Resource-Based View
In order to develop an effective long-term strategy, companies can adopt a resource-based view.
I this approach, managers analyse a company’s resources and capabilities to help establish a stronger a competitive advantage.
The company can then formulate a long-term strategy based on the addition of these resources and capabilities.
3 Categories of resources
- Tangible resources are physical objects, and we are able to see them with our eyes. Examples of tangible resources are capital, land, buildings, plants.
- Intangible resources are untouchable and unseeable, in other words, they are not physical objects. Examples of intangible resources are intellectual property (such as patents or copyrights), knowledge, company culture, etc. Intangible resources are important for brand valuation, knowledge.
- Human resources are about the abilities of the employees, their skills/know-how, their communication and collaboration ability, and their motivation.
Assumptions of the resource based view
- Resource heterogeneity, which basically means that the resources (tangible, intangible, and human) differ from company to company. This would mean that if two companies would have the exact same resources, the two companies would have the exact same strategy.
- Resource immobility. This tells us that the resources are not able to move from company to company in the short term. This way, a company can not copy the same resources as another company and then use the same strategy.
Capabilities
These are special types of resources that can improve the productivity of our previously mentioned resources.
They are specific to the firm, immobile and are deeply rooted in the organization.
Dynamic capability
The ability to continually adapt to both internal and external circumstances.
VRIO-framework
The letters in VRIO stand for valuable, rare, inimitable, and organized to capture value.
With the valuable and rare factors, we can measure the extent to which the competitive advantage has been set up.
With the two other factors, in-imitable and organized to capture value, we can see whether the competitive advantage is sustainable.
The first part is thus mostly about whether you can have it, whereas the second part is mostly about whether you keep it.
Valuable –> VRIO
For the valuable factor, we look if the resource or capability is relevant to the key success factors of that market. So, what are the key factors in the industry? In order to find this out, we can ask ourselves a set of questions:
- Why are customers mostly choosing one specific company instead of the competition?
- This leads to the following questions: Where should an organization in this industry excel in if it wants to attract customers?
- What resources and capabilities can we link to this?
- Does this help us with exploiting an opportunity or cancel out a threat?
If the answer to the last question is yes, then the resource or capability is valuable. For example, for Spotify this is their algorithm and the artists.
Rare –> VRIO
The rare factor looks at whether you have the ability to bring something special to the market with your resources and/or capabilities.
For example, Alessi, an Italian kitchen utensil company, has turned their company around with special designs for their products that other companies did not have.
Inimitable –> VRIO
The inimitable factor does not specifically talk about the fact that the resources and/or capabilities are impossible to recreate, but more about how much time and effort it takes to recreate it.
People with a “normal” skill set and tangible resources are the resources that are fairly easy to recreate or pass on.
The more a capability is based on a specific managerial skill or routine to the organization, the more difficult it will become to recreate the capability. These routines depend on collaboration, communication and trust within the company.
Organized to capture value
States if the company’s organizational structure is effective and if the firm is able to coordinate its systems.
A company that was able to do this very well, was Kodak, which was centered around making the best and easiest cameras for a lot of people.
Isolating Mechanisms
Hinder rivals from competing away a firm’s competitive advantage. They include:
- Better expectation of future resource value. If your firm buys a resource early it will usually have a lower price. If later on this resource turns out to be much more valuable, other firms will have to pay much more than your firm did.
- Path Dependence occurs when the options you currently face are limited by your past decisions. For example, product development is very difficult to imitate because it takes time, so once those decisions are made, they are irreversible.
- Causal Ambiguity. A company can be successful, but not be able to identify why it was successful. If the reason for success is unclear others cannot copy it.
- Social complexity. When social and business systems interact, competitors cannot substitute or imitate the success because of its complexity.
- Intellectual property (IP) protection. IP protection aims to prevent others from copying legally protected products or services. Examples include patents, designs, copyrights, trademarks, and trade secrets.
Dynamic capabilities perspective
This states that the external environment is rarely stable, so firms need to adjust their core competencies to changing external environments. If not, core competencies may turn to core rigidities.
Core rigidity
Core competency that turns into a liability because the competency was not changed and upgraded as the environment changed.
Dynamic capabilities
Firm’s ability to create and modify its resources over time. Firms should focus on intangible resources. These are built through continuous investments and experience.
However, intangible resources can also deplete as key employees leave or if a specific activity is not done for some time. Therefore, the dynamic capabilities perspective says that managers need to decide which investments to make over time.
Resource stocks
The current level of intangible resources in the firm.
Resource flows
The level of investments to build or maintain a resource.
Value-Chain Analysis
The value chain is the internal activities a firm does when transforming inputs into outputs.
Through each activity, the firm adds incremental value and incremental costs. There are two types of activities. Primary activities and Secondary activities.
Value chain analysis allows managers to see how competitive advantage flows from a set of activities.
Primary activities
Add value directly as inputs are transformed, for example, operations.
Secondary activities
Add value indirectly, for example, through research and development.
Strategic activity system
States that the firm is a network of interconnected activities or systems.
As systems are complex and causally ambiguous, competitive advantage is usually sustained.
Although rival managers may be able to see some elements of a system, the capabilities to manage them are hard to see and to imitate.
