Entrepreneurial Finance: Resource-Based View (RBV)

Lakshya Singh Lakshya Singh
Feb 25, 2020 11 min read
Entrepreneurial Finance: Resource-Based View (RBV)

One of the directions of the search for the foundations of the strategic success of an enterprise is the resource approach of strategy formation, which is considered as an alternative to the market-oriented strategy of strategy development. The resource concept occupies a steadily leading position, being currently the most advanced and reasonable tool of the theory of strategic management. The theoretical background of the resource approach is in good agreement with the works of classical economists, for example, E. Penrose, J. Schumpeter, R. Rumelt, and others.

The practical significance of the resource approach lies in the new justification of the role of management in the strategic management of the company. To effectively manage the process of creating competitive advantages, management needs to identify, develop, protect the organization’s resource base promptly, implementing new combinations of resources, which will ensure effective transformation and change of resources “at the entrance” to the organization into output value-added products that have value for consumers. The resource approach lays the methodological basis for the qualitative analysis of strengths and weaknesses, allowing to highlight the resources that are key to building and maintaining the competitive advantage of companies, especially startups. The purpose of this study is to analyze the resource-based view as an essential element for the development of startups.

The Concept of Resource-Based View (RBV)
Resources as a Critical Category of RBV
Analytical Evaluation of Resource Properties in RBV
RBV as the Foundation of a Competitive Startup Business Model

The Concept of Resource-Based View (RBV)

The “compression” of the economy, the structural and temporal uncertainty of the further development of industries and regions make the study of internal sources of economic potential startups relevant. The results of monitoring the main approaches and methods of strategic management (Prahalad et al. 2001) show that the study of the micro bases of firms' sustainable competitive advantages is increasingly concentrated in the area of ​​the modern resource concept (RBV). The primary side of a resource-based company representation theory is its ability to combine many previously separated threads of the theory of strategic management into a single stable analytical framework - competitive analysis, industry analysis and assessment of parameters of the internal environment of a company (Fleisher & Bensoussan, 2007).

The resource approach to the formation of a strategy is based on the fact that each firm has a variety of resources acquired in the factors of product markets and “acquired” in the course of its activities, as well as the ability to combine them with their capabilities (qualified personnel, technical means) and goals.

The principal differences between the modern RBV approach and other theories of strategic management are as follows:

  1. The unit of analysis is the firm, not the industry (market) (Wernerfelt, 1995).
  2. The source of sustainable competitive advantages in different resources (heterogeneity is explained by the specific transformation of resources within the firm) (Penrose, 1995).
  3. The essence of the company's strategy is not in the traditional development of the product structure and coverage of market segments but the development of a dynamic concept of changes in its nature (Ciszewska-Mlinarič & Wasowska, 2015).
  4. The ability to use economic instruments allows us to explain how a company's resources determine its effectiveness in dynamic competitive conditions.

Resources as a Critical Category of RBV

Studying the controversy on this issue and at the same time recognizing the dynamic nature of the market and intra-company processes, the authors generally consider the differentiated approach to the separation of categories of the resource concept to be the most successful from the logical nature of the puzzle of terms. Nevertheless, some definitions and their interrelations require clarification. The basis of the formation of the company's resources is the factors of production, defined as undifferentiated resources available on the market - land, unskilled labour, the capital.

Thus, the external environment is the primary source of the company's resources. It is clarifying the existing approaches to understanding the category of “resources” (Helfat et al. 2009). The authors propose the following definition: resources are specific assets controlled by a firm that are difficult or impossible to imitate and which allow a firm to implement strategies that enhance its economic and managerial efficiency, as well as ensure its receipt of quasi-rent (Helfat et al. 2009).

The definition focuses on two significant points: first, the company must control resources. To control does not mean to own, but to find an opportunity to use them. This theoretical construct not only explains how business ideas “start” without resources but does not contradict the idea of ​​using resources within the framework of a relational approach (sharing resources in an inter-company network); secondly, the concept of quasi-rent is interpreted as a method of obtaining economic benefits by capturing the disproportionate share of other economic rents over the competitive level: Ricardian (income from owning limited valuable resources), monopoly (income from market power) and entrepreneurial (income from risk and innovation) (Fleisher & Bensoussan, 2007).

Thus, effective resource management should automatically provide higher returns than competitors. It is precisely the presence of quasi-rent that, unlike the industry approach proposed by M. Porter (2008), explains the difference in the efficiency of companies operating in the same market. Adhering to the principle of separation of the categories “resources” and “abilities,” it is important to note the available classifications of resources that meet this requirement (Porter, 2008).

According to K. Hofer and D. Schendel (1978), the firm’s competitive advantages can provide six types of resources: financial, physical, human, technological, organizational and reputational. R. Grant (1991) adds intangible resources to this typology. Later, they were allocated three blocks of resources: material, intangible and human (Grant, 2016). Sh. Hunt (1999), in addition to the generally accepted list, identifies the seventh type of resource - jurisdiction (legal), bearing in mind the possibilities of using the institutional and other advantages of the company's location. Roos, S. Pike and L. Fernstrom (2005) classify all the company's resources in the context of two blocks: the first includes the so-called traditional economic resources — material and monetary; The second group includes intellectual resources, including relational, human and organizational capital. The authors argue that it is the second block of resources that can provide the firm with competitive advantages in the long term.

D. Collis and S. Montgomery (1998) divide resources by type of efficiency into two categories:

  • Public goods - resources that can be simultaneously and conflict-free to be used in several businesses (trademarks, technologies, advanced management methods);
  • Private goods - resources that are harder to manage due to competition between departments (financial resources).

The classifications of J. Timmons and S. Spinelli (2004) are based on the need for resources to create a business. They allocate four types of resources required for the organization of a firm: human (management team, not employees!), Financial assets (plant, equipment) and a business plan, i.e., resources that an entrepreneur can control, starting his activity.

From the standpoint of the theory of transaction costs, resources are specific assets that cannot be used in an alternative way without a significant loss of their potential. It is a problem of moving resources that make their heterogeneity long-term, and their competitive advantages sustainable. Using the specified evaluation criterion, O. Williamson (1985) identified six types of resource specificity: the specificity of the location of the asset; the specificity of physical assets; human capital specificity; targeted assets aimed at expanding production capacity; trademarks; asset specificity over time.

Combining the RBV analysis with the principles of the systems approach, G. B. Kleiner suggests investigating two significant resources - the right of ownership to the space available to the subject and the time available to them, proving that it is these resources and their properties that ensure sustainable development of the system. Despite the differences in the structure of resources, the authors, adhere to one position - they seek to select resources that meet the requirements of uniqueness (Chursin & Tyulin, 2018). Therefore, before determining the final composition of a firm's resource portfolio, it is essential to determine the list of properties that should be present in a competitive resource.

Analytical Evaluation of Resource Properties in RBV

For the first time, an analytical scheme for assessing the properties of resources was cited in his work by J. Barney (n.d.), proposing four measuring parameters: value (value - V); rarity (R); the impossibility of copying (imitability - I) and the indispensability of a model of organization (organization - O). The VRIO model, linking the listed properties of resources with the sustainability of the competitive advantages of a firm, is currently almost the only generally recognized and widely used tool for identifying resources in strategic management. The study of J. Barney gave a powerful impetus to the use of this analytical framework in other works. So, R. Amit and P. Schumaker (1993) clarify the properties of resources: value consists of external value (strategic industry factors) and the complementarity of resources within the firm; rarity is determined by the physical rarity of the resource and (or) the low possibility of its sale; the impossibility of copying is divided into merely the impossibility of copying and the low substitutability of resources.

According to D. Collin and S. Montgomery (1999), the value of a resource is created by three factors: rarity, conformity, and demand, i.e., the value is a consequence of rarity, and not an independent attribute of a resource, according to J. Barney. Also, the authors point out that resources cannot be assessed in isolation from other factors since their value is determined in conjunction with market forces (Collis & Montgomery, 1999). R. M. Grant determined the most significant properties of resources according to the level of potential of their profitability: at the stage of creating an advantage - the rarity and relevance (relevance) of a resource; at the stage of creating sustainability, the advantages are the duration of use, the ability to imitate and transfer the resource; at the stage of assigning the results - ownership of the resource, level of market power and integration in the processes (Grant, 2016). M. Peteraf (1993) identifies four criteria that a firm's resources must meet to generate sustainable competitive advantages: resource heterogeneity; ex-ante restrictions on competition (only those resources that are purchased at a price below their present value can generate rents); ex-post restrictions on competition (difficulty in imitating a resource) and imperfect resource mobility.

The VRIO conditions given in general are only necessary but not sufficient for the usage strategy of specific resources of a particular firm: a strategic resource for one firm may not be such for another (Barney, n.d). In other words, the correspondence of the available resources to the degree of their importance is significant for obtaining sustainable competitive advantages in this market (spatial aspect) and existing conditions (temporal aspect).

The theory of resource dependence is closely intersected with the RBV concept, according to which an organization depends on the business environment in direct proportion to its need for resources or actions (Thompson, 1967). Possession of strategic resources increases the independence of the company from changes in the external environment. The founders of the resource dependence theory J. Pfeffer and J. Salancik (2003) distinguish two properties of resource significance: the relative volume (size) of the required resource (for example, for a university the primary resource will be human capital) and its criticality for the functioning of an organization for many types of business it will be insignificant, but without this resource the activity of the company is impossible).

RBV as the Foundation of a Competitive Startup Business Model

Supporters of the traditional approach consider the resource strategy as a combination of two groups of decisions: decisions about the volume and quality of the necessary resources and decisions about the behaviour on the market of resources. In the resource concept, resources play a fundamental role, which means that their management should be much more efficient. The sequence (algorithm) of the development of the strategy of the company based on the RBV analysis can be represented as follows:

  1. Setting the goal and determining the desired results;
  2. RBV - analysis;
  3. The rationale for the choice of strategy (Foss, 2005).

For a firm to be recognized as competitive, it must be of value, be unique in terms of visible external results, and useful from the internal results of the activity. Therefore, at the 1st stage of the formation of a resource strategy, before deciding on the acquisition or use of resources, the firm should make a forecast of the results that are planned to be obtained with the help of these resources. Thus, the management of a firm must classify external (visible) and internal results, to understand how they are related to each other. There are three areas of a company's strategic development (three ways to get visible results): cost leadership, focusing, and differentiation. In each case, the firm generates specific values ​​for the consumer; accordingly, it can be concluded that the required resources and their significance will differ significantly (Deusen et al. 2007).

Assessment of the results, in general, is a needed practice not only for companies but for college and university students as well. While they are taught to write entrepreneurial finance research papers, they often forget about their own productivity. Conducting research, writing essays, analyzing different business studies is a valuable academic experience, but often it stands between students and their own, much more perspective projects, side jobs, networking, etc. Addressing one of the professional academic writing services, such as smartwritingservice.com for assistance, is a cost-effective way to deal with the academic to-do list on time and spare energy for real breakthrough projects.

At the 2nd stage of the formation of the company's resource strategy, the resource portfolio is analyzed (RBV analysis). Systematization of the previous provisions of our study allowed us to identify the main directions of this analysis:

1) Assessment of the degree of relevance of resources (compliance with the demands of the external environment) is feasible by studying four parameters that determine the key success factors for any business (Rockart, 1979): characteristics of the macro-environment, industry parameters, competitive position and the specifics of the company (in particular, determining the place of the company in the value chain);

2) Assessment of the availability and adequacy of resources for the implementation of the chosen strategy. The identification of the resource base of a company can be made by drawing up a resource tree - a structure that allows the decomposition of common groups of resources for their specific types (Roos et al. 2005). The method of compiling a resource tree allows you to identify both resources and the portfolio as a whole simultaneously;

3) Determining the significance of each type of resources for creating quasi-rent - can be made by weighing resources in two directions: assessment of the impact of the resource on the generation of economic rent; comparison of the available resource with the normative (ideal) in quality and quantity;

4) GAP-analysis - identification of excess and (or) missing resources. In terms of a combination of properties, a resource can be conditionally assigned to one of four groups: an unconditionally valuable resource (regardless of market conditions and other institutional conditions, gives a firm a competitive advantage); conditionally valuable resource (gives competitive advantages under certain market conditions); a necessary but not valuable resource (available for most market players, but necessary for generating economic rents; an example of this is the source of funding); non-valuable and optional resource (its presence does not affect the competitiveness of the company or gives a negative effect) (Økland, 2015);

5) Determining the complementarity of resources. Complementary resources, as noted earlier, can have an additional positive effect. Therefore, it is important to classify resources by pairing degree, which will allow choosing from the available strategic alternatives those that will use the associated resources, i.e., to give the maximum possible synergistic effect (Ambrosini, 2007). It is also important to carry out a “reverse” process, namely: to determine how existing resources can be integrated in another way, and on this basis for choosing adjacent strategic alternatives.

At the 3rd stage - the justification of the choice of strategy - the problems identified in the process of RBV analysis are eliminated. Within this stage, in our opinion, the following strategic choice is possible:

1) Investment in resources - At the same time, the firm must answer two questions:

  • How to invest: in current resources to maintain existing competitive advantages, in new resources to implement new projects or to refrain from investing;
  • What to invest in? (It is possible to use resources in different strategies);

2) Improving the quality of resources - strengthening existing, mutual addition of resources and their balancing, reprocessing and co-optation;

3) Resource regulation - expanding the company's resource access to markets or focusing on one; focus on cost reduction or product quality (according to the selected strategic area). Resource properties are not stationary. It means that their uniqueness and, consequently, their value may change over time. Therefore, the proposed sequence of actions the company must comply with permanently - only then can we talk about long-term success (Kirsch, 2007).


So, proposed by identifying the resource portfolio, determining its properties that provide sustainable competitive advantages, the algorithm for justifying the strategic choice of a company allows to: determine the resources of the company in the context of the modern resource approach; identify the factors contributing to the uniqueness of the company's resource portfolio; determine the set of properties of the resources needed to generate economic rents; identify the final composition of the firm's resource portfolio, allowing to achieve sustainable competitive advantages; highlight the main directions of RBV analysis.


What is a resource-based view?

The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage.

What is a resource-based view example?

Examples include buildings, plants, equipment, exclusive licences, patents, stocks, land, debtors, employees.

What is the primary limitation of the resource-based view?

(1) The recourse-based view has no managerial implications, (2) the resource-based view implies infinite regress, (3) the resource-based view's applicability is too limited, (4) sustained competitive advantage is not achievable, (5) the value of a resource is too indeterminate to provide a useful theory.


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