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Resource-based view (RBV)

Use this framework to see how resources give your company a competitive advantage

Michael Porter teaches us that a competitive advantage is obtained by cost leadership, a differential strategy, or a focus strategy. However, it is possible to have two companies adopting a fairly similar strategy with widely different results. Compare the success of Walmart and Kmart as discount retailers. The former has grown to be one of the largest retailers in the world while the latter has been close to bankrupt. Professor Jay Barney in 1991 wrote an article in the Journal of Management entitled Firm Resources and Sustained Competitive Advantage. His thesis is that resources underpin the competitive advantage of firms.

Prof Barney's resource-based view (RBV) is a framework built around the resources of a company. The resources could be anything from physical assets through to knowledge, patents or even company culture. The key to understanding the value of the resources is to measure them against the following criteria:

Valuable – do the resources enable the company to improve and maintain its efficiency?
Rare – are the resources unique or are they available to competitors?
Imitable – can alternative resources be developed or imitated?
Non-substitutable – can resources be replaced by another resource?

 

These criteria are known under the acronym VRIN.

 

Quite clearly a company that owns resources that are valuable and not in the possession of competitors will have a comparative advantage. It is in a position to use this comparative advantage to offer superior value and so improve its market position.

The VRIN criteria leads to a view on the competitive strength of a company:

  • Competitive disadvantage – this is a company that has none of the VRIN resources - ie no resources of competitive value.

  • Competitive parity – this is a company that has valuable resources but they are not rare - ie competitors have similar resources.

  • Temporary competitive advantage – this is a company that has valuable and rare resources but they can be imitated which means that the advantage may soon be lost.

  • Unused competitive advantage - this is a company that has resources that are valuable, rare and difficult to imitate but it hasn't got itself organised to take advantage of them.

  • Sustainable competitive advantage – this is a company that has valuable resources which are rare difficult to imitate and cannot be substituted and which the company has organised to its advantage.

 

A sustainable competitive advantage is very difficult to envisage. De Beers may have had a competitive advantage in diamonds for many years but eventually substitutes and new diamond reserves have removed the advantages of its resources. So too Walmart may have ridden high on its competitive advantage for many years but it is now facing a threat from Amazon. Porter's view on competitive advantage takes into consideration the changing external marketplace and should be used alongside the RBV framework.

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