Strategically valuable resources (Collis and Montgomery)

A resource has no strategic value in isolation. Its value emerges from the interaction among customer demand, scarcity, competition, substitutes and the organisation’s ability to capture the return it creates.

When to use it

• Apply the tests when strategy proposes building core competences, creating a learning organisation or transforming capabilities.
• Interpret those initiatives as choices about a distinctive portfolio of resources rather than as fashionable programmes.
• Test the portfolio against the changing industry and competitive context. Durable strategy combines insight about internal capability with rigorous external market analysis.

Origins

David J. Collis and Cynthia A. Montgomery developed the framework to connect the resource-based view of the firm with market and industry analysis. Building on resource scholars including Birger Wernerfelt and Jay Barney, they argued that a capability becomes strategically valuable only when it survives demanding external tests involving demand, scarcity, appropriability, durability, imitation and substitution.

What it is

Collis and Montgomery bridge two schools that are often presented as rivals: external positioning associated with Porter, GE/McKinsey and BCG, and internal resource-based strategy associated with Hamel and Prahalad, Grant, Barney and Kay.

They distinguish three resource types:

Physical assets – plant, equipment, locations and other tangible resources.

Intangible assets – brands, reputation, knowledge and comparable non-physical resources.

Organisational capabilities – coordinated routines, processes, judgement and culture.

Marks & Spencer illustrates the distinctions. Its freehold locations were physical resources; its brand reputation and employee loyalty were intangible; and its supply-chain relationships and managerial judgement were organisational capabilities.

The strategic worth of any such resource depends on the dynamic interaction of scarcity, appropriability and demand. That market dependence prevents the analysis from treating an internal strength as valuable regardless of industry or time.

Use five external tests:

Inimitability: How difficult is the resource to copy? Barriers include physical uniqueness, path dependency, causal ambiguity and economic deterrence. This parallels the imitation test in Barney’s Strategically distinctive resources (Barney).

Durability: How long will the resource remain productive and relevant? The Disney brand, for example, continued long after Walt Disney’s death.

Appropriability: Who captures the economic value? A leveraged-buyout firm may depend on executives’ contact networks, but those resources can leave when the executives establish their own funds.

Substitutability: Can a different resource or business model provide customers with the same outcome and erode the advantage?

Competitive superiority: Is the firm demonstrably better than rivals on the capability that matters? Competence is not an internal claim about what the company performs well; distinctive competence requires an external comparison and customer relevance.

Strategically valuable resources

Added strategic value

The result is effectively an industry analysis applied to internal resources.

How to use it

Identify candidate resources and test each for inimitability, durability, appropriability, non-substitutability and competitive superiority.

Then apply Grant’s The resource and capability strengths/importance matrix (Grant):

Identify potentially valuable resources.

Appraise relative importance.

Assess strength against competitors.

Combine importance and relative strength.

Develop the strategic implications.

Three broad actions follow:

Invest in resources already held – as Disney repeatedly invested in animation capability.

Leverage resources into suitable adjacencies – as Disney extended its brand into retail and publishing.

Upgrade resources the strategy requires – as Intel developed consumer branding through “Intel Inside.”

Reassess the tests as markets and technologies change. A formerly rare capability can become commonplace, a durable brand can lose relevance and an alternative technology can substitute for a once-unique asset.

Top practical tip

Name the customer demand and competitive mechanism that make each resource valuable, then identify who actually captures the resulting return.

Top pitfall

Do not replace external market analysis with an inward-looking list of strengths. A resource can be impressive inside the organisation and strategically irrelevant outside it.

Further reading

• Collis, D.J. and Montgomery, C.A. (nineteen ninety-five). “Competing on Resources: Strategy in the Nineties.” Harvard Business Review.
• Wernerfelt, B. (nineteen eighty-four). “A Resource-Based View of the Firm.” Strategic Management Journal.