What is the Resource Based View of the firm?

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The resource based view of the firm is one of the most important strategic perspectives. It is one of the most fundamental ways that strategy departs from economies (with tends to view firms as homogenous), and closely aligns with reality. In many markets the resources and capabilities of firms do differ, and this leads firms to compete in different ways and achieve different returns.

Unpacking the Resource Based View of the firm

The resource based view of the firm (RBV) seeks to explain the difference between firm performance by analyzing the resources of the companies. Its basic premise is that companies within the same industry differ from one another, and the source of this difference is explained because different firms have different resources and capabilities.

Beyond possessing different resources and capabilities, it is not possible for companies to easily copy the resources of other firms. Imitation in resource position is prevented or made difficult because many resources cannot easily be acquired. Companies may, for example, poses resources that they have developed over the years, and copying firm operations is not easy. Routines, culture, managerial talent are all examples of resources that are hard to copy. Indeed, many of these resources are hard for outsiders to truly understand and even companies have troubles copying the internal working of their firm if they try setting up a different facility.

Difference between the Resource Based View and other perspectives

The assumption of homogenous firms in economic theory

One of the largest assumptions underpinning much economic analysis is that firms are homogenous. The output of firms is treated as the same – customers have no reason to opt for one firm instead of another. Relationships between demand, supply, price, and the number of firms in the market are made without any specific consideration of the underlying capabilities of the firm.

The resource based view steps away from this assumption. Firms are specifically considered as being comprised of different resources – and these different resources allow companies to pursue different strategies. Rather than each firm in a market having products that are interchangeable with one another, in the resource based view, the offering of firms can differ. This distinction can also fundamentally change markets – if each firm has unique products or services, it can have a ‘localized monopoly’ – able to charge a higher price because there are specific reasons that customers are going to their products over the competition. 

Industry analysis - including Porter's Five Forces

The resource based view also fundamentally differs from industry analysis, including Porter’s Five Forces, which analyses groups of relatively similar firms within a marketplace. Industry analysis is intended to understand similarities between firms – Porter’s Five Forces helps explain why certain industries tend to be more profitable than others.

While firm differences do crop into Porter’s Five forces as reasons why rivalry and customer bargaining power may be lower (both because customers have specific reasons to go to firms, such that they are not as directly competing with one another), it is not the key insight of the analysis. The five forces framework is predominantly intended to explain consistent factors that impact all firms, rather than specific distinctions between them. 

Market focused analysis

The resource based view also differs from market-based analysis in that it fundamentally considers the underlying capabilities of the firm (explaining what they focus on), rather than focusing on the market. While companies may have specific positions within an industry, catering to the needs of specific demands, their ability to target these segments rests on the underlying resources and capabilities of the firm. That is, the resource based view tends to view the key distinction between firms as not on who they target, but their underlying capabilities (which in turn, influences their ability to meet the needs of specific customer demands). The market target flows from the resources – and there must be alignment between the market served and the resources and capabilities of the company. 

The importance of Resource Based View to management

Part of the reason why the resource based view is so important to management is that highlights the importance of examining the firm’s resources when determining strategic actions. Ultimately, it is the resources and capabilities of the company that determines the markets that the company can operate in and how it is distinct from other firms in the market. If the resources that underpin the firm are difficult for others to imitate or substitute, this influences whether the firm can sustain its position over time. 

Relative to the industry that the firm is in, the resources of the company are also often more directly under the control of management. Developing the underlying resources is within the control of management – and enables the firm to pursue market positions and take advantage of opportunities that arise. 

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