Strategy 2: The resource-based view of strategy

In part 1 of this short series, I shared my understanding of Porter’s Diamond using an example of Germany’s luxury car manufacturing industry. Now in part 2, I will further narrow it down to the internal analysis level and explain the importance of resources, capabilities and VRIO.

What is the resource-based view of firm strategy?

The idea of the resource-based view of strategy was presented in Jay Barney’s paper “Firm Resources and Sustained Competitive”, which highlights the idea that resources and capabilities are the key drivers for greater profitability and a sustained competitive advantage.

Tools such as Porter’s five forces are useful for understanding industry profitability. However, economic performance is not just about looking at the external environment but also a firm’s internal environment.

Sustainable competitive advantage

Ultimately, the main objective of strategy is to create a sustained competitive advantage. Since a firm’s resources and capabilities are the key drivers of a sustained competitive advantage it needs to satisfy four key VRIO characteristics that are:

• Valuable
• Rare
• Imperfectly imitable
• Organisational exploited.

What does VRIO mean?

 A firm’s resources and capabilities need to add value to create a competitive advantage. Here, the main objective is to increase efficiency. For example, a new IT system is valuable since it increases efficiency by increasing the number of calls an agent can answer. The second objective is to increase effectiveness. For example, opening a new regional campus increases effectiveness and enables outreach to a new market of students.

Resources and capabilities need to be valuable and rare in order to achieve a sustained competitive advantage. If a valuable resource or capability is common and shared by many firms it will not lead to a sustained competitive advantage but rather a competitive parity.

A firm’s resources and capabilities also need to be imperfectly imitable. If competitors have difficulty copying these resources, then firms can obtain a temporary advantage. Four factors that can make something imperfectly imitable includes:

• Uniqueness by nature and legal right. For example, patents.
• Historical condition. For example, a resource obtained or developed due to a historical event, which could not be recreated or obtained over a period of time.
• Casual ambiguity, which refers to the firm’s unclear understanding why their resources create value.
• Social complexity that arises from trust, informal and interpersonal relationships and culture.

By having resources and capabilities that work together, it makes it more difficult to be copied and so a firm can obtain a temporary competitive advantage.

Finally is the ability to be organisationally exploited. This refers to the firm’s ability to exploit the full competitive potential of a resource/capability. Firms need to have its strategy, structure and processes aligned to give its people an incentive to exploit the firm’s strategy.

 A firm’s analysis of its internal environment is as important as the external environment. We can see that resources and capabilities are drivers of a sustained competitive advantage and profitability. Therefore, it is important to understand the four VRIO characteristics.

Barney, J (1991) Firm resources and sustained competitive advantage. Journal of management, 17(1).

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Peter Tran is a Digital Intern at MEC. He is in his final semester at the University of Technology Sydney, majoring in Marketing and Environmental Science.