Competitive Advantage, Strategy and Problem Structuring: Revealing
the Role of Managerial Cognitive Asymmetries
23" International Conference of the System Dynamics Society
July 17-21, 2005
Boston, USA
Martin Kune
London Business School
Email: mkunc@london.edu
John D. W. Morecroft
London Business School
Regent’s Park
NW1 4SA London
Tel +44 207 262 5050
email jmorecroft@london.edu
ABSTRACT
The resource-based view of strategy (RBV) seeks to explain why some firms consistently
outperform rivals in the same industry by acquiring a unique set of strategic assets (or resources). We
suggest firms achieve competitive advantage through ‘cognitive asymmetries’ (differences between
dominant managerial mental models) that lead rival management teams to implement distinct resource
building strategies. This managerial and cognitive view of competition and rivalry lends itself to
investigation through problem structuring methods. We suggest that resource maps, as a problem
structuring method, can be used to interpret managerial mental models for strategic decision-making in
terms of resource building processes. Through resource maps, we represent the system of asset stocks
believed to be most important for driving business performance. We illustrate the framework by
comparing and contrasting maps of the system of resources (asset stocks) that best characterise the four
leading firms in the UK Commercial Radio Broadcasting Industry.
INTRODUCTION
Penrose (1959), an influential economist, has suggested that firms are collections of
productive resources, harnessed through managerial decision-making processes, offering
customers attractive product and services. For a firm, resources and products are two sides of
the same coin (Wernerfelt, 1984). To make products requires the deployment of several
resources and most resources can be used in several products. Consequently, by specifying the
commitment of the firm to a product market, it is possible in principle to infer the minimum
requirements of resources to compete effectively. Conversely, by specifying a resource
profile, it is possible to find the set of product-market activities where a firm will be able to
compete efficiently (Wernerfelt, 1984; Barney, 1986). Consequently, the enduring and
systematic performance differences among relatively close rivals in an industry are determined
by strategic decisions responsible for developing a portfolio of resources over time — a
perspective known as the resource based view of the firm RBV (for a review see Foss 1997).
However, one of the central characteristics of strategic decision-making is its lack of
structure. Strategic decisions occur relatively infrequently and involve ambiguous data and
possible disagreement about which data are relevant. Strategic problems, which do not have a
clear formulation, are extremely difficult to describe. Additionally, feedback about the
success of a strategy is often ambiguous because there are multiple criteria available to
evaluate outcomes, which may not be observable immediately after implementation (Schwenk,
1984). In other words, strategic problems are ill structured problems (Rivera Ungson et al.,
1981).
Since managers handle complex and ambiguous strategic problems using their mental
models to represent their information worlds and facilitate information processing and
decision-making (Walsh, 1995), management’s dominant logic controls the portfolio of
resources over time (Morecroft, 2002). Therefore, the organisational outcomes in terms of
firm performance and competitive advantage, are, in a philosophical yet practical sense,
reflections of managers’ values and cognitive biases (Hambrick and Mason, 1984). In other
words, firms can be viewed as top management mental models (an interpretist view of
business) transformed into real organisations (a functional view of business). This
transformation from the world of ideas and intentions to the practical world of competing
firms is the basis of our paper and our argument that problem structuring and competitive
advantage are related.
Resource Portfolio Management
Our argument is echoed in contemporary strategy literature. Schwenk (1995) reports that
decision-makers’ cognition is receiving increased research attention because of its central role
in strategic issue diagnosis and problem formulation. Our work fits this emerging paradigm
by taking a cognitive view of resource portfolio management, a key strategic decision making
process under the resource based view of the firm.
In our approach the process of building resources comprises two distinct components:
resource conceptualisation, which is a creative managerial cognitive process (Schwenk, 1984;
Walsh, 1995); and resource management, which encompasses the operating polices that guide
asset stock accumulation (Dierickx and Cool, 1989). The result of accumulating strategically
relevant asset stocks is distinctive firm performance. Then firm performance feeds back to
reinforce or undermine the initial conceptualisation of the set of relevant resources as figure |
depicts.
INSERT FIGURE | HERE
Resource conceptualisation
Managerial mental representations or knowledge structures of the resource system are not a
direct imprint of reality but a result of complex selection, sorting, manipulation and conversion
processes shaped by the experience and existing knowledge of individuals with the power to
act (Walsh, 1995; Eden and Spender, 1998). In other words, managers’ mental models affect
what they see, and two managers with different mental models can observe the same industry
or even the same firm, and conceptualise not only the resource system differently but also
suggest different relevant resources to achieve competitive advantage. Consequently,
managers can gain a competitive advantage simply by exploiting limited and diverse
representations of the resource system existing in the industry — which we define as cognitive
asymmetries.
Resource management
Once the management team has conceptualised and communicated the set of strategically
relevant resources, they then have to build and develop the resources over time. We define
this component of decision-making as resource management. Using information feedback
concepts from system dynamics we represent resource management as purposive adjustment
of resources through asset stock accumulation and goal-seeking information feedback
(Morecroft, 2002). Resource management decisions lead to corrective actions intended to
close observed gaps between desired and actual resources.
Defining and monitoring the gaps (shortages or excesses) in a firm’s portfolio of
resources is essentially an information processing activity. Such information processing is
imperfect, judgmental and behavioural — subject to the practical constraints of bounded
rationality (Morecroft, 1985; Sterman, 2000). Every manager has available a large number of
information sources to gauge the firm’s resources. But each manager selects and uses only a
small fraction of all available information. Through this behavioural decision-making process,
managers collectively build and configure the set of strategically relevant resources for
competing in the industry.
The Role of Problem Structuring Methods in Strategic Decision Making
Strategic decision making to achieve a competitive advantage has many of the characteristics
of unstructured problems described by Mingers and Rosenhead (Mingers and Rosenhead,
2004) :
e Multiple actors: Organisations operate in competitive environments formed by tightly
interconnected networks of rival decision makers whose decisions cannot be ignored
by any one firm because the decisions impinge on each other.
e Multiple perspectives: As senior managers in the same firm do not usually know or
agree the best set of resources to compete in an industry, it is even more difficult for
them to know what managers in competing firms believe to be the best set of
resources.
e Conflicting interests: Organisations tend to compete rather than co-operate most of the
time because they are responding to firm specific goals, shareholder pressures and
governmental regulations.
e Key uncertainties: Decision makers’ choices in a given firm will undoubtedly affect
pay offs in the network of rival firms and decision makers, but it is very difficult for
any stakeholder to infer the best contingent strategy. To do so they would have to
foresee competitor reactions and anticipate a competitive equilibrium of the kind
suggested by industrial organisation economics (IO) researchers who have studied
industry competition using the theory of non-cooperative games (Tirole, 1990). In
practice competitive strategy, move and countermove, is fraught with uncertainty
because decision makers are boundedly rational and lack the information and inference
skills to reliably predict the behaviour of rivals.
Thus, it is reasonable to expect that problem structuring methods such as SODA, Robustness
Analysis and Drama Theory (Mingers and Rosenhead, 2002) can help to analyse and facilitate
strategic decision making. Indeed SODA, supported by cognitive mapping and based on
personal construct theory, has been further developed specifically for strategy making and
strategy delivery, a methodology known as JOURNEY Making (Jointly Understanding,
Reflecting, and Negotiating StrategY) (Eden and Ackerman, 1998). We are proposing
something analogous, a problem structuring method particularly suited to analysing and
understanding differential firm performance and competitive advantage, based on concepts
from system dynamics and the resource based view of the firm (RBV). This synthesis of ideas
from OR and strategy leads us to use system dynamics diagramming tools to support strategic
decision making and the analysis of competitive behaviour.
Resource Maps as a Problem Structuring Method for Resource Portfolio Management
Unlike cognitive mapping we are not looking for mean-ends relationships (Eden and
Ackerman, 2004) underpinning strategy but instead for the ‘strategic architecture’ (Warren,
2002), which is the set of resources perceived to be strategically relevant for competitive
advantage and responsible for firm performance. Therefore, the question driving resource
mapping is:
What are the set of resources perceived by managers to be relevant for superior firm
performance?
Thus, in this interpretation of mental models for strategic decision-making we represent top
managers’ conceptualisation of their firms and strategy in terms of resource building. We
admit this is a stylized way of portraying managerial mental models but it has the advantage
that we can link mental models to firm performance over time. So ‘resource maps’ are
pictures or visual aids to comprehend elements of managerial thought related to resource
building and competitive strategy (Eden, 1992). In that sense, we see ‘resource maps’ as
facilitative devices (analogous to SODA - Eden and Ackerman, 2002) for use with individuals
or groups for problem solving and negotiation about strategy. Through a resource mapping
exercise, the dominant logic in the management team driving resource building and resource
allocation is available for analysis, which increases the transparency of strategic decision
making for those most closely involved (Eden, 1992).
“Resource maps’ are essentially stock and flow diagrams (see Sterman 2000, ch.6) and
are conceptually similar to strategic architecture maps (Warren, 2002). However the choice of
which stocks and flows to model is informed by ideas from RBV and strategy about the need
for unique configurations of resources to underpin competitive advantage. In resource maps,
‘stocks’ are used to represent diagrammatically resources or asset stocks using the description
suggested in Barney (1986) and Dierickx and Cool (1989). The chosen resources are
perceived by managers to be strategically relevant because they confer competitive advantage
over rivals. ‘Flows’ depict increases and decreases in the level of resources, controlled by
implicit or explicit operating policies (Morecroft, 2004). Finally, a web of ‘connectors’
represents the perceived causal attributions that, through operating policies, link resources to
the accumulation rate of other resources in the firm. To conclude, a stock and flow diagram
has all the formalities (Sterman 2000, ch. 6) required for a system dynamics model, but a
‘resource map’ is just a picture to be used with managers as a basis for understanding and
negotiating competitive strategy. A resource map may or may not require quantification (of
the kind proposed by Warren 2002) or formal algebraic modelling and simulation (of the kind
traditionally used in System Dynamics) depending on whether the issue facing the
management team is essentially interpretist (reconciling conflicting views about strategy) or
functionalist (seeking insight into the likely outcome of an agreed strategy), or some
combination of the two.
A RESOURCE MAPPING EXERCISE
As a practical illustration of our approach we present a resource mapping exercise based on
the UK commercial broadcasting industry. To construct our maps we used Chief Executive
Officer’s (CEO) comments made in 1998-2000 annual statements of four leading firms in the
industry (Capital Radio ple, Scottish Radio Holdings plc, GWR plc and Emap plc). We first
analysed the statements ourselves in much the same way we would interpret comments of
managers in a live resource mapping exercise. Then as an independent cross-check (described
in more detail later) we asked mature MBA students with knowledge of core strategy concepts
to read the same annual statements and to pick-out strategically relevant resources of the rival
firms. From this analysis we were able to identify distinctive resource building strategies and
tie them to cognitive asymmetries in the rivals’ stated approach to strategy. Obviously there
are methodological limits to this limited sample of firms and our use of annual statements as a
surrogate for interviews with actual managers in those firms. We first address these limitations
before describing in more detail our method and results.
We justify our focus on only four firms because previous published studies of
cognition in firm strategy have employed limited samples in order to observe specific
differences between individual cases (Jenkins and Johnson, 1997). Moreover in this particular
industry the four firms are the dominant players with approximately 70% market share of
commercial radio broadcasting in the UK, so the sample is representative.
We considered the criticism found in some academic cognition literature (for a review
see Fiol, 1995) about whether texts excerpted from annual statements constitute valid
measures of top managers’ cognition. One problem with comments in annual statements or
letters to shareholders is that neither the author, nor the author's intent, are known. This
identity problem raises two interrelated questions. First, was the comment written by a
member of the top management team or by a public relations specialist communicating on
behalf of the top management team? Second, do comments in the public domain accurately
reflect the cognition of the top management team? Abrahamson and Hambrick (1997)
investigated these two questions, and they found anecdotal evidence suggesting that public
comments reflect some form of consensus among various managers in the upper echelons of
organization, as they often prepared the comments together. Moreover, some studies provided
evidence that annual reports constitute valid measures of top managers! cognition, when it
comes to causal attributions (Fiol, 1995; Huff and Schwenk, 1990). However, positive and
negative evaluations are more likely to reflect ‘impression management’ than non-evaluative
statements (causal attributions) (Fiol, 1995).
Note that in this exercise we were not seeking an overall evaluation (good or bad) by
top managers of the strategy. Rather we were seeking the list of resources that the top
management mentioned as responsible for the competitive performance of their firms. In
other words, we focused on causal attributions of firm performance in terms of resources.
Therefore, for the various reasons mentioned above, we have confidence in the information
gleaned from annual reports for our purpose of demonstrating resource mapping.
The Three Step Process Followed
e First, we reviewed in detail the annual statements of the companies to identify factors and
resources suggested by top management to be responsible for the performance of their
firms. We separated factors from resources to identify those concepts that might be
difficult to represent as asset stocks, such as operational processes or exogenous variables.
An example of analysed text is quoted below. Here resources are shown in bold, their
effect on the development of other resources in italics, and finally references to firm
performance are underlined.
“Cla:
fM had broken through the 5 million audience barrier. This was a great achievement for our
programming team at Classic {M. Much of the audience increase can be attributed to a new schedule,
which offers many more points of access for new listeners. Often the new programmes are also revenue
opportunities. As the range of radio stations proliferates, it is increasingly important to differentiate our
output from that of our competitors, and we concentrate on the proven success factors of well-researched
music, relevant local news output, intelligent presentation.” (GWR Annual Statement 1998)
This quotation mentions two main resources: audience and programming team. The effect
of the programming team on audience is to provide new and good quality programmes that
differentiate Classic {M from rivals and attract listeners. A large audience then generates
revenue opportunities for Classic f{M.
Second, thirty-three MBA students were randomly assigned the annual statements of one
of the four companies to read and analyse. The exercise was part of their first assignment
in a strategic modelling and simulation course. They were asked to identify the factors and
resources most responsible for competitive advantage. All the MBAs had prior business
experience and they had already taken at least one course in strategy. While the factors
responsible for competitive advantage were intended to be different than resources
themselves, the definition of resources provided to students in the exercise was ambiguous
enough to generate overlaps between the two categories. We employed open-ended
responses to observe not only the level of agreement among students about the resources
they identified (reflecting their direction of attention) but also the similarities and
repetition of their descriptions of resources and factors (reflecting the intensity of their
attention).
We obtained nine responses for Capital Radio plc, four for Scottish Radio Holdings plc,
eleven for GWR ple and six for Emap ple. Three responses were invalid because the
authors mistakenly analysed briefing materials about the UK commercial broadcasting
industry as a whole (provided as background reading to all students) instead of analysing
the annual statement of the assigned company. We compared the responses for each
company with our own list of resources from step one to observe the level of agreement
reached. We paid special attention to the resources/factors found in common by students
because they signal students’ direction of attention (which we called ‘Percent of
Agreement’ in the table of results for each company). We also noted the frequency of
mention of similar resource/factors because repetition signals the intensity of students’
attention (which we defined as ‘Level of Importance’ in the tables). The degree to which
two or more students describe similar resources, or do so with the same frequency,
indicates the homogeneity of students’ attention patterns (Abrahamson and Hambrick,
1997).
For example, we grouped the following resources/factors suggested by the students under
the label ‘programme division staff in GWR ple:
1. Recognised presenters including Dave Lee Travis and Simon Bates; 2. Skills in programme development;
3. Localized, quality programming that creates a bond with listeners; 4. Programme division; 5. Ability to
research music, 6. Programmes; 7. Programme teams; 8. Best radio programs; and 9. Localized,
customized, and quality programming
Finally, once we consolidated the list of resources/factors perceived to be source of the
competitive advantage of each company, we mapped them using system dynamics stock
and flow symbols. We then added causal relationships derived from CEO comments
(recorded in step 1) to arrive at a resource map. (Note: the links between resources do not
represent specific policies responsible for resource building of the kind often modelled in
system dynamics (see for example Sterman 2000 chapter 13, Morecroft 2004, Forrester
1992). There was not enough information in CEO comments to reliably deduce operating
policies. Instead we show simpler causal links that compress presumed underlying
policies or decision processes. However, if we were conducting a resource mapping
exercise face to face with management teams from commercial broadcasters we would
endeavour to capture both policies and operating constraints.
Resource Maps
The management of the four leading commercial radio stations in the UK perceive their
sources of competitive advantage differently. On the one hand, Emap ple and Scottish Radio
Holdings (SRH) ple see the radio business as part of a broad multimedia strategy, but they
each have different market orientations. Emap plc’s assets such as magazines, radios and TV
channels are oriented to pop music listeners. SRH’s radio and newspapers are oriented to the
general informational requirements of Scottish communities.
On the other hand, GWR ple and Capital Radio plc management perceive commercial
radio broadcasting as their core competence, but they don’t share the same strategies for
generating revenues. While GWR plc management leverages the ‘Classic fm’ brand to classic
music listeners located not only in UK but around the world, Capital Radio ple management
leverages its well-known pop music brand mostly in the London area, offering not only radio
programmes but also selling other complementary products and services such as music
concerts, records and online music to pop music listeners.
GWR Group plc.
The list of resources and factors identified by students and perceived to be the source of
competitive advantage of GWR ple is presented in table 1. There are six main concepts
(resources and factors) showing a high percentage of agreement among students and
appreciable level of importance (based on frequency of mention).
INSERT TABLE | HERE
We used this list to map out the resources and connect them as they might be
visualised by GWR managers. The result is shown in figure 2. Although the map is
synthesised from annual statements it nevertheless gives an idea of the interrelated resource
building activities believed by GWR management to underpin their competitive strategy. A
familiarity with the syntax of resource maps enables us to interpret how the firm is likely to
perform over time — an interpretation that broadly parallels the intuitive reasoning GWR
managers would use to explain the operation of their strategy. Basically the number of radio
stations and the quality of the programming staff (which increases Classic fm’s reputation as a
good listening option) help to attract more radio listeners to GWR radio stations (arrow 1). A
bigger audience enables the sales team to sell national advertisers more airtime (audience size
is audited by an independent organisation -RAJAR- to provide advertisers with unbiased
information about the performance of each radio station) thereby increasing the productivity of
the sales team and the amount of advertising revenues (arrow 2). Extra revenues can be used to
buy more radio stations in the UK or abroad (arrow 3) as well as to hire more programming
staff. At the same time, GWR management recognise the need to control operating costs.
They plan to achieve this control through ‘Integration of the Systems in the Group’ an activity
connected to operating costs, which is shown as an outflow from ‘Cash Available’.
The resource map helps to visualise the firm’s intended competitive strategy in terms
of building and configuring a unique set of broadcasting resources and assets difficult for
rivals to copy. Moreover the resource map provides a basis to explain how the strategy will
play out over time, a kind of dynamic hypothesis that could if necessary be checked-out more
thoroughly with quantification, modelling and simulation.
INSERT FIGURE 2 HERE
Capital Radio plc.
The investigation of Capital Radio management’s comments suggested the set of factors and
resources presented in table 2. All responses achieved a high level of agreement because the
annual statements provided a particularly clear picture of Capital fm’s core business and its
sources of competitive advantage. Like GWR ple, the fact that Capital fm’s core broadcasting
business is well-defined helped students to achieve a high level of consensus on the set of
resources responsible for firm performance.
INSERT TABLE 2 HERE
The main resources identified were: radio stations, listeners, sales team, ‘Capital fM’
brand, radio presenters/programming staff, and the portfolio of assets and products under the
‘Capital fM’ brand. The resulting resource map is presented in figure 3. The number of
London based radio stations and a highly recognised team of presenters located in the best
time slots, such as breakfast time, increase the reputation and the attractiveness of the radio as
a good listening option, which generates growth in the audience (arrow 1). Capital
management also believe that marketing actions, for example concert events such as ‘Party in
the Park’ (arrow 2), help to improve the visibility of Capital Radio as a brand. Higher
audience (shown as breakfast and youth listeners) helps the sales team to sell more expensive
airtime to advertisers increasing the amount of sales per salesman (arrow 3) and Capital
advertising revenues. The ‘Capital fM’ brand and its reputation as a pop music entertainment
group is exploited through a portfolio of related assets such as restaurants, on-line music sales
and a record label (arrow 4).
INSERT FIGURE 3 HERE
Emap plc.
The set of resources judged to be responsible for Emap plc’s performance is displayed in table
3. In this case our step 1 analysis and students’ step 2 responses did not achieve as high a
degree of consensus on the main factors/resources as in the GWR or Capital cases.
Interestingly the highest degree of agreement was achieved on intangible concepts, such as
innovation and market oriented organisational structure, rather than more tangible resources.
In addition, the level of importance was low implying a high diversity of concepts and lack of
agreement among students about the sources of competitive advantage. Moreover only one
student suggested as a key resource ‘radio stations’ (this result is interesting since we are
describing the annual statement of one of the leaders in pop-music radio with stations like
Magic FM, Kiss FM or Melody FM). The lack of a clear core business might have affected
students’ responses because Emap is a multi-media business organised in customer market
segments (pop-music listeners and magazine readers) rather than in media assets like radio or
magazines.
INSERT TABLE 3 HERE
Emap ple’s resource map in figure 4 contains six key resources: radio stations,
magazines and a record label (all oriented and recognized as pop-music brands),
multimedia/content synergies, sales team, and young listeners (15-44 years). We associated
the concept ‘management skills to grow undervalued assets’ with the effective control of
operating expenses — an outflow from the corporate cash resource. Two concepts suggested in
students’ responses (innovation and global strategy - see table 3) are not included in the
resource map because they do not represent resources or actions aimed at controlling flows but
instead are descriptions of preferences for certain types of resources. For example a
preference for buying international assets rather than local assets can be interpreted as part of a
‘global strategy’. The process of resource building implied by figure 4 (how Emap’s strategy
will play out over time) can be interpreted as follows. Emap multimedia group has a portfolio
of products such as magazines, radio stations and a record label aimed at a young market. A
portfolio of media products has two synergistic consequences: one is to increase the
availability of media content for each product (arrow 1); and the second consequence is to
attract radio listeners to buy its magazines and magazine readers to listen its radio stations
(arrows 2 and 3). Higher radio audience and magazine readership help the sales team to offer
better advertising options to advertisers increasing the amount of sales per salesman and the
level of revenues (arrow 4), which can then be used to buy more radio stations or magazines.
INSERT FIGURE 4 HERE
Scottish Radio Holdings plc (SRH)
SRH management comments in the annual statements suggest the set of factors and resources
shown in table 4 to be responsible for firm performance. Most of the students’ responses
coincided with our step | analysis. Since Emap and SRH are similar companies (they are both
multimedia groups), it is interesting to observe the differences in the level of agreement and
importance obtained for SRH and Emap (see table 3 for Emap’s resources). There is much
better agreement for SRH. There are a number of reasons for this difference. First is the
narrower scope of SRH ple that serves a defined geographic region (North of England,
Scotland and Northern Ireland) with a strong focus on radio and newspapers and an
organisation structure based on these two media types. Emap’s scope is broader and can be
described as a global portfolio of media assets, with special emphasis on magazines, aimed at
a specific youthful market segment. Second, Emap reorganised its business structure (from
media type to customer facing) during our analysis while SRH maintained a stable business
structure over the three annual statements.
INSERT TABLE 4 HERE
The resource map of SRH ple in figure 5 has five main resources: audience, radio
stations, newspapers, sales team, and synergies derived from content sharing among different
media assets. The implied process of resource building is as follows. As radio stations and
local newspapers share news, they increase their reputation and attractiveness as a good option
for local information, which helps them to sustain radio audiences and newspaper readers
(arrows | and 2). Large radio audiences and high newspaper readership help the sales team to
sell airtime to local advertisers (arrow 4). SRH management also suggest that research
activities are necessary to sustain the attractiveness of radio programming because radio
listeners change their preferences about the types of programmes they will listen to (arrow 3).
INSERT FIGURE 5 HERE
Review of Reported Performance of the Rival Broadcasters
Finally, to complete our analysis, we present in table 5 a set of performance indicators
covering the period 1999 to 2002 derived from the four firms’ financial statements and from
the organisation responsible for auditing radio listening (RAJAR
http:www.rajar.co.uk/QuarterlySummary/ accessed 4 October 2003). The table shows
heterogeneous performances and important differences among the four firms in our sample.
For example, those firms (Capital and GWR) whose core business is radio broadcasting obtain
higher revenues than multimedia firms. The extra revenues appear to come from expanding
the number of stations. But in 2001 and 2002 revenue growth slowed or even reversed
suggesting fewer good opportunities to expand the portfolio of radio stations as the industry
consolidated with fewer players. On the other hand when we observe the average hours
listened per listener, the opposite picture emerges. Both multimedia companies (Emap ple and
SRH plc) exhibit a higher number of hours per listener than their more focussed rivals,
suggesting synergies among a portfolio of media assets.
INSERT TABLE 5 HERE
DISCUSSION
In this paper, we suggest that managerial decision-making to guide firm strategy involves two
distinct components: first the creative conceptualisation of strategically relevant resources and
then the implementation of operating policies to build those resources. The interaction
between competing visions and idiosyncratic operating policies leads to complexity and
variety in firm performance. In practice industry leaders conceive different mental models of
the ‘best strategy’ to pursue because they face unstructured competitive and strategic
situations and interpret the ambiguities differently. They have in mind different resource
configurations (an interpretist view of strategy formation). Whatever resource configurations
they eventually agree based on these alternative visions, the resulting firms they build perform
differently in reality (a functionalist view of strategy execution). Competitive advantage can
therefore be said to arise in part from managerial cognitive asymmetries. If so then the
analysis of differential firm performance (a topic of central importance to strategy academics
and practitioners alike) should benefit from problem structuring and modelling methods. Here
we propose resource mapping as a novel and useful problem structuring method that combines
ideas from system dynamics with the resource based view of the firm.
To illustrate our approach we devised a resource mapping exercise using publicly
available information on four UK commercial radio broadcasters. First we examined Chief
Executives’ comments in successive annual statements and identified the resources and factors
most important for each firm’s competitive positioning. Then we asked MBA students to read
the same annual statements and to independently identify the most important resources. Next
we compared the students’ lists of resources with our own and with each other. In most cases
the level of agreement was greater than 60% suggesting that people with business experience
can reliably recognise a resource-based strategy without themselves being expert modellers.
Using the lists and related material we then constructed resource maps to represent visually the
connections between the resources and the implied resource building strategies of the rival
firms. Finally, we interpreted the maps to illustrate the potential dynamic performance of the
firms stemming from their strategies.
RESOURCE MAPS AS A PROBLEM STRUCTURING METHOD AND
THEIR RELATIONSHIP WITH SYSTEM DYNAMICS
We believe resource maps, as part of a resource conceptualisation exercise, can help
decision makers responsible for strategy to clarify and negotiate their theories-in-use. In that
sense, resource maps can contribute to procedural rationality in strategic decision-making,
consistent with Pidd’s (2004) view of what OR/MS can bring to strategy.
For example, when working with managers in a single company, we can use resource
maps to elicit their different interpretations of firm strategy and expected performance. Even
within a single broadcaster like Capital radio it is possible that some members of the
management team may have in mind new and radical strategic initiatives that challenge the
status quo (such as the launch of a magazine or record label to make Capital more like its rival
Emap). A resource mapping exercise would tease out these alternative views and the resulting
diagrams may, if handled sensitively, defuse potential conflict arising from the need to
prioritise options. However, Mingers and Rosenhead (2002) p.15 table 1.4 suggest that the
technical requirements for appropriate problem structuring methods should include not only
diagrams but also explorations of the solution space, discrete options, possibilities, and
scenarios.
For resource maps exploration of the solution space comes from using the diagrams to
interpret the dynamics of resource building as we have shown for the commercial radio
broadcasters. However we believe the scope for meaningful exploration of the solution space
and options is further expanded by translating the maps into system dynamics models.
Simulations can then help managers discover hidden pitfalls in strategy by allowing them to
rehearse resource building (a task which is dynamically complex due to interdependencies,
time delays and non-linearities). Our point is that cognitive flaws in strategy making arise
from faulty expectations people form about the dynamics of resource building and it is just as
important an activity for making successful strategy to uncover these flaws as it is to air
differences of opinion about which particular resources to build. For example, it is precisely
during organisational transformation or (as we observed in the Emap case) when the core
business is not clear in top management minds that resource mapping alone is most useful for
sharpening people’s alternative views of the intended business. Once there is agreement (or at
least accommodation) in support of one or other view, then full blown system dynamics
modelling, as a complement to resource maps, can help to explore the solution space by
rehearsing the preferred resource building strategy through simulation. In this case, system
dynamics models are used as ‘transitional objects’ to facilitate dialog and exploration of future
performance among the top management team (Morecroft, 2004).
In these situations, we use system dynamics to quantify relationships and to simulate
possible futures within the context of an agreed resource-based strategy. While ‘resource
maps’ based on stock and flow diagrams are visual aids to comprehend managers’
conceptualisation of a strategy, a system dynamics model directs management attention
towards the performance of the firm over time that results from actually building and
deploying the resources through policies for resource (asset stock) management.
In conclusion we note that resource mapping opens up the front-end of system
dynamics modelling, offering scope for negotiation and dialogue about the purpose of strategy
similar to other problem structuring methods. Causal loop diagrams and system archetypes
(Wolstenholme, 2003) perform much the same function, but resource maps are better suited to
20
competitive strategy and firm performance because they explicitly depict asset stock
accumulations and are compatible with ideas about competitive advantage from the strategy
field. Moreover resource maps, by starting from stocks and flows, lead naturally to a system
dynamics simulator and its benefits for exploring solution spaces, options and scenarios.
Nevertheless we recognise that resource maps and system dynamics are not a panacea for
problem structuring in the strategy domain. Cognitive mapping and SODA offer different
possibilities for negotiation and conflict resolution among the stakeholders of a firm’s strategy.
Other approaches such as robustness analysis are more appropriate for discrete strategic
choices like a one-off decision to diversify or not. Resource mapping and system dynamics
are best suited to continuous processes related to medium to long-term resource building
strategies in which the waxing and waning of asset stock accumulations over time determine
strategic success (Lane, 2000).
21
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24
v |
Resource Resource Firm
Conceptualisation Management Performance
Figure 1 The relationship between firm performance and firm resources incorporating
managerial cognition
Concepts
Radio Stations local and
overseas
Classic fm brand (reputation)
Sales team
Programming Staff
Integration of systems and
operational process “?
Listeners
Percent of
73%
73%
64%
64%
36%
* percent of agreement between students.
** percent of factors and resources identified by students related to the concept.
(1) Integration of systems and operational process is not a resource but a specific
action aimed to reduce the outflows of one resource (cash)
Level of
importance **
17%
12%
9%
17%
12%
9%
Table 1 Factors and resources underpinning competitive positioning and performance of GWR
Group ple (identified by MBA students from their reading of GWR annual statements)
Sales Team
5 Competitors*
Pudience
ns rot Pj
ate
sales team
Sales Team Pudience’
Switching
Radio Business
UK
valores Radio Sations,
Revenues
Cash Available
Padience
Growth in
UK Radio Sations
Operating ae =
Costs
jenues
Integration of
Systems in the
Group
Programme
Division Staff
Adjustment
rate
GWR Hiring Rate
Programme
Division Staff
Intemational
Radio Stations
International Expansion
Growth in
Intemational
Radio Stations OH
Figure 2 A resource map of GWR Group ple.
Concepts
Radio stations licenses
(analogue and digital)
Sales team"?
Capital {M brand and special
events directed to
community”
Breakfast and Young listeners
Assets related to music sales
(record label and on-line music
sales) and restaurant chain
(synergies)
Reputation for quality
programming/Highly
recognized radio presenters
Portfolio of strong branded
products (marketing skills)”
Percent of
agreement *
100%
100%
100%
67%
67%
56%
44%
* percent of agreement between students.
** percent of factors and resources identified by students related to the concept.
(1) This concept was not included in our original list but it was included due to the
high level of agreement among the students’ responses.
Level of
importance **
28%
20%
14%
11%
9%
™%
T™%
(2) ‘Special events directed to the community’ is not a resource but a specific action
aimed to improve one resource (brand recognition).
(3) Portfolio of strong branded products is a result of marketing skills to use the brand
in different business. Portfolio of branded products can also be shown as a set of
assets such as ‘Assets related to music sales —record label-‘ and ‘Restaurant chain’.
Table 2 Factors and resources underpinning competitive positioning and performance of Capital
Radio ple (identified by MBA students from their reading of Capital Radio annual statements)
Capital
Sales Team
Competitors’ Breakfast and Young
Listeners
o—o—
Capital
Hiring Rate Breakfast a
Sales Team Productivity ‘Young Listeners
Radio Business sents
London based
Radio Sations
Capital
Advertising
Revenues
Capital Capital Growth in
Cash Available Radio Sations
5 a] ital fm
Capital brand keputation
‘Operating
Costs
Capital
Radio Presenters Capra
Programming Statt reparation:
rate
from branded
Assets Hiring Rate
Radio Presenters:
Programming staff Marketing efforts
to promote brand
Portfolio
of branded Assets Patty in the Park
r Growth in
Portfolio of Branded Assets South <4
of Assets
brand reputation
Figure 3 A resource map of Capital Radio ple.
Concepts Percent of Level of
agreement * importance **
Acquisition of asset 100% 19%
undervalued ‘?
Organisational structure 83% 15%
(Market oriented)
Innovation © 67% ™%
Pop oriented brands 50% 8%
Sales team 50% ™%
Multimedia structure 50% 5%
(Content synergies)
International/Global strategy © 50% 3%
Young Listeners 33% 3%
Magazines and Record Label 33% 3%
* percent of agreement between students.
** percent of factors and resources identified by students related to the concept.
(1) Acquisition of asset undervalued is not a resource but a specific skill of the
management team aimed to reduce the outflows of one resource (cash).
(2) Competitive factors mentioned by students but not included in our original list.
Table 3 Factors and resources underpinning competitive positioning and performance of Emap
ple (identified by MBA students from their reading of Emap annual statements)
Market oriented
Pop music ‘Competitors Pop music
Sales Team
magazine readers radio radio
ra es ; audience Pudience
Hiring Rate :
< 4 Pop musi
Sales Team ieameiouss audience
fo Business oi ching
Productivity
market sales team .
Pop music ‘Atractiveness
toda Radio Stations, at pen wes indie
Advertising
Revenues
Conporate cidearw
Cash Available ie Sees
Pop muse
ia Magazine & Radio
Busigess Unit Operating Management skills gobi lar
enues Costs to grow undervalued
resources
ep iat Pop music
Magazines reputation
inorease
Growth
in magazines
setractiveness of
Pop music pop musio magazines
record label
Related Pop Music Business or",
Competitors
magazine readers
‘d
Pop music
reader
Pop music
magazine readers
Figure 4 A resource map of Emap ple.
Concepts Percent of Level of
importance **
Research and marketing 100% 23%
activities ‘?
Regional multimedia structure 100% 17%
(Content synergies)
100% 15%
Local listeners
Digital radio stations 60% 6%
Sales team 50% 4%
Analogue radio stations 40% 4%
Promotion of radio industry ° 20% 2%
* percent of agreement between students.
** percent of factors and resources identified by students related to the concept.
(1) Research and marketing is not a resource but a specific action aimed to improve
one resource (brand reputation through better programming).
(2) Promotion of radio industry is a factor considered to be important on the
development of SRH as multimedia group.
Table 4 Factors and resources underpinning competitive positioning and performance of SRH ple
(identified by MBA students from their reading of SRH annual statements)
Local
Local ae
Sales Team competitors ;
rade radio
Local
Hiring Rate 7
Sales Team Productivity Suitching
oross media sales team Rate
Radio Business
Regional
SRH Radio Stations
Advertising
Revenues Attractiveness
sR Comaate Grouth in local of radio eAptent
Sa Radio licenses
ie C5 ne) SRH
ip A Newspapers & Radio brand reputation
Revenues: Operating areal content synergies
Costs Petivities
Local sRH
Newspapers reputation
increase
Growth 4
in newspapers
titles
Newspaper Business -
Competitors’ “tract 's of Local
newspapers SRH Newsypers — Newpapers
readers readers
Local Newspaper <a
read
itching
Figure 5 A resource map of SRH ple
EWR ple Group
Radio Listening” Total Radio Listening” Total Radio Listening’ | Radio Revenue” (2)| Number of | Revenue per Station]
“000 listeners (000 hours listened | hours per listener £m Stations™ Em/station
Classic fm (1) _Restof Group] Total Group Total Group
7999 6004 F100 91205 9.03 co oo 25
2000 6041 5490 114282 991 102 53 19
2001 6698 5378 111645 9.25 120 54 22
2002 6657 5334 vos [et] 50 [yea
Capital Radio ple Group
Radio Listening” Radio Listening™ | _ Radio Listening Radio Revenue™ Number of Revenue per Station
‘000 listeners 000 hours tistened | hours per listener £m Stations™ Em/station
Capital fm (london) Rest of Group| Total Group Total Group
1999 3017 3384 69813 10.91 105 1 o5
2000 2852 5039 83145 10.54 124 a 59
2001 2951 5192 80607 9.90 122 21 58
zooz | __2460 5252 nora uaa] no | at sr
EMAP ple Group
Radio Listening” Radio Listening™ Radio Listening" | Radio Revenue’ (@) Number of Revenve par Station
‘000 listeners 000 hours listened | hours per listener £m Stations‘ Emistation
Magic & Kissfm Rest of Group| Total Group Total Group
7909 2456 4179 72078 70.86 78 26 30
2000 2503 4153, 68213, 10.25 a4 26 32
2001 2677 4028 69473, 10.36 a3 26 32
Scottish Radio Holdings ple (SRA)
Radio Listening” Radio Listening™ | —RadioListening™* [| Radio Revenue Number of __] Revenue per Station
‘000 listeners (000 hours listened | hours per listener £m Stations Em/station
Group (4) Total Group Total Group
7999 33 DIVO!
2000 35 #DIVI0!
2001 34 #DIVIO!
|
zone 20 Ea
* Weekly reach - ‘000 listeners who listen to a station for at least 15 minutes in the course of week - Quarterly Summary at December - Source RAJAR
** Total hours of listening in ‘000s weekly - Quarterly Summary of Radio Listening at December - Source RAJAR / Total hours in UK is 500,000,000
** Average number of hours per listener weekly - Quarterly Summary of Radio Listening at December - Source RAJAR
* Annual Revenues - Source Annual Statements from each Company
‘\* Number of Stations in the UK that made the total radio listening hours and radio listeners - Source RAJAR
(1) National figures
(2) Only UK radio revenues are included in this figures.
(3) 2001-2 Revenues are estimated since EMAP reorganised its business divisions and the revenue from radio was added to magazines and TV revenues
(4) The numbers of listeners corresponds to 2002, which is the only data available from Rajar
Table 5 Performance indicators of the four leading firms in UK Commercial Radio Broadcasting
(1999-2002)
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