Resource Based Theory
Resource Based Theory of the Firm
In contrast to more traditional ideas about strategy, such as the Porter’s Five Forces Model, recent interest has focused on the resource-based view (RBV) of firms that inverts the problem of strategy thinking considering the way capabilities are brought to market more important than how the environment determines strategy. The RBV is an inside out perspective. The model is based on the concept of economic rents and regards an organisation as a set of resources that need to be managed to deliver competitive advantage. Accordingly, within this framework manager’s act to optimise the utilisation of these capabilities focusing their attention on those resources that derive the most economic rent for the organisation – those capabilities that add most value. Strategic intent for managers from a RBV is to maximise economic rents over time.
This view of the firm has a coherence that makes it attractive over other mechanisms of strategic decision making and reflects a growing dissatisfaction with more contextual models such as the Five Forces Model (see Hax for a rendition). Traditional strategy models in a classical sense have as focus the external competitive environment and at their heart the idea of ‘fitting’ an organisation within its environment (the environment more or less as a given) and in a general way do not to look inside the company at capabilities – in contrast to the RBV it is an ‘outside in’ approach. The linkage between capabilities and strategy are weakly formulated - although it must be remarked that some aspects of the classical approach, say, the barriers to entry in the Porter Model, do imply the possession of key capabilities that are difficult to replicate for example and thus forming the ‘barrier’ for a competitor’s entry. In contrast to this classical perspective the resource-based view is grounded in the idea that a firm's internal environment, in terms of its resources, capabilities and competences are more critical to the determination of strategic action than the external environment. The resource-based view starts from the idea that a firm's unique resources and capabilities provide the basis for a strategy, and a strategy should be chosen that allows the organisation to exploit what it has in terms of core resources (competences) relative to the market demand.[a] The RBV also differs in its perspective on the environment per se – that the environment is not a given but can manipulated by action. Markets can be created or paradigms changed by an organisations to its favour by use of the resources it has at its disposal to create new opportunities for its products and services.
Resources on their own do not lead to competitive advantage and of their own do not achieve anything. It is the efficient coordination and configuration of resources within the organisation that leads to their transformation into capabilities (or competences) that the firm possesses (or needs) to go to market. A competence at one level is (just) the ability to do something and all organisations must possess these in order to function and be able to simply engage in market activity - its a basic entry requirement. What makes a difference is how some organisations are able to hone and refine aspects of their performance that creates - through a process of specialisation and learning formidable barriers to competitors and increased value to their customers.
In a classical strategy process one can typically start from the view of considering the markets and nature of customers served and in the ways products or services match real needs from customers and from this go on to consider the internal capabilities. The mechanism follows a market identification model (exemplified by segmentation approaches) and then entering such domains with a view to achieving monopoly rents and dominance – find the profit and dominate. This is a perspective that is fine when we are dealing with markets that are quasi stable and relatively non volatile - with customer needs that can be codified and understood. But when the external environment is in a state of flux and end customer needs start evolving towards mass customisation this approach starts losing its explanatory use. Furthermore, the trend during the eighties and nineties for large organisations to construct a market identity rather broadly (leisure industry rather than airline for example) led to some corporations being cast as generalist and not achieving success. It is far better from a RBV to focus on key capabilities which tend (particularly technological competences) to be relatively stable over time, deeply embedded in an organisations architecture and accordingly can act as a firmer foundation for developing a strategic plan.
Resource-Based View (RBV)Strategy Formation
Grant (1991) laid down a five step procedure for strategy formation which is shown below.
- Taking Stock of the Organisation's resources. Identifying resources and classification form the key task within Grants initial step. Assessment of the strengths and weaknesses of resources (as well as opportunities or threats from competitors) and identifying the links to capability is a critical task not aided by the unclear reporting within organisations. Careful assessment of organisational routines is advised taking care to account for tacit knowledge embedded in processes and people. Particular attention is needed in the relations between resources and capabilities and supporting processes and how these interact to achieve competitive performance.
- Capability is what organisations create with people and resources working in harmony. A functional breakdown of the organisation is derived showing the key capabilities across functional areas - taking care that many distinctive capabilities are to be found in the integration across the organisation. The whole Dell Direct competence for example is a result of the integration of several critical capabilities including the mastery of the supply chain - the Dell Direct model is an example of a Core Competence.
- Evaluation of the Rent earning potential of the capabilities and resources focusing on the sustainability of the competitive advantage offered and the ability of the firm to realise those rents. A competitive edge usually erodes and degrades over time and a careful and realistic assessment has to take place as to how long an advantage can endure. Transparency, how easy is it to replicate or use and to what extent the superior performance can be transferred are two related issues that are assessed during this phase. Finally, how well can the organisational repertoires and routines (forms of tacit knowledge) be acquired or learned is also a critical issue at this stage of assessment.
- Selecting a strategy that best makes use of the capabilities of the organisation and takes advantage of the opportunities placed before the company from the market
- The final step to feedback the strategy consequences - whilst the main task of this process is to utilise in an effective way the organisation’s assets and capabilities it is also concerned with developing the internal resources, particularly personnel, in order to sustain the strategy over time.
RBV and Outsourcing
The strategic perspective from a RBV on the achievement of sustainable economic rent over time by focusing on those resources that add value over their cost means that those activities that do not return value (or sufficient value) are de-emphasised. This means in practice economising on the activity/resource - reducing its costs hence improving return – or looking for ways to provide such internal services from the market by for example outsourcing. The rationale for a strategic outsource position can be cast within a RBV perspective by recourse to the ‘focus on core competences’ discourse which re-crafted means focusing on those resources that add value (high rents) and away from low value activities. This objective can be further refined to pay attention to those resources, activities or processes that are core to the nature of the competitive position of an organisation and focusing to be understood as directing investment, resources and attention to those activities that earn value.
The RBV gives a rationale basis for determining the strategic intent of an organisation, where the organisation should place its focus, and as a corollary those activities normally performed within an organisation that may need less attention but says little about when market placement is needed for this other ideas need to be brought in such as Transaction Cost Economics.
- 1And as a corollary following on from this; strategy is grounded on two premises: firstly internal capabilities provide the basic direction of the strategy and secondly are the primary cause of profit (or value) for the organisation (Grant 1991).