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96 PART 2 • STRATEGY FORMULATION

The Resource-Based View (RBV)
Some researchers emphasize the importance of the internal audit part of the strategic-
management process by comparing it to the external audit. Robert Grant concluded that the
internal audit is more important, saying:

In a world where customer preferences are volatile, the identity of customers is
changing, and the technologies for serving customer requirements are continually
evolving, an externally focused orientation does not provide a secure foundation for
formulating long-term strategy. When the external environment is in a state of flux,
the firm’s own resources and capabilities may be a much more stable basis on which
to define its identity. Hence, a definition of a business in terms of what it is capable
of doing may offer a more durable basis for strategy than a definition based upon the
needs which the business seeks to satisfy. 4

The Resource-Based View (RBV) approach to competitive advantage contends that inter-
nal resources are more important for a firm than external factors in achieving and sustaining
competitive advantage. In contrast to the I/O theory presented in the previous chapter, propo-
nents of the RBV view contend that organizational performance will primarily be determined
by internal resources that can be grouped into three all-encompassing categories: physical
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resources, human resources, and organizational resources. Physical resources include all
plant and equipment, location, technology, raw materials, machines; human resources
include all employees, training, experience, intelligence, knowledge, skills, abilities; and
organizational resources include firm structure, planning processes, information systems,
patents, trademarks, copyrights, databases, and so on. RBV theory asserts that resources are
actually what helps a firm exploit opportunities and neutralize threats.
The basic premise of the RBV is that the mix, type, amount, and nature of a firm’s inter-
nal resources should be considered first and foremost in devising strategies that can lead to
sustainable competitive advantage. Managing strategically according to the RBV involves
developing and exploiting a firm’s unique resources and capabilities, and continually main-
taining and strengthening those resources. The theory asserts that it is advantageous for a
firm to pursue a strategy that is not currently being implemented by any competing firm.
When other firms are unable to duplicate a particular strategy, then the focal firm has a
sustainable competitive advantage, according to RBV theorists.
For a resource to be valuable, it must be either (1) rare, (2) hard to imitate, or (3) not
easily substitutable. Often called empirical indicators, these three characteristics of
resources enable a firm to implement strategies that improve its efficiency and effective-
ness and lead to a sustainable competitive advantage. The more a resource(s) is rare, non-
imitable, and nonsubstitutable, the stronger a firm’s competitive advantage will be and the
longer it will last.
Rare resources are resources that other competing firms do not possess. If many firms
have the same resource, then those firms will likely implement similar strategies, thus
giving no one firm a sustainable competitive advantage. This is not to say that resources
that are common are not valuable; they do indeed aid the firm in its chance for economic
prosperity. However, to sustain a competitive advantage, it is more advantageous if the
resource(s) is also rare.
It is also important that these same resources be difficult to imitate. If firms cannot
easily gain the resources, say RBV theorists, then those resources will lead to a competi-
tive advantage more so than resources easily imitable. Even if a firm employs resources
that are rare, a sustainable competitive advantage may be achieved only if other firms can-
not easily obtain these resources.
The third empirical indicator that can make resources a source of competitive
advantage is substitutability. Borrowing from Porter’s Five-Forces Model, to the degree
that there are no viable substitutes, a firm will be able to sustain its competitive advan-
tage. However, even if a competing firm cannot perfectly imitate a firm’s resource, it
can still obtain a sustainable competitive advantage of its own by obtaining resource
substitutes.