What’s it: A resource is something we use to function and operate effectively. It may have physical substances such as money and material or non-physical substances such as knowledge and talents.
Resources are the inputs to produce goods and services in the economy. We often call it a factor of production.
In business, company assets represent resources. Companies use them to develop competitive advantages and generate profits. They can be tangible assets such as machinery and equipment or intangible assets, such as brand equity and human capital.
Tangible assets vs. intangible assets
Resources are useful for generating competitive advantage, either through cost advantage or differentiation. To be valuable, they must be rare and difficult or expensive for competitors to imitate. Also, they must provide benefits for the company.
Company resources cover two types of categories:
- Tangible or physical assets such as land, buildings, factories, equipment, and inventory. They have physical substance and are useful for everyday operations.
- Intangible assets consist of various non-physical elements, such as brand name and company reputation. Other sources are human capital (employee knowledge and skills) and intellectual property (such as patents, copyrights, and trademarks).
Intangible assets are rarer than tangible assets. Take human capital, for example. Competitors find it difficult to imitate or acquire similar staff qualities and skills. They are unique and attached to the individual.
Competitors may be able to improve the quality of their staff through education and training. However, it is often expensive or takes a long time. Also, the results may not be exactly the same because of the many factors that influence it.
Meanwhile, tangible assets are easy to imitate. A company can easily purchase equipment and machines with the same technology as competitors’. For this reason, some practitioners consider tangible resources, not the primary source of competitive advantage.
Economists divide resources into four categories. Together, we refer to them as factors of production or economic resources:
Land includes various natural resources around us. Natural resources fall into two general categories, namely renewable and non-renewable resources. Examples of renewable resources are metallic minerals. They are formed through a long geological process and cannot be replenished or reproduced when depleted.
Meanwhile, renewable resources can be replenished or reproduced relatively quickly after consumption. Examples are forests and fisheries. Likewise, we can continue to plant and harvest various agricultural commodities to meet our needs.
Labor consists of physical and mental efforts. For example, suppose a worker operates machinery in a factory. Or, an analyst builds a valuation model of a company’s stock price.
In production, business depends not only on the quantity of labor but also on its quality. By increasing the number of workers, firms can increase output.
Likewise, improving the quality of workers makes them more productive. Using the same input, they can produce more output. Or, they produce the same output but are faster.
The labor quality depends on several factors, such as training, education, and the work environment. The quality of workers also increases with experience. When they have worked for a long time, they become more skillful and acquire more knowledge to do tasks faster.
Apart from that, productivity also depends on the equipment they use. Advanced equipment allows workers to be more productive than conventional equipment.
Capital is a man-made means of production, such as machinery and equipment. Without capital, labor has to produce by hand, and it is unproductive.
Specifically, economists exclude financial capital, such as money in this category. Financial capital does not contribute directly to the production process. Instead, they are useful for buying capital, such as machinery, equipment, and recruiting labor.
Capital varies between types of work. For example, a factory worker uses machines to produce goods. Teachers use textbooks, desks, and whiteboards to produce educational services. Copywriters use computers and small notes to produce writing.
Apart from quantity, the quality of capital is also vital to increase production. High-tech machines, for example, can produce more output, be more efficient and faster. An important factor affecting the quality of capital is technology advances.
Technological advances also affect labor productivity. For example, you can produce more articles on a computer than a typewriter.
Entrepreneurship refers to the ability to combine three other resources (land, labor, and capital) to produce goods and services. Those who do it we call entrepreneurs.
Entrepreneurs take risks to combine, manage, and empower these three resources. As compensation, they make a profit.
Why resources matter
To explain it, I will specify its effect on business and the economy.
Effects of resources on business
Together with capabilities, resources are a determining factor for strategic competitiveness. Capability refers to a company’s ability to use its resources to create value. Without capabilities, resources will be of no value.
For example, a company has excellent talents. However, if the company’s capability in empowering them is low, it will only be in vain. Competitors will likely surpass it. Even though they have average talent, competitors know how to maximize them.
Companies need capabilities and resources to create value. They use it to develop differentiation strategies and cost leadership. And both will form core competencies if they contribute to competitive advantage, and competitors do not have or cannot replicate them.
Resources are valuable when they enable the company to make a strong demand for their product. Take Apple, for example. The company is innovative in making premium products. Apple products not only meet and satisfy consumer needs but also build loyalty. This uniqueness makes consumers willing to pay higher prices and even queue to get the latest edition.
Furthermore, resources are also valuable for producing a low-cost structure. For example, Toyota has a lean production system supported by advanced pieces of equipment, enabling it to produce more efficiently.
Effects of resources on the economy
Economic resources determine the productive capacity of an economy. They contribute not only to short term but also long term economic growth. Specifically, apart from technological advances, economists explain that the only factors affecting the long-run aggregate supply are production factors.
When the supply of labor increases, the economy can produce more output. Likewise, an increase in the stock of capital goods (such as machinery) enables the economy to increase production.
Apart from quantity, the quality of labor and capital is also crucial for long-run aggregate supply. An important factor that affects is technological advances. With the more sophisticated technology, people are more productive and can produce more output and faster.