Resource-Based View of the Firm
What is a Resource-Based View?
The resource-based view ( RBV ) of the organisation is a strategy for achieving competitive advantage that emerged during the 1980s and 1990s, following the works of academics and businessmen such as Birger Wernerfelt, Prahalad and Hamel, Spender and Grant.
The core idea of the theory is that instead of looking at the competitive business environment to get a niche in the market or an edge over competition and threats, the organisation should instead look within at the resources and potential it already has available.
According to RBV, it is significantly easier to exploit new opportunities using resources and competencies that are already available, rather than having to acquire new skills, traits or functions for each different opportunity. These resources are the main focus of the RBV model, with its supporters arguing that these should be prioritised within organisational strategy development.
Types of Resource
Within an RBV model, there are two main types of resource (assets), which will likely be familiar to accountants and financial specialists:
. These are physical things - for example, property, land, products and capital. These are resources which can generally be bought easily on the market and thus offer little competitive advantage, as other organisations can also acquire identical assets quickly if they should like.
. This refers to items and concepts that have no physical value but can still claim to be owned by the organisation. This may refer to any reputation, trademarks or intellectual property which the organisation may possess. Some of these - e.g. reputation - are built up over a significant period of time, and is something which other competitors or comparable organisations cannot buy on the market. These will likely stay within the organisation and are their main source of competitive advantage.
Assumptions of RBV
There are two significant, critical assumptions of RBV - that resources must also be:
. This first major assumption is that resources, skills and capabilities must vary significantly from one organisation to another. If these organisations had the exact same set of resources and individuals, they would not be able to employ varying strategies in order to compete with one another, as other organisations would be able to follow them step-by-step (known as "perfect competition").
Perfect competition does not exist in the real world - companies may be exposed to the exact same competitive and external forces, but they are still able to formulate different strategies to compete with one another. Thus, RBV assumes that this is due to the varying values of their resources and skills.
. The second assumption of RBV is that resources are immobile, and thus unable to move freely from organisation to organisation (e.g. employee movement), at least over the short-term. Due to this, organisations are unable to quickly replicate the resources of rival organisations and therefore implement the same strategies. Intangible assets - knowledge, processes, intellectual property, etc. - are more likely to be 100% immobile than are tangible assets.
Although possession of heterogeneous and immobile resources is crucial to organisational success, it is not alone if they wish to sustain this competitive advantage. Barney (1991) identified a framework for examining the key properties of resources and
organisations (VRIN). These criteria were altered later by other leadership thinkers, and the new acronym VRIO was developed. This stands for:
. Resources are valuable if they can help to increase the value of the service or product supplied to customers or others reliant on the organisation. This can be improved by increasing differentiation, decreasing the cost of production, or other general modifications to improve the quality and worth of the service. Any resources that do not meet this condition may lead to a competitive disadvantage.
. Any resources - both tangible or intangible - which can only be acquired by one or very few organisations, may be considered rare. If organisations have the same resources or capabilities, this can result in competitive parity.
. If an organisation holds resources which are valuable or rare, they can at least achieve a competitive advantage in the short-term. However, to sustain this advantage the resources need to be costly to imitate or substitute, or else rivals may begin to close the gap by obtaining the same or similar resources.
Organised to capture value
. Resources do not necessarily convey a competitive advantage - if the organisation, its systems and its processes are not designed to exploit the resource to its fullest, then it cannot hope to gain a competitive advantage. This could refer to not utilising talented or knowledgable individuals in the correct department or role, or not fully building campaigns that utilise the organisation's positive reputation, amongst many other examples.
Only when all of these factors are fulfilled can one gain a sustained competitive advantage, and can innovate and get ahead in the market. The process for maximising an advantage using the RBV should follow as such:
Identify the organisation's potential key resources
Evaluate whether the resources fulfil the VRIO criteria
(using the flowchart below)
Develop and nurture the resources that pass these criteria
If organisational leaders do as such, the organisation should hypothetically be expected to pull ahead of rivals and to advance through new ground in the market.
VRIO Flowchart. Adapted from: Rothaermel, F. (2013). '
Though the original formulators of the RBV play down the importance of external activity within the market, Hooley et al. (1998) have suggested that the marketing paradigm and the RBV are not unreconcilable, and that external strategic planning is still important for success.
In an RBV-centric organisation, leaders should select strategies that best exploit internal resources relative to external opportunities and competition. This can involve many different strategic positions, due to the variety of forms which resources can take.
Hooley et al. suggest that there are six different competitive positions one can take when utilising a resource-based view of the organisation:
These various strategies have been posited as being significantly less rigid than Porter's well-known competitive strategies, and depend entirely upon the resources available to the firm.
Critiques of RBV
Supporters of RBV posit that competitive advantage is best achieved by utilising present internal resources. However, this has drawn many critics within leadership and management, and other theories and frameworks such as the industrial organisation view (I/O), place more emphasis on strategic planning, regulatory policy and the activity of market competition.
In reality, the likelihood is that significant amounts of an organisation's performance can be explained by both factors, though some studies have indicated that internal resources are indeed more important with regards to competitive advantage and performance overall.
There are other critiques, however. The authors of RBV frameworks tell managers that they should find and develop high potential resources, using the VRIO framework; however, they do not suggest how this should be done, and in reality, there is often nothing that managers appear able to do to improve the resources available. What it does neglect to mention, is that leaders and managers have the capability to improve the processes and systems that create higher-value resources - which could over the longer-term have a more significant impact on the performance of the organisation.
In addition - when in unpredictable markets such as the technology industry, innovations and new inventions can almost-instantly have a drastic effect on the value of resources. This can render previous activities to try and generate a sustainable advantage totally null - thus, RBV can be considered to only be a practical view when situated in a stable competitive environment. Some (e.g. Eisenhardt and Martin, 2000) have indicated that levels of organisational learning and adaptiveness are more crucial to success over the long term, though RBV can be an important model in the short term.
Further critiques include the extreme rarity of resources that match the VRIO criteria, the limit of the VRIO criteria itself in determining value, the unclear and indeterminate nature of VRIO itself, and the ambiguous nature of the term "resources". The general concluding thought is that RBV can be useful for developing competitive advantage, particularly in the short-term, but should be considered in partnership with other frameworks and theories when performing long-term strategic planning.
- Grant, R.M. (1991). The resource-based theory of competitive advantage: implications for strategy formulation. California Management Review, 33(3), Berkeley. pp.114-135.
- Hooley, G., Broderick, A. & Möller, K. (2006). Competitive positioning and the resource-based view of the firm . Journal of Strategic Marketing, 6(2). pp. 97-116.
- Kraaijenbrink, J., Spender, J-C. & Groen, A. (2010). The resource-based view: A review and assessment of its critiques. Munich Personal RePEc Archive, 21442, Munich.
- Spender, J-C. & Grant, R.M. (1996). Knowledge and the firm: Overview . Strategic Management Journal, 17(2). John Wiley and Sons, London. pp. 5-9.
- Wernerfelt, B. (1984). A Resource-Based View of the Firm. Strategic Management Journal, 5(2). pp. 171-180.