What is a “hard to substitute” resource?

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Understanding hard to substitute

A key component of the resource-based view, and VRIO frameworks, is that if a company has a valuable, and rare resource it provides the basis for a competitive advantage. Whether that competitive advantage is transitory in nature or sustainable, however, depends on whether the resource itself can be imitated or “substituted” by another firm.

While the imitation of a resource is relatively intuitive – whether a firm is able to copy that resource themselves – hard to substitute is a little more complicated. How is this different from imitation?

The key thing with whether the resource can be substituted or not is whether there is another way of gaining the benefit without the resource. Competitors may, for example, be able to come up with a completely different approach that negates the need to have that resource. Thus, they are not imitating it, but negative its benefit using a different approach. 

Example 1: Outsourcing the activity

One way that a competitor may be able to derive a similar benefit without actually imitating the resource is by partnering with a 3rd party company. If they are able to make us of the resource that someone else has, they may be able to gain access to the benefit without having to directly imitate the resource itself.

Example 2: Developing a completely different approach

Another approach for substituting the resource would be to develop a completely different approach. For example, a company may have a trained set of workers that can effectively carry out a task. If a competitor was to invest in AI, and mimic this capability in a different manner (i.e., using computers instead of humans), then the firm may be able to substitute for the resource – gaining a compatible benefit in a different manner.

The importance of being hard to substitute

It is important to be aware o the possibility that another firm may engineer out the resource that you have been deriving your benefits from – working out a different way of gaining that advantage. It is easy to get focused on direct imitation and conclude that it would be impossible for another company to copy what you have. While this may be important, don’t lose sight that there could be a completely different approach, negating the need for directly owning your resource.