Resource Based View of the Firm
Do your internal resources give you a competitive advantage?
The Resource Based View (RBV) of the firm starts from the concept that a firm’s performance is determined by the resources it has at its disposal. The way these resources are used and configured enable the firm to perform and can provide a distinct competitive advantage.
One of the most widely used strategy tools is SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. Most companies develop their strategy by looking externally. The strategy is based on opportunities and threats they perceive in the market place. The internal, strengths and weaknesses, view is often ignored, but a balanced strategy should reflect both views and this is why RBV is important.
Jay Barney has argued that to deliver long term competitive advantage, resources should be Valuable, Rare, Imperfectly Imitable and Non-substitutable. This is often captured by using the acronym VRIN, and used as the basis for evaluation your resource base.
Resource based theory of the firm has a long history, but more recently, developments such as “core competences” have attracted attention. Many of these developments have been conceptual and therefore difficult to implement in practice. Here we will discuss the concepts and provide some tools to help you with the practical aspects of developing and nurturing resources and competences.
Defining competences and resources
As different writers have used different definitions for competences, capabilities and resources, it is useful to start by explaining what is meant by the terms. The approach taken follows that used by Mills et al (2002) in their book “Competing through competence”.
What is a Competence?
A ‘competence’ is an ability to do something. When applied to companies we say:
- A company has a strength or a high competence activity if it can out-perform most competitors on a competitive factor that customers' value.
- A company has a weakness or a low competence activity if it under-performs most competitors on a competitive factor that customers' value.
Competence in this sense is a way of describing how well (or not) your firm performs its necessary activities.
Overall, competence is best thought of as a variable, rather than an attribute. It is not something that a company has, or does not have, but it is something that a company has to a certain degree. We judge that degree by comparing it to the performance of its competitors. Thus a company with a high competence in a particular activity is considered equal to its best competitors in that activity.
Competences - the ability to do something - are underpinned by resources, the things an organisation needs to perform the task required of it.
What is a resource
A resource is something your organisation owns or has access to even if that access is temporary. Resources can be either tangible or intangible:
Tangible resources are relatively obvious. Examples include buildings, plant, equipment, exclusive licences, patents, stocks, land, debtors, employees – generally tangible resources can be touched or felt; they have a physical shape.
Intangible resources are, by definition less easy to recognise. They include skills, experience and knowledge of employees, advisers, suppliers and distributors. Skills, knowledge and experience can also be held or embodied in systems, in-house databases, personal and organisational networks, brands and reputation. An organisation’s culture and values can be very important resources too, especially, for example, the prevailing attitudes to customers, quality and change.
Note that many of these resources lie within a firm’s ownership, for example stocks and equipment. Many others are not owned but can be accessed; for example the experience and knowledge of suppliers, customers or advisers. Other, often very important, resources are the skills and knowledge of your employees. They are available to the company today but, having free will, they can leave whenever they wish.
Why should we measure resource and competence development?
There are four main reasons for measuring resource and competence development:
- It allows you to balance the short-term with the long-term. Much of measurement is focused on performance, which is focusing on today. Focusing on the development of resources helps you focus on the future.
- It focuses on the resources which help you improve rather than just the targets you are trying to meet.
- It increases your understanding of the key drivers of performance.
- If you don’t measure resources and competences, actions will tend to address more high profile measures and work against your resource development aims.
A Resource Measurement Framework
The representation used for the Resource Measurement Framework is depicted in figure 1. Unlike a process model of performance, the relationship between competence performance and its underpinning resources is not a simple linear relationship. Thus the depiction of the competence, resources and measures is less structured. In figure 1, the competence is represented by the external triangle and the resources that underpin the competence by the ovals inside.
Experience has shown us that it is useful to show the interaction between the main resources by means of arrows. The arrows are drawn to show how one resource influences another. Influences can be two-way or one-way. For example in figure 1, Resource 1 affects Resource 2 but not the reverse, and Resources 2 and 3 influence one another.
Using the competence and resource measurement framework
In this section, I will use an example of how the framework is used in practice. The example is a recruitment competence in a multi-national engineering company. This example shows how resources interact to build a competence and how easily these resources can be destroyed.
GKRR plc (not its real name), is a major multi-national engineering company who had developed a scheme for recruiting and developing high quality graduate engineers for the group as a whole.
The main recruitment of graduate engineers was centralised in the group’s R&D function which recruited, employed and trained between 10 and 15 engineers a year. The training programme was centred on a series of projects which each engineer undertook over the two to three year period they spent on the central R&D programme. These projects were primarily based in the operating companies around the group and each project was carefully selected and managed by a tutor.
However, conversations revealed that there was significantly more to the recruitment and training of the graduate engineers than had been captured by this approach.
It was agreed that the objective of the process was:
“To provide a continuous supply of high quality engineers for the future development of the business.”
Using the process framework the competence measures chosen were:
- Number of applicants
- Percentage of offers accepted
- Number employed
- Variety of projects offered
- Percentage of projects successfully completed
- Cost per project
- Value of business improvement achieved
- Number of graduates placed
- Number of project alumni still employed by GKRR
- Mean value of alumni seniority
- Mean time to reach level 3 manager position
Delving into the reasons why the recruitment competence performed so well revealed a more complex picture of the resources that underpinned it:
- Many companies in the UK had experienced difficulty in recruiting high quality graduate engineers. In contrast, at GKRR, central recruitment had been built up over the last 15 years and nobody in the company could remember when they last had a problem in this area.
- The company focused on the top four engineering universities in the UK, building up a track record of recruiting the best and developing relationships with the academic staff to help in this process. The staff were happy to assist, as they could see the quality of the training and development provided as well as the successful careers paths of their previous students.
- The graduate engineers didn’t have to be found jobs within the group on completing the programme, they were often syphoned off during their second or third year when the operating companies were eager to place them directly into line management positions. The central R&D group had difficulty keeping many of their graduates until the end of their training.
- The projects were successful because they also brought benefits to the operating companies in which they took place. Incidentally, the operating companies had to pay for the projects, but they were still in demand. The projects were often used for moving best practice around the group and as a result were usually highly successful in bringing rapid performance improvements.
- The engineers developed quickly during the 2 to 3 years in the development scheme. This was mainly attributed to the skill of the tutors in choosing the next project. Each project was chosen to stretch the graduate to the limit of their abilities, with support provided by the tutor to ensure that the graduate didn’t completely flounder. The managed progression and mentoring through simple to more complex projects greatly assisted the trainees’ development.
- After 15 years of running the programme, there was a large group of alumni, with many in senior positions throughout the group.
The resources identified were:
- A very good in-house reputation
- Documented evidence of international projects and promotion
- The recruitment process
- The training process
- Long-lived relationships with university staff
- The project group alumni
- The staff group
These resources interacted and supported one another, for example:
- The evidence of international projects and promotion assisted recruitment but also helped build the relationship with the university staff.
- The relationship with the university staff enabled the company to recruit the best candidates, building their in-house reputation for quality people.
- The training process enabled the international projects to be undertaken with minimal risk of failure, it also helped build the reputation with the universities and the in-house reputation.
- The whole competence was further supported by the alumni who had reached senior positions and who were now recruiting from the scheme.
GKRR - a postscript
At the time of this analysis, moves to reduce central costs were underway. Two operating divisions decided that they could set up their own internal recruitment and development scheme copying the scheme run by central R&D.
The problem was that the divisions didn’t have their own tutors to supervise the projects. So they had to rely on their own internal line management. They also had to use central R&D training for the short courses they provided.
Although the costs appeared lower (mainly because the line management time required to run the scheme was never fully costed) this approach began to undermine the resources built up over the previous 15 years. Firstly, it confused the university staff, who had always been ready to recommend the company in the past. Secondly, it reduced the quality of graduates taken, as the operating companies did not have the same reputation and these posts were seen as second class. Other effects were still awaited.
The points being illustrated in this case are:
- You can rapidly destroy resources built over many years - in this case 15 years of work was being undermined in just over 12 months.
- It is easy to believe that the same results can be achieved far more cheaply. Don’t start changing things that are really working well without fully understanding how they work and the consequences of the change.
- Don’t always believe that because things are going smoothly, they are easy to do. Some of your most important resources may well go unnoticed simply because they are being used so well that they never come to anyone’s attention.
Benefits of taking a resource based view
- You will get to understand the real drivers of performance in your business.
- You should be able to identify and protect important resources and capabilities.
- You will be able to focus of sustainable performance improvement through the development of resources and capabilities.
Pitfalls to be avoided
- This does take time, so focus on what is really important to your business both now and in the future.
- Everybody wants to think that what they do is central to the businesses success, that their resources are key, and that they provide the core competences required to be competitive. In reality, this is only true in a very few cases, so this aspect has to be managed sensitively.
- Core competences can become “core rigidities”. Sometimes, technological breakthroughs or new business models make existing resources and competences obsolete. Moving beyond the investment you have made is often hard to do.
Mill, J. F., Platts, K. W., Bourne, M. C. S., and Richards A. H., (2002), Competing through competences: achieving sustainable advantage through the strategic management of resources, Cambridge University Press, Cambridge, UK.