Resource Based View (RBV) is a theory that suggests competitive advantage is derived from the organisation itself, rather than the competitive environment it is in. Whilst similar to the VRIO Framework, it theorises that the resources a business or firm possesses, the resources they can acquire and the resources they can keep are what defines an organisation’s competitive advantage, instead of how they as an organisation and their products and services fair in comparison to their competitors.
Jay Barney explains in ‘Firm Resources and Sustained Competitive Advantage‘ the theory suggests exploiting external opportunities by utilising resources already owned by the organisation is more effective and easier overall than developing/acquiring resources to take advantage of the same opportunity and this makes sense from a cost-savings perspective; it would be cheaper, for example, to transfer a bilingual employee in a non-customer facing role to customer services if there was an influx of foreign language speaking customers who share the same language as the employee than it would be to hire a new employee to meet the same need, hiring this employee would involve a second wage expense (though the job the employee left to be transferred will need to be filled, unless their previous workload can be delegated to other staff), staff training to ensure they’re current with the organisational culture and values and other costs associated with recruitment.
Implementing the Resource-Based View
When developing a strategy based on the RBV, there are three questions that strategists need to address to understand what their resource capabilities are. There are;
- What resources does an organisation have?
- What resources can they build?
- What resources can they maintain?
Answering these questions then allows organisations to apply the five tests that will define whether the resources afford the organisation a competitive advantage.
First, organisations need to define the resources they already possess and question how these can be used to exploit an opportunity they’re considering. In many cases, the possessed resources will be sufficient but over time, as resources deplete, the organisation has to consider how they will replenish, replace or build upon the resources they already have which is the second consideration they’ll make. Finally, the organisation has to question how they intend to maintain the resources above a certain level, which could include a range of actions from limiting the use of certain resources or regularly replenishing supplies using a Just-in-Case (JIC) or Just-in-Time (JIT) model.
The five tests can be applied once the first question has been addressed, but ideally, all questions will be addressed at the same time with equal importance as doing so enables organisations to strategies for the future, increasing the longevity of the opportunity they intend to exploit. If an organisation waits until they’ve ran out of resources defined in the first question before moving onto the next question, it’s likely their productivity will halt whilst they consider what resources they can get hold of and whilst they wait to acquire those resources.
Upon consideration of the three questions, firms can apply the five tests to each resource to define whether individual resources provide a competitive advantage and allow organisations to compare which resources are most effective in a given scenario. The five tests are:
- Competitive Superiority
This test refers to whether a resource can be imitated, replicated or acquired by a competitor. How easy a resource is to imitate will determine whether there is any competitive advantage, whether sustained or temporary. In the event the resource can be easily imitated or acquired by a competitor then there will be no competitive advantage and the organisation will have to consider the VRIO framework or similar tool to ascertain if there is another reason they may maintain a competitive advantage. All other tests under the RBV become relatively redundant in the case of easily imitated or cheap to imitate/acquire resources but it is dependent upon how an organisation is using their resources compared to a competitor.
Often, resources can be in plentiful supply but difficult to acquire, this can be seen in some commodity markets, including oil whose prices are largely driven by a cartel, Organization of the Petroleum Exporting States (OPEC), who control roughly 75% of the world’s crude oil reserves choosing to distribute an amount of oil each year which creates an artificial limitation of supply which affects oil prices, the price of oil has a knock-on effect to the price we pay for petrol and diesel that we use to fuel our cars to the price of plastic goods manufactured by top-name brands.
Interestingly, the world saw oil prices plummet over 50% in the weeks following the Coronavirus outbreak driven by an oversupply of oil resulting in a dramatically shorter available storage capacity caused by a significantly smaller global consumption of oil-based products as over 24% of the world’s population enter national lockdown in an attempt by world governments to stem the spread of the virus and killer Covid-19 disease. The price of oil has begun to rebound as of 22nd April 2020 after a deal OPEC made to limit production and warnings from Donald Trump that their warships would sink Iranian oil tankers putting the availability of oil at significant risk demonstrating how easy it is to manipulate oil prices. That said, cartels and world governments only have so much control over prices – if the demand isn’t there, prices will simply continue to fall. This isn’t an article about the effects of coronavirus on oil prices though, there are plenty of articles in the news that address this.
The durability test relates to the longevity of resources being used and how soon it is likely they will run out. Resources will good durability will offer a better competitive advantage in terms of cost-savings and productivity than those which don’t. For example, machine parts made from iron will break or wear down easier than steel meaning steel naturally has higher durability; using steel components in machinery means fewer repairs over time and a decreased risk of machine breakdowns which may halt production costing the firm money in lost revenue.
If durability is inherently low, competitive advantages can still be drawn from the availability of resources (contrary to the point above) and how soon replacement parts (as in the case of machine parts) can be delivered. If organisations stockpile less durable resources, they can still benefit from a temporary competitive advantage provided the supply of resources remains high. The supply of resources, when made available to competitors from the supplier, can inadvertently take away from any competitive advantage the firm hopes to gain.
It stands to reason that how appropriate the resource is for use in a current situation has a bearing over the competitive advantage an organisation possesses as a result of owning said resource. An inappropriate resource, such as an electric drill with no water resistance qualities wouldn’t be appropriate to use in a wet environment for obvious reasons and instead a hand drill would be much better though you’d expect to take longer drilling the hole and it may lack certain precision.
If the hand drill from the above point breaks down, how viable is it to substitute the resource for another tool that could bore a hole of similar quality? The lower the substitutability of resources as they deplete or breakdown or otherwise become unavailable decreases the competitive advantage possessed by an organisation. However, when considering the substitutability in consideration of frameworks such as VRIO, if a competitor can substitute a resource the organisation has and can achieve similar or better results then the competitive advantage is lowered too. As a reminder, it is important to bear in mind again that the resource-based view analyses an organisation’s own capabilities with no consideration for external factors driven by competitors. The RBV approach considers competitive advantage to be derived from the resources possessed by a firm and how these resources enable the firm to exploit opportunities, regardless of competitor influence.
When considering substitutability, organisations may find suppliers are willing to develop resources which may be viable substitutions, even where resources are usually protected through intellectual property rights. It is important therefore to consider and evaluate suppliers who may have these capabilities to form relationships with them to attempt to prevent substitutes from entering the market.
The competitive superiority test considers resources alongside one another to ascertain which has more advantages over the other, if at all. Going back to the machine parts example, steel machine parts in most cases would have better competitive superiority than iron machine parts, the same way an electric drill will be competitively superior when compared to a hand drill (disregarding the specific job the tool has to do and the environment the tool is working in).
Competitive superiority can be affected by a range of factors and it is up to an organisation how they assess and compare resources based on the opportunity presented.
Cornerstones of Competitive Advantage
Margeret Peteraf defined the cornerstones of competitive advantage in much the same way to the five tests defined by Jay Barney. Peteraf defined firms as having a competitive advantage if their resources were heterogeneous and inimitable, with imperfect mobility and limited viable competitions.
Peteraf’s ‘Cornerstones of Competitive Advantage’ offers a simplified take on the resource-based view and offers a limited framework to define whether certain resources present advantages towards an opportunity or in an environment. The simplified view allows for easy comparison of resources and can also be extended to adequately compare a firm’s resources and the competitive advantage they may have with other competitors, similar to the VRIO framework.
Limitations of the Resource Based View
Although the five tests define whether a company has a competitive advantage so far as RBV goes, in reality, this isn’t always the case. It is difficult to assess some of the tests by taking an internal view respective of the opportunity or threat presented to the organisation without comparing their resources and overall strategy to that of their competitors. In fact, the only time RBV is truly appropriate as a standalone tool is where the organisation is operating in a blue ocean environment, free of direct competition. And even then, it pays to conduct regular VRIO analysis to ensure your blue ocean isn’t turning red…
The resource-based view results in organisations failing to compare their own capabilities to their competitors and in doing so, they fail to follow industry trends by narrowing their focus too much towards the microenvironment and this in itself can hinder a firm’s ability to recognise, let alone act upon, key opportunities for growth and development.
Without coupling RBV with another strategic tool. including VRIO or SWOT, organisations can find themselves limited to an extent it causes a hindrance to organisational performance. Without monitoring the competition and seeing what they’re up to, organisations will miss opportunities presented by their competitors who may have discovered something the first organisation may not have in their narrow view to strategy.
In-Depth Analysis of RBV
The video below offers an insight into the resource-based view with lots of examples to aid comprehension, it is recommended to anyone with an interest in exploring the subject further, however, my personal opinion is that the RBV approach is limited and should only be used by organisations operating with blue ocean strategies in mind. Alternatively, you can purchase Jay Barney’s ‘Resource-Based Theory: Creating and Sustaining Competitive Advantage’ on Amazon.
Barney, J., 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), pp.99-120.
Peteraf, M., 1993. The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14(3), pp.179-191.