Resource Based View of the Firm

The Resource-based View of the Firm (RBV) is an approach to micro-economics and business strategic management that became popular in the 1990s, although its origins can be traced back to Edith Penrose (“The Theory of the Growth of the Firm”,1959) and G.B. Richardson (“Information and Investment, a study in the working of the competitive economy”, 1960).

Major proponents were Wernerfelt, B. (“The Resource-Based View of the Firm”), Prahalad and Hamel (“The Core Competence of The Corporation”) and Barney, J. (“Firm Resources and Sustained Competitive Advantage”).

The approach is based on the concept that firms consist of various types of tangible and intangible resources – skills, knowledge and experience; technology; data and information, materials, location and processes. When these resources are combined, they create ‘Capabilities’ (viewed as a special type of resource), some of which, either individually, or in combination, create a set of “Core Competencies” (also termed “Core Capabilities” or “Strategic Capabilities”), that provide a sustainable competitive advantage to the firm.

Core competencies are not product/service specific, but contribute to the competitiveness of a range of products and services. They transcend any particular product or service, and potentially any single business unit within the organisation.

Not all resources are equal. It is those resources that are valuable and rare that create a competitive advantage that is sustainable, i.e. are difficult for competitors to imitate.

What this leads to are companies that do not think of themselves purely in terms of the products and services they provide, but also as a set of core competences, that create global leadership in the sectors they choose to operate within.

On the surface these companies can have product portfolios that seem idiosyncratic. A good example is Honda, who’s core competence in engines and power trains has given it a long standing competitive advantage in car, motorcycle, lawn mower and generator businesses. This is also reflected in their long standing commitment to formula One – a good example of how core competences can be re-enforced further, by how the company is perceived.

In the service sector, more recent examples include Amazon and Google, who have created highly diverse businesses, but based on some clearly well thought through core competences.

Beyond strategic planning, RBV has two principal areas of application relevant to service and service operations design, both of which I have covered under “Methods”:

Sourcing Decisions. To paraphrase Prehalad and Hamel, “it is not possible for a company to have an intelligent alliance or sourcing strategy, if it has not first made a choice about its core competences”. A good example of this is Ocado in the UK. Extensibly an online Supermarket, they view themselves foremost as a technology company.

Business/Enterprise Architecture. The link to the architecture of the enterprise was originally made by Prahalad and Hamel in “The Core Competence of the Corporation” and in their well known book “Competing for the Future”. They argued that companies should develop a corporate-wide “strategic architecture”, that identifies which “core competences” to build; and their constituent technologies and other resources. Today, this approach can be seen through the use of Business Capability Modelling (BCM), which provides the principal link between strategy and operational design.

Further Reading….