The Resource-Based View of Strategy

Pralahad and Hamel’s work on core competencies has made a valuable contribution to understanding how firms leverage their capabilities to achieve competitive advantage. While Barney has argued that sustainable competitive advantage results from organizational resources that are valuable, rare, inimitable and non-substitutable (see the VRIO framework later in this article).

More recently, Teece et al. have also contributed to the RBV with their work on ‘dynamic capabilities’ which examines an organization’s abilities to adapt and switch its competencies in order to remain competitive in rapidly changing markets.

Basic Principles of the RBV

The RBV has its roots in economics, and provides a model for analyzing organizational strengths and weaknesses. It regards organizations as collections of tangible and intangible resources and capabilities that determine how efficient and effective a company is at performing its functional activities. In order to thrive, organizations need to have resources and capabilities that allow them to perform their activities cheaper or better than their competitors.

In contrast to the outward looking positioning view of strategy, the RBV encourages organizations to find a ‘strategic fit’ between their internal resources and capabilities, and the external environment in which they do business.

The concept of economic rent is important to the RBV. Kay defines this as ‘what firms earn over and above the cost of capital employed in their business.’ [2] He believes that a firm’s objective should be to increase its economic rent, rather than its profits, and that firms which increase profits but not economic rent, e.g. through investments or acquisitions, destroy value.

It is important to point out here that economists tend to use rent as a measure of strategic success, while strategists tend to be more interested in gaining competitive advantage.

Classifying Resources

The terminology surrounding the RBV can be confusing and often contradictory, but the following classifications are helpful in understanding what we mean by an organization’s or firm’s resources.

"Firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc., controlled by a firm that enable the firm to conceive and implement strategies that improve its efficiency and effectiveness."[3]

An organization or firm will have both tangible and intangible resources at its disposal. Tangible resources are generally those that can actually be touched or seen, e.g. physical resources such as buildings and equipment, and financial resources such as money.

Intangible resources are more abstract and are often found within and amongst the organization’s employees. De Wit and Meyer break intangible resources down further into relational resources and competencies:

1. Relational resources refer to the resources available to the organization as a result of its interaction with its external environment. These consist of the relationships the organization builds with others in its external environment, e.g. with buyers, suppliers and competitors, and which it can use to help it achieve its goals. In addition, a firm’s reputation in its external environment can also be classed as an intangible, relational resource.
2. Competencies can be given a variety of different definitions, but de Wit and Meyer suggest Durand’s definition, which sees competencies resulting from a combination of the following three elements: [4]

• Knowledge, i.e. levels of understanding and insight that a firm can possess via its employees, e.g. market insight, competitor intelligence.
• Capability, i.e. the organization’s ability to combine several skills into a particular capacity to carry out an activity or set of activities.
• Attitude, i.e. the organization’s particular approach to everything it does. For example, Virgin would be said to have an entrepreneurial attitude, while Tesco would be seen to have a competitive mindset.
• One further resource classification that is often mentioned in relation to the RBV is that of core competencies which Prahalad and Hamel have defined as the activities and processes through which resources are deployed in ways that cannot be imitated or obtained, in order to gain competitive advantage. [5]

For many organizations, the key challenge when evaluating their resources is to be able to categorize them in the first place. For example, land is clearly a tangible resource, but an organization’s employees could be regarded both as a physical resource – a pair of hands to carry out a task – but also bringing intangible resources such as expertise. With certain intangible resources, such as tacit knowledge, the organization may not even know that they are there.

As well as understanding the resources an organization has at its disposal, in order to be successful, it must benchmark itself against its competitors and potential competitors to establish whether its resources are unique, or better in some way. Trying to establish what other organizations’ intangible resources are can be particularly difficult to do, and often a certain amount of guesswork is required.

Resources as a Source of Competitive Advantage

According to Barney, a resource can become a source of competitive advantage if it is:

• Valuable, i.e. it adds value or reduces the cost of creating value.
• Rare, i.e. it is distinctive to the organization.
• Inimitable, i.e. it is costly or difficult to imitate.

And if the Organization is able to exploit these resources.

Competitive advantage will be sustained only if the cost of imitation for other organizations is greater than its benefits.

This concept is sometimes referred to as the VRIO framework and can be used to analyze the potential competitive advantage offered by a resource, or combination of resources, as shown in the table below.

Is the resource Valuable

Is the resource Rare

Is the resource costly to Imitate

Is the resource exploitable by the Organization

Competitive implications

No

-

-

No

competitive disadvantage

Yes

No

-

Yes

competitive parity

Yes

Yes

No

Yes

temporary competitive advantage

Yes

Yes

Yes

Yes

sustained competitive advantage

Source: Barney, J. (1997). Gaining and Sustaining Competitive Advantage. Addison-Wesley. Available here.

Conclusion

While Kay believes that the positioning view of the firm is useful in describing industry structure, he has pointed out that it ‘sheds no light on the central strategic issue: why different firms, facing the same environment, perform differently’.

The Resource-Based View of strategy seeks to help organizations to answer this question; by enabling them to identify the source of competitive advantage in their organization; by assessing their resources and capabilities; and how these can be leveraged for organizational performance and success.