Small businesses can leverage their internal resources to gain a competitive advantage. Known as the resource-based view, or RBV, this approach is based on the idea that a company's assets, organizational processes, expertise and capabilities can strengthen its position in the market. This theory highlights the need for a fit between a company's strategic resources and the external market rather than focusing solely on its external competitive environment.
TL;DR (Too Long; Didn't Read)
According to the resource-based view, companies may use their key resources, assets and capabilities to gain a competitive advantage. As a manager, you must focus on those resources that are valuable, rare, nonsubstitutable and difficult to imitate.
What Are Internal Resources?
Any organization regardless of its size relies on internal resources to function properly and achieve its goals. These may include financial resources, physical resources, human capital and more. Established companies typically have a defined resource management process, which helps them allocate resources efficiently. Small businesses don't have the same financial and physical resources as a large organization, but they can leverage human capital and technical know-how.
Even if you're just getting started, you may already have the resources needed to gain a competitive edge. A software company, for example, may have a strong team of software developers and engineers, who are its biggest asset. Generally, a firm's resources can be classified into four main categories:
- Financial resources (existing funds or a company's ability to raise funds)
- Physical resources (inventory, real estate, equipment and other tangible assets)
- Human resources (employees)
- Intellectual resources (most types of intellectual property, including copyrights, patents and trademarks as well as proprietary software, customer databases and industry know-how)
Human resources, for example, is not just a function in a company. This term refers to all of the people you employ. Pharma companies rely heavily on people for research and development, prospecting, sales and other key activities. Technology companies employ professionals with strong coding skills and technical know-how, while call centers need people with good communication skills.
Identify Your Strategic Resources
The resource-based view theory revolves around a company's strategic resources, which are the building blocks of business growth. These types of resources create value for an organization and may become a sustainable competitive advantage. Furthermore, they are not available to competitors and cannot be easily imitated or implemented by others.
For example, your office equipment isn't necessarily a strategic resource. Most types of computers and other equipment can be easily replaced. A company's human capital, on the other hand, is often an invaluable resource. Copyrights, trademarks and other intellectual resources can make it easier to attract investors, strengthen your market position and increase brand recognition, among other perks.
Not all resources are equally important, so you must identify your key resources and then seek ways to leverage them. Think about what you need to create, promote and sell your products or services. Make a list and classify these tools and capabilities into tangible and intangible assets/intangible resources. Highlight those that bring the most value to your small business and set you apart from your competitors.
A product-driven business, for instance, relies on human and intellectual resources. A real estate company, on the other hand, relies on physical resources. A startup competing against other new companies in emerging markets can leverage its financial, intellectual and human resources to gain a competitive edge. Regardless of your industry or type of business, it's essential to identify your key resources and align them with your strategic goals.
Understanding the Resource-Based View
The resource-based view is based on the idea that a company's resources determine its success. This theory emerged in the early '90s and became popular due to Jay Barney's article "Firm Resources and Sustained Competitive Advantage." Its proponents state that organizations can use their key resources, assets and capabilities to gain a competitive edge. To put it simply, sustainable competitive advantage and business performance derive from developing strategic resources.
Traditional theories focused on leveraging external factors as a means to set your business apart. The resource-based view theory, on the other hand, states that companies should look within at the resources they already have available rather than seeking to acquire new competencies, functions or skills. A firm's resources should hold value in the context of the target market and require an extended learning curve so that they cannot be easily imitated by competitors.
The resource-based view has been widely applied to numerous areas of strategic management. According to this theory, each firm has different resources and thus may use different strategies to accomplish its goals. The extent to which these resources can be substituted or imitated determines whether or not your business can achieve sustainable competitive advantage.
Furthermore, the RBV assumes that a company's strategic resources are difficult to identify through formal analysis and thus, its competitors may find it difficult to replicate them. If, say, you have a creative genius on your team, your competitors may not be able to find and hire someone with similar skills and competencies. If you develop a proprietary software program, they may have a hard time creating a product that's just as good as yours or better than yours.
What Makes Your Business Special?
According to the RBV, not all resources have the potential to drive competitive advantage. In order to do so, they must be valuable, rare, inimitable and nonsubstitutable. The VRIO framework, an integral component of this theory, emphasizes the same qualities except for "nonsubstitutable," which is replaced with "organization-wide supported".
Resources that enable a company to identify and leverage opportunities while protecting itself against threats are considered valuable. Those resources also need to be rare and inimitable, meaning that other companies don't have access to them or cannot easily imitate them. If your competitors use the same resources as you, your business cannot achieve superior performance. For example, resources derived from a company's history or culture may be difficult to imitate.
Organizations also need to focus on using resources that cannot be substituted. If other companies can develop software programs that are similar to yours, then you no longer hold a competitive advantage. According to the VRIO framework, a firm's resources must be supported by its organizational culture, structure and process. Without these elements, your business would not be able to leverage its assets and exploit the competitive advantage.
As a leader, you need to define your resources and determine which ones meet these criteria. According to Barney, these resources can be classified into three categories: human capital, physical capital and organizational capital. Make a list based on this classification and then try to figure out which resources are rare, inimitable or costly to imitate, valuable and nonsubstitutable.
Resources vs. Capabilities
Under the RBV theory, resources are defined as the assets, attributes, know-how, capabilities and processes that enable businesses to develop and implement strategies for greater efficiency and effectiveness. Therefore, capabilities are a type of resource. In this context, they refer to a company's ability to use organizational resources to perform specific tasks and achieve the desired outcome.
The resource-based theory also mentions core competencies. In a business context, competence describes the ability of a firm to perform its activities. Successful companies have the ability to develop unique core competencies based on their resources and capabilities. These characteristics are firm-specific and bring value to the end customer.
Different companies have different core competencies. These attributes develop over time and define your brand. Apple devices, for example, stand out for their distinctive style. Walt Disney masters the art of storytelling, while Zappos is known for its outstanding customer service. As your business grows, you can leverage your company's core competencies to raise brand awareness and stand out from the competition.
RBV in Real Life
Perhaps the best way to understand the resource-based theory is to see how it applies in real life. Google, for example, took a unique approach to human capital management. The company relies on data-driven HR insights to hire and retain people who create innovative products.
Additionally, no other company uses data-based employee management to the same extent as Google. Its approach to human capital management is not just expensive but also difficult to imitate. Plus, the company has an effective system that allows it to exploit these capabilities. Therefore, Google's resources are valuable, rare, inimitable and organized to capture value, leading to a sustained competitive advantage.
The RBV theory can be applied in any industry. For example, health care organizations may use this approach to better understand the results of major quality improvement efforts. A tech startup can implement the VRIO framework to see how its products compare to those of its competitors and take the steps needed to maximize existing resources.
Limitations of the RBV
Like most theories used in business, the resource-based view has its share of criticism. For example, it can be difficult to determine the appropriate level of analysis due to the broad definitions of resources. Furthermore, certain types of resources, such as a company's reputation or knowledge, are subjective. Managers must also consider the fact that heterogeneity doesn't necessarily imply uniqueness.
While it's true that a firm's resources are important, they are not the only factor behind business growth and performance. Regulatory policies, strategic planning and other aspects matter too. Another potential issue is that new technologies and trends are emerging every day and may have a dramatic effect on your key resources.
Researchers also state that valuable resources don't necessarily provide a competitive advantage. The global economy and other external factors may have a greater impact under certain circumstances. For example, even if your software program is valuable, rare and so on, customers may still want a less-advanced product that comes with a lower price tag during economic downturns. Additionally, your competitors may offer a completely different product that yields similar results in terms of efficiency.
Increase Your Competitive Advantage
The resource-based view of the firm is just one of the many ways to increase your competitive advantage. Despite its limitations, this approach can help you define and leverage your key resources to achieve better performance. Consider using it along with the PEST framework, which focuses on the macro-environmental factors that can impact your bottom line. You may also conduct a SWOT analysis to identify your company's strengths and weaknesses, discover opportunities and anticipate potential threats.
As far as the RBV goes, it can be applied to individual departments or can be applied companywide. As a manager or small business, you may use these insights to exploit unused competitive advantages. By identifying your key resources, you'll be better able to develop a competitive strategy and market your products.
Be ready and willing to shift resources. Technology and markets are constantly evolving. Your key resources may become obsolete five or 10 years from now. Keep an open mind, make the most of what you have and continue to improve your business processes.
To stay up to date on the latest business strategy insights, look into the Journal of Management and Strategic Management Journal. You should also familiarize yourself with the works of Edith Penrose, Joseph T. Mahoney, Barney, J. B., Prahalad and Hamel, Birger Wernerfelt, David Teece, Michael Porter, Pandian, and Priem and Butler.
- SCORE Association: Key Resources Are Essential to Your Business Success
- Oxford Research Encyclopedias: The Resource-Based View of the Firm
- Institute of Chartered Accountants in England and Wales: Resource Based View of the Firm
- Cleverism: Key Resources Building Block in Business Model Canvas
- SAVIOM: Using the Resource-based View Strategy for a Competitive Advantage
- BC Open Textbooks: Resource-Based Theory