A resource-based approach to analysing the strategy of ABC Motors

Names in this essay have been pseudonymised.

Introduction

The Resource-Based View (RBV) approach to strategy may have emerged, historically, as a counter-argument to the Classical ‘industrial organisation economics’ approach – OU (2014a, p. 64 – 66). However, the RBV approach has evolved into a contemporary set of academic concepts that link an organisation’s performance, i.e. competitive advantage, from its ability to develop and exploit internal resources (e.g. skills, structure, finance etc.) in order to maximise on opportunities or counteract threats in its external environment.

ABC Motors, a subsidiary of XYZ Plc., is a multi-site commercial vehicle dealer group that provides vehicles sales, parts and aftersales servicing to a mix of retail and fleet customers. The RBV approach in this essay will highlight the resources, capabilities and opportunities for ABC Motors; as well as resource gaps to be filled, in order that ABC Motors sustain competitive advantage.

Resources, Capabilities and Competitive Advantage

Barney (1991) suggests that a company’s resources consist of assets, capabilities, processes, knowledge and more attributes. Accountants have difficulty in valuing, for example, knowledge because of the associated complexities such as transferability. Barney’s definition extends the traditional scope of resources accounted for, on a company’s balance sheet, to include the intangible.

Not all of a company’s resources contribute to competitive advantage and Barney (2014) proposes the VRIO framework to valuing resources: Value, Rarity, Imitability and organisational compatibility. Using this framework and the resource categories proposed by Grant (1991) as the basis of the table below, the resources of ABC Motors are shown:

Resource TypeResources
FinancialEffectively unlimited financial support from owner – enabling investment and cash flow e.g. able to extend customer credit terms.
Physical4 large premises with workshops and warehousing, specialist workshop equipment, fleet of vans. A large investment and complexity reduces imitability because the organisation’s process have developed over 40 years to run the workshops effectively.
Human120 employees covering business functions of operations, finance, HR, information systems, sales, marketing. Although not rare, employees can transfer to competitors and roles are visible; how the organisational structure coordinates the resources makes them effective.
TechnologicalCurrent diagnostic equipment and specialist tools are rare and cannot be acquired by non-franchise holders. The bespoke enterprise resource planning (ERP) system is rare, not visible and therefore difficult to imitate.
ReputationAssociated to large UK manufacturer, well branded – this cannot be imitated easily.
OrganisationalPartnerships e.g. fleet management companies, body-builders – not transparent to competitors and cannot be imitated (some exclusive arrangements).

Grant (1991) states that “on their own, few resources are productive” and the “capabilities of a firm are what it can do as a result of teams of resources working together” (p. 142). ABC Motors can, for example, use resources of technicians, workshops, diagnostic equipment, stocked parts and administrative staff to coordinate the process; to service and repair a commercial vehicle. ABC Motors provides spare parts to customers by using resources of experienced parts technicians, a large warehoused parts inventory and the driver with a van to deliver the part.

OU (2014a) states that “capabilities also occur at different levels and at different levels of complexity”. Competencies can be regarded as a collection of capabilities and the diagram below illustrates ABC Motors’ hierarchy of capabilities.

Capability LevelSeries ASeries B
Cross-FunctionalSales / Customer ServiceManaged Service
Functional Operations (Transformation) Sales & Marketing
SpecialistVehicle repairManaged sales cycle generates customer order
Single-taskTake customer booking for vehicle repairCustomer vehicle expired warranty is identified.

In series A, the single-task capability of processing a customer call to book a vehicle service – using resources of a service advisor (human) to enter the booking onto the computer system (technology). Combination with other single-task capabilities, such as checking for manufacturer recalls or invoicing the customer, produces the specialist capability of vehicle repair. In turn, specialist capabilities combine to make the Operations function. When further combined with capabilities from other functional areas such as a follow-up phone calls to survey customer satisfaction; a cross-functional capability of customer service developed.

Series B is demonstrates the principles with the example of vehicle sales. A single-task of identifying a vehicle just out of warranty may be combined with the task of reviewing customer spend on vehicle maintenance to provide the specialist capability of selling a vehicle. This is a significant part of the sales function; along with ordering and taxing a vehicle. The sale may include a service maintenance plan provided by the operations function so the customer is provided with a (cross-functional) managed service.

Capabilities, similar to resources, have differing value for the business’ performance in their contribution toward sustained competitive advantage. As internal perceptions of a capability’s usefulness vary (e.g. a manager may over-value a historical resource) Grant (1991) suggests, “The critical task is to assess those capabilities relative to those of competitors”. Grant sates:

“The returns to a firm’s resources and capabilities depend upon two key factors: first, the sustainability of the competitive advantage… and, second, the ability of the firm to appropriate the rents earned…”

A capability’s value will erode over time and may be short-lived as competitors imitate that capability. Prahalad and Hemel (1990) distinguish capabilities as strategic “core competencies” (offering sustained competitive advantage) if they create new market opportunities, increased perceived customer benefits of the end product/service and are difficult for competitors to emulate. Grant (1991) proposes four capability attributes that determine the value of that capability as illustrated in the table below.

CapabilityDurabilityTransparencyTransferabilityReplicability
Customer serviceHigh – maintained by experience.Low – it is hard to see why ABC Motors excels at customer service.High – staff can move business and take processes with them.Low –
24 Hour OperationsHigh – canHigh – very visibleHigh – can just copyHigh
MOT / Service RemindersMed – has to be maintained on databaseHighLow – requires specific softwareHigh – can produce own software.

As resources may combine into valuable capabilities, capabilities themselves may be coordinated into more complex high level capabilities and offer competitive advantage. The diagram below illustrates this concept.

Figure 1 A resource-based approach to strategy analysis: a practical framework – Grant (1991)

A capability only offers competitive advantage if, according to Grant (2013), it is able to “satisfy its industry key success factors (KSFs).” The KSFs of the commercial automotive industry are those which subsequently benefit the customer’s own business such as minimise downtime on vehicles being repaired.

The table below illustrates some of ABC Motor’s capabilities and the sustained competitive advantages produced alongside which KSFs are satisfied.

CapabilityCompetitive AdvantageKSF
Telephone Availability
(Cross-site VoIP telephony call routing)
Able to talk to someone who can deal with specific query within 60 seconds of calling.Many customers in the busy industry prefer to call and transact verbally. Few have sophisticated technology communication and some don’t even use emails.
24 Hour OperationsFew dealers and independent garages provide extended service hours.Commercial vehicles are working assets for customers and downtime impacts their profitability. Vehicles serviced outside of customer business hours help maintain productive time for customers.
Parts Van Deliveries at least twice per daySome dealers do not deliver parts at allMain customers are independent garages and they will often have vehicles off the road waiting for parts so delivery time is critical for them to be able to provide customer service.
Specialised vehicle provision – via various long-term partnerships with vehicle-body-builders and bodyshops.Customers are able to come straight to ABC Motors for a managed service where they can specify both the chassis and the body type (fridge, box, tail lift).Customers must deal with multiple suppliers to order new specialised commercial vehicles. They typically order the vehicle from the manufacturer dealer, the body from a body-builder and even separate sign-writers and bodyshops to have vehicles decorated with their branding. Single supplier/point of contact massively advantageous.
Managed routine inspections, servicing and MOTs – via the ERP software system that tracks key vehicle dates.ABC Motors are able to pro-actively remind customers when vehicles are due for certain operations such as an MOT. They can use manufacturer systems to identify recall work and quickly address on the vehicles. ABC Motors are able to pro-actively remind customers when vehicles are due for certain operations such as an MOT. They can use manufacturer systems to identify recall work and quickly address on the vehicles.

It is important to consider that not all resources are valuable and to realise the value of a resource, it may need to be used in conjunction with other resources to produce capabilities. The capabilities themselves then offer an organisation competitive advantage but to sustain the advantage, capabilities must have certain attributes to prevent either their erosion or imitation by competitors. Furthermore those capabilities must satisfy the KSFs of the industry they are employed in.

Resource Gaps

Prahalad and Hamel (1990) describe how “management trapped in the strategic business unit (SBU) mind-set” can be counter-intuitive to the RBV approach because, for example, they inevitably depend on external sources for resources and capabilities not present within the SBU. ABC Motors uses the traditional organisational structure of automotive dealers with separate vehicle sales, spare parts and vehicle servicing departments – each individually accountable for their contribution margins.

The sales and service departments each use an external supplier to valet vehicles because, each cannot individually cost-justify a full-time valet for their respective work volumes. ABC Motors could invest and develop an in-house valet to provide services to each department and then even directly to customers as an additional revenue stream.

Each department operate their own collection/delivery drivers and vans, which causes under or overutilization on a given day for a department at any given site. Many drivers are outsourced temporary workers and it is often remarked how each new person has little knowledge of the customers or areas. By operating a centralised logistics function, ABC Motors could nurture that capability – which, in addition to economies of scale, may ultimately widen the markets they operate it e.g. collection of waste material (batteries/used parts) from customer premises.

Grant (1993) indicates that “competition and evolving customer requirements” requires a company to “constantly develop their resources” to sustain advantage. Grant continues to explain that “capabilities are learned and perfected through repetition, capabilities develop automatically through the pursuit of a particular strategy”.

The first step for ABC Motors to realise the benefits, such as diversification or cost economies, by enhancing existing resources is an RBV strategic approach: ABC Motors should re-organise from a divisionalised SBU structure to functional divisions of sales and operations – the latter would consist of workshop, facilities, warehousing and logistics. Each one of those functional capabilities could then be enhanced. Again, for example, perhaps ABC Motors ’s ability to manage stock becomes so efficient that customers use this as an outsourced service or just-in-time principles are adopted to reduce overall stock holding.

ABC Motors uses ERP software so that a cost clerk can invoice a service customer or a parts technician can process a telephone order. ABC Motors should augment the software resource by integrating with the website to permit customers to log in to an online account to order parts or view past invoices (avoiding administrative burden by requesting copy invoices). This would enhance the customer experience and contribute to Customer Service and provide advantage over competitors.

Concluding on the value of the resource-based view

The RBV at the very least, offers a contrasting approach to strategy than that of more accepted Classical external analysis of the environment. Where competing approaches may suggest that because an opportunity exists, a business should strive to exploit it regardless of its ability to, the RBV does not conversely say that just because a business has a competency, it should invest in it and exploit it (regardless of demand or consideration of other external factors). The RBV inherently values resources and subsequent capabilities in respect to competition. Only when a resource contributes to sustained competitive advantage (as opposed to short term gains), does the RBV approach value that resource.

Similar to contending theories, the RBV makes assumptions as highlighted by (Barney, 1991). The RBV assumes “there will be resource heterogeneity” and that there is “no inevitability that resource heterogeneity will disappear”. Some industries seem to readily reach homogeneity because resources are so easily imitable. For example, new products in the financial markets released by one company are very easily copied by another.

The RBV approach seems to lend itself well to established large multi-national firms as almost a way of reorganising themselves to focus internally, not externally. OU (2014, p.125) states “it is perfectly possible for a company to have a competitive product line up but be a laggard in developing core competencies – at least for a while.” The RBV assumes a long-term objective for a company and perhaps is not so applicable to small enterprises such as an organisation that merely wants to resell OEM products at competitive prices or where franchises, like ABC Motors, have large elements of strategy determined to them. It does not cater well for an organisation that exists for an intended short period of time (e.g. an Olympic Games facilities company) and nor does it cater for businesses in industries that are heavily regulated – net effect again that large elements of strategy is determined externally.

Although, the method by which the RBV focuses so intimately on an organisation to ‘expose their hidden talents’ is engaging (in comparison to the more scientific Classical approaches); the analytical conclusions and subsequent recommendations are therefore much less generalisable – no clear rigid methodology is transferable from one organisation to another.

Barney (2014) introduces the notions of ‘path dependence’ (unique circumstances/timings that develop a capability) and ‘causal ambiguity’ (cannot be certain how resources or capabilities give rise to competitive advantage) as attributes that increase a capability’s value. This lack of clear causal links between resources and success reduces the more ‘scientific’ analyst’s confidence in the RBV as an infallible approach to strategic analysis and, again, the path dependence reduces the generalisability of the RBV conclusions.

However, it is arguable that the RBV principles can be generalised and perhaps it is only the practical aspect of the RBV that cannot be readily generalised. Commercial organisations, with goals of long-term wealth generation, may directly seek the answers as to what makes a company successful, so they themselves can simply copy an RBV strategy. The importance of the RBV approach is that it does not simply provide ‘answers’ but offers a change in paradigm: The responsibility of top management is no longer just cost savings nor gaining share in end product markets but to strengthen a company’s fundamental resources and subsequent capabilities so that company is better able to compete in future. With changing industry and customer requirements and the volatility introduced in markets by rapid technological change, companies must diversify and cross industry boundaries to not only survive but in order to grow their portfolio of value offerings. RBV is an approach that enables companies to achieve these more sustainable strategic goals.

Perhaps the RBV is a very difficult approach to understand compared with, for example, the Evolutionary approach whereby efficient markets determine strategy. Although, an argument may entail that just because something is difficult to comprehend, this does not mean it is not valid. If something is difficult to comprehend, however, then it is difficult to communicate to potential beneficiaries; and therefore its practical implementations are not realised and the RBV remains an, albeit intelligent, academic insight.

References

Barney, J.B.(1991) ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17, no. 1, pp. 99–120.

Barney,J.B.(2014) Gaining and Sustaining Competitive Advantage,4th edn, Harlow, Pearson Education Ltd.

Grant, R. M. (1991) ‘The resource-based view of competitive advantage: implications for strategy formulation’, California Management Review,vol.33, no.3,pp. 114–22.

Grant, R. M. (2013) Contemporary Strategy Analysis, 8th edn, Chichester, Wiley.

The Open University (2014) B301 Block 2: Strategic Analysis, 2nd Edn, Milton Keynes, The Open University

Prhalad, C. K. AND Hamel, G. (1990) ‘The Core Competence of the Corporation’, Harvard Business Review, Ma-June, pp.79–91.

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