The Resource-Based-View of a Firm Essay
The Resource-Based-View of a Firm
Introduction- What is the Resource-Based-View of a Firm?
A Resource-Based-View emphasizes that a firm utilizes its resources and capabilities to create a sustainable competitive advantage that ultimately results in superior value creation and above normal profits. This view combines both the internal and external environments. There has been much literature written on this topic since the 1980s. In this essay, I will discuss the link between a firm’s resources and sustainable competitive advantage and the characteristics and strategic implications of the resource-based-view of a firm.
The Resource Based View of a firm (RBV) has grown in popularity since the late 1980s. It was originally developed by Wernerfelt in 1984 as an attempt to build a solid foundation for the theory of business policy, (Clulow et al, 2003). However, the importance of firm-specific resources was recognized as far back as the 1930s by economists; Chamberlin and Robinson. These economists suggested “that the unique assets and capabilities of firms were important factors giving rise to imperfect competition and the attainment of super-normal profits” (Fahy,1999).
This was further developed in 1959 by Penrose who suggested that a firm is more than an administrative unit; it is also a collection of productive resources the disposal of which between different users and over time is determined by administrative decision (Penrose, 1959). Towards the end of the 1980s, there was increasing dissatisfaction with Porter’s Forces Model which had dominated that decade. This model concentrates its emphasis at an industry level. This led to the emergence of the RBV of a firm which acknowledged the importance of company specific resources in the context of the competitive environment.
The concept of firm’s resources heterogeneity is the basis of RBV. The significance of this concept as a new direction in the field of strategic management was largely recognized in 1984 with the article “A resource-based view of the firm” by Wernerfelt which in 1994, was awarded the Strategic Management Journal best prize indicating that RBV was now a vital part of strategic management literature. He suggested that evaluating firms in terms of their resources would lead to insights that differ from conventional perspectives.
In 1991, Barney developed this concept further and developed a framework to identify the characteristics of resources needed to generate sustainable competitive advantage.
Resources & Capabilities of a Firm
One of the main principles of RBV is that all resources are not of equal importance. More emphasis is placed on the characteristics of advantage-creating resources. These resources can be divided into three groups: physical capital resources, human capital resources and organizational capital resources (Collis & Montgomery, 1995).
Physical capital resources are the physical technology used in a firm such as equipment, raw materials and geographic location. These represent the tangible assets of a company. Human capital resources are the training, experience, judgment, intelligence, relationships, and insights of individual managers and workers in a firm. Organizational capital resources include the firm’s reporting structure, its formal and informal planning, controlling and coordinating systems, as well informal relations among groups within a firm and between a firm and its environment (Barney, 1991). However, it is important to remember not all of these resources may be relevant. The RBV of a firm is only concerned in resources that can be a source of sustained competitive advantage for the firm.
Firm Resources & Sustainable Competitive Advantage
A firm has a sustainable competitive advantage when it implements a value creating strategy that is not being implemented by another competitor and cannot be copied by another firm. As all resources are not of equal importance or possess the potential to be a source of sustainable competitive advantage, it is important to be able to characterize the relevant resources. Barney (1991) suggests that these resources must meet four conditions; value, rareness, inimitability, and non- substitutability. Collis and Montgomery (1995) proposes that these advantage-creating resources meet five tests; inimitability, durability, appropriability, substitutability and competitive superiority.
A resource can only be considered a source of sustainable competitive advantage when it is valuable. Resources are valuable when they let a firm implement strategies that improve its efficiency and effectiveness, (Barney, 1991). Both Barney, and Collis and Montgomery believe that there is a “complementarity” between environmental models of competitive advantage (e.g.: a SWOT analysis) and the resource-based view. A SWOT analysis will highlight a firm’s resources that will exploit opportunities and neutralize threats. However, there are other characteristics that a resource must possess for it to generate a sustained competitive advantage.
A valuable resource cannot be considered a source of sustained competitive advantage if it is possessed already by other firms. If other firms possess this resource, then there is nothing stopping them from exploiting the resource in the same way, thus eliminating any competitive advantage. Some firms require a mix of resources to carry its strategy. These resources may consist of a mix of tangible, intangible and capabilities as mentioned before. One resource that may be necessary in implementing a firm’s strategy is managerial talent. Together this bundle of resources may be rare, however, individually they would not create competitive advantage although they may still be valuable, (Barney, 1991)
Inimitability- Is it hard to copy?
This may be one of the most important characteristics of a value creating resource because it limits competition. If the resource is inimitable, then any profit generated from it is more likely to be sustainable. A resource that is easily copied will only generate temporary value.
A resource may be hard to imitate for reasons of complexity; that is the competences on which the strategy is based upon is too difficult for competitors to understand. There may casual ambiguity associated with complexity; meaning that although a competitor may discover what the linked competences of a successful strategy are it may be impossible to see why they give rise to the success they do, (Johnson & Scholes, 2002). These casual ambiguous resources are often organizational capabilities, which may be culturally embedded deep down in the organization and may even depend critically on particular individuals.
Another source of inimitability is economic deterrence. This occurs when an organization makes a large capital investment in an asset. The competition could replicate this move, however because of the limited market potential, chooses not to (Collis & Montgomery, 1995).
Unique historical conditions can also be a source of inimitability. For example, a firm that locates itself on a premises that turns out to be a much more valuable location that was anticipated is an inimitable physical resource. Another example would be a firm, with a unique and valuable organizational culture that was developed over a long period of time. This would also be hard to imitate. (Barney, 1991)
This characteristic draws on Porter’s Five Force model. Although it may be impossible to imitate a firm’s resource completely, it may be possible to substitute it with something similar. Barney (1991) gives the example of a particular firm’s high quality management team. It is possible for another firm to create their own high quality team that is strategically equivalent. Therefore, a quality management team cannot be viewed as a source of sustainable competitive advantage although it may be valuable, rare and inimitable.
This characteristic tests how long the resource will last (depreciate). The longer the resource will last the more valuable it will be. Like inimitability, this test asks if the resource can sustain competitive advantage over time. Because of today’s rapidly changing environment, resources depreciate very quickly. For example, technological know-how in a fast changing industry is a rapidly wasting resource, (Collis & Montgomery, 1995).
This characteristic was first recognized by an economist Joseph A. Schumpeter in the 1930s. He suggested that early movers with innovative new ideas dominated the market initially and earned super-normal profits. However this valuable resource was soon imitated or surpassed by another competitor’s innovation, so their super-normal profits turned out to be transitory. Therefore, banking on the durability of resources is risky as most core competences have a limited life and will only earn temporary profits, (Collis & Montgomery, 1995).
This is another reason why a resource may be a source of sustainable competitive advantage. It is concerned with whether or not the capabilities and competences of a firm may be traded. If they can be traded, then sustainable competitive advantage may not be possible. A firm may benefit from having a highly innovative R&D team, however this asset may be head-hunted by competitors, therefore they are tradable. Intangible assets such as brand name or brand image is difficult for another firm to obtain. Even though a competitor buys out the company, there may be problems in transferring the value of the brand to new ownership, (Johnson & Scholes, 2002). Grant (1991), [as cited by Fahy, 1999] proposes that some resources may geographically immobile due to the costs of relocation and this is a trait shared with inimitability.
Appropriability- Who captures the value the resource creates?
It is important to note that not all profits from a resource go back to the company that owns it. It may be spread out between many players such as customers, distributors, suppliers, employees, shareholders and the government. For example, a firm that relies heavily on contacts and relationships often considers this an important resource. However this resource often resides with the individuals making the deals. Therefore, these individuals can break away from the firm and set up themselves or move to another firm. A firm may be effective at capturing value from it physical and financial assets, but may not be as effective at capturing value from their intangible assets such as brand names and copyright (Grant, 1991).Basing a strategy on resources such as these can make profits hard to capture.
When a firm evaluates their resources, it is vital that they assess them relative to their competitor’s resources. When identifying core competences, it should not be an internal assessment but an external one. The firm should identify what it does better than its competitors and identify this as their distinctive competence (Collis & Montgomery, 1995).
Fig 1: Characteristics of a Resource creating Sustainable Competitive Advantage
The RBV of a Firm’s Ability to Innovate
This is an emerging theme in resource-based literature. It is concerned with the
relationship between innovation, firm structural characteristics and the environment which the firm operates. Traditionally, it is believed that differences in a firm’s innovative activities are explained by industry and organizational structure characteristics. However, recently there has been a growing body of literature that embraces the RBV of a firm (e.g., Brown & Eisenhardt, 1995) and its relationship with innovation. This perspective suggests that different organizational resources and capabilities affect the firm’s capacity to innovate. (Kostopoulos, Spanos & Prastacus, 2002).
Within this perspective, tangible and intangible resources are taken and transformed by capabilities to produce innovative forms of competitive advantage. These innovative activities are limited by the availability of financial resources. According to Kostopoulos, Spanos & Prastacus, (2002), internally generated funds are more conductive to R&D activities and investments than external funds primarily because of the “existence of information asymmetries between the firm and the external capital environment” , for example; a competitor may gain information on R&D projects and as consequence the firm may lose control over their innovations.
Therefore, from a resource based view perspective, innovation does not come from scanning the external environment for market opportunities but from looking internally within a firm and building on resources and core competences within the firm.
Based on the assumption of a firm’s resources heterogeneity the RBV focuses on the firm’s opportunity to produce innovative output with increased future value. This innovation output may last longer, will probably motivate further innovation and can contribute to a sustainable competitive advantage. This innovation will be hard to imitate by competitors as it will be based on firm specific resources. (Kostopoulos, Spanos & Prastacus, 2002).
This relationship between RBV and innovation is bilateral. RBV expands the knowledge of a firm’s capacity to innovate. At the same time, innovation provides an ideal method through which a firm can renew its resources therefore benefiting the firm in two ways.
(Kostopoulos, Spanos & Prastacus, 2002).
Resource Based View & SHRM
With its emphasis on internal firm resources as sources of competitive advantage, the popularity of the RBV in the Strategic Human Resource Management (SHRM) has increased hugely. Since Barney’s (1991) article outlining the basic framework and criteria for sources of sustainable competitive advantage, the RBV has become by far, the theory most often used within SHRM, both in the development of theory and the justification for practical research. (Dunford, Snell & Wright, 2003)
RBV has provided a theoretical bridge between the areas of strategy and SHRM. By concentrating attention to the internal resources, capabilities and competences of a firm such as knowledge learning and dynamic capabilities. It has brought strategists to face a variety of issues as regards the management of people, (Barney, 1996). However, most strategists are not well up on the specific HR tools used in the management of people.
The RBV’s internal focus on a firm’s resources has been of great benefit to SHRM and has provided a basis on which to explore the role that people and HR functions can play in an organization. It also provides a framework for HR personnel to better understand the strategic management of an organization and therefore, play a more positive and active role.
Firms should build their strategies on value creating resources that will create a sustainable competitive advantage as discussed in detail previously. Once a firm has identified these resources, they will often be intangible such as the organizational culture, brand name etc. Most firms are not positioned with competitively valuable resources but with a mixed bag of good, bad and mediocre resources.
Valuable resources must be joined with other resources and embedded in a set of functional policies and activities that distinguish the company’s position in the market.
In a changing environment, firms must continually acquire, develop and upgrade their resources and capabilities if they are to maintain competitiveness and growth (Wernerfelt & Montgomery, 1998).
An RBV strategy requires continuous investment in order to maintain and build valuable resources. However, investing in resources without examining the industry environment is dangerous. By ignoring the environment and just investing in core competences will increase the risk of low return on investment. Similarly if competitors are ignored, the profits that could result from a successful RBV strategy will filter away in the struggle to acquire those resources (Collis & Montgomery, 1995)
If a firm has no valuable resources when compared against the competition or if their resources have been imitated or substituted by competitors, then the firm will be forced to upgrade their resources. Collis & Montgomery (1995) identify three ways of doing this:-
1. Adding new resources such as a brand name.
2. Upgrade to different resources that are threatening the company’s current capabilities
3. Upgrade resources that will allow the firm to move into a structurally more attractive industry.
The strategy of a firm must leverage resources into markets that will gain competitive advantage or increase the firm’s resources. However managers tend to overestimate the transferability of resources across different markets. This is usually because valuable resources are hard to imitate and substitute.
The bi-lateral relationship that RBV has with innovation is an ideal way to create a sustainable advantage in two ways. First, RBV allows the firm to output innovation of higher value and second, these innovations can create new resources and capabilities that competitors will find very hard to copy.
The resource based view of the firm is an important theory in strategic management. However it is still only growing as a body of literature and as Collis (1991) notes, as cited by Fahy (1999), “no coherent body of theory has as yet emerged to summarise the resource-based view”. In this section I have tried to review the logic behind RBV and clearly explain the importance and characteristics of RBV as well as some of its uses.
Contextualisation: RBV and Tesco.com
Tesco’s online delivery service was initially launched in 1996. They were the first retailer in the UK to start this type of service allowing customers to place orders over the phone, by fax and on the internet. In 2001, they expanded this service to Ireland. By 2001, they had the largest grocery internet business in the world. In this section I will discuss how Tesco used a resource based strategy to achieve this.
Tesco had the advantage over other on-line retailers in that they were already strongly established in the UK. They had a well recognized brand name that had been built up since the 1930s and had developed a strong customer base. Tesco also had the financial resources to implement a good strategy. They were able to provide excellent customer service due to the knowledge they acquired through the Tesco ClubCard. The key to their success was their use of their own physical retail stores as distribution centers and their technology partnership with Interwoven.
In 1995, Tesco introduced the first customer loyalty card, which offered benefits to regular shoppers while at the same time helping Tesco to analyze its customer’s needs. Today, Tesco has 10 million ClubCard member households. It is impossible to register at Tesco.com without a Tesco ClubCard number, and if a first-time online shopper already has one, the system will recognize that. In this way, Tesco is able to track how many online shoppers are its own customers and how many it is drawing from the competition. Tesco uses the extensive data it gathers on its customer’s shopping habits to customize products and services.
They also use this data to target specific market segments such as young families, students or senior citizens. This done through sending their ClubCard members a monthly magazine that is specifically tailored to particular demographic groups promoting new products and offers that may interest them.
Tesco also organize ClubCard evenings (free in-store gatherings for certain ClubCard holders) to promote products. For example, customers that may have purchased wine or cheese on-line or in their stores may be invited to a wine and cheese evening as a “thank- you” for their custom. However, these evenings are more about an opportunity for Tesco to have personal contact with their customers and gain valuable information of the needs and wants of their customers.
Use of Existing Retail Stores as Distribution Centers
This is probably the key resource that Tesco utilized in implementing its on-line strategy. When deciding the delivery format for it on-line shopping, Tesco had to decide between two different approaches: the use of warehouses or to use its existing retail stores as distribution centers. Building huge warehouses would have cost millions of pounds and were not feasible, for example a warehouse in London would have to cover a large area to justify the cost of building it but then speedy and efficient deliveries would be impossible due to the high level of congestion in London.
Tesco realized that they could use their existing resources (vast network of retail stores) as distribution centers. By delivering from existing stores, no route takes longer than 25 minutes since 94% of the population in England lives within a 25-minute radius of a Tesco store. This approach also greatly facilitated the rollout of their on-line service. While other competitors had to spend a lot of time and money on the construction of an extensive warehouse operation, Tesco gained a first-mover advantage by using its stores as distribution centers allowing them to offer this service in 100 of its 639 stores in the UK in 1999 and attracting 250,000 customers.
Tesco try to base their actual order fulfillment process on resources that they already have. The actual process is as follows. Customer orders go an office in Dundee, Scotland, where they are grouped and sent to stores on the morning of the chosen delivery day. Each store’s own computer system then sends the orders to shopping carts, equipped with mini-computers that navigate the pickers through the shop for the orders in the fastest possible time to ensure maximum efficiency. Each supermarket is divided into six sections: groceries, produce, bakery, chilled foods, frozen foods and “secure” products such as alcohol and cigarettes.
Each picker covers only one section, picking products for six customers at a time. Through the use of the route planning computer and the division of the store into six sections, pickers average 30 seconds of picking time per item, so a typical item order of 64 items can be fulfilled in 32 minutes. Pickers work during normal trading hours but tend to go around the stores when they are quietest: between 6.00am and 10.00am and 11.00am to 3.00pm.
The average cost for picking an order is around $8.50 and an average order is $123. Tesco.com recovers these picking costs in a number of different ways:
1. They save about 3% of the order value by not using checkout clerks
2. Online orders tend to have higher gross margins (more than 30%) compared their typical in-store sale (25%). The reason behind this is that on-line shoppers tend to be more well off and purchase more profitable goods such as organic vegetables, quality meats etc.
3. Tesco.com minimize the cost of picking errors by automating as much of the process as possible. The pickers are all equipped with handheld scanners so when they select an item they scan it through and the computer will tell them if it is the right one.
Technology Partnership with Interwoven
When launching its online store, Tesco’s challenge was to create the technology to keep abreast of inventory. Initially they employed several web design agencies to manage the website. However, as Tesco’s on-line store continued to expand rapidly the need for more efficient management grew. Therefore, Tesco formed a partnership with Interwoven to provide the required technology support.
This partnership has enabled Tesco to grow quickly. They have gone from being a test site for a few stores to the biggest on-line grocery site in the UK. They have improved customer relations as they can now create and merge store-specific content for all their retail locations enabling them to respond quickly to changes in pricing, stock levels etc.
Their site is run by a team of just 12 people which is very cost efficient.
The key success of Tesco.com was the use of their existing resources within the firm They already had a strong brand image thanks to their physical network of stores that they had built up from the 1930s which gave them an advantage when they launched their on-line store.
Tesco were able to use information from their existing loyalty card system (ClubCard) to analyse their customers in great detail which lead to higher than normal level of customer service. For example, when a customer logged onto their website, they would be provided a record of what they had bought previously and of special offers and promotions that would be of interest to them specifically.
By identifying their physical retail stores as distribution centers, they saved themselves the astronomical cost of building warehouses and the long period of time involved in constructing them. This gave them first-mover advantage and allowed them to invest heavily in other areas such as technology to improve efficiency. By using this method of distribution, Tesco were able to guarantee delivery of the customer’s order within a time-frame of 1 hour as 94% of England is within a 25 mile radius of a Tesco store.
Tesco realized that technology had a large part to play in the success of their on-line operation. As a result of saving money by using an “out of store” approach they were able to invest heavily in technology to increase efficiency in a number of different areas such as: automating order-picking as much as possible to speed up and reduce human mistakes made (handheld scanners and mini-computers) and making their website more user-friendly (web infrastructure was integrated with their inventory system informing customers immediately if their chosen product was out-of-stock).
This resource based strategy has allowed Tesco to win market share in new segments without having to build new stores, thus a low capital commitment. In June 2001, Tesco bought a 35% market share in GroceryWorks (a North American based on-line retailer that is majority owned by Safeway) which was making serious losses. GroceryWorks had previously operated using a warehousing system but this was replaced with Tesco’s in-store picking system. This strategy is a success with even lower operating costs than in England due to less congestion on the roads and lower fuel costs for the delivery vans. Tesco has successfully introduced their resource based strategy to on-line grocery retailing in the States.
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