Resource-based view

The resource-based view (RBV) as a basis for the competitive advantage of a firm lies primarily in the application of a bundle of valuable tangible or intangible resources at the firm's disposal (Mwailu & Mercer, 1983 p142, Wernerfelt, 1984, p172; Rumelt, 1984, p557-558; Penrose, 1959[1]). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile[2]:105–106 (Peteraf, 1993, p180). Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort (Barney, 1991[2]:117). If these conditions hold, the bundle of resources can sustain the firm's above average returns. The VRIO and VRIN (see below) model also constitutes a part of RBV.[3]

Characteristics

  1. Identify the firm’s potential key resources.
  2. Evaluate whether these resources fulfill the following criteria (referred to as VRIN):
    • Valuable – A resource must enable a firm to employ a value-creating strategy, by either outperforming its competitors or reduce its own weaknesses.[2]:99[4]:36 Relevant in this perspective is that the transaction costs associated with the investment in the resource cannot be higher than the discounted future rents that flow out of the value-creating strategy (Mahoney and Pandian, 1992, p370; Conner, 1992, p131).
    • Rare – To be of value, a resource must be rare by definition. In a perfectly competitive strategic factor market for a resource, the price of the resource will be a reflection of the expected discounted future above-average returns (Barney, 1986a, p1232-1233; Dierickx and Cool, 1989, p1504[2]:100).
    • In-imitable – If a valuable resource is controlled by only one firm it could be a source of a competitive advantage.[2]:107 This advantage could be sustainable if competitors are not able to duplicate this strategic asset perfectly (Peteraf, 1993, p183; Barney, 1986b, p658). The term isolating mechanism was introduced by Rumelt (1984, p567) to explain why firms might not be able to imitate a resource to the degree that they are able to compete with the firm having the valuable resource (Peteraf, 1993, p182-183; Mahoney and Pandian, 1992, p371). An important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firm’s competitive advantage stems is unknown (Peteraf, 1993, p182; Lippman and Rumelt, 1982, p420). If the resource in question is knowledge-based or socially complex, causal ambiguity is more likely to occur as these types of resources are more likely to be idiosyncratic to the firm in which it resides (Peteraf, 1993, p183; Mahoney and Pandian, 1992, p365[2]:110). Conner and Prahalad go so far as to say knowledge-based resources are "…the essence of the resource-based perspective" (1996, p477).
    • Non-substitutable – Even if a resource is rare, potentially value-creating and imperfectly imitable, an equally important aspect is lack of substitutability (Dierickx and Cool, 1989, p1509.[2]:111 If competitors are able to counter the firm’s value-creating strategy with a substitute, prices are driven down to the point that the price equals the discounted future rents (Barney, 1986a, p1233; Sheikh, 1991, p137), resulting in zero economic profits.
  3. Care for and protect resources that possess these evaluations, because doing so can improve organizational performance (Crook et al., 2008).

The VRIN characteristics mentioned are individually necessary, but not sufficient conditions for a sustained competitive advantage (Dierickx and Cool, 1989, p1506; Priem and Butler, 2001a, p25). Within the framework of the resource-based view, the chain is as strong as its weakest link and therefore requires the resource to display each of the four characteristics to be a possible source of a sustainable competitive advantage.[2]:105–107

Definitions

A subsequent distinction, made by Amit & Schoemaker (1993), is that the encompassing construct previously called "resources" can be divided into resources and capabilities.[4] In this respect, resources are tradable and non-specific to the firm, while capabilities are firm-specific and are used to engage the resources within the firm, such as implicit processes to transfer knowledge within the firm (Makadok, 2001, p388-389; Hoopes, Madsen and Walker, 2003, p890). This distinction has been widely adopted throughout the resource-based view literature (Conner and Prahalad, 1996, p477; Makadok, 2001, p338; Barney, Wright and Ketchen, 2001, p630-31).

Definition of "capability"

Makadok (2001) emphasizes the distinction between capabilities and resources by defining capabilities as "a special type of resource, specifically an organizationally embedded non-transferable firm-specific resource whose purpose is to improve the productivity of the other resources possessed by the firm"[5](p389). "[R]esources are stocks of available factors that are owned or controlled by the organization, and capabilities are an organization’s capacity to deploy resources".[4]:35 Essentially, it is the bundling of the resources that builds capabilities.[6]

Definition of "competitive advantage"

A competitive advantage can be attained if the current strategy is value-creating, and not currently being implemented by present or possible future competitors.[2]:102 Although a competitive advantage has the ability to become sustained, this is not necessarily the case. A competing firm can enter the market with a resource that has the ability to invalidate the prior firm's competitive advantage, which results in reduced (read: normal) rents (Barney, 1986b, p658). Sustainability in the context of a sustainable competitive advantage is independent with regard to the time frame. Rather, a competitive advantage is sustainable when the efforts by competitors to render the competitive advantage redundant have ceased (:[2] p102; Rumelt, 1984, p562). When the imitative actions have come to an end without disrupting the firm’s competitive advantage, the firm’s strategy can be called sustainable. This is in contrast to views of others (e.g., Porter) that a competitive advantage is sustained when it provides above-average returns in the long run. (1985).

Precedence of "competitive survival" over "competitive advantage"

The main difference between the resource-based view of the firm and dynamic capabilities view is the fact that the latter focuses more on the issue of competitive survival rather than achievement of sustainable competitive advantage. This focus appears to be closer to contemporary business realities, the latter being more "high-velocity" than the case in previous decades. The demise of companies like Nokia shows that the more pressing issue is competitive survival. Strategy scholars Gregory Ludwig and Jon Pemberton (2011),[7] emphasize the need to focus on the actual process of dynamic capability building rather than generate further abstract definitions of dynamic capabilities. It is of key importance to focus on different industry contexts to further advance this emerging area of research. In many industries, changing the entire resource base in response to external changes is simply unrealistic. At the same time, ignoring external change altogether is not an alternative. Senior managers are therefore forced to engage with the complex task of dynamic capability building in order to facilitate competitive survival in the light of depreciating value of resource bases available within the firm.

Dynamic capabilities theory attempts to deal with two key questions:

  1. How can senior managers of successful companies change their existing mental models and paradigms to adapt to radical discontinuous change?
  1. Ultimately, how can companies maintain threshold capability standards and hence ensure competitive survival?

When senior managers are confronted with the task of building dynamic capabilities, they need to consider sometimes drastic fluctuations in the threshold capability definition standards, making it more and more complex for companies to understand the minimum requirements to remain in the game as an industry player. In turn, these fluctuations derive from external change in the macro environments and the total resource sum available in an entire industry. Monitoring of these external and increasingly unpredictable parameters will then allow managers to tackle the internal process of adapting their resource base. Often, this is simply not possible because of strong path dependencies or practical feasibility constraints that apply to certain industries. For example, some industries rely on a certain manufacturing process. Once a new technology arrives, changing the manufacturing process at short notice is unrealistic. It is therefore more likely that adaptations are centered around managerial routines at the capability level, rather than apply to the resource base level. In other words, managers need to make the most of their existing resource material yet simultaneously understand the ongoing depreciation of this resource base.[7]

History of the resource-based view

Some aspects of theories are thought of long before they are formally adopted and brought together into the strict framework of an academic theory. The same could be said with regard to the resource-based view.

While this influential body of research within the field of Strategic Management was named by Birger Wernerfelt in his article A Resource-Based View of the Firm (1984), the origins of the resource-based view can be traced back to earlier research. Retrospectively, elements can be found in works by Coase (1937), Selznick (1957), Penrose (1959), Stigler (1961), Chandler (1962, 1977), and Williamson (1975), where emphasis is put on the importance of resources and its implications for firm performance (Conner, 1991, p122; Rumelt, 1984, p557; Mahoney and Pandian, 1992, p263; Rugman and Verbeke, 2002). This paradigm shift from the narrow neoclassical focus to a broader rationale, and the coming closer of different academic fields (industrial organization economics and organizational economics being most prominent) was a particular important contribution (Conner, 1991, p133; Mahoney and Pandian, 1992).

Two publications closely following Wernerfelt’s initial article came from Barney (1986a, 1986b). Even though Wernerfelt was not referenced directly, the statements made by Barney about strategic factor markets and the role of expectations can clearly be seen within the resource-based framework as later developed by Barney (1991).[2] Other concepts that were later integrated into the resource-based framework have been articulated by Lippman and Rumelt (uncertain imitability, 1982), Rumelt (isolating mechanisms, 1984) and Dierickx and Cool (inimitability and its causes, 1989). Barney’s framework proved a solid foundation upon which others might build, and its theoretical underpinnings were strengthened by Conner (1991), Mahoney and Pandian (1992), Conner and Prahalad (1996) and Makadok (2001), who positioned the resource-based view with regard to various other research fields. More practical approaches were provided for by Amit and Shoemaker (1993),[4] while later criticism came from among others from Priem and Butler (2001a, 2001b) and Hoopes, Madsen and Walker (2003).

The resource based view has been a common interest for management researchers and numerous writings could be found for same. A resource-based view of a firm explains its ability to deliver sustainable competitive advantage when resources are managed such that their outcomes cannot be imitated by competitors, which ultimately creates a competitive barrier (Mahoney and Pandian 1992 cited by Hooley and Greenley 2005, p. 96, Smith and Rupp 2002, p. 48). RBV explains that a firm’s sustainable competitive advantage is reached by virtue of unique resources being rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (Barney 1999 cited by Finney et al. 2004, p. 1722, Makadok 2001, p. 94). These authors write about the fact that a firm may reach a sustainable competitive advantage through unique resources which it holds, and these resources cannot be easily bought, transferred, or copied, and simultaneously, they add value to a firm while being rare. It also highlights the fact that not all resources of a firm may contribute to a firm’s sustainable competitive advantage. Varying performance between firms is a result of heterogeneity of assets (Lopez 2005, p. 662, Helfat and Peteraf 2003, p. 1004) and RBV is focused on the factors that cause these differences to prevail (Grant 1991, Mahoney and Pandian 1992,[2][4] cited by Lopez 2005, p. 662).

Fundamental similarity in these writings is that unique value-creating resources will generate a sustainable competitive advantage to the extent that no competitor has the ability to use the same type of resources, either through acquisition or imitation. Major concern in RBV is focused on the ability of the firm to maintain a combination of resources that cannot be possessed or built up in a similar manner by competitors. Further such writings provide us with the base to understand that the sustainability strength of competitive advantage depends on the ability of competitors to use identical or similar resources that make the same implications on a firm’s performance. This ability of a firm to avoid imitation of their resources should be analyzed in depth to understand the sustainability strength of a competitive advantage.

Barriers to imitation of resources

Resources are the inputs or the factors available to a company which helps to perform its operations or carry out its activities (,[4] Black and Boal 1996, Grant 1995 cited by Ordaz et al.2003, p. 96). Also, these authors state that resources, if considered as isolated factors, do not result in productivity; hence, coordination of resources is important. The ways a firm can create a barrier to imitation are known as “isolating mechanisms”, and are reflected in the aspects of corporate culture, managerial capabilities, information asymmetries and property rights (Hooley and Greenlay 2005, p. 96, Winter 2003,p. 992). Further, they mention that except for legislative restrictions created through property rights, the other three aspects are direct or indirect results of managerial practices.

King (2007, p. 156) mentions inter-firm causal ambiguity may results in sustainable competitive advantage for some firms. Causal ambiguity is the continuum that describes the degree to which decision makers understand the relationship between organizational inputs and outputs (Ghinggold and Johnson 1998, p. 134, Lippman and Rumelt 1982 cited by King 2007, p. 156, Matthyssens and Vandenbempt 1998, p. 46). Their argument is that inability of competitors to understand what causes the superior performance of another (inter-firm causal ambiguity), helps to reach a sustainable competitive advantage for the one who is presently performing at a superior level. Holley and Greenley (2005, p. 96) state that social context of certain resource conditions act as an element to create isolating mechanisms and quote Wernerfelt (1986) that tacitness (accumulated skill-based resources acquired through learning by doing) complexity (large number of inter-related resources being used) and specificity (dedication of certain resources to specific activities) and ultimately, these three characteristics will result in a competitive barrier.

Referring back to the definitions stated previously regarding the competitive advantage that mentions superior performance is correlated to resources of the firm (Christensen and Fahey 1984, Kay 1994, Porter 1980 cited by Chacarbaghi and Lynch 1999, p. 45) and consolidating writings of King (2007, p. 156) stated above, we may derive the fact that inter-firm causal ambiguity regarding resources will generate a competitive advantage at a sustainable level. Further, it explains that the depth of understanding of competitors—regarding which resources underlie the superior performance—will determine the sustainability strength of a competitive advantage. Should a firm be unable to overcome the inter-firm causal ambiguity, this does not necessarily result in imitating resources. As to Johnson (2006, p. 02) and Mahoney (2001, p. 658), even after recognizing competitors' valuable resources, a firm may not imitate due to the social context of these resources or availability of more pursuing alternatives. Certain resources, like company reputation, are path-dependent and are accumulated over time, and a competitor may not be able to perfectly imitate such resources (Zander and Zander 2005, p. 1521, Santala and Parvinen 2007, p. 172).

They argue on the basis that certain resources, even if imitated, may not bring the same impact, since the maximum impact of the same is achieved over longer periods of time. Hence, such imitation will not be successful. In consideration of the reputation of fact as a resource and whether a late entrant may exploit any opportunity for a competitive advantage, Kim and Park (2006, p. 45) mention three reasons why new entrants may be outperformed by earlier entrants. First, early entrants have a technological know-how which helps them to perform at a superior level. Secondly, early entrants have developed capabilities with time that enhance their strength to out-perform late entrants. Thirdly, switching costs incurred to customers, if they decide to migrate, will help early entrants to dominate the market, evading the late entrants' opportunity to capture market share. Customer awareness and loyalty is another rational benefit early entrants enjoy (Lieberman and Montgomery 1988, Porter 1985, Hill 1997, Yoffie 1990 cited by Ma 2004, p. 914, Agarwal et al. 2003, p. 117).

However, first mover advantage is active in evolutionary technological transitions, which are technological innovations based on previous developments (Kim and Park 2006, p, 45, Cottam et al. 2001, p. 142). The same authors further argue that revolutionary technological changes (changes that significantly disturb the existing technology) will eliminate the advantage of early entrants. Such writings elaborate that though early entrants enjoy certain resources by virtue of the forgone time periods in the markets, rapidly changing technological environments may make those resources obsolete and curtail the firm’s dominance. Late entrants may comply with the technological innovativeness and increased pressure of competition, seeking a competitive advantage by making the existing competencies and resources of early entrants invalid or outdated. In other words, innovative technological implications will significantly change the landscape of the industry and the market, making early movers' advantage minimal. However, in a market where technology does not play a dynamic role, early mover advantage may prevail.

The above-developed framework for the RBV reflects a unique feature, namely, that sustainable competitive advantage is achieved in an environment where competition does not exist. According to the characteristics of the RBV, rival firms may not perform at a level that could be identified as considerable competition for the incumbents of the market, since they do not possess the required resources to perform at a level that creates a threat and competition. Through barriers to imitation, incumbents ensure that rival firms do not reach a level at which they may perform in a similar manner to the former. In other words, the sustainability of the winning edge is determined by the strength of not letting other firms compete at the same level. The moment competition becomes active, competitive advantage becomes ineffective, since two or more firms begin to perform at a superior level, evading the possibility of single-firm dominance; hence, no firm will enjoy a competitive advantage. Ma (2003, p. 76) agrees stating that, by definition, the sustainable competitive advantage discussed in the RBV is anti-competitive. Further such sustainable competitive advantage could exist in the world of no competitive imitation (,[2] Peteraf 1993 cited by Ma 2003, p. 77, Ethiraj et al., 2005, p. 27).

Based on the empirical writings stated above, RBV provides the understanding that certain unique existing resources will result in superior performance and ultimately build a competitive advantage. Sustainability of such an advantage will be determined by the ability of competitors to imitate such resources. However, the existing resources of a firm may not be adequate to facilitate the future market requirement, due to volatility of the contemporary markets. There is a vital need to modify and develop resources in order to encounter the future market competition. An organization should exploit existing business opportunities using the present resources while generating and developing a new set of resources to sustain its competitiveness in the future market environments; hence, an organization should be engaged in resource management and resource development (Chaharbaghi and Lynch 1999, p. 45, Song et al., 2002, p. 86). Their writings explain that in order to sustain the competitive advantage, it is crucial to develop resources that will strengthen the firm's ability to continue the superior performance. Any industry or market reflects high uncertainty and, in order to survive and stay ahead of competition, new resources become highly necessary. Morgan (2000 cited by Finney et al. 2005, p. 1722) agrees, stating that the need to update resources is a major management task since all business environments reflect highly unpredictable market and environmental conditions. The existing winning edge needed to be developed since various market dynamics may make existing value-creating resources obsolete.[8]

Criticism/Limitations

In 2001, one of the most interesting academic debates in strategic management was published in Vol.26 (1) of the Academy of Management Review. Priem and Butler (2001a) started off by their critique of Barney's (1991) original article. Barney (2001) then responded and defended his research, followed by another critical comment by Priem and Butler (2001b).

Priem and Butler (2001) raised many key points of criticism:

However, Barney (2001) provided counter-arguments to these points of criticism.[2] For example, he said that any theory could be rephrased to appear tautological. He also stated that his theory applies to static (equilibrium) environments, but not to dynamic environments. As today's business realities are clearly not static but dynamic and characterized by high velocity and rapid change, Barney (2001) thus admitted that his 1991 VRIN theory has little potential for applicability to the real world. It does, however, provide a good way for senior managers to better understand their resource base. Barney (2001) also suggested re-defining the criterion of "value" and pointed to different ways of describing "competitive advantage" as strategic advantage, above-average industry profits and economic rents.

Priem and Butler (2001a;2001b), however could be criticized for slightly missing the point. This is because they focus on the status of the RBV as a theory, the tautology allegation and sustainable competitive advantage. In business reality, senior managers are often not interested whether or not the RBV constitutes a real theory or not. Instead, they require guidance for achieving competitive survival. As Ludwig and Pemberton (2011) have shown, any firm operating in today's dynamic external business environments needs to focus on competitive survival and their capabilities.

Further criticisms of the RBV are:

The relational view is an extension of the resource-based view for considering networks and dyads of firms as the unit of analysis to explain relational rents, i.e., superior individual firm performance generated within that network/dyad.[9]

See also

References

  1. ↑ Penrose, E. T. (1959). The Theory of the Growth of the Firm. New York: John Wiley
  2. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Barney, J.B. (1991). "Firm Resources and Sustained Competitive Advantage" (PDF). Journal of Management 17 (1): 99–120. doi:10.1177/014920639101700108.
  3. ↑ Kozlenkova, Irina; et al. (January 2014). "Resource-based theory in marketing". Journal of the Academy of Marketing Science 42: 1–21.
  4. 1 2 3 4 5 6 Amit, R.; Schoemaker, P.J.H. (1993). "Strategic assets and organizational rent" (PDF). Strategic Management Journal 14 (1): 33–46. doi:10.1002/smj.4250140105.
  5. ↑ Makadok, R. (2001). "Toward a Synthesis of the Resource-Based View and Dynamic-Capability Views of Rent Creation". Strategic Management Journal 22 (5): 387–401. doi:10.1002/smj.158.
  6. ↑ Sirmon, D.G., M.A. Hitt, & R.D. Ireland (2007). "Managing Firm Resources in Dynamic Environments to Create Value: Looking Inside the Black Box". The Academy of Management Review 32 (1): 273–292. doi:10.5465/AMR.2007.23466005. SSRN 1342630.
  7. 1 2 Ludwig, Gregory and Pemberton, Jon (2011). "A managerial perspective of dynamic capabilities in emerging markets: the case of the Russian steel industry". Journal of East European Management Studies 16 (3): 215–236. ISSN 0949-6181.
  8. ↑ "Achieving a sustainable competitive advantage in the IT industry through hybrid business strategy: A contemporary perspective"- Tharinda Jagathsiri (MBA-University of East London)
  9. ↑ Dyer, J.H., Singh, H. (1998). "The relational view: Cooperative strategy and sources of interorganizational competitive advantage". Academy of Management Review 23: 660–679.

Further reading

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