How can I tell if your competitive advantage is competitive or an advantage?

I introduced the idea of a castle and moat metaphor in understanding how businesses can sustainably succeed.

Here is a critical way to test this metaphor and its relationship to your business is the use the RBV model.

The Resource-Based View (RBV) is a perspective that examines the link between a company’s internal characteristics and its performance.

This approach considers that Businesses should look inside their company to find the sources of competitive advantage instead of looking at the competitive environment. Thus Company Resources are the basis of Sustainable Competitive Advantage.

A Company’s resources can be defined as ‘all assets, capabilities, organizational processes, company attributes, information and knowledge controlled by a company that enables it to improve its efficiency and effectiveness’. Resources are often classified into categories such as tangible (e.g. equipment, machinery, land, buildings and cash) and intangible (e.g. trademarks, brand reputation, patents and licenses).

In order for companies to transform these resources into sustainable competitive advantage, resources must have four attributes that can be summarized in the VRIO framework.

Valuable (VRIO)

First and foremost resources must be valuable. According to our model resources are seen as valuable when they enable a firm to implement strategies that improve a firm’s efficiency and effectiveness by exploiting opportunities with customers or by mitigating threats from competitors. If none of the resources possessed by a firm are considered valuable, the focal firm is likely to have a competitive disadvantage.

Rare (VRIO)

Secondly, resources must be rare. Resources that can only be acquired by one or few companies are considered to be rare. If a certain valuable resource is possessed by a large number of players in an industry, each of the players has a capability to exploit the resource in a similar way, therefore none of the players a competitive advantage. Such a situation is indicated as competitive parity or competitive equality. In case a company does possess a large amount of resources that are valuable and rare, it is likely to have at least temporary competitive advantage depending on how well they utilize their resources.

In-imitable (VRIO)

Although valuable and rare resources may help companies to engage in strategies that other firms cannot pursue  (lacking those relevant resources), it is no guarantee of long-term competitive advantage. Valuable and rare resources may give you a first-mover advantage but competitors will probably try to imitate these resources. Thus the next criteria that resources should meet is that they should be hard and/or costly to imitate or substitute because of:

  • Unique historical conditions: choices made in the past influence the options a company has in the present and future. Similarly, a company that has located its facilities on what turns out to be a very valuable location than initially anticipated, has a perfectly inimitable physical resource.
  • Causal ambiguity: causal ambiguity exists when the link between the resources you control and its sustainable competitive advantage is not fully understood. Competitors can’t duplicate you, since they simply don’t know which resources they should imitate.
  • Social complexity: if the most important resource of a company is a combination of the strength of its social network, interpersonal relations, a company’s culture and its reputation among both suppliers and customers, it is very hard for competitors to build an identical social network since it is dependent on so many different factors.

If a company’s resources are both valuable, rare and inimitable due to the reasons mentioned above, you have a high potential to gain a competitive advantage that is sustainable over time. There is however one more important criteria that needs to be present within the company.

Organization-wide supported (VRIO)

The resources on their own do not create any advantage for a company if the company is not organised in way to adequately exploit these resources and capture the value from them. You therefore need the capability to assemble and coordinate resources effectively. Examples of these organisational components include a company’s formal reporting structure, strategic planning and budgeting systems, management control systems and compensation policies. Without the correct organization to acquire, use and monitor the resources involved, even companies with valuable, rare and imperfectly imitable resources will not be able to create a sustainable competitive advantage. When all four resource attributes are present, a company is safe to assume it has a distinctive competence that can be used as source of sustainable competitive advantage.

Below is a diagram that sums up the four VRIO attributes and the resulting advantages the company has in different situations.

Note that the VRIO framework is a follow-up of the VRIN framework (Valuable, Rare, Hard to Imitate, Non-substitutable). The creator of the VRIN and VRIO framework, Jay Barney, combined the I and N into one attribute and added the O as extra criteria. Inimitability in the VRIO framework therefore means that resources are hard to imitate because competitors cannot duplicate and/or substitute them.