Source: Foss, N. (Ed.) (1997). Resources, firms, and strategies. Oxford University Press.
Over the last 15 years, particularly within the academic community, a revised view of strategy has been growing in importance. This emerging body of thinking offers senior managers some important new perceptions. It has become known as the resource-based view of strategy.
In 1997, Nicholai Foss, an Associate Professor at the Copenhagen Business School in Denmark, brought together 22 seminal contributions on the subject of the "resource-based view" of strategy in a book called Resources, Companies, and Strategies. In the present article, Tony Kippenberger sets out to provide an overview of these evolving ideas, drawing almost exclusively on the work presented in Foss's book. Designed to summarise many different ideas it has been impossible in a single article to provide individual attribution. While from time to time individual authors are cited. It is important to underline, as Nicholai Foss does, that the resource-based view is not "one integrated perspective". Rather it is a confluence of renewed academic thinking on the subject.
THE CORE CONCEPT
The resource-based view focuses primarily on the resources and capabilities that a company has and only secondarily on the industries/markets in which it operates. This reflects the fact that all organisations develop unique resources and capabilities and that it is these which are the ultimate source of competitive advantage. All types of competitive advantage require uniqueness in one form or another. If a company wishes to become the lowest cost provider in its industry/market, it must develop a unique way of achieving this (otherwise others would share the same position). If a company seeks to be a high-price, low-volume producer, then it must differentiate itself and develop its own unique way of satisfying its customers’ wants and needs.
However, while uniqueness may be a necessary condition for achieving competitive advantage, it is not, of itself, sufficient. Simply possessing different, unique capabilities and resources does not provide any certainty that competitive advantage can be achieved because, as resource-based theory argues, all companies are already uniquely different. The best that these differing resources and capabilities can therefore achieve is to give the company the potential for competitive advantage.
Competitive advantage, and particularly sustainable competitive advantage, depends on the nature and type of resources and capabilities that a company has, how they have been amassed and how they are used and deployed. Management, especially top management, plays the critical role in all of this and carries the burden of responsibility for achieving success.
THE STARTING POINT
To understand the underlying logic of the argument it is essential to go back to basics.
The nature of organisations
All companies, or their constituent parts, begin life endowed with just an entrepreneur's ideas, an explorer's discovery or an inventor's creation (there being few other reasons for risking money in a business enterprise). In many instances, this immediately makes them different. However, even organisations with similar starting points quickly begin to diverge as different management decisions and choices are made. As each company develops, it takes on its own special characteristics and becomes, as Philip Selznick describes it, "peculiarly competent (or incompetent) to do a particular kind of work".
This process is self-reinforcing because managers concentrate on what they and their company already know, and can do, best. In the process, the different resources and capabilities that organisations acquire or accumulate then increasingly predetermine what alternatives are open for the future.
In the end, directly contrary to the formal economic 'theory of the firm', companies within the same industry compete with substantially different bundles of resources and capabilities, using significantly different approaches to try to achieve individual competitive success.
The nature of resources
The most obvious resources are physical assets such as plant and equipment, factories, R&D laboratories, office buildings, natural resources, raw materials, work-in-progress and so on. Some of these resources are used up rapidly, some give continuing service over many years, some are acquired, some produced, some leased.
A company’s human resources comprise the many individuals, all with differing degrees of skill, who undertake the vast range of activities, tasks and functions within an organisation. Some are on short term, others on long term, contracts. Some have little experience, others have a great deal. Many may represent substantial investment by the company and, as Edith Penrose pointed out, "the firm can suffer something akin to capital loss when employees, at the height of their attributes, leave the firm. Such employees, while not owned, are effectively ‘part of the firm’."
Financial capital is another obvious form of resource. Less tangible but by no means less important are resources such as brand names, reputation, customer or consumer trust and dealer loyalty, as well as intellectual property rights such as copyrights and patents.
The value of resources
While all these resources have their own intrinsic value, they nevertheless remain ‘inputs’. Their real value lies in the way that they are used – the ‘outputs’ that they can yield. Thus exactly the same resources, when used differently or in different combinations, provide their own distinct outputs.
The sheer variety of potential resources and the inherent variability within each resource (no two office blocks, individuals or patents are the same) combine with this wide range of different outputs to create the essential uniqueness of each company.
Given that uniqueness is a necessary but not sufficient condition required to achieve competitive advantage, resources, and above all the way they are deployed, are an essential part of achieving it.
Resources and capabilities
However, to make the best use of their available resources, organisations require capabilities. Such capabilities also come in many different forms. They may, for example, be the command of a particular material technology, high-level marketing skills, effective product development processes, an able treasury function or an aptitude in introducing new production processes. They also, critically, include management capabilities.
But capabilities are also much more than this. They are in themselves unique resources, available to managers, to be deployed in different ways.
The nature of capabilities
While many resources that organisations have are tangible assets, capabilities are, by their very nature, intangible. They are to be found in organisational structures and ways of doing things, in routines and managerial processes. They represent organisational capital in the form of the experience, skills and know-how that enable people to do things well, and can even been seen in the way that team members work together in a particular company environment. Such capital does not, of course, appear on the balance sheet.
If it is these resources and capabilities, in all their various forms, that create the potential for competitive advantage, the question about how they can actually create it remains. The initial answer is that they must be developed, co-ordinated and then deployed in such a way that the company can provide goods or services more economically than others or be able to satisfy customers’ needs and wants better than rivals. The ideal being a combination of the two.
Whether such competitive advantage yields good profit streams, however, depends on a second set of judgements and decisions: the actual products/services to be provided, the nature and size of the customer market chosen and the competitive nature of that marketplace. The ability to repeatedly get this right is, of course, yet another set of capabilities.
Regrettably, however, even if all this is achieved, the ensuing competitive advantage (and its profit stream) may not be sustainable. Competitors, anxious to share in the profitable opportunity the company has uncovered will seek to follow suit. They have two basic ways of doing this: by directly imitating the product/service or by providing a good/better alternative. In the product/market arena there are myriad ways of achieving this. Products may be reverse-engineered to discover their component parts and how they were made. Service delivery can be sampled repeatedly until the key elements are identified, and then replicated. Marketing expenditure can be matched, alternative distribution channels found.
Even in-company resources and capabilities can be readily emulated or copied. Good competitor analysis can rapidly identify anything from newly installed IT systems to specialist machine tools that have provided a competitive edge. It can uncover new sales or marketing techniques, component sourcing arrangements, specialised service training, supplier partnerships, outsourcing deals and even which alliances or joint ventures are providing new knowledge. All provide keys to imitation or substitution.
Widespread recognition of this has led many companies to despair of achieving sustainable competitive advantage. For example, during the 1980s, many financial institutions spent billions on IT systems that would give them a market edge, only to watch rivals buy better, newer, faster equipment that negated any brief advantage they had. In the 1990s, retailers launched credit and loyalty cards to build marketing databases, only to watch rivals do the same. Each apparent advantage quickly turns into just another entry ticket to play in the game.
Sustainable competitive advantage
It is here that the resource-base view has important insights to offer. If all companies are different, and uniqueness ultimately stems from internal resources and capabilities, then how can they be used to create sustainable competitive advantage?
The fundamental argument is that competitive advantage does not lie in the products or services themselves, but in the resources and capabilities that produce them. A company’s own resources and capabilities must therefore be:
THE RIGHT TYPE OF RESOURCE
Resource-based theorists have invested a good deal of time and effort in identifying the types of resource and capability that match these critical conditions. They fall, it is suggested, into a number of categories that offer varying degrees of protection:
Unique physical resources
Clearly, there are a range of physical resources that are, by definition, unique. These may vary from a vast oil field to a small, highly specialised piece of production equipment that has been designed and built in-house. However, while actual imitation is difficult, if not impossible, other oil companies will discover alternative (substitute) fields, and competitors can often emulate the way even specialised equipment works.
These may take the form of intellectual property, including patents, copyright and trademarks such as ownership of well-known names and other quasi-property rights. Legally protected to prevent direct imitation, these properties are, nevertheless, open to varying degrees of substitution. Pharmaceutical companies constantly vie with each other for better drugs to cure the same ailments. Even brand names can be substituted by other brands – for example UK retailer Marks & Spencer’s move into financial services and Virgin’s move into colas and spirits.
Important attributes such as reputation, a good image or the trust of consumers represent intangible values that cannot be ‘owned’, because they are in the eye of the beholder, but do ‘attach’ to companies. Rolls-Royce, Chanel or Apple may be brand names, but their power and strength lies in their intangible brand values developed over time. Valuable reputations come in many forms: from a reputation for fair dealing with suppliers or distributors to a very different reputation for rapid and aggressive response to competitors. Such values or reputations cannot be imitated quickly and are not vulnerable to easy substitution. The corollary, unfortunately, is that such values can all too easily be irreparably damaged by the company itself.
Intangible internal resources
Apart from physical resources, companies also possess valuable intangible resources. Some of the most valuable represent knowledge and information compiled over time – for example, long term, intimate knowledge of customers (many of Marks & Spencer’s suppliers have worked with them for decades: see Issue 9 pages 32-36), or experiential knowledge about particular technological processes that builds up within an R&D department. Such private information and knowledge comes in many forms. Other internal resources are even more intangible. For instance, the particular structures and ways of doing things that create corporate cultures able to perpetuate important, company-specific attributes. Examples of such cultures can be seen in companies like Hewlett-Packard and ABB (see Issue 13, pages 25-26). These resources are practically impossible to imitate and take years to substitute. They are also, by definition, integral to the company.
But, lying behind all these important resources is something even more fundamental: the past and present capabilities from which these resources are derived in the first place. The capabilities to explore, discover and develop an oil field; to invent patentable products or processes; to create a powerful brand; to build a strong reputation; to understand markets, garner knowledge and maintain relationships.
The product of skills and abilities, knowledge, learning and experience, these capabilities are to be found at the individual and organisational level, on the shop floor, in the R&D labs and in the executive suite. From production skills to management ability, from teamwork to individual flair, such capabilities are the most idiosyncratic, and therefore the most difficult to imitate, resources available to a company. While competitors will use their own capabilities as substitutes, so complex are most organisations that particularly successful mixtures of capability are often hard to isolate and identify, let alone emulate.
By looking at resources and capabilities in this way, it becomes apparent that the more physical and more visible they are, the greater the likelihood that they can be imitated or at least reasonably emulated. Conversely, the more intangible the resource or capability, the more difficult that becomes. But what also appears to be the case is that imitation is most difficult when the resource is one that can only be developed over time, or when success stems from a mix of capabilities that are difficult for competitors to identify.
BARRIERS TO IMITATION
These conclusions have led resource-based theorists to look for barriers to imitation. In doing so they have developed the following concepts:
Levels of uncertainty
The greater the uncertainty or ambiguity about the causes of a company’s success, the less likely others are to compete. Firstly because they do not know exactly what to imitate nor how to go about it, and secondly because such uncertainty often puts competitive investment at too much risk. However, the difficulty in identifying what attributes are currently creating success may not be confined to competitors. The complexity of many organisations denies easy analysis even to the company itself. Just as Michael Polanyi, describing tacit knowledge, suggested that as individuals "we can know more than we can tell", the same can apply to organisations. This presents managers with the problem of identifying what they most need to protect.
Unique, complex combinations
This inability to identify the causes of success stems from the complex combinations of resources and capabilities that companies develop. While each element may theoretically be scrutinised, from marketing expenditure to the make-up of an R&D team, from back-office technology to channel management, it is the way resources and capabilities can be made to work together that proves difficult to replicate. Just as products may be reverse-engineered but process technology cannot (because it is not visible to the outside world), so visible facets of an organisation can be studied but its management and other internal processes cannot.
These unique combinations also tend to develop around themselves a rich layer of tacit knowledge. Many companies have faced the frustration of trying to transfer new methods of operating even within their own organisational structure – from one plant or office to another – with little success. If self-replication runs up against this barrier, then external imitation is likely to be even more difficult. However, it needs to be remembered that internal technology transfer is concerned with adapting the technology to the least capable internal user, whereas the threat of imitation is posed by the most capable external competitors. Much of the explanation for the problems of internal transfer is put down to the difficulties of passing the tacit knowledge of those originally involved to those who have to learn the new processes or technologies from scratch. Because moving personnel from one internal plant to another is often a way round the problem, companies need to remember that many of their more intangible, knowledge-based capabilities belong to individuals or groups of individuals. Since human resources cannot be 'owned', only contracted, they are potentially highly mobile. This puts a significant premium on a company’s ability to retain them.
Benchmarking and the use of consulting companies to acquire particular methodologies appear to have the capacity to break down some of these barriers. However, importing and inserting particular techniques can prove disappointing. This is often because they are introduced in isolation – separated from other capabilities or routines that make them truly effective. But beyond this, putting already developed techniques in place is fundamentally different from having the creative capability to develop such new techniques in the first place. Imitators are thwarted by the difficulty of discovering and repeating the developmental process involved because the skill of how to do something is different from knowing how to create it. Resources based on collective learning and creativity are enhanced as they are applied, and the ability to learn and create are capabilities that companies possess and in which they need to invest.
Last, but by no means least, is the value of time. Many critical resources and capabilities take time to develop. Advantage therefore goes to those who started first. This is not the same as first-mover advantage in the marketplace, where the first company to launch a new product may reach critical mass, or dominate a niche before its rivals – although the concept is similar.
The first to choose and follow a research path, develop a brand name, build a reputation, cultivate an innovative culture, establish a knowledge base or invest in specialist skills, will have time on their side. They will tend to get the patents, acquire the image or develop the most productive environment first. The longer it takes to develop, the deeper the capabilities will be and the greater the advantage they provide. The critical issue is choosing the right resources and capabilities to pursue in the first place, or knowing how best to make use of those the company already has. And that is a crucial management capability.
As if all this were not difficult enough, there is another, further consideration that has to be taken into account: the cost of amassing the required resources or capabilities to achieve a chosen strategy. If ‘above average profits’ are the aim of sustainable competitive advantage, the process of amassing resources to fulfil a strategy must not outweigh the profit potential of that strategy.
Reputations, brand names, patentable products or processes do not come cheap. But if they cost more than they are worth, or are deployed badly once possessed, then future profitability or intrinsic value are destroyed. When companies seek to buy resources by, for instance, licensing a new technology, buying prime site locations, co-venturing to build knowledge or even acquiring another company, they are likely to find that the expected level of future profits are already, at least partly, reflected in the price they have to pay. Because, in the end, it is the cost of the necessary resources that directly affects profitability, there are strong arguments for creating them internally rather than acquiring scarce resources in open competition in the marketplace.
To acquire or build resources and capabilities at the lowest cost, competition for them – in whatever form – must remain limited. If competitors recognise the value of developing a brand name in the same market at the same time, the stakes are automatically raised. If rivals decide that the same technology is the key to the future, the value of specialists in the field, whether as individuals or corporate entities, rises as competitors outbid each other to recruit or buy them.
Again, first-mover advantage is likely to apply. The first to seek out important scarce resources will tend to pay less for them than the last to do so. The first mover also tends to get the ‘pick of the crop’. However, for this to apply, the need for a particular resource must, by definition, be largely unexpected. If it were widely anticipated, then everyone would move at once.
First movers, therefore, have to be better informed, so that they can accumulate resources before competitors recognise the value of the strategy for which they are being obtained. This is difficult for two reasons: the same methodologies for analysing the business environment are now widely practised, and more and more information is constantly becoming available. This means managers need special insights, unusual foresight or sheer good fortune.
Such good fortune occurs when managers find their company has already accumulated the resources which, when combined in a different way, enable them to undertake a chosen strategy. If those resources were the result of some previous management decision(s), they may well have been obtained at a price much lower than a competitor would now have to pay to match them. Indeed, it is precisely because the outcomes of managerial decisions are uncertain, and are specific to a particular company at a particular point in its history, that the cost of resources and capabilities may not reflect their value at some future date. Such uncertainty tends to revolve around different expectations about the future, with some managers being more accurate than others. Misfortune occurs when managers overestimate the potential value of a strategy and pay too high a price for the necessary resources. If they have outbid rivals for them, they suffer from what Jay Barney terms "the winner’s curse".
Unexpected change – brought about by, for instance, rapid technological breakthroughs, sudden shifts in increasingly fickle consumer tastes, or radical market entry by an innovative newcomer – tends to dramatically alter the distribution of profits in an industry. It is critical, therefore, that managers do not sit back and rely on good fortune. Constantly alert to the shifting sands of their environment, they need to have a deep understanding of their existing resources and capabilities, know how they are currently deployed, and continually assess what new capabilities may be needed in the future.
Because barriers to imitation often protect the first successful mover, speed, even when there are high levels of uncertainty, may be critical. As Richard Rumelt points out, good strategy is not necessarily enacted with a high degree of initial confidence, even if managers might appear confident. Unless there is a difference between the subsequent value of a strategy and the prior cost of acquiring the necessary resources, there will be no above-average profits. Counter-intuitively, uncertainty is the strategic opportunity to get it right – if companies wait until the best entry or production method is fully understood, it will normally be too late to take advantage of that opportunity. Unfortunately, as Harold Demetz points out: "It is not until the experiments are actually tried that we learn which succeed and which fail."
Because uncertainty carries with it the greatest profit potential, sudden opportunities can easily seduce managers into the rapid acquisition of, and heavy investment in, the resources and capabilities that appear necessary to take advantage of them. If the opportunity appears attractive enough, other temptations arise. One is to ignore the cost implications of competing for desirable resources, another is to overlook the fact that any resources that can be acquired quickly also tend to be relatively easy to imitate. Furthermore, as Richard Nelson and Sidney Winter point out, just as individuals cannot know their job just by mastering the required routines, no more can organisations become capable of high performance just by acquiring all the ingredients – even if they have the recipe. Few capabilities are easily and quickly acquired.
Generally, such sudden bursts of enthusiasm and investment do not adequately compensate for failures in consistency over time. Important resources have to be developed over long periods. The loyalty of a company’s dealers must be cultivated, the trust of its customers earned, brand strength built. Capabilities are the product of organisational skills, experience and learning and are themselves dependent on previous accumulations of learning, investment and development. Other intangible resources, such as patented products and processes, are similarly the result of protracted internal R&D activity.
Again, time is a critical factor. ‘Crash’ R&D programmes, for example, are typically less effective than consistent, lower outlays over time. Consistent first movers, provided they move in the right direction, have the advantage. Steady accumulators have other advantages because success often breeds success. Companies who have already developed important technological or production know-how are more likely to make further advances or breakthroughs. The same applies in other areas, for instance strong brand awareness can accelerate new product take-up, making it very difficult for competitors to catch up, particularly in a market where achieving ‘critical mass’ or market dominance matters (for example in the video games market).
Without constantly being topped up, all capabilities and resources decay over time. Flows (like advertising expenditures), which can be turned on or off at will, are much less powerful than stocks (brand loyalty) accumulated and maintained over time.
History matters, and matters a great deal. Past decisions, strategic choices and subsequent management actions will all have determined the inherent capabilities and resources that a company has accumulated. These, in turn will tend to dictate which future resources and capabilities can be most easily developed. Conceptually therefore, companies already possess a portfolio of strategic options largely determined by earlier choices. In the same way, current decisions about new resources and capabilities may be seen as buying future options, giving today’s strategic choices a much longer-run, and greater, impact than many managers appreciate.
So trying to break out of such historical patterns has implications because critical capabilities that enable companies to perform well often reside in their organisational memory, based on knowledge developed through shared experience. Indeed all-important innovation usually results from fresh combinations of existing knowledge and new learning and people tend to learn best in areas where they already have experience. Bruce Kogut and Udo Zander point out that the further companies move away from their knowledge base, the more their probability of success becomes that of a start-up operation. The same may apply if companies fail to safeguard the historical knowledge base retained in their organisational memories – the more they lose, the more they have to keep starting from scratch.
As far back as 1957, Philip Selznick defined the role of leadership as being "to defend the integrity of an organisation and its distinctive competence". Many managers fail to recognise that it is the particular combination of their company’s resources and capabilities, rather than the end product or service itself, that lies at the heart of their company’s competitive advantage. They therefore run the danger that those resources and capabilities are inadequately protected from imitation, may be rendered useless by substitution or even seduced away by competitors. Managers may also fail to appreciate the criticality of time in the accumulation of powerful capabilities and the fact that they need to be constantly maintained and developed.
Richard Rumelt takes this further, arguing that because a company’s competitive position is defined by a bundle of unique resources and relationships, it is the task of general management to adjust and renew these resources and relationships as time, competition and change erode their value. Simply living off current resources and capabilities will, in the long run, lead to inferior competitive performance, increasingly restricted profitability and inevitable decline.
The strategic problem therefore facing managers is to decide upon, and then develop, those resources and capabilities that are both most difficult to imitate and yet most likely to provide a platform for the valuable products and services needed in the competitive markets of the future. These choices, about how and where to invest, are critical because they form long term commitments that are difficult to reverse. Making such decisions and commitments, in the face of real uncertainties about the future, tests strategic management ability to the full.
While economists and management academics wrestle to construct a solid underpinning of theory for this view, many managers will judge it intuitively by its fit with reality and its applicability. To paraphrase one of the contributors, while the model is freely available to all, its strategic ramifications depend on managers’ ability to make good use of it.
At the very least, the model should prompt managers to look at how they currently make best use of, and protect, their own company’s specialised resources and capabilities, while provoking thoughts about those needed for the future. Although, and this is a significant implication of the concept, many companies may not know what it is that they do well! Where this is the case, much benefit may be gained by some really sound investigation and thinking. SWOT analysis conducted purely from this perspective may yield valuable insights.
The broader implications are potentially vast – not just in the form of a ‘to do’ list, but in the changes of perception that the concept brings. What, for instance, does the resource-based view say about joint ventures and alliances? What, for that matter, are the implications for outsourcing, partnership sourcing, the supply chain and sourcing decisions generally? What about organisational learning and especially knowledge management, where codification of knowledge may be a double-edged sword? At a more general level, what part may benchmarking play in lowering barriers to imitation? How good is your ‘balanced scorecard’ at picking up the importance of accumulating resources rather than just measuring their current performance? And so on.
The resource perspective is not alone in recognising the strategic significance of managing the firm's human capital. But its strategic analysis of barriers to imitation, intangible resources and the development of capabilities all help to explain why knowledge and people management are receiving more attention, not only as sources of competitive advantage but as essential just to stay in the race.
Having said all that, resources and capabilities are only half the equation. The critical issue is how they are used.