Financial Resources And Its Importance Commerce Essay

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In the competitive business world of today, a firms resources are the fundamental factors that enable it to conceive and implement strategies to improve its efficiency and effectiveness. It is a key factor for success as success depends, in a significant part, to how efficient and effective the firm is in converting inputs to outputs. It is the means by which the organisation can gain a competitive advantage as the competitive advantage and superior performance of an organisation is explained by the distinctiveness of the organisation's capabilities; it helps the organisation to stand out in the corporate jungle of today.

In this essay, we will discuss about the strategic resources with an emphasis on the Financial Resources and how important it is for the firms to gain an advantage.

Competitive Advantage can be attained if the current strategy is value-creating, and not currently being implemented by present or possible future competitors (Barney, 1991, p102). Competitive advantage is sustainable when the efforts by competitors to render the competitive advantage redundant have ceased (Barney, 1991, p102; Rumelt, 1984, p562). It can be called sustainable when the imitative actions by its competitors have ceased but at the same time, not spoiling the firm's competitive advantage.

Resource based view strategies of firms was developed to explain how organizations achieve sustainable competitive advantages. Supporters of the resource based view have tried to explain why firms differ and how important it is in the competitive global environment of today.

In order to transform from a short-term competitive advantage into a sustained competitive advantage, an organization requires its resources to be heterogeneous in nature and not perfectly imitable (Barney, 1991). These resources, then, become the firm's valuable resources that are neither easily imitable nor substitutable without great efforts (Barney, 1991, Hoopes, 2003) and if these conditions stay, the firm's variety of resources can help the firm in sustaining returns that are above-average.

A firm's resources are the inputs that are required during the firm's production process, such as, capital, equipments, finance, specific skills of individual employees, talented managers, etc. These inputs undergo the transformation process to become the outputs of the firm, such as, the goods and services, profit or loss, employee and customer satisfaction, etc. The co-operative combination and integration of a firm's set of resources can contribute towards the competitive advantage of the firm.

A Open Systems Model

(Mullins 1999 adapted)








Physical resources

Human resources

Financial resources




E.g. management,



Capability is what the firm has learned to do with its resources or its capacity to interactively perform a stretch task. It makes a direct difference to the firm's competitive advantage, such as, to enable it to cut costs or serving customers quickly (Haberberg & Rieple, 2001). To gain competitive advantage, it should be neither too simple to be highly imitable, nor so complex that it defies internal steering and control.

Competence is deep-seated and accounts for the firm's capabilities, such as, a deep understanding of a specialised field of information technology, human psychology or chemistry (Haberberg & Rieple, 2001).

Kotelnikov, V. [Online] Resource Based View (RBV) of Firms [Accessed: 25th April, 2010] Available at:

Resources can be tangible or intangible.

Tangible Resources: They are the physical assets of an organisation, for e.g. plant, labour and finance (Johnson, Scholes and Whittington, 2009).

Intangible Resources: They are the non-physical assets, for e.g. information, reputation and knowledge.

Threshold Resources: They help the organisation to meet the industry criteria to survive and compete in a given market.

Strategic or Unique Resources: These resources meet the industry's criteria for success and also help in gaining a competitive differential advantage. They cannot be easily imitated by the competitors.

According to Barney (1991), Strategic Resources must be:

Rare within the industry. For e.g. the Computer -aided Design (CAD) in the early 1980s, when it was very costly and only few could afford them.

Valuable. For e.g. the CAD systems as it reduced the cost of repetitive design work.


And there should be Non-availability of substitute resources. For e.g. Mona Lisa.

(Haberberg and Reiple, 2001)

There are mainly 5 types of corporate resources:

Physical Resources:

These resources are usually freely available on open market (for e.g. purchase of hotel, access to raw materials, location, etc.)

They can be strategic when:

The resources are rare such as: tourist attractions with historic value, natural landscapes for an outdoor centre etc.

The resources are integrated in the company's proprietary technology, for e.g. some Japanese companies, rather than purchasing their machine tools, they make their own.

Resources, which were bought cheaply as other firms were not aware of their yet, but now, are valuable. For e.g. some retail locations.

(Haberberg and Rieple, 2001)

Financial Resources

These resources are supplied in plenty in the capital markets.

They are strategic when they are in large quantity and:

When finance is an important element of the product itself. For e.g. Airline Industry.

When a firm has access to funds in huge quantities (from which poorer firms are excluded) so that it can use them to strike generous deals, i.e. having a strong balance sheet. For e.g. winning exclusive contract by promising substantial funding.

When companies have ample cash reserves and borrowing capacity i.e. having deep pockets.

Possession of expensive physical or human resources that aid in gaining competitive advantage. For e.g. having the CRS technology for a hotel chain.

(Haberberg and Rieple, 2001)

3. Human Resources

Human resources are more heterogeneous than the physical or financial resources as human beings will always behave differently in different countries and organisations and hence, they are the most likely source of advantage being rare and difficult to copy.

They can be derived from a firm's pleasant working environment or culture.


Individuals with rare talents (theme part and carnival entertainers, football players, etc).

Groups of individuals with new and rare skills (IT firms, banks, etc.)

(Haberberg and Rieple, 2001)

4. Intellectual Resources

Intellectual resources are quite important for an organisation and they usually have the capacity to be the source of competitive advantage.

Important intellectual assets include:

Patents (for e.g. Dyson)

Research programmes

Customer databases, etc.

These resources can acquire competitive advantage if:

They are significantly superior to its competitors, such as, larger and more detailed customer database.

Genuinely difficult to copy, such as, high tacit knowledge content of an organisation, management attention, etc.

(Haberberg and Rieple, 2001)

5. Reputational Resources

Reputational resources combine two main types of resources: a firm's reputation (degree of esteem which its customers see it with) and the firms' brands (names used by them in the market place).


It is associated with the firm itself (e.g. Virgin)

It usually remains invisible on balance sheets.

It arises from successful branding and advertising or from word of mouth (researchers' discussion at conferences, industry gossip, etc.)

A good reputation can benefit the organisation and the buyers in a number ways:

It can reduce the customers' search costs (customers pressed for time can head straight to retailers with a reputation of offering reasonable price instead of comparing prices in shops).

Good reputation reduces the risk of customers when buying larger items like washing machines, cars, consultancy services, etc. ( these represents major commitments for consumers as it is difficult to judge the quality at the time of purchase).

A good reputation is beneficial to an organisation as it helps in impressing the stakeholders (employees, suppliers and retailers, bankers and shareholders)


It is associated with the products or family of products (e.g. Virgin Atlantic).

When a firm builds a brand, it gives its products a 'personality' which symbolises certain desirable things to the prospective purchasers.

It shortens the buyer's selection process by being strong enough to be almost an automatic choice and spare the time, money or mental anguish of buyers.

Brands benefits the seller as well:

A strong brand will result in repeated purchases, that too, by charging premium prices.

Easier launches for its new products.

Brand loyalty from the customers.

Firms can be benefitted further if the brand is associated with a particular market segment as they can tailor their products and marketing message to that particular customer group.

Branded products have proven to be of strategic value (e.g. Levi-Strauss, Coca-Cola, Rolls-Royce, etc.

(Haberberg and Rieple, 2001)

Importance of strategic resources:

Firms can be more profitable than their competitors in the medium term

Advantage of remaining profitable as the competition intensifies as the newer or weaker competitors may struggle.

Firms can be more resilient even when the environment changes.

(Haberberg and Rieple, 2001)


The resource based view of strategy is the competitive advantage of an organisation which is explained by the distinctiveness of its capabilities and resources.

(Johnson Et al, 2005)

The mother of resource based theory is a British economics professor, Edith Penrose who explained in her book The Theory of the Growth of the Firm (1959) those Resources as basis for understanding firms' expansion. Since then much work had been done in this sector and many authors have proposed different definitions and contributed towards the development of RBV.

Reasons for RBV Development

The external environment is in a state of flux.

Resources and capabilities maybe more stable in these conditions.

The RBV strategy is particularly pertinent where the rate of change is significant.

This strategy emphasizes the uniqueness of each company

The RBV is about exploiting the differences rather than doing the same as competitors.

(Grant, 2010)

The Elements of RBV's Sustainable Competitive Advantage

Various authors have made significant contributions and agreed on the importance of individual company resources within an organisation. Taking these views into account, the seven elements that comprise the RBV can identified.

Prior or acquired resources: Rather than starting from scratch in a totally new area, it is more advantageous for a company if it builds on the strengths that are already available to it.

Innovative capability: Innovation is important as it very much likely to deliver a real breakthrough in competitive advantage which will be difficult to be matched by the competitors for a lengthy period.

Being Truly Competitive: It is necessary for any resource to deliver a true advantage over the competitors and it must be comparatively better than the competition.

Substitutability: For resources to be most competitive, it has to be un-substitutable.

Appropriability: The results of the advantages of a resource must be delivered to the company itself and only, rather than distributing (even a part of it) to others.

Durability: Useful and unique resources must have longevity. If it advantage is not sustainable, there is little point in identifying it.

Imitability: For resources to have competitive advantage, it should not be easy to imitate them.

(Richard Lynch, 2006)

A competitive advantage is simply an advantage a company has over its competitors. A competency can produce competitive advantage provided:

- It produces value for the organization, and

- It does this in such a way that cannot easily be pursued by competitors.

Hence, for the resources to gain Sustainable Competitive Advantage, it should be:

Rare or Scarce.





(Fahy, 2000)


The resource-based strategy must be implemented in the form of directed strategic projects.

Value Chain Management

The sequence of processes adding value to the firm's inputs in order to create outputs is called the value chain. The whole value chain is considered in a strategic point of view. The individual elements of value addition, i.e. the inbound logistics, operations, marketing, etc. must be integrated in the firm in order to use its resources most effectively. Communication is of utmost importance as communication is necessary between marketing and operations for the production capacity to be optimised. Operations, in turn, must communicate with procurement for effective management of stock holding. All functions must communicate with Human Resource Management regarding the need for people and their development. The function of strategic management is not only ensuring the effective working of the existing communication procedures, but also being innovative and encouraging learning about new and better ways of doing things.

(Philip A Wickham, 2000)

Core Competences & Unique Resources

Unique resources are those resources that can create sustained competitive advantage for a firm. These resources are distinctive or unique capabilities specific to particular organisations and cannot be imitated.

"Core Competences are the skills and abilities by which resources are deployed through an organisation's activities and processes in such a way as to achieve competitive advantage in ways that cannot be imitated or obtained by others". (Johnson et al, 2010, p 65) Only the firms with superior performance skills are bestowed with core competences, while other firms need to acquire them in order to stand in the competition.

According to Prahalad and Hamel (1990), core competences:

Should generate access to a range of markets for the firm.

Contributes to the perceived customer benefits of end products.

Imperfectly imitable by competitors.


Toyota, Honda, Nissan

Low-cost, high-quality manufacturing capability and short design-to-market cycles.


Ability to design and manufacture ever more powerful microprocessors for PCs


Defect-free manufacture (six-sigma quality) of cell phones.

British Airways,,

Whirlpool, etc.

Cost Efficiency


Economies of scale

Cost efficiency

Product/Process design

Supply costs

An important strategic capability for any organisation is to pay proper attention towards the achievement and continuous improvement of the management of costs and this can be done by proper involvement of both appropriate resources as well as the core competences. However, this is becoming a threshold strategic capability for many organisations mainly as:

Consumers do not value the product features at any price and

Competitive rivalry keeps driving down the costs as competitors will always try to reduce their cost and offer the same value as the rivals to under-price them.

To achieve effective cost management, the key cost drivers should be kept in mind, such as:

Economies of Scale: This is most important in the manufacturing organisations, in sector such as motor vehicles, chemicals, metals, etc. as in these sectors, the high capital costs of the plants has to be recovered over high volumes of output.

Supply costs: It may be influenced by location (proximity of steel and glass manufacturing to its energy source or raw material). Supply costs are of particular importance to organisations acting as intermediaries (e.g. retailers, whose main concern is to achieve lower costs of supply than their competitors).

Product or process design: This influences influence competitive position as well, since, many organisations gains efficiency in production processes by improvements in 'capacity-fill, labour productivity, yield (from materials) or utilisation of working capital'.

Experience: It can be a key source in achieving cost efficiency as it may provide competitive advantage in terms of relationship between cumulative experience gained by organisations and its unit costs which is called the experience curve. The experience curve proposes that an organisation undertaking an activity develops competence in this activity over a period of time and therefore, does it more competently and efficiently.

(Johnson Et al, 2005)


Importance of Financial Resources

It is at the heart of all business organisations; the new value created by the organisation is in the form of financial resources and these are only used to reward the business's investors and stakeholders.

Finance is a capital and operational resource.

Funding development and fixed asset purchase gives rise to capital.

Cash flow constitutes the operational resources.

According to some authors, it is only important when it is in very large quantity and expensive.

For e.g. Cases, where finance is an important element of product, such as, the Airline Industry or in organisations where expensive physical or human resources are vital for competitive advantage, such as, the purchasing of CRS technology for hotel chains.

Financial resources are of utmost importance to make the initial investment, to operate on a day to day basis and to develop and grow.

(Haberberg and Rieple, 2001)



New customer services.

Research & development.

New Plant.

Joint ventures.


Financial Resources

Retained earnings.

Shareholder's equity.

Long-term dept.

Long-term debt.

Shorts-term funds.


The Importance of Profit

Profit helps organisations to grow and develop by investing in new plant, machinery, products and buying new companies or is used to pay dividends to shareholders who have invested in the organization.

Depending upon the strategic direction of a company, the balance of using profit can be quite tricky and takes time to assess. The chief executive may have to defend these decisions at shareholders meetings in case of large companies with many shareholders.

For e.g. Walt Disney Corporation's theme parks and resorts usually have to make incredibly difficult investment decisions and new theme parks can cost billions of dollars.

Financial managers help in assessing these decisions using a variety of techniques. However, they have to assess against non-financial parameters, such as, sustainability or impacts during recommendations.

For small and independent organisations, the decision process is quite difficult as the costs associated with investment are very high.

For e.g. a new black cab, for instance, costs around £28,000. The payments on such investment may affect the personal income levels of the self-employed driver who earns around £23,000 after expenses. A taxi operation is also, not a cheap operation to run as the taxi owner has to make sure that business will thrive before making the investments.

Profit Generation - Income over Expenditure

Excess income after expenditure is a useful tool as it open ways for funding organisations for both profit making and non-profit making organisations.

In case of profit making organisations, profit is defined as the term which denotes the difference between income and all expenditure used in order to make that income occur.

For e.g. in case of an airline, it would mean the number of tickets multiplied by price charged for each ticket (income) less the cabin crew charges, airport taxies, head office bills, travel agent commission, aircraft lease, fuel, etc. (cost and expenses).

In other words:

Income - (Cost + Expenditure) = "Profit"

(Wiscombe, 2009)

Capital Investment in different types of organisation


Profit making sector of the economy

Not for profit sector of the economy


Private Sector Organisations

Public Sector Organisations

Voluntary Organisations

Funding and


Funded by private

investment, organizations

vary in structure they


Sole Trader


Limited Companies

Public Limited Companies

Largely funded by

national or local


Largely funded by

voluntary subscription,

membership fees or


Examples of


To shareholders

To 'fans' or consumers of the product

To employees

To government for taxation

To funding councils

To the tax payer

To members

To sponsors

To patrons

To spectators

Sources of Finance

Retained Profits: Profits that are kept by the organisation rather than distributing them to the shareholders as dividends.

Profit Generation: When a firm generates considerable amounts of profit.

Equity Finance/share issues: In order to raise finance for new strategy activities, when an organisation issues new shares to current and new shareholders, it is called the share or equity issues.

Short term and long term loans: Short term loans are loan that has to be repaid in less than a year, usually, with high interest rates. Long terms are to be repaid in more than a year, usually, with cheap interest rates but with collateral.

Leasing: It is a kind of debt when a firm hires an asset for a definite period but with a possibility of buying it at the end of that period.

Sale of assets: An organisation can also raise finance by selling some of its valuable assets. For e.g. the case of TUI Travels :

(Richard Lynch, 2006)

In June 2008 TUI Travel were reported to have debts of £900 million. In addition they were operating in an economic climate that suggested fewer holidays would be taken in the following summer.

Strategic planning had developed a policy of not owning aircraft in order to allow greater flexibility of use. When business was good the company could lease aircraft, if there was a downturn they would not be holding the capital and expenditure costs of replacement and maintenance.

The company therefore sold and leased back 19 of the 28 aircraft it owns in a deal that would raise $526 million. Despite this huge sum the company would need to write off a paper loss of $155 million due to a fall in the aircraft value nevertheless the accounts will show a reduction in debt of $371 million, just over a third of the total.


Financial Management: Its pros & cons

Financial management is associated with Strategic and Operational challenges.

Ensuring profit generation of firms is not easy.

By the use of budgeting and forecasting, financial management keeps large as well as small firms on track. Thus, it gains control of their decision and ensuring profitability.

During the event of non-forecasted disasters such as, the Tsunami, the attack on World Trade Centre, outbreaks of diseases, etc., financial planning helps considerably.

Organisations with secure financial management techniques can quickly implement strategies to offset the effects of disasters by identifying their business costs, reducing them where possible, and formulate ways to find marketing strategies to increase the much-reduced sales

(Wiscombe, 2009)

Strategic Financial Management

Strategic Financial Management is effective when the Mission, Vision and Objectives of an organisation incorporate Sustainability, Growth, CSR and Ethics.





Strategies Implementing by Profit & Non-profit Organisations

Reinvestment of retained earnings





Examples of Financial Strategies for Success

Unitising Accountability

Over the last twenty years, the Dutch brewing company Heineken has achieved market leadership in many countries across the world. Founded in the nineteenth century, the company has connections beyond its Dutch national roots.

In the early 1980s, Alfred Freddy Heineken, considered the view that the European market would consolidate over the succeeding 20 years and judged to join the worldwide consolidation process and took the strategic decision to expand, mainly, by acquisition.

During the 1980s and 1990s, they bought up companies mainly in Europe and then began to move into the Central and East European markets - Poland, Hungary Russia, etc.

It built a strong market position (as it was before some rival companies) which continues to the present.

It also started exporting to the U.S. and bought small breweries there.

It also made its moves into Asia, Africa and even in some Muslim countries like Lebanon, Egypt where it makes non-alcoholic beer.

Its international expansion considerably increased its sales and profits which doubled over a ten-year period.

(Richard Lynch, 2006)

Minimising Risk

Wyndeham has grown to become one of U.K.'s most successful printing groups in less than 10 years with a strategy based on minimising risk.

Each company they acquired was successful with house-keeping already in order; hence, there were little need to interfere too much. This formula had worked as all the 11 acquisitions of Wyndeham, except one, have stayed with the group, which is now one of U.K.'s largest printers of magazines and brochures. Every week, the organisation is approached by at least one company to join the group.

Well-times acquisitions along with strong organic growth have leg to the group's rise in turnover from £2.3 m in 1991-1992 to £71.9m in 1998. Losses of £250,000 turned into pre-tax profits of £10.2m over the same period. Operating margins of more than 15% are the highest in the sector.

The company also benefits from minimal central costs as its head office in Hove has a small staff of just 4, and production costs have been kept low as well by investing in new technology.

(Philip A Wickham, 2000)

Hedging the bets and Buying Right

Bus and train operator, Arriva ensured protection from rising fuel prices early in 2008. Due to which, by June 2008 it had fixed all its fuel requirements for 2008 at 28p per litre and has already fixed 75% of that needed in 2009 at 39p per litre.

In an industry where fuel is vital, the acquisition of such a vital resource, that too, at such good price provides sound financial management.

Although, it is not the only strategy to be working well, however, revenues are up by more than 50% in the first half of 2008.

This enabled Arriva to address the continuing rise in costs to the business and allowed time to plan for the further expected rises in fuel prices.

However, fuel prices then fell.

(Wiscombe, 2009)

Negotiating Costs

Frontier Airlines is one of four US carriers who sought bankruptcy protection during April 2008.

However, at first glance it is not the external factor (increased fuel costs) that has been to blame.

If the rise in global fuel prices had been a legitimate factor, shareholders might take comfort that the business was well-managed, and blame the world recession.

However, the company declared that the reason for their difficulty was that the principal credit card processor would be withholding a greater share of proceeds from ticket sales.

The competitive nature of the industry inferred that this increase in direct costs adversely affects the ability of the company to remain in business.

Better financial management should have provided some alternative strategies before the arrival of this crucial situation.

(Wiscombe, 2009)

Cost Saving

Nissan's position as a profitable and viable global automaker was compromised by 1999 as it lost money for six of seven consecutive years, since, 1992. The company's global market share was declining and it was suffering losses on an average of $1000 per vehicle sold in U.S. Carlos Ghosn understood that the regeneration of the product, though imperative, was not the only option and devised a cost-saving strategy to improve the finances.

Deploying problem-solving, cross-functional and cross-company teams, Nissan arrived to the strategy of cost savings which can be achieved through:

Changing the relationships with the suppliers.

Reduction of staff.

Reduction of debt.

Shutting down non-viable plants and non-profitable products.

Setting guidelines for all employees including executives for a clear 'pay-for-performance' strategy.

Devising a clear leadership succession plan for a long term period.

The results after being implemented in all the aspects, led to immediate financial improvement, allowing Nissan to invest more in the product and giving more to shareholders. The Nissan Revival Plan was completed one whole year early, with better-than-expected outcomes and profits soared to record heights (more than US$3.8 billion in 2002).

(, 2009)

Social Responsibility versus Shareholders

Modern finance argues that the only important people in an organisation are the shareholders and owners and hence, all strategies needs should be concerned with maximising the shareholder wealth.

Similarly, others argue that other than an adequate level of compensation to the shareholders, an organisation has a greater responsibility towards its stakeholders - management, employees, government and the society, particularly as organisations have accepted the implications of the firm's Corporate Social Responsibility.

Saving the natural environment, caring for underprivileged and conservation of energy are some of the many responsibilities of organisations. Strategies needs to be devised and directed to achieve these aims, at least in part.

(Lynch, 2006)


Although, all the resources can add to the competitive advantage of an organisation, Financial Resources are the most effective ones. The other resources (physical, human, intellectual, reputational) will have little effect if the company is compromised in terms of financial resources. In fact, it is essential to maintain the other resources.

Organisations with sound capital and operational resources are likely:

To gain more profitable than competitors in the medium term.

Remain profitable as competition intensifies while newer or weaker competitors may struggle.

Financial resources are central for a business to develop capital projects and to maintain its operational activity.

Assessment of capital investment is an important decision making function, so as the selection of projects and most suitable means of financing it.

The demand and need for the product, based on micro and macro environment, should be proved by the general data.

To achieve financial success, the techniques for financial management is very crucial, though, it covers only one aspect.

Financial planning implicates pro-actively involving with the strategic direction of the company's mission, vision and objectives.

Not a single, but all the managers have to think and innovate about finance and its implications.

PESTLE factors can affect the organisation as well as the strategies financial management (both planning and economics).

The resource is the management of (limited) resources and not only the money!

Looking at the above mentioned examples and strategies, there can be a number of ways by which an organisation can gain advantage with the help and usage of its financial resources.