1

Resource Based View (RBV) of

Competitive Advantage
An Overview
Pankaj M Madhani

The Resource Based View (RBV) analyzes and interprets

internal resources of the organizations and emphasizes
resources and capabilities in formulating strategy to achieve
sustainable competitive advantages. Resources may be
considered as inputs that enable firms to carry out their
activities. Internal resources and capabilities determine
strategic choices made by firms while competing in their
external business environment. Firm’s abilities also allow
some firms to add value in customer value chain, develop
new products or expand in new marketplace. The RBV
draws upon the resources and capabilities that reside within
the organization in order to develop sustainable competitive
advantages. According to RBV, not all the resources of firm
will be strategic and hence, sources of competitive
advantage. Competitive advantage occurs only when there
is a situation of resource heterogeneity and resource
immobility.
© The Icfai University Press. All rights reserved.

Electronic copy available at: http://ssrn.com/abstract=1578704

4 RESOURCE BASED VIEW: CONCEPTS AND PRACTICES

Introduction
Resource Based View (RBV) analyzes and interprets resources of the organizations
to understand how organizations achieve sustainable competitive advantage. The
RBV focuses on the concept of difficult-to-imitate attributes of the firm as sources
of superior performance and competitive advantage (Barney, 1986; Hamel and
Prahalad, 1996). Resources that cannot be easily transferred or purchased, that
require an extended learning curve or a major change in the organization
climate and culture, are more likely to be unique to the organization and,
therefore, more difficult to imitate by competitors. According to Conner,
performance variance between firms depends on its possession of unique inputs
and capabilities (1991).

Example
Honda, the world’s largest engine manufacturer is following a RBV strategy.
Honda built its business strategy around the firm’s strength, capability and
expertise in building petrol-based engines. Honda initially started with small
clip-on engines for bicycles then moved to two wheelers such as scooters and
motorbikes, marine engines, generators, lawn and garden equipment, and cars
(Honda and Acura automobiles) and even jet planes. Each of these products
competes in quite different product verticals, but leverages a unique resource and
capability of Honda to build world class petrol-based engines.

Origin of RBV
The RBV takes an ‘inside-out’ view or firm-specific perspective on why
organizations succeed or fail in the market place (Dicksen, 1996). Resources that
are valuable, rare, inimitable and non substitutable (Barney, 1991) make it possible
for businesses to develop and maintain competitive advantages, to utilize these
resources and competitive advantages for superior performance (Collis and
Montgomery, 1995; Grant, 1991; Wernerfelt, 1984).

According to RBV, an organization can be considered as a collection of physical

resources, human resources and organizational resources (Barney, 1991; Amit
and Shoemaker, 1993). Resources of organizations that are valuable, rare,
imperfectly imitable and imperfectly substitutable are main source of sustainable
competitive advantage for sustained superior performance (Barney, 1991).

Electronic copy available at: http://ssrn.com/abstract=1578704

 Resource Based View (RBV) of Competitive Advantage: An Overview 5

A resource must fulfill ‘VRIN’ criteria in order to provide competitive advantage

and sustainable performance. A ‘VRIN’ criterion is explained below.

1. Valuable (V): Resources are valuable if it provides strategic value to the

firm. Resources provide value if it helps firms in exploiting market
opportunities or helps in reducing market threats. There is no advantage
of possessing a resource if it does not add or enhance value of the firm;
2. Rare (R): Resources must be difficult to find among the existing and
potential competitors of the firm. Hence resources must be rare or unique
to offer competitive advantages. Resources that are possessed by a several
firms in the market place cannot provide competitive advantage, as they
cannot design and execute a unique business strategy in comparison with
other competitors;
3. Imperfect Imitability (I): Imperfect imitability means making copy or imitate
the resources will not be feasible. Bottlenecks for imperfect imitability can
be many viz., difficulties in acquiring resource, ambiguous relationship
between capability and competitive advantage or complexity of resources.
Resources can be basis of sustained competitive advantage only if firms
that do not hold these resources cannot acquire them;
4. Non-Substitutability (N): Non-substitutability of resources implies that
resources can’t be substituted by another alternative resource. Here,
competitor can’t achieve same performance by replacing resources with
other alternative resources.
According to Barney valuable resource ‘must enable a firm to do things and
behave in ways that lead to high sales, low costs, high margins, or in others ways
add financial value to the firm’ (1986, 658). Barney also emphasized that ‘resources
are valuable when they enable a firm to conceive of or implement strategies that
improve its efficiency and effectiveness’ (1991, 105). RBV helps managers of
firms to understand why competences can be perceived as a firms’ most important
asset and, at the same time, to appreciate how those assets can be used to improve
business performance. RBV of the firm accepts that attributes related to past
experiences, organizational culture and competences are critical for the success of
the firm (Campbell and Luchs, 1997; Hamel and Prahalad, 1996). Table 1 provides
brief outline of prior work on RBV.
6 RESOURCE BASED VIEW: CONCEPTS AND PRACTICES

Table 1: Prior Work on the RBV

Authors (year) Major Contribution

Penrose (1959) Emphasizes the internal resources of a firm. A

firm's growth is based on a firm's resources and
limited by managerial resources

Andrews (1971) Emphasizes management of internal resources

Lippman and Rumelt (1982) Sustained competitive advantage results from rich
connections between uniqueness and causal
ambiguity

Wernerfelt (1984) Firms as bundles of resources

Rumelt (1984) Strategic theory of the firm based on the idea of

firms as resource bundles

Barney (1986) Characteristics of the factors market determine

possibilities for a firm to earn rents

Rumelt (1987) Firms as rent-seekers. The importance of isolating

mechanisms to earn rents

Rumelt (1987), Dierickx and Cool (1989)
Summary article on imitability barriers (e.g., causal
ambiguity and isolating mechanisms like asset
interconnectedness, asset stock efficiencies, etc.)
that impede (or make very costly) imitation from
other competitors

Day and Wensley (1988), Aaker (1989), Strategic formulation models that have firm
Grant (1991), Wernerfelt (1989) resources as the central concept and as the sources
of sustainable competitive advantage

Prahalad and Hamel (1990) Core-competencies as the drivers of corporate

strategy and diversification. Business should
exploit and leverage core competencies.
Corporations should diversify in related businesses
which can make use and enhance the core
competences of the organization
Contd...
 Resource Based View (RBV) of Competitive Advantage: An Overview 7

Contd...
Hansen and Wernerfelt (1989), Empirical studies that support the hypothesis that
Rumelt (1991) firm-specific resources or organizational factors are
more important than industry variables for
explaining firm superior performance

Barney (1991) Key strategic resources can be sources of strategic

competitive advantage if they are scarce, difficult to
imitate, non-substitutable, and valuable

Conner (1991) Comparison of the resource based theory of the

firm with other strategic approaches derived from
economics. Clarification of assumptions of the
resource based theory and its implication for rent
earning strategies

Peteraf (1993) An integrative resource based framework for

strategic competitive advantage. Proposes that
firms obtain superior performance, by earning rents
from scarce and efficient resources and/or form
market power in the product markets

Day (1994) Capabilities framework of strategic competitive

advantage. Distinguishes between outside-in,
spanning and inside-out capabilities

Collis and Montgomery (1995) Managerially-oriented review of the RBV

Grant (1996) Knowledge based view develops considering

knowledge as the key or strategic asset of firms

Teece, Pisano, and Shuen (1997) Dynamic capabilities as sources of competitive

advantage

Adapted from Olavarrieta & Ellinger, 1997; Mahoney, 2004.

Resource Based View: Types of Resources and Capabilities

According to RBV, resources can be broadly defined to include assets,
organizational processes, firm attributes, information, or knowledge controlled
by the firm which can be used to conceive of and implement their strategies
(Learned, Christensen, Andrews and Guth, 1969; Daft, 1983; Barney, 1991;
8 RESOURCE BASED VIEW: CONCEPTS AND PRACTICES

Mata et al., 1995). Examples of resources are brand names, technological abilities,
efficient procedures, among others (Wernerfelt, 1984; Olavarrieta and Ellinger,
1997; Spanos and Lioukas, 2001). Other researchers have classified different
resources as tangible and intangible (Itami and Roehl, 1987; Hall, 1992; Hall,
1993). When identifying resources, several researchers have grouped specific types
of resources that may enable firms to conceive and implement value creating
business strategies (e.g., Hitt and Ireland, 1985; Grant, 1991; Amit and
Schoemaker, 1993; Black and Boal, 1994; Bogaert, Maertens and Van
Cauwenbergh, 1994; Wade and Hulland, 2004).

Barney (1991) categorises three types of resources:

1. Physical capital resources (physical, technological, plant and equipment),

2. Human capital resources (training, experience, insights), and
3. Organizational capital resources (formal structure).
Brumagim (1994) presents a hierarchy of resources with four different levels
of corporate resources;

1. Production/maintenance resources (considered the most basic or lowest

level),
2. Administrative resources,
3. Organizational learning resources, and
4. Strategic vision resources (considered the most advanced or the highest
level).
All firms possess a wide spectrum of resources and capabilities. For better
understanding of resources it is necessary to distinguish such varied resources.
One useful approach for such classification is to group resources in two categories
viz., tangible resources and intangible resources (Table 2).

Identification of Resources and Capabilities for Sustainable

Competitive Advantages
The RBV has been useful in identifying the basis by which the resources and
capabilities of a firm serve as sources of sustained competitive advantage (e.g.,
 Resource Based View (RBV) of Competitive Advantage: An Overview 9

Table 2: Types of Resources and Capabilities

Tangible Resources and Capabilities Examples
Financial – Ability to generate internal funds
– Ability to raise external capital
Physical – Location of plants, machines, offices, and their
geographic locations
– Access to raw materials and distribution channels
Technological – Possession of patents, trademarks, copyrights, and
trade secrets
Organizational – Formal planning, command, and control Systems
– Integrated management information systems
Intangible resources and capabilities Examples
Human – Managerial talents?
– Organizational culture
Innovation – Research and development (R & D) capabilities to
innovate new product, process and services
– Capacities for organizational innovation and change
Reputational – Perceptions of product quality, durability, and
reliability among customers
– Successful product branding and positioning with
satisfied and loyal customer base
– Reputation as a good employer
– Reputation as a socially responsible corporate
citizen.
Adapted from (1) J. Barney, 1991, Firm resources and sustained competitive advantage, Journal of
Management, 17: 101; (2) R. Hall, 1992, The strategic analysis of intangible resources, Strategic
Management Journal, 13: 135-144.

Wernerfelt, 1984; Barney, 1991; Peteraf, 1993). As such, resources and capabilities
are fundamental underpinnings of any source of advantage (Rumelt, Schendel
and Teece, 1991). Valuable resources are termed strategic assets (Barney, 1991;
Amit and Schoemaker, 1993). The RBV asserts that ownership and control of
strategic assets determines which organizations will earn superior profits and enjoy
a position of competitive advantage over others. Three major questions are asked
of resources to identify the impact they have:
10 RESOURCE BASED VIEW: CONCEPTS AND PRACTICES

1. Is the resource or capability valuable?

2. Is it heterogeneously distributed across competing firms?
3. Is it imperfectly mobile?
As shown in Figure 1, it is only when the three questions are confirmed that a
sustained competitive advantage is likely to be gained.

Figure 1: Identification of Resources and Capabilities

Is a resource
or capability
valuable?

No
Yes

Is it heterogeneously
distributed across
competing firms?

Yes No Competitive
Disadvantage

Is it
imperfectly
mobile?

No Competitive
Yes Parity

Sustained Temporary
Competitive Competitive
Advantage Advantage

Adapted from Mata et al., 1995.

The question of a resource’s value is generally confirmed in two ways. First, if

a resource is used to reduce a firm’s cost it can be seen as valuable (low cost
resources). Second, if a resource is used to increase a firm’s revenue it can be seen
as valuable (differentiated resources). As such, valuable resources may be used to
implement new strategies to improve efficiency and effectiveness (Barney, 1991),
improve customer satisfaction (Bogner and Thomas, 1994; Verdin and
 Resource Based View (RBV) of Competitive Advantage: An Overview 11

Williamson, 1994), or reduce cost (in relation to competitors) (Barney, 1986;

Peteraf, 1993). In essence, a resource is valuable if it helps an organization to
improve its performance relative to their competitors. If the resource meets these
conditions the second question is examined. If not, and the resource is exploited,
at worst, a competitive disadvantage may be gained – this is because the resource
is not valuable to the organization.

The second question regarding the distribution of a resource examines whether

the given valuable resource is freely available. If the resource is freely available to
all firms, then a competitive parity may be gained, allowing the firm to have the
same resources as its competitors. However, if it is not freely available
(heterogeneously distributed), then the resource may be a source of competitive
advantage (given the third question). While some firms may enjoy resource based
advantages (due to their resource base) others will be in a position of resource
based disadvantage (Michalisin et al., 1997). Put another way, the resource
heterogeneity implies that firms have varying capabilities. Therefore, firms with
marginal resources can expect to breakeven, while firms with superior resources
should expect to earn rents (Peteraf, 1993). The differences in firm resource
endowments can be attributed to several factors: the time the firm enters the
marketplace, different sets of knowledge, products and systems of learning, as
well as decisions made over time (Helfat, 2000).

The third and final question measures the degree of competitive advantage
which may be gained from the given resource. This is achieved by questioning
the mobility or inimitability of a resource. If the resource is perfectly mobile
then the resource is likely to be only a source of temporary competitive advantage,
at best (Mata et al., 1995). This temporary nature is attributed to the advantage
because the resource could, due to its mobile nature, change hands. Michalisin
et al., (1997) states that since a firm’s advantage is based on a firm having strategic
assets that are superior to one’s competitors, therefore, the ability to sustain the
advantage is a function of the heterogeneity of such resources.

Barney (1991) defines sustained competitive advantage as a non-duplicatable

advantage. This follows from Lippman and Rumelt’s (1982) and Rumelt’s (1984)
definitions that outline a sustained competitive advantage as an advantage that
12 RESOURCE BASED VIEW: CONCEPTS AND PRACTICES

continues to hold after efforts of others to duplicate the advantage have ceased
(Barney, 1991). Barney’s (1991) definition of sustained competitive advantage
does not mean it will last forever. Rather, it suggests that it will not be competed
away or easily duplicated by the efforts of others (Barney, 1991). Barney states
that sustained advantages may be challenged when unanticipated changes in the
economic structure of an industry occur. Such unanticipated changes therefore,
can make what was a source of sustained advantage no longer a source of advantage.
Rumelt and Wensley (1981), and Barney (1997) call these unanticipated changes
‘Schumpeterian Shocks’. Therefore, a firm enjoying a sustained competitive
advantage when faced with a Schumpeterian Shock may experience a major shift
in the nature of competition and any sources of sustained competitive advantage
may be nullified. A sustained competitive advantage may only be made when
resources are strategic and valuable, are heterogeneously distributed and
imperfectly mobile and firms should sustain the advantage notwithstanding
periods of Schumpeterian Shock.

Resource Based View (RBV) Vs. Market Based View (MBV)

The resource based view (RBV) is a way of viewing the firm and consecutively of
imminent strategy. The RBV was popularized by Hamel and Prahalad in their
book Competing for the Future (1996). RBV considers the firm as a bundle of
resources. These resources, and the way that they are combined, make firms
different from one another and in turn allow a firm gain competitive advantage.
This concept of RBV is quite different from the traditional Market Based View
(MBV). According to MBV perspective, firms are considered as fairly homogenous
and driving force for market competition is branding and positioning efforts of
competing firms. Further, according to MBV, identifying alternative market as
characterized by Michael Porter’s five forces model is major strategic issue. MBV
does not take into account whether firm is in position to exploit available market
opportunity i.e., whether firms have enough resource and capabilities to compete
in the marketplace.

RBV in Changing Environment: Dynamic Capabilities

As market is dynamic, firm’s resources also need to change over a period of time
to make them relevant to changing market condition. This perspective is based
 Resource Based View (RBV) of Competitive Advantage: An Overview 13

on the dynamic capabilities and is outcome of RBV (Teece, Pisano and Shuen,
1997). Dynamic capabilities have been defined as firm’s processes that use
resources specifically the processes to integrate, reconfigure, gain, and release
resources. While RBV primarily concentrates on types of resources and capabilities
for its strategic importance, the dynamic capability concentrates on how these
resources and capabilities need to change or update over a period of time to keep
their relevance in the changing marketplace.

The RBV considered resources and competencies as static that can be pointed
as stationary at certain time framework and will remain so over a period of time
also. The focal point is that when firms are having resources that are valuable,
rare, inimitable and non substitutable, it enables firms to develop value enhancing
strategies that are not easily copied by competing firms (Barney, 1991; Conner
and Prahalad, 1996; Peteraf, 1993; Wernerfelt, 1984). However in this era of
dynamic economy, there is need for firms to build up new capabilities or
competencies for sustaining such competitive advantage (Teece, Pisano and
Schuen, 1997). Dynamic capabilities thus are the organizational processes or
strategic routines by which firms develop new configuration for updating resources
as per market requirement (Eisenhardt and Martin, 2000). Such dynamic
capabilities require that organizations establish processes that enable them to
change their routines, services, products, and even markets over time.

The RBV, MBV and dynamic capabilities perspective all focus on different
unit of analysis and degree of change as shown in Figure 1. Initially to cope with
market forces, MBV was conceptualized, subsequently focus shifted to RBV.
Finally, to respond to challenges of ever changing globalized world, concept of
Dynamic Capabilities became popular. This transition is shown by direction of
arrow in Figure 2.

The dynamic capabilities approach, examines competitive advantage in the

globalized environment of rapid market change. In such dynamic marketplaces,
where the competitive environment is rapidly changing, managers of firms need
to develop capabilities embedded in the firm which are based on sequences of
path dependant learning in order to achieve periods of competitive advantage
(Teece et al., 1997; Eisenhardt and Martin, 2000; Miller, 2003). Dynamic
14 RESOURCE BASED VIEW: CONCEPTS AND PRACTICES

Figure 2: Characteristics of RBV, MBV and Dynamic Capabilities

Static

Market Based Resource Based

View View
Degree of
Change

Market Dynamic
Forces Capabilities

Dynamic
Market Unit of Analysis Firm

Compiled by the author.

capabilities are strategic and organizational processes like product development

and strategic decision-making that create value for firms by manipulating resources
inherent with firms (Eisenhardt and Martin, 2000, p 1106). Winter (2003)
views dynamic capabilities as process of extending, modifying, or creating new
capabilities. The key differential between ordinary capabilities and those that are
dynamic is that dynamic capabilities are linked with change and more particularly,
changing the resource base of a firm (Collis, 1994; Winter, 2003).

The dynamic capabilities approach is especially relevant today when global

competitive forces are changing landscapes of industries. In this globalized
environment ways of achieving competitive advantage are changing fast. As such,
firms in this marketplace need to have timely strategies, flexible infrastructures,
and an ability to utilize resources and capabilities in coupled and innovate ways
(Teece et al., 1997). Therefore, in contrast to traditional RBV assumptions
competitive advantages gained in the dynamic marketplace may be based on
capabilities, which have greater homogeneity and substitutability across firms
(Eisenhardt and Martin, 2000). Competitive advantages achieved through
dynamic capabilities are therefore based on the ability to change the resource
 Resource Based View (RBV) of Competitive Advantage: An Overview 15

base of the firm. This means dynamic capabilities alter resource bases by creating,
integrating, recombining, and releasing resources (Eisenhardt and Martin, 2000).

Dynamic capabilities have been tightly coupled with a dynamic or rapidly

changing environment (Teece et al., 1997; Sher and Lee, 2004). However, Zahra
et al., (2006) also discuss the applicability of such capabilities in non dynamic
marketplaces and suggest that while organizations which operate in more dynamic
marketplaces would gain greater value from dynamic capabilities; it does not
exclude organizations in slower to change marketplaces from gaining value from
dynamic capabilities.

Limitations of the RBV

Limitations of the RBV can be grouped into following three main areas1:

1. The vagueness of terminology associated with the RBV,

2. The tautological nature of some of the views underlying assumptions,
3. Methodological issues.
Vagueness of Terminology
The lack of commonality of terms with RBV research has received a lot of criticism
in the literature (e.g., Foss, 1998; Williamson, 1999; Fahy, 2000; Priem and
Butler, 2001; Montealegre, 2002; Rugman and Verbeke, 2002; Foss and Knudsen,
2003; Hoopes et al., 2003; Wade and Hulland, 2004). Collis (1994) and others
(e.g., Coates and McDermott, 2002; Ray et al., 2004) describe the number of
definitions as vast. The use of different terminology to explain results of RBV
studies makes it very difficult to compare the results of various studies. For example,
while some researchers outline distinct meanings for the core terms; resources,
competencies, and capabilities (e.g., Helfat and Peteraf, 2003), other researchers
use the terms interchangeably (e.g., Ray et al., 2004). Nanda (1996) suggests
that the lack of commonality of terms limits the usefulness of results of RBV
research to strategic thinking. Conner comments that since everything in a firm
may be seen as a resource ‘resources lose (their) explanatory power’ (1991,
p.145). Similarly, Hax and Wilde (2001) suggest a significant limitation of RBV
research is the vagueness of the theory.
1 Karyn Chri S Tine Rastrick, http://adt.waikato.ac.nz/uploads/approved/adt-uow20080115.215153/public/04c
16 RESOURCE BASED VIEW: CONCEPTS AND PRACTICES

Tautological Nature
Another significant assessment of the RBV is that the view is essentially a tautology
(Porter, 1991; Foss, Knudsen, and Montgomery, 1995; Mosakowski and
McKelvey, 1997; Priem and Butler, 2001; Bromiley and Fleming, 2002) in nature.
Porter claims that ‘at its worst, the resource based view is circular’ (1991, p 108).
The researchers also challenge the premise of the RBV suggesting that the view
“seems to assume what it seeks to explain” (Hoopes et al., 2003, p 891).
Furthermore, the researchers posit that the lack of clarity about core aspects of
the RBV impede the development of theory and fruitful debate.

Methodological Issues
Each of the studies of resources and firm performance vary substantially in terms
of the methodology employed and the way the RBV research is designed. Rouse
and Daellenbach (1999) question the strong bias towards quantitative research
methods suggesting that such a methodology is not appropriate for RBV research
in general. The researchers suggest that the nature of advantages in organizations
should be firm based and complex and, as such, qualitative and field based
methodologies are much appropriate. Chan (2000) supports this position
suggesting that the field of research may not be fully understood until more
qualitative contributions are added to the conversation.

Discussion and Conclusion

The RBV also deals with competitive business environment faced by firms but
take an inside-out approach i.e., it starts with analysis of firm’s internal
environment. As such RBV is often considered as an alternate to Porter’s five
force model. The RBV emphasizes internal resources and capabilities of firm in
formulating strategy to achieve sustainable competitive advantages in the
marketplace. Internal resources and capabilities determine strategic choices made
by firms while competing in its external business environment. Firm’s abilities
also allow some firms to add value in customer value chain, develop new products
or expand in new marketplace. When firm’s capabilities are considered as
paramount in the creation of competitive advantages, it will focus on
reconfiguration of value chain activities. This is necessary as it provides opportunity
to identify the capabilities within value chain activities which provide it with
 Resource Based View (RBV) of Competitive Advantage: An Overview 17

competitive advantages. The RBV draws upon the resources and capabilities that
reside within the organizations in order to develop sustainable competitive
advantages. Resources may be considered as inputs that enable firms to carry out
its activities.

According to RBV, not all the resources of firm will be strategic resources and
hence sources of competitive advantage. Competitive advantage occurs only when
there is a situation of resource heterogeneity (different resources across firms) and
resource immobility (the inability of competing firms to obtain resources from
other firms). If the resource is not perfectly mobile (i.e., the resource is not free to
move between firms, or if a firm without a resource faces a considerable cost
burden in developing, acquiring or using it, that a firm already using it does
not), then the resource is likely to be a source of sustained competitive advantage.
If a resource is imitated or substituted then any advantages gained may be short
lived. In short, the more mobile a resource is, the less sustained the advantage
gained from that resource will be. In this current era of fast changing globalized
world, if an organization is able to change swiftly and be more alert to changes in
the competitive market, then they are more likely to gain and sustain competitive
advantage.

(Pankaj M Madhani, Faculty Member, Icfai Business School, Ahmedabad. He can

be reached at pankaj.madhani@gmail.com).

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