Resource audit

Goal

A resource audit lists what an organisation owns, then judges each item on what it could contribute to a competitive advantage. A resource is an asset the organisation holds or controls and can commit to its business: money, a building, a qualified person, a reputation, a proven procedure.

The decision it supports is a strategic one: what to build growth on, which gap to close before committing, which resource to protect. Robert Grant built his resource typology to make the resource-based view usable in strategy formulation. The analysis starts from what the firm holds, derives from it what the firm can do and chooses where those holdings are worth most.

The deliverable is a dated table. Each row carries a resource, its category, its description, the measure that quantifies it where one exists, its holder, the contract under which the organisation holds it and the result of the VRIN test.

Usage

When to use it

• Expansion or diversification decision: establish what the organisation already holds before costing what it has to acquire.
• Strategy formulation: choose the line of business from the resources that resist imitation.
• Internal half of a SWOT analysis: feed strengths and weaknesses from a dated inventory.
• Merger or acquisition: compare the two holdings, spot the duplicates and the complements before discussing a price.
• Framing a change programme: check that the resources it consumes exist or can be obtained.

When not to use it

• The question is about what the organisation can do: an inventory does not measure the performance of an activity, so turn to business capability analysis.
• The decision turns on the environment: an internal inventory says nothing about competitors, regulation or demand, so turn to PESTLE or Porter's five forces.

Description

Stocktaking alone gives a list nobody uses; the test applied to an incomplete list mistakes what is visible for what matters.

The five categories

Financial resources are equity, cash, operating cash flow, borrowing capacity and open credit lines. They are read off the balance sheet and counted in CHF. What the audit takes from them is room for manoeuvre: an undrawn credit line is an option to commit; a high debt ratio constrains every investment decision.

Physical resources are land, buildings, equipment, vehicles and inventory. Their strategic weight comes from location, from how specific their use is, from their condition and from the official approvals attached to them.

Human resources are the people and what each of them brings: qualification, personal certification, experience, working languages, availability. The audit counts heads and qualifications, and it records concentration: a skill held by one person is a resource and an exposure.

Reputation is what customers, authorities, suppliers and candidates believe about the organisation. It is built by consistent behaviour and decays slowly, which makes it costly to imitate: a competitor copies an offer in a quarter; it cannot buy years of inspections with no findings. It is observed in what third parties do, renewals, referrals, audit results and certifications held.

Know-how is what the organisation knows and what stays when a person leaves: patents and licences, accumulated data, written procedures, working routines, culture. Grant makes two categories of it, technological resources and organisational resources, which brings his typology to six where practice retains five. The former, filed and protected, appear in a register; the latter, embedded in routines and culture, are obtained by interview.

The procedure

The scope and the date are set first. A stock is counted at a point in time, and two inventories are comparable only if they cover the same entity. The scope can be the company, a division or a business unit; it is named before the first interview.

Stocktaking starts from the registers already in place, which yield the tangible resources: balance sheet and accounts, fixed-asset register, human resources information system (HRIS), contract and licence register, intellectual property portfolio. Intangible resources have no register. They are obtained by asking the people who do the work what the organisation can do that others cannot and why customers come back. The answers are converted into named resources.

The contract under which a resource is held states on what terms it can be taken away from the organisation: a leased machine, software under an annual licence, an employee working out a notice period and a revocable official approval are resources the organisation has at its disposal without owning them. A strategy built on a revocable resource inherits that revocability.

The VRIN test

Barney puts each resource through four questions. Value: does the resource let the firm seize an opportunity or fend off a threat? Rarity: how many competitors hold it? Imitability: at what cost can a competitor who does not have it obtain it? Non-substitutability: is there a strategically equivalent substitute for it?

The answers build on each other. A resource without value is of no strategic use. A resource that has value and that every competitor holds gives what Barney calls competitive parity: its absence shuts a firm out of the market; its presence sets nobody apart in it. A resource that has value and is rare gives an advantage, for as long as the rarity lasts. The last two questions give that duration: a rare resource that can be bought spreads with the first competitor who pays; a rare resource that is costly to imitate holds. Barney names three reasons imitation fails: historical conditions the competitor cannot reproduce; causal ambiguity, nobody being able to say exactly what produces the performance; social complexity, the resource sitting in a web of relationships that is not for sale.

Barney reformulated the test in 1995. Non-substitutability there joins imitability, since finding a strategically equivalent substitute is a way of imitating. The question of organisation takes the fourth place: is the firm organised to exploit the resource? The test keeps four questions and the acronym becomes VRIO. That last question earns its place through the cases where a rare and inimitable resource lies idle for want of a process, a structure or an owner to put it to work.

Resource and capability

A resource is what the organisation has. A capability is what it can do. Grant treats resources as the inputs to production, few of which are productive on their own. For him, a capability is the ability of a set of coordinated resources to perform a task, and advantage lies in capabilities more than in resources.

The working test comes down to three traits. A resource is counted; it has a holder and a contract behind it; it is bought or lost. A capability is exercised, is observed in its result and survives the replacement of the resources that carry it. Business capability analysis maps the latter and rates them on agreed dimensions; the resource audit records the former and tests them. The usual sequence puts the audit first, since a capability is built by combining audited resources, but neither technique imposes that order.

Both feed the internal half of a SWOT analysis: a strength resting on a resource that is named, measured and tested stands up to challenge better than a strength asserted in a workshop.

The pitfalls

The commonest is stopping at the balance sheet. Financial and physical resources are already reported elsewhere, and an audit that limits itself to them reproduces an accounting statement. What the technique adds lies in the intangible resources, reputation and know-how, which carry no ledger entry and vanish from any analysis that does not go looking for them.

The second is the confusion between book value and strategic value. An asset written down to zero can be irreplaceable because of its location or its official approval; a recent and expensive asset can be acquired by any competitor in three months. The balance sheet prices the asset; the test says whether it sets the firm apart.

The third is reputation confused with communication. What the organisation says about itself falls outside the audit's scope. What third parties attest falls inside it, as dated facts.

The fourth is the drift towards capabilities. "Claims handling" and "product development" name what the organisation can do. An audit row written at that granularity redraws a capability map.

AI considerations

AI handles the mechanical part of the audit well. It consolidates heterogeneous registers into a single inventory and sorts it by category. It reads contracts and procedures to surface the resources that carry no accounting entry: approvals, exclusivity clauses, service level commitments. It prepares the interviews by drafting challenge questions for each candidate resource, and it writes the summary of the table.

Judgement, the most expensive part of the audit, cannot be automated. Rarity and imitability are judged against real competitors, whose resource position is not public: a model will produce an estimate that is plausible and unverifiable. Causal ambiguity makes that worse, since an organisation unable to say what produces its performance will not supply the missing material. The transcript of an interview does not take the place of an interview. Finally, the consolidated inventory brings together salaries, contracts, intellectual property titles and customer lists: entrusting all or part of this inventory to an external AI service is a decision that falls under the FADP and business secrecy.

Examples

A Basel freight forwarder with 90 staff is weighing an extension into cross-border pharmaceutical logistics. The audit produces the table below.

Two rows out of seven carry the advantage, the inspection record and the cold-chain know-how, which no register held. Three rows establish nothing more than competitive parity: their absence would block the extension; their presence does not justify it. The table also points to the weak spot, two declarants trained for pharmaceuticals in a business that depends on them, which makes training a third the first expense in the business case.

Visualisations

The deliverable is shown as it is, in rows and columns. The main illustration carries the mechanism: five categories feed one inventory, which a filter splits into two outputs, the resources that establish no more than competitive parity and those that can carry an advantage. The inventory alone produces no output.

Cost

Tooling

A spreadsheet is enough for the deliverable: a few dozen rows, seven columns, a sort on the conclusion. The entries come from systems already in place, accounting and the fixed-asset register for the tangible side, the HRIS for qualifications and certifications, the contract management system for licences and approvals, the Swiss register kept by the Swiss Federal Institute of Intellectual Property for registered patents and trade marks. An organisation that already maintains an enterprise architecture repository finds its application resources there and can attach the audit to its capability map, which spares it two parallel inventories. Intangible resources are collected in interviews and workshops, where no tool replaces the conversation. The consolidated table carries pay data and contract clauses: its access rights are settled before it circulates.

Sources

• Grant, R. M., The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation, California Management Review, 33(3), 1991, pp. 114-135: a resource typology in six categories that separates technological from organisational resources, as well as how resources, capabilities and competitive advantage fit together.
• Barney, J. B., Firm Resources and Sustained Competitive Advantage, Journal of Management, 17(1), 1991, pp. 99-120: the VRIN test and the three reasons a resource resists imitation.
• Barney, J. B., Looking Inside for Competitive Advantage, Academy of Management Executive, 9(4), 1995, pp. 49-61: the reformulation into four questions, where substitution joins imitability and organisation becomes a question in its own right, which gives VRIO.