John McManus explores the strategic management theory of Resource-Based View as it relates to competitive advantage.
Conceptualised some sixty years ago, Resource-Based View has become one of the most prominent and cited theories of strategic management. RBV seeks to explain the internal sources of a firm’s persistent competitive advantage. Resources can be classified as valuable, rare, inimitable, and non-substitutable. Simply put RBV is founded on the notion that the effective and efficient function of all useful resources owned by the firm will assist in determining its competitive advantage.
RBV can be traced back to the pioneering work of Professor Edith Penrose on the growth of the firm (1959). Professor Penrose recognised that internal managerial resources are both forces and limits to the expansion any one firm can undertake. A key assumption of RBV is differences in resource endowments can lead to competitive advantage and superior firm performance. Whilst there are many different meanings to describe RBV; in the context of this narrative, RBV is defined as:
A mechanism used to assess the available amount of firms strategic assets
RBV asserts that firms accumulate crucial resources and capabilities over time and as such are absorbed by the market incrementally. The ability to succeed in international and global markets is a function of the internal capabilities of the firm. The theory of internal capabilities can be traced to evolutionary economics. Evolutionary economics deals with the study of processes that transform economies of firms, institutions, industries, employment, production, trade and growth within, through the actions of diverse agents from experience and interactions, using evolutionary methodology. The theory points to the unleashing of institutional innovation through the generation and testing of ideas which aides discovery of new knowledge which accumulates more value for the costs incurred than competing alternatives. As a result, creation of new knowledge leads to the development of organisational capabilities, consisting of critical competences and embedded routines. These firm resources in turn lead to superior performance, particularly in highly competitive or challenging environments.
RBV theory highlights that not all resources are of equal importance in terms of achieving competitive advantage and superior performance, some are of more value than others. Valuable resources will enable a firm to apply strategies and perform in ways that lead to increased market share, higher sales, lower costs, higher margins, or in ways that add value to the firm.
It is widely thought that tangible resources have a greater value then intangible assets (for example intellectual property); this in part is due to the way firms account for trading activities and the way balance sheets are constructed to meet regulatory requirements. The dilemma faced by many firms is that tangible products are easy to replicate or duplicate by competitors and some claim that tangible assets are a relatively weak source of competitive advantage and economic benefit. On the other hand, it could be argued that intangible assets provide a more significant source of competitive advantage than tangible assets because of the barriers to duplicating knowledge. RBV theory also acknowledges that firm attributes related to past experiences, organizational culture and core competences are critical to the internal and external accomplishments of the firm.