RBV Concept in Theory - Essay Example

Assignment Ref April 24, 2006. Resource Based View of a Firm Introduction The of economics teaches us many insights into a firm’s operations and provides us the tools that permit an analysis and measurement of its performance. Analysis of operations and performance measurement helps to find solutions to all issues beginning with investment decision, commercial activity, and later, survival and growth. Some of the prominent concepts that come to one’s mind are Michael E. Porter’s five forces model of competitive position, competition and strategy, Irving Fisher’s Theory of Interest, Bill Phillips’ curve on inflation and unemployment (at national level), to name a few. Jay Barney’s Resource Based View (RBV) is one such interesting tool. Because of its simplicity, engineers find it easy to understand the management perspective behind enterprises. This essay explains the concept of RBV, examples of key resources in well-known companies, managements’ approach in using the tool together with opinions on its utility and limitations. RBV concept in theory & select examples All firms are built on certain resources. In common parlance, we hear of money, materials and men as the resources of any business in a very broad sense. If all firms collect these resources and start operations to produce and market the same goods or services, then there will be intense competition and few would survive. In order to survive with normal profits and grow with supra-normal profits, a firm has to distinguish itself in some ways from the others competing with it. One way of looking at such distinguishing features of a firm is the so-called ‘resource-based view’, conceived and named as such by Jay Barney in the early 1990s. (last name) 2 Barney1 postulated that a firm has to identify the resources it has in its command, evaluate them to identify the ‘key resources’ which give the firm its competitive advantage and guard them jealously to maintain the strategic advantage. In order to identify whether a resource can be treated as a key resource or not, Barney developed a four point criterion of resource evaluation, VRIN, that stands for: V for valuable resources, using which a firm can devise strategies for improving efficiency and effectiveness. R for rare resources, which are not available for competitors. I for imperfectly imitable, meaning those that can not be easily imitated or copied to appear as those belonging to the firm, and, N for non-substitutable, meaning which cannot be substituted by any other easily available resource. As can be seen, the emphasis is on resources as internal to a firm. From the simplest Mom & Dad stores, requiring no more than a couple of people, a few consumer items and a place to store and sell, to the very complex commercial or industrial firms of today with properties, unique products, patents and trained staff, we have a plethora of resources. Many of them are quite visible for all to see; but many more are what are known as intangibles, which are not seen or easily understood; for instance, good will, trademarks and patents. These are very valuable resources, not seen but only felt by the customers. A firm with good resources will perform better than one lacking it. To cite a few examples: Dow Chemicals has its R&D capabilities, large number of patents and trademark products as its VRIN resources. BBC’s news correspondents with their high credibility and worldwide presence are its VRIN resources. _____________________________ 1.Barney, J. (1991) Firm Resources and Sustained Competitive Advantage. (last name) 3 Linux’s open source code and the good will it earned are its rare and imperfectly imitable resources. French wine makers of Bordeaux region and its vineyards enjoy VRIN resources. Indian curries, Chinese cuisines, Japanese sushi also come in similar categories, depending upon the situation. For example, an Indian curry may be commonplace in India but can be a rarity in a Washington DC street and hence qualifies as an imperfectly imitable resource! The contract research capabilities of Dr. Reddy’s Laboratories along with its highly trained pool of low cost manpower are its VRIN resources; Managements and RBV Thus, a successful firm has a unique set of resources which it safe guards in order to retain and enhance its leverage in the market place to earn extra-normal profits. The extent to which firms guard their VRIN resources is legendary. Patents, registered trade marks, licensing, employment contracts that restrict taking up service with competitors etc. are some of the examples. We are all aware of the famous Coke recipes, which are never made public, even to licencees and franchisees. Barney says that, “a firm achieves competitive advantage when it is able to implement a “value creating strategy not simultaneously being implemented by any current or potential competitors.”(p.102). By this statement, he puts the responsibility on the shoulders of managements to make strategic choices by “identifying, developing and deploying key resources to maximize returns.” Vladim Kotelnikov2 says that, as opposed to many other strategies that analyse ______________________________ 2. Kotelnikov, V. Innovation Unlimited. (last name) 4 external factors while designing a business, RBV lays emphasis on the analysis and exploitation of the internal factors of a firm, to gain competitive advantage for super profits. Other analysts also have differing views on the RBV concept, its utility and limitations. It is a widely held view that VRIN analysis of competitive advantage is more appropriate for intangible assets than with tangible ones since the later can be more easily imitated or acquired by competitors thus disqualifying them as being key resources. That is to say, “attainable resources are not sustainable”3. This brings us to the question of managing tangible resources in the form of competences as against managing VRIN resources, which can be largely intangible. Managements and VRIN Resources vs. Competences While managements strive to acquire key resources for earning supra-profits for their firms, once that status is achieved, their attention and time is devoted more on managing the competences. Here by competences, we mean the unique combination of the key resources of a firm, which gives it the competitive advantage. For example, a team of highly trained staff, conducting say R&D activities that would produce intellectual properties to the firm like unique products, trade marks and patents, and, a marketing team that successfully markets these products – all combine together as VRIN factors in a unique combination, that transformed into the firm’s competences. However, fast changing technological knowledge and developments can quickly destroy competences, say Steven Casper and Richard Whitley4. Hence, it is the generally held view that in the practical application of RBV of a firm, there is usually less emphasis laid on the ___________________________ 3. Unknown, Value Based Management.net 4. Casper, S., Casper and Richard Whitley. (2002) Managing competences in entrepreneurial technology firms: a comparative institutional analysis of Germany, Sweden and the UK (last name) 5 management of resources than on the management of competences. That is to stay, the managements do tend to rest on their laurels neglecting development of new competences until they see a threat of competition catching up with them. In doing so, a re-look at VRIN resources and their appropriate mix to meet to new challenges of creating new competences, becomes inevitable. Conclusion Resource-based view of a firm lays emphasis on identifying key resources it has which can give it the strategic advantage for making extra-normal profits. Opinions differ on the effectiveness of this tool for managing external environment of a firm, which is strategically as important as the internal resources upon which RBV depends. Managements find it easier to manage that ‘unique combination’ of VRIN resources which, is its competence and in the process neglect to take note of erosion of key resources, especially due to fast changing technological developments. RBV concept helps engineers and managers to understand the importance as well as limitations of key resources, in the management process. (last name) 6 Reference List Barney, J. (1991) Firm Resources and Sustained Competitive Advantage. Casper, S. and Whitley, R. (2002) Managing competences in entrepreneurial technology firms: a comparative institutional analysis of Germany, Sweden and the UK Kotelnikov, V. Innovation Unlimited. Available at http://www.1000ventures.com/business_guide/ mgmt_stategic_resource-based.html (As retrieved on April 22, 2006) Unknown, Value Based Management. Available at http://www.valuebasedmanagement.net/ methods_barney_resource_based_view_firm.html (As retrieved on April 14, 2006) Read More