So, you may have heard of the resource-based view (RBV), resource-based model or resource-based theory and wonder if it can help you with your startup strategy. Well, you’re in luck, because as it’s one of the models studied in detail in business strategy courses so I’ve had a few encounters with it in the past. As part of my start-up exploration, I really had to look at my business strategy in light of what I’d learned about the RBV of the firm and how I can use resource-based view examples to help me develop my business.
Now, like all models, the RBV has to be considered as part of a toolkit, not something to be taken as gospel. Models are designed to challenge your thinking, provide you with different perspectives and ways of looking at things, unique viewpoints and ideas but only when you engaged with them critically. It is imperative when using any sort of model that you undertake to unpack implicit and explicit assumptions containing within both the model and your own thinking around the task at hand. There may be elements of the model that can provide you with value, you may discard it completely as inappropriate in your circumstances or you might find that combining some of its ideas with other models delivers you with a unique value proposition.
- Firstly, what are Resources?
- What about the positioning school?
- Enter the Resource Based View
- A quick word on Capabilities
- Organising Your Resources to Gain Competitive Advantage
- Resource based view examples – working through my startup strategy
- My key 3 reasons for using Resource-Based Model Examples
- Understand resource gaps in my offer – and make a plan to fill them
- Explicitly look for new ways to combine my resources and capabilities to deliver value
- Identify any “attic” resources that might become new income streams
- How does this help your business?
- Additional Source Details:
Firstly, what are Resources?
The dictionary definition of a resource is a bit too confusing for my liking; however, it’s what you’ll often encounter so I’ve included it here.
“An economic or productive factor required to accomplish an activity, or as means to undertake an enterprise and achieve desired outcome. Three most basic resources are land, labor, and capital; other resources include energy, entrepreneurship, information, expertise, management, and time.”http://www.businessdictionary.com/definition/resource.html
In line with most of the thinking around the RBV, I much prefer Robert Grant’s (2010, p.119) definition splitting resources down into three distinct areas. I find this makes identification of resources easier:
This is anything that you can touch, this includes things like assets (money, buildings, equipment, borrowing capacity, etc)
These are the things that generate value for your business, but you can’t touch them – things like your brand, reputation, ownership of patents or copyrights and your corporate culture.
Things inherent within your human resources like skills, motivation, communication and collaboration.
Within a single-person startup, like mine, the majority of my resources will exist within Tangible and Human segments, although it is very important not to overlook the value of your personal brand. Over the past almost fifteen years I’ve worked for three major employers and within that time I’ve not only interacted with people within those businesses, but also with their suppliers and customers. Now it will take some careful effort to leverage my personal brand (or the positive relationships that I’ve built with my former employers, colleagues, fellow students, consultants, suppliers, customers, etc.) to translate its value into my corporate brand but that is part of the strategy that I will have to devise.
What your business gets from its resources
Resources are the building blogs of value generation. Part of the value generated by your business becomes the product or service that you provide to your customers. But as an extension, your resources are also the building blocks of the value that you generate for your business through leveraging these resources. It sounds confusing, I agree.
Increasing the value generated by tangible, intangible, or human resources might involve finding a way to improve your process to generate more value with the same level of resources, or be deployed in a way that is more profitable for your business. If you think about it, your resources aren’t fully utilised in only generating value for your customers, there will be elements of process improvement or automation to help you achieve the same amount of value faster or through deploying fewer resources. There also might be new ways of deploying your resources that generate additional value.
Using my startup journey as an example, my business will be a bootstrapped startup – therefore all its initial funding is coming from my savings and my only human resource at the beginning will be me.
The majority of tangible assets will be pulled from my personal inventory (laptop, printer, space in which to work, etc).
The human resource side will consist of skills, expertise and time, therefore, anything I can do to make the administration sides of my business slicker and more streamlined automatically will free up my “time” resource to work on the value generation side. However, on the flip side, the cost of gaining back this time is often a decrease in the “cash” resource when paying for automation tools. Therefore to justify the resource balance between the time gain and cash cost the time that I regain must be deployed in such a way that it generates more value than the cash cost of the administration “slickness”.
What about the positioning school?
You may have heard that there are two ways of gaining customers – being competitive on price or being unique. The is the positioning school’s way of thought based on Michael Porter’s books Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980) and Competitive Advantage: Creating and Sustaining Superior Performance (1985) and is often shown in a 2×2 matrix.
The difficulty with 2×2 matrices is that they distill all of the nuances of life down to make it simple enough to fit into four boxes, and as we all know, nothing is really that simple. So 2×2 matrices must be considered to be a model used to describe something simply – not an accurate reflection of reality. Another thing to be aware of is that a 2×2 matrix cannot take into account changes due to time marching on, and in the startup world, time moves fast.
As you can see in the image below, a simplistic version of strategy as ascribed to the positioning school has two sweet spots, you can either provide a generic product or service and compete on lowest price or a unique product or service and price it accordingly. Now, as the 2×2 matrix doesn’t account for time progression the unique product or service that you offered yesterday may become generic as the market copies it tomorrow – something to be aware of!
Firstly, let’s consider the generic product with cost leadership. This can be seen on marketplaces like Amazon, or Fiverr where you have an option of vendors for the same (or similar) product or service. It seems like a no brainer really, if the value that you’re getting is the same no matter who you buy it from, then you will choose the lowest cost supplier. It also forms the basis of a lot of corporate strategic purchasing initiatives when the company focus is on cost superiority rather than quality, relationship or expertise.
If your product or service is unique, the positioning school suggests that you should price it around the highest point that the market will support. If we revert, for a moment, to the idea of shareholder value – then this approach makes sense. As a business, if our primary aim is to generate shareholder funds then achieving the highest possible sustainable price for our unique offering will maximise our profitability and satisfy the shareholders.
If, however, we are approaching our business in a more collaborative way, and we wish to generate value for our full range of stakeholders, we might decide to price our unique product or service at a more collaborative, relationship building level that delivers an Irresistible Offer to our customer.
There is a full section on the irresistible offer in the Beginner’s Guide to Moving from the Corporate World to Entrepreneurship. If you don’t fancy reading the whole thing you can skip straight to it by choosing Creating the Elusive Irresistible Offer in the table of contents.
Now, the cost/uniqueness misses. If you underprice your unique product or service you are seen to disservice your business in two ways: you are reducing the perceived value of your product/service within the market, effectively setting a ceiling price (“leaving money on the table”) and you may cast doubt onto the quality of the offer amongst your ideal customer base. On the other hand, if you overprice your generic product you may make a few sales, but the majority of the customers will be cost-focused when acquiring generic products and services and will go to a cheaper competitor.
This all assumes, of course, that the market into which you are supplying your product or service is basically homogenous. That is to say that all customers in the market want the same thing for similar reasons and that business strategy definition is an analytical process appropriate to most industries at most levels. Therefore, once you’ve established your strategic goal, you apply a generic strategy (such as cost/uniqueness). As we all know, very little is actually generic and while analytic processes deliver some value (I have to say this, I’ve spent most of my career in analytical roles), you would do your business a disservice not to acknowledge the uniqueness surrounding it and its market.
Enter the Resource Based View
It is generally considered that the resource-based view of the firm came into its own in the late 1980s / early 90s, although the 2015 Harvard Business Review paper Navigating the Dozens of Different Strategy Options by Martin Reeves, Knu Haanaes and Janmejaya Sinha dates it as early as 1984. In 1990 C. K. Prahalad and Gary Hamel published their paper The Core Competence of the Corporation in the June edition of the Harvard Business Review. This paper emphasized the role of resources and capabilities within the understanding and derivation of business strategies and was a catalyst in bringing this way of thinking to the forefront.
So, we’ve spoken a bit about resources already, but what we now need to look at is how we take those resources and use them to create a competitive advantage in a manner that is slightly more sophisticated than merely being price competitive or providing a unique offering. For this, we will look to J. Barney’s 1991 paper Firm resources and sustained competitive advantage published in the Journal of Management as cited by Grant (2010). In which Barney explored the assumption that resources are not evenly distributed across businesses and came up with a method of determining the potential of the organisation’s resources to generate sustainable competitive advantage.
A quick word on Capabilities
The tangible, intangible and human resources available to your business are useful in and of themselves; however, the majority of the value creation potential comes from being able to put them to a coordinated, cross-functional use. Combining resources together is used to create competencies. Core competencies are considered to be those resources and capabilities that are the foundation of a business’s competitiveness in its marketplace.
Now while on the surface it may seem like identifying resources and capabilities is a fairly straight forward exercise, the nuances of the individual business must remain at the forefront of your mind. A straight forward value chain analysis may not, for instance, be sophisticated enough to identify some unique resources or capabilities of your business. This tends to be the case in older organisations and Grant (2010, p.123) advises that this can potentially be overcome by undertaking an evaluation of past challenges and successes. There may be patterns in the business’s history which once identified can point the way to these key, but not explicit resources and capabilities.
Organising Your Resources to Gain Competitive Advantage
Barney suggested that for the resources and capabilities identified to generate a sustainable competitive advantage for a business or organisation they must possess four key attributes:
- Be Valuable
- Be Rare
- Be Imperfectly Imitatable
- Organised so that the firm can capture their value
- increase the value delivered to the customer
- decrease the cost of the offer
- extend the offer to deliver more value for the same cost
- create a new and valuable offer
- exploit opportunities identified outside the organisation
- defend from threats identified outside the organisation
- difficult to acquire resources are considered rare
- resources that are only available to one or a few firms
Imperfectly Imitatable Resources
- Expensive for another company to acquire or imitate this resource or capability
- Difficult to find or create a comparable resource or capability to substitute
Barney identifies three reasons why resources may be difficult or costly to imitate.
- The desired resources or capabilities are based in the complex interpersonal relationships or culture present in your organisation. This is called Social Complexity.
- The desired resources or capabilities may have arisen as a byproduct of the organisation’s history. Historical Conditions often create resources or capabilities that are very difficult to copy or substitute – these are also the resources and capabilities that are often difficult to identify because they are just “there” in the fabric of the company.
- We just don’t know how we got here – these resources and capabilities are put down to Causal Ambiguity, and because no one knows how they occured, they can’t be recreated.
Organised for value capture
Having all these Valuable, Rare and Imperfectly Imitable resources or capabilities is useless if you don’t put them to work. Your business needs to be organised to make use of the resources and capabilities that have been identified as creating your competitive advantage – otherwise, they are as useless to your business. Consider unutilised valuable, rare and imperfectly imitable resources and capabilities to be the garlic press of the business world – as everyone can chop garlic it seems like a purposeless kitchen gadget until you actually use it!
Resource based view examples – working through my startup strategy
Strategy can be a scary word, because it has big connotations. If you get strategy wrong there can be serious business consequences, but the same is the case if you fail to have a strategy at all. So to make strategy a bit more appealing at this point, I’m going to work through some models that are helping me define how I’m going to achieve my long term goals – this is, after all, the crux of strategy.
My key 3 reasons for using Resource-Based Model Examples
Now rather than give you examples of the resource-based view, because they would be a retrospective analysis of what people have done shown within the resource-based view framework, which doesn’t help you with applying the theory to generate forward-looking value. I’m going to show you three different models that you can use to help you understand gaps in your resources, and give you the basis for planning how to fill them, look for new ways of combining your resources to generate value, and identify some idiosyncratic resources that may seem out of step with your core offer, but could potentially generate a new income stream.
Understand resource gaps in my offer – and make a plan to fill them
So, resources, as we’ve mentioned already consist of tangible, intangible and human elements. Before we can identify gaps in our offer, we need to inventory what resources we have available in these three categories (all of them, even if they seem irrelevant). This is slightly easier with a one-man setup, like I’m planning; however, it’s also completely doable as a group.
Regardless of if you are starting completely from scratch (without a formed offer yet) or not, then you will want to note down every possible resource you can think of in each category. Keep them somewhere safe and add to them as you acquire, develop or think of any new resources. These lists will be very helpful when you’re looking for new ways of combining resources and capabilities to deliver value. They will also be your businesses “strengths” both solo and when combined into capabilities.
Now, this phase can happen before or after you’ve identified your market and offer – the advantage of doing it before is the available resources can be used to define the business (the business can be defined as a bundle of resources rather than a provider to a specific market or segment). This can lead to more stability in volatile times because your resources and capabilities are something that the business itself can control where as the market is not.
Take what you now know about your company resources, and identify any areas of gap or “weakness”. Now prior to the identification of your market and product or service this may be limited to technical gaps – for example, I can’t do my own accounts, therefore, I will need to acquire the resource of “accounting”. However, I don’t need a full-time accountant for my business, so I can satisfy this gap by outsourcing the accounting function to a service provider. In the short term, it is often more efficient to outsource filling the gaps; however, depending on the importance of the resource to your business you may wish to either develop the necessary resources internally (I’m upskilling in graphic design because my business will require a lot of this resource, and I enjoy it) or acquire them through hiring appropriately skilled individuals.
You now have internal business side of a SWOT chart completed, as you have identified your businesses strengths and weaknesses.
Explicitly look for new ways to combine my resources and capabilities to deliver value
If you’ve read my Beginner’s guide to Escaping 9 to 5 then you’ve already encountered the SCAMPER model. It is a great way of taking inspiration from outside the business to look at new product or service development ideas. However, this time, rather than using it to look for products or services to offer to the market, we will take the same approach but twist our starting point so that we are keeping all of our resources and capabilities at the forefront of our minds.
So, as you work through Substitute, Combine, Adapt, Modify, Put to Another Use, Eliminate and Rearrange this time think of your resources and capabilities identified in the previous step and how they can be used. Leveraging creative techniques again I find it useful to note down all the ideas generated on a mind map, rich picture or on post-its in a storyboard form and add to them as more ideas are generated.
Identify any “attic” resources that might become new income streams
While identifying your business resources, did you stumble across any superfluous strengths? For example, in my personal resource evaluation, I have some skills which are not currently in line with my business ideas – however, I’ve noted them down anyway. Things like: I am an excellent seamstress, I play the saxophone and the piano and I can teach horseback riding. None of these seem to be things that I can obviously leverage within my current plan to escape the corporate world (I have no desire to provide tailoring services, become a musician or teach horseback riding), but I may have an epiphany around how these “attic” resources can be uniquely leveraged to generate value for my business.
As a recent example, I explored the following with a friend’s business:
In the UK the majority of beauticians do not autoclave their tools for sterilisation (the same technique involving pressure and heat as is used on medical equipment), whereas in a lot of other countries, they do. Now tattoo studios are required to use medical-grade autoclaves to sterilise any non-disposable customer contacting tools, so a tattoo studio with an underutilised autoclave could potentially offer the use of its resource to beauticians wanting to increase their level of customer protection for an appropriate fee.
How does this help your business?
The model’s and methods I’ve talked about today are not without criticisms, which I’ll get to in a moment; however, these do not take away from the fact that they can be used to generate practical strategies for your business. Equally, however, they are not fixed – so if you can modify them, combine bits together or select specific elements to provide you with more value to your business then do it!
Like all theories or models attempting to gain a handle on complex situations, the resource based view is not without its criticisms.
The first being, that identifying resources and capabilities is hard! I’ve suggested using creative techniques because that gives you the best chance of identifying outlier resources and capabilities that could become valuable later on. However, just because you’ve managed to identify your resources, it doesn’t mean that they are sufficient to achieve a competitive advantage or that you’ll be able to activate them and combine them into advantageous capabilities.
The resources that are value generating for your business may not satisfy the VRIO framework, so if something doesn’t fit the framework but you feel is that it is generating value don’t discard it! Competitive advantage also has roots in the market in which business is positioned, so depending on the market, your resources and capabilities may be insufficient to generate an advantage.
This is just a taster of some of the criticisms, you will no doubt come up with your own as you choose to work through these models, and one of those will probably be my favourite criticism – this feels a bit like a prescription if you put in A, B comes out. But I can tell you, this is not the case. All of these models should be treated as tools within your toolkit, they may be useful in some situations and they may not, it’s up to you to decide when and where you use them.
So, you now have a taster of the resource-based view of the firm, and some examples of why I’m using these techniques to help define the value generation strategy of my escape from the corporate world. As regular readers will know, my outline plan consists of leveraging both active and passive income streams within my business, and as part of that, I’m working on staying within my niche and provide everyone following my journey with access to the tools that I’m finding helpful.
With this multi-pronged strategy to income streams, one thing that is becoming quite clear is that I have set myself up for a lot of work in refining my business’s approach to each element of the income stream. Within the current turbulent times, however, I am glad that this is the approach that my initial strategic analysis lead me to.
So, to wrap it all up, resources are seen to drive unique capabilities within a business and this combination of resources and capabilities can be used to create competitive advantages within your market. The resource identification piece is hard work, but putting in the work now can create the foundation that you can build your business upon later.
Additional Source Details:
BusinessDictionary.com. WebFinance, Inc. http://www.businessdictionary.com/definition/resource.html (accessed: April 20, 2020).
Grant, R. M. (2010) Contemporary Strategy Analysis, Ninth Edition, Published by John Wiley & Sons Ltd, Chichester West Sussex.
Reeves, M., Haanaes, K., Sinha, J. (2015) Navigating the Dozens of Different Strategy Options, Harvard Business Review, 24th of June. https://hbr.org/2015/06/navigating-the-dozens-of-different-strategy-options (accessed: April 20, 2020).