’s SWOT analysis look?
• What additional information would you like to have for your leverage analysis?
• What suggestions might you make to XYZ about leveraging its resources to
achieve its goal?
• Which resources would you recommend leveraging and how?
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Leveraging
Resources
Time for groups to share their findings
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Leveraging Resources
Hypothetical debriefing
• Summarizing XYZ’s industry, airline service is hard to differentiate; price competition is the norm; which in turn, produces terrible
profits for the entire industry. So, how did XYZ manage to out-compete its rivals in a very difficult marketplace?
• Short Answer - There are certain resources and capabilities specific to XYZ that are not shared by its competitors.
(What are they?)
• This simple insight has been developed into a resource-based view, which has emerged as one of the core perspectives on business. It
recognizes that for companies to succeed, when their competitors fail, they must have certain, unique resources and capabilities which
their competitors do not possess.
• A basic proposition of the resource-based view is that a company consists of a bundle of productive resources and capabilities. As
such, it then stands to reason, the better your company becomes at recognizing, understanding and leveraging those resources and
capabilities, the more successful your company is likely to become.
• The resource-based view focuses on the value (V), rarity (R), imitability (I), and organizational (O) aspects of resources and capabilities,
leading to a VRIO framework. Addressing these four important questions has a number of ramifications for competitive advantage.
• SO HOW DID XYZ’s BUSINESS ACTIVITIES RATE BASED ON VRIO CONSIDERATIONS?
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Leveraging Resources
Overall, only valuable, rare, and hard-to-imitate resources
and capabilities that are organizationally embedded and
effectively exploited can lead to sustained competitive
advantage and consistent, above-average performance
• The Question of Value - Do Company resources and capabilities add
value? Only value-adding resources can possibly lead to competitive
advantage, whereas non-value-adding capabilities may lead to
competitive disadvantage.
• The Question of Rarity - How rare are valuable resources and
capabilities? At best, valuable but common resources and capabilities lead
to competitive parity but no advantage. Only valuable and rare resources
and capabilities have the potential to provide competitive advantages.
• The Question of Imitability - Valuable and rare resources and
capabilities can be a source of competitive advantage only if competitors
have a difficult time imitating them. While it is relatively easier to imitate a
firm’s tangible resources (such as plants), it is a lot more challenging and
often impossible to imitate intangible capabilities (such as tacit knowledge,
superior motivation, and managerial talents).
• The Question of Organization - Even valuable, rare, and hard-to-imitate
resources and capabilities may not give a Company sustained competitive
advantage, if it is not properly organized. How can the Company be
organized to develop and leverage the full potential of its resources and
capabilities?
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Leveraging Resources
Suppose your analysis suggests your company does not do something well?
• The Company’s management must ask: “Does the company really need to engage in this activity?”
• If not, then why not stop? And, if the Company decides to stop, then what is the best way to wind-down the Company’s involvement with the
activity?
• If the Company must remain involved with the activity, does the Company really need to perform the activity in-house?
• To answer that question, the Company should consider:
(1) Whether the activity is industry-specific or common across industries; and
(2) Whether the activity is proprietary (company-specific) or not.
• If the Company concludes the activity involves a great deal of commonality (a.k.a. commoditization) across industries and little need for
keeping it proprietary — then the Company may want to out-source. If the activity is industry-specific, but still involves a high level of
commoditization the Company still may wish to out-source.
• Ultimately, if the Company concludes that it is not competitive, it may decide to improve its in-house capabilities by acquiring or hiring the
resources needed to be competitive; outsource the activity; sell the unit involved; or lease the unit’s services to other companies. This is
because operating multiple stages of activities in the value chain may be too cumbersome and inefficient.
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Leveraging Resources
• There is nothing novel in the notion that companies compete on resources and capabilities. The tougher challenge comes when
attempting, via the VRIO framework, to distinguish resources and capabilities that are valuable, rare, hard-to-imitate, and
organizationally embedded from those that do not share these attributes.
• The VRIO framework used in conjunction with the SWOT analysis, is a very powerful planning tool for leveraging your company’s
resources effectively. While you cannot pay attention to every resource and capability, you must have some sense of what really matters.
• A common mistake that managers often make when evaluating their company’s capabilities is failing to assess them relative to rivals,
thus resulting in a mixed bag of both good and mediocre capabilities.
• Using the VRIO framework, a value chain analysis helps you make effective decisions on what capabilities to focus on in-house and what
to outsource.
• Increasingly, you’ll begin to realize that what really matters is not tangible resources that are relatively easy to imitate, but intangible
capabilities that are harder for rivals to get their arms around.
• At present, as much as 75% of the value of publicly traded corporations in the United States comes from intangible, knowledge-based
assets, up from approximately 40% in the early 1980s. This is a crucial reason that business guru’s increasingly label the new global
economy as a “knowledge-based economy.”
• Companies must focus on the identification, development, and leveraging of valuable, rare, hard-to-imitate, and organizationally
embedded resources and capabilities, which are often intangible. It is thus not surprising that capabilities not meeting these criteria are
increasingly outsourced.
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Leveraging Resources
• Relentless imitation or benchmarking (“Keeping up with the Jones”), while
important, is not likely to be a successful strategy.
• Companies that follow have a tendency to mimic the most visible, the most
obvious, and, consequently, the least important practices of winning firms.
• Think about it, companies that meticulously replicate every resource
possessed by winning competitors can hope to attain competitive parity, at
best!
• Companies so gifted with resources to imitate others may be better off by
developing their own unique capabilities. The best performing companies
often find new ways of adding value.
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Leveraging Resources
• Remember, a competitive advantage that is sustained does not imply that
it will last forever, that’s not realistic in today’s competitive marketplace.
• All a company may hope for is a competitive advantage that will be
sustained for as long as possible. However, over time these advantages
may be expected to disappear.
• Therefore, the lesson for all companies, including current market leaders, is
to develop strategic foresight— the ability to look “over-the-horizon” and
effectively plan for the future.
• Strategic foresight enables a company to anticipate future needs and move
early to identify, develop, and leverage resources and capabilities to
successfully compete in the future.
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Leveraging Resources
1. Today, we’ve discussed what a company’s resources and capabilities are:
• “Resources” and “capabilities” are tangible and intangible assets a company uses to choose and implement its strategies.
2. We’ve also discussed basic SWOT analysis along the value chain:
• A value chain consists of a stream of activities from upstream to downstream which add value
• A SWOT analysis seeks to ascertain a company’s strengths and weaknesses on an activity-by-activity basis relative to rivals.
3. We’ve examined the decision-making process whether to keep an activity in-house or outsource it:
• Outsourcing is defined as turning over all or part of an organizational activity to an outside supplier
• An activity with a high degree of industry commonality and a high degree of commoditization can be out-sourced, and an industryspecific and company-specific (proprietary) activity is better performed in-house
4. And, we’ve discussed how to analyze the value, rarity, imitability, and organizational aspects of resources and capabilities (VRIO)
• A VRIO framework suggests that only resources and capabilities that are valuable, rare, inimitable, and organizationally embedded will
generate sustainable competitive advantage.
5. Finally, we’ve learned the following:
• Companies need to build strengths based on the results of their SWOT analysis and their specific VRIO frameworks
• Relentless imitation or benchmarking, while important, is not likely to be a successful strategy
• Creativeness; Innovation; Leadership; Pioneering new ways to deliver value; analysis and planning are all critical to gaining a
competitive advantage;
• Companies need to anticipate future trends, and build-up resources and capabilities to leverage them for future competition
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