Have you ever puzzled over academic concepts?
“What does this mean? Should I be using this?“
This briefing discusses some academic stuff, which is important for teachers to understand. It’s useful for professionals too, because you may come across these concepts, puzzle about what they mean, and wonder if you should be using them. I have put a few key references at the end.
In very simple terms, the academic study of strategy and performance has shifted its attention in recent decades. From the early 1980s, people focused on how ‘industry forces’ [competitors, customers, new-entrants, suppliers and substitute products and services] impacted on the profits firms in an industry could achieve and how strategy could cope with those forces.
By the 1990s, though, it looked like these issues did not explain much about why some firms perform better than others. Research identified that things about the business itself seemed to be more important, e.g. how much they spent on R&D or marketing. [Translation “You can do well in tough markets, and mess up in attractive ones!“] Further investigation suggested firms could sustain strong performance by developing ‘strategic‘ resources that others could not copy. This idea has crystallized into as the so-called ‘resource-based view‘ of strategy – affectionately known as RBV.
Since we have repeatedly talked about the principle that resources drive performance, you might think that this idea and RBV are one and the same thing – they aren’t.
An accepted definition of RBV resources is
“…all assets, capabilities, competencies, organizational processes, firm attributes, information, knowledge, and so forth that are controlled by a firm and that enable the firm to conceive of and implement strategies designed to improve its efficiency and effectiveness.”
Management often blames any shortfall in performance on “inadequate resources“, so it may seem self-evident that resources are important, but RBV claims that only certain special items matter. Since many resources are easy to get – cash can be borrowed, production capacity can be bought, staff can be hired – any firm that gets behind on such things simply copies what its competitors have. [Yes I know, if the academics think it’s so easy, they should go try it!] So the RBV asserts that any resource can only give sustained advantage if it is valuable, rare, hard to imitate, and works with other organizational factors – the so-called “VRIO criteria.”
To see if any resource will give you a competitive edge, RBV recommends you ask the following questions:
- Is it durable? A resource that deteriorates or becomes obsolete quickly is not likely to provide sustainable advantage, e.g. production equipment wears out, and staff skills get out of date.
- Is it mobile or tradeable? Many resources are easily bought or taken from other firms. Equipment suppliers may sell the latest technology to your rivals as well as yourselves, customer lists can be purchased, and staff can be attracted by better salaries.
- Is it easy to copy? Many resources can be easily copied by rivals, so these too offer little scope for competitive advantage. You might launch a great new product but if it is easily copied the benefit will be short lived.
- Can the resource be substituted? Even if you cannot buy or copy your competitors? resources, you may still be able to challenge them by using something else. A common example is firms who can?t persuade retailers to sell their products can use telephone or Web sales channels instead.
So what kinds of things fulfil these criteria? – certainly not the simple tangible factors discussed in earlier briefings. RBV focuses instead on more subtle and complex things, especially intangible resources, e.g. reputation or staff morale, capabilities (or competences), knowledge and processes. We will get to those later in the strategy dynamics story, but earlier briefings explained how performance depends directly and unavoidably on resources that do not fulfil those criteria? e.g. customers drive revenue, staff and capacity drive costs. The abstract intangible factors of the RBV are important, of course, but they can only affect performance by influencing the simple, tangible resources at the core of the business system.
DIFFICULTIES IN APPLYING THE RESOURCE-BASED VIEW
It is hard to disagree that intangibles, capabilities and knowledge are important, but applying these things as RBV suggests is tough. As described in the literature, they are abstract, ambiguous and qualitative, so management debate degenerates into semantic discussions about what the words really mean – hardly a solid foundation on which to build a strong strategy with confident outcomes. And it?s going to be hard steering strategy and performance into the future if you can?t work out what difference a decision makes to these squishy things.
There are even cases that don’t seem to need RBV-type resources at all. There is nothing unknown or mysterious about how Southwest, Ryanair or McDonald’s function. The two airlines pursue a completely transparent strategy, even signalling ahead how they intend to develop further. Just about every detail of McDonald’s operations is even written down and passed around in its franchise manuals! Many hundreds of executives have had experience in these companies during their long periods of success, and are deeply familiar with their inner workings. Why, then, have such individuals not been able to replicate that success elsewhere? The RBV says this is because of some still more abstract capabilities of the senior management – strategy dynamics says it’s because of the power of the system! So the approach differs from RBV in three main ways:
- First, we don’t ignore the tangible factors that comprise the heart of any business or organization – we make them explicit, quantify them and connect them to the organization?s performance outcomes.
- Secondly, we go beyond resources that are “owned or controlled“. To influence performance, you only need a resource to be somewhat reliable – “If it is there today, it is likely to be there tomorrow.” This means in particular that “customers” become part of the business system – newspapers and TV channels keep customers for many years, and customers’ relationships with sports clubs and banks often last longer than their marriages!
- Thirdly, strategy dynamics makes explicit how exactly resources work together – but more on that in future briefings.
Until next time…
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“What on earth is that?!” you may wonder. It is a rather simple idea, supposedly set out by a 14th-century friar, William of Ockham.
All it says is that, given a number of possible explanations for something, the simplest and most concrete explanation is likely to be the best. At the very least, a simple, concrete idea needs to be disproved before we go looking for abstract and complicated answers.
You might bear William in mind whenever you read articles and books about strategy and business.
Read more about the book on our website
And here are those references…
Michael Porter (1980) Competitive Strategy, Free Press, New York is the seminal reference book on how external forces determine performance and how strategy can deal with them, or even exploit them.
Jay Barney, J. (2002) Gaining and Sustaining Competitive Advantage, 2nd ed?n, Pearson, Upper Saddle River, NJ gives an eloquent explanation of RBV and its implications for strategic management, together with comprehensive coverage of the supporting literature.
Robert Grant (2005) Contemporary Strategy Analysis, 6th ed?n, Blackwell, Oxford, Chapter 5 gives a managerial explanation of how to analyse resources and capabilities in the way RBV suggests. There is also a neat article on the idea ? David Collis and Cynthia Montgomery (1995) Competing on resources: Strategy in the 1990s. Harvard Business Review, Vol 73, No. 4, pages 118?128.