Resource based view (RBV) deals with the internal strength and weakness of a firm. In the concept of RBV, a firm’s performance and profitability are determined by the assets of the firm and managerial abilities of the people working in the firm which it can use as a cutthroat competitive gain in sustaining its operations in the market.
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Concept of EVA and economic rent
Economic value added is a measurement system used to measure the performance of business in economic terms i.e. not the accounting profit but the economic profit. It is a measure of excess worth created by the firm. EVA includes both debt and equity capital. So, EVA promotes the creation of shareholder wealth in the firm and it also analyses the performance of line and staff managers. “EVA is calculated as follows:
- Operating expenses =Operating profit (or earnings before interest and tax, EBIT)
- Taxes = Net operating profit after tax (NOPAT)
- Capital charges (Invested capital x Cost of capital) = EVA
- Where EBIT = earnings before interest and tax, NOPAT= Net operating profit after tax, and Capital charges = invested capital x cost of capital” (Young & O’Byrne, 2001, p.35).
When a firm receives income more than its opportunity cost or transfer earnings, it is called as receiving economic rent. Economic rent indicates the imperfections in the market and is a guide to taxation. The concept of economic rent depends on economic factors like land, labor and all other internal factors of a firm like production, marketing, inventory stock level etc. Economic profit = total revenue –total cost. Economic rent is based on demand and it increases or decreases because of the customer’s interest in the firm.
Resources & their use
Resources are the valuable input which is used to increase the economic value of the firm. Tangible resources are the resources which can be utilized in the form of goods or services in the firm for its operations. Physical resources are related to the physical capability of a resource to formulate a strategy like maintenance of plant and machinery, buildings, storage area, marketing management procedure, adoption of proper distribution channel, sufficient stock level etc. Financial resources are the lifeline of a firm which includes cash and bank balances, investments, debtors, creditors and loans. It also includes the capital gearing ratio. Human resources are both tangible and intangible. The skills of work force that the firm employs and the managerial capabilities of managers in the firm are intangible human resource while the employment of people in the organization with regard to their productivity is tangible human resource. Intangible resources are not directly required in formulating a strategy, but they are essential for business. Technical resources are the resources which increase the firm’s innovation and creation skills like generation of new ideas, untouched lines of business concepts. Intellectual resources refer to the commercial rights that a firm possesses. Patents and copyrights are intellectual resources. Goodwill is an intangible but valuable asset; it shows reputation of the firm in the market. A special mix of physical, financial, human and intangible resources enable a firm to enjoy competitive advantage among the competitors.
Distinctive capability is the inner capability that a firm possesses; it cannot be imitated by any other firm. Trademark, Goodwill etc. are included in distinctive capability of a firm. Distinctive capability of a firm can be identified by the goods and services provided by the firm, opinion of the customers, market allocation etc. Competency is a unique feature that every firm should hold to participate in the given market environment and this competency is derived from collection of assets. A core competency is a group feature that a firm enjoys by achieving its viable benefit. Association of these three gives value accumulation and this helps achieve viable benefit by the organization. In short, distinctive capability of the firm helps increase the internal strength of the organization.
- Distinctive capability is essential for the success of the organization; but it is not enough for success.
- Distinctive capability of the company cannot be imitated by any other company. A distinctive capability of the firm develops from architecture, reputation and innovation.
Architecture – It is the configuration of links between the clients, staff and suppliers – both inside and outside organization. One is between staffs and boss and the other is between the clients and distributors.
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Reputation – Reputation of the firm emerges through consumers’ own experiences. Providing excellent products and services creates some kind of reputation in the mind of the consumers.
Innovation – It provides distinctive capability to the firm. Innovation is necessary to sustain the market.
Distinctive capability of a firm cannot be reproduced by any other firm; if any firm reproduces it; it cannot become distinctive capability of that firm. Value chain model helps to identify bundles of features; through this firm tries to achieve its viable benefit. These capability and resources like tangible and intangible resources are basis of the plan formulation. “There are two fundamental reasons for making the resources and capabilities of the firm the foundation for its strategy. First internal resources and capability provide the basic direction for a firm’s strategy and, second resources and capabilities are primary source firm” (The international environment: A resources based view of strategy, n.d., p.137) Resource based view of the organization highlights the inner competence of the organization for making the strategy to accomplish viable benefit in the market. If the firm is able to identify the inner competence, it helps identify the strength as well as weakness of the firm. Resources based view illustrates resources and capability contained inside the organization. Resources are the key factors needed for organizational functioning. Resources include both physical (like financial assets, human resources) as well as indefinable resources (like technology, skill). All the resources and capabilities help the firm attain competitive advantage.
The international environment: A resource based view of strategy. (n.d.). pp.124-151. (Provided by the customer).
Young, D.S., & O’Byrne, F.S. (2001). EVA and value based management: A practical guide to implementation. Mc Graw- Hill professional. Web.