Module MT110

Resource-Based View

 

Module author

Nitin Pangarkar

NUS Business School
National University of Singapore
Singapore

Learning objectives

After you studied this module, you will be able to:

  • Define resources according tot he resource-based view of the firm.
  • Explain what resource-based view is about and what it tries to explain.
  • Discuss why it is relevant to know about this theory in today's economic environment and management practice.
Workload units 1
Reading extract Resource-Based View

 

Why Open School of Management believes that knowing the resource-based view is helpful

Resource-Based View (RBV) is a tricky concept for a business entrepreneur to understand, but one that must be understood if an individual hopes or expects to enter business stardom.

First and foremost, it is important for one to understand that resource-based view is one of a number of economic theories that attempt to define the best way in which a business can maximize productivity and, thus, profit. It is not a law, and it has not been factually proven, although there are certain statistics and case studies which give prudence to the idea of RBV.

So, what is Resource-Based View? A textbook definition of RBV is that, in a given market, a business will gain competitive edge (as well as sustainability) over its opponents only when 1) the resources of said business (i.e. land, labor, capital) are being implemented in a manner that captivates complete productivity with said resources, and 2) the resources are heterogenous when compared to similar resources of other businesses in the market.

Now, we understand that the definition above is quite a mouthful, so we think it would be useful if we broke it down into actual examples.

However, before we begin with the examples it is also important for us to understand that there are also two sorts of resources that are measured when comparing how well companies are actually doing. These are tangible resources and intangible resources.

For example, an internet-based corporation like Ebay only has a couple billion dollars, presumably, in physical, tangible, real resources. These resources would include people, the Ebay headquarters, and a few different hardware properties that allow Ebay to maintain its presence on the web. However, the intangible resources that a company will maintain are usually worth many times what their tangible resources are. For example, Ebay maintains a public presence in the stock market which is worth many billion dollars, so Ebay's brand as an idea (in this case presented as a company on the stock market) is worth close to $60 billion.

Still, tangible resources play an extremely important role in insuring that a business is able to develop intangible property values in the first place.

Now, concerning the first rule of RBV theory, available resources must be used completely and most productively in order for a business to maintain competitive edge. So, let's assume that McDonalds has hired 1 million people nationwide. Furthermore, one specific McDonalds has hired 20 people in a metropolitan area. If there is a demand for 800 burgers an hour at this specific location, each employee will need to be capable of making 80 burgers/hour.

If each person is capable, with the given technology available, to make 80 burgers an hour, then that business will be able to compete with other food businesses around it because it is able to meet demand needs with a resulting supply continuously.

Next, a business must have resources that are heterogenous when compared to the resources of other similar businesses in a local market.

Let's use McDonald's again. Now, McDonald's, Cookout, Wendy's, and a variety of other restaurants all make hamburgers. All of these restaurants also now have dollar menus or cheaper menu options that are comparable with each other. So, why is McDonald's able to thrive any more if it is no longer the only restaurant with a dollar menu/cheap dining options?

The answer is simple. Although McDonald's, Wendy's, and everybody else in the world makes hamburgers, the meat used in McDonald's burgers is slightly different from that of Wendy's and et cetera. McDonald's meat is heterogenous to the meat of its surrounding fast food competitors. As such, McDonald's, as well as Wendy's, are both able to maintain sustainability in the fast food market because they both offer slightly different products that appeal to different consumers.

When price is the only determinant, the business with the cheapest price will always, or almost always win. But when factors like style, brand, and quality play into product consumption choices for a customer, many more businesses are able to survive and thrive in a given market.

What does all of this mean for my business?

If you believe in the theory of Resource-Based View, there are quite a few ways that you can change your business for the better. Most of these changes affect land, labor, and capital:

1. Concerning land, you will want to make sure that your business is set up in a prime location depending upon the products it produces. A prime location is a location that will allow the most product to be created and/or sold. So, if you're running a fast good joint, you'll want to be on a popular street corner in a big city. Why? Because, even though your rent will be higher, your profits will increase greatly assuming you are making proper use of labor and capital.

2. As far as labor goes, you will want to higher motivated individuals and provide them with incentives to working well. If they quit meeting their expected productivity level, they are not useful to your business. You must meet maximum productivity in order to meet maximum results. So, sometimes that means firing people who aren't dedicated to their work. However, sometimes it also means promoting those individuals who are most valuable (productive) for your business so that they continue to have incentive to work for you.

3. Finally, you must have great capital. Capital consists of buildings and machinery. So, in order to stay competitive, your buildings must be in a condition to where they can serve their proper purpose, and your machinery (or technology) must be on par with standards necessary to produce at the same rate as other businesses within the same market.

Really, you must make maximum use of your resources at all time. According to Resource-Based view, you will be successful in the competitive market if you can do so. Furthermore, your business will be sustainable.

 

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