Austrian Capital Theory holds that capital assets are heterogeneous and complementary. In business language, that means an entrepreneur can assemble set of assets that are special to his or her firm and combined in such a way that the combination is unique, or at least hard to copy. If the assets generate consumer value, and hence a revenue stream from consumer purchases, then the entrepreneurial firm can be said to have marketplace advantage – it is unique or advantaged in its creation of consumer value.
The Resource-Based View (RBV) of the firm came from this thinking. The marketplace advantage available to any firm results from its assembled resources (synonymous with assets for the purposes of our discussion). We talked to Professor Steven Phelan, Distinguished Professor at Fayetteville State University, an expert in this field.
Note: The conventional language of RBV is competitive advantage. At Economics For Entrepreneurs, we prefer the idea of the search for uniqueness, where the point of reference is the consumer rather than the competitor. Therefore, we’ll use terms like marketplace advantage and commercial advantage.
Resource-based strategic thinking guides entrepreneurs in the identification, assembly and use of resources in unique (or at least differentiated) ways to create sustained marketplace advantage. The use of resources is how entrepreneurs create revenue flows from consumers. The money-value of the resources – and hence the market value of the firm – derives from these revenue flows. The goal is to align the resources as perfectly as possible with consumer wants and preferences. Entrepreneurs who combine consumer-valued resources in unique ways can establish an advantage in the marketplace. If their combination of resources is unique, or at the very least hard to copy, then the advantage is sustainable and the revenue flows can be anticipated to continue absent changes in consumer preferences.
What kind of resources are we talking about? All kinds, both tangible and intangible, and both physical capital and human capital. It’s the combination that counts. A handy acronym for the kinds of resources available for entrepreneurs to combine is PROFIT: Physical, Reputational, Organizational, Financial, Intellectual and Human, and Technological resources. It’s a good exercise to review your resources under each of these headings and question whether they are unique and hard to copy.
Reputational, Organizational and Intellectual (Human) resources are the most usual sources of uniqueness (in the VRIO framework, “unique” translates into valuable, rare, hard to copy / inimitable and non-substitutable).
Reputational resources can include brand, customer satisfaction levels and trust.
Organizational resources can include processes, methods, and culture, and also includes the bundles of resources we call capabilities.
Intellectual resources include people (always unique), teams, decision rights, as well as patents and recipes.
Sustainable advantage is reinforced when other firms can’t see inside the “black box” of the combination of resources and can’t reproduce the “secret sauce”. It might be the case that your Physical, Financial and Technological resources are not differentiated, or even rare. The “secret sauce” is in how you combine them, and especially how you combine them with Reputational, Organizational and Intellectual resources. If outsiders can’t see inside, and can’t decipher the combination or copy the recipe, you can separate yourself in the consumer’s perception as a unique choice.
How you deploy the resources can also be a source of advantage. Operational excellence can be differentiating and value-creating. If you can guarantee customers and suppliers that you’ll operate with excellence in all directions – on time, on budget, high responsiveness – you’ll create an advantage over other firms that don’t keep their promises. Think of this as a bundle of resources that you deploy really well. The business literature sometimes calls it “core competence”. High quality, consistent operations do not come easily. This capability is also a resource.
Dynamic flexibility can be thought of as a bundle of capabilities around detection of and action in response to the need for change. Austrian economics stresses marketplace dynamics and the role of entrepreneurs in detecting and responding to changes in consumers’ wants and preferences. Such agility does not come easily to the firm. It requires “sensing” the uneasiness of consumers and using empathic diagnosis to identify the source of the uneasiness, and creativity and imagination in rearranging resources to produce new offerings. Organizationally, the entrepreneur must make the change occur – ready the organization for the adjustment and orchestrate individuals and functions to shift. It’s a rare capability.
Implementing the resource-based strategy is a continuous activity. Winning entrepreneurs shuffle and reshuffle resources continuously. Professor Phelan urges entrepreneurs to ask this question every day: what can we do better? Ask it in every resource area of the PROFIT framework. Gather information that tells you where you need to improve or change. (You can use a template like SWOT – Strengths, Weaknesses, Opportunities, Threats, but make sure your use of it is deeply analytical and not just a laundry list of what you do.) And then execute the hard part of dynamic flexibility: taking rapid action. This is the advantage of small companies and entrepreneurs.
Useful books mentioned by Professor Phelan:
Entrepreneurship Strategies and Resources; Marc J. Dollinger
The E-Myth Revisited; Michael E. Gerber
Crossing The Chasm; Geoffrey A. Moore