Resource Based View Essay
Resource Based View
The mid-eighties witnessed the emergence of a growing body of work collectively labelled the resource and capability-based view of the firm (RBV). In reality, Resource Competence View (RCV) first adopted an “economic” orientation. Pioneer studies (Wernerfelt, 1984) , Barney, 1986, 1991, Dierickx and Cool, 1989, Peteraf, 1993) focused on the type of resources and competencies that could offer to its owner a sustainable competitive advantage. Therefore, resources and competencies approach first appeared as a theory of competitive advantage or a theory of “performance of the firm” (Argyres & Zenger, 2007). It is only recently, in the last 20 years that organizations have started using the resource based view approach on strategy. Nowadays, they view it as the most important key development in international business research and strategic management, an approach that gives a coherent vision based on a firm’s capabilities to help determine the strategic resources necessary for the firm’s survival and growth within a particular market place.
As Hitt et al (2001) stated, “the resource based model assumes that each organization is a collection of unique resources and capabilities that provides the basis for its strategy and that is the primary source of return.”. It suggests that in order for a firm to sustain competitive advantage, it must not only have resources and capabilities but also have a firm control over it and they must meet certain basic criteria such as being: valuable, rare, inimitable and non substitutable such that it is impossible to be copied or replicated (VRIN). Although a resource based view strategy sounds like the better way to go, others have wondered if this approach is at all necessary or bring any more insight than the traditional understandings into a successful strategy to survive and thrive into a competitive market, strategy that will allow the firm to have a good competitive advantage.
In this review, we aim to elucidate the concepts behind the resource based view strategy and its use by managers. Furthermore, we aim to elaborate on its advantages but also disadvantages moving on to a critical analysis of this emerging approach to strategy and competitive advantage from the point of view of well known authors such as M. Porter (1980,1985) who believes that external factors mainly contribute to a firm’s competitive advantage and Jay Barney (1991) who criticizes the narrow approach of a resource based view on competitive advantage, mainly the homogeneity it gives to firms resources.
RESOURCE BASED VIEW : A CRITIQUE
The RBV has emerged after the industrial work of Michael Porter and Rick Perry , who stated that companies must achieve a competitive advantage based on external factors. In fact, the RBV suggests that differences in profitability between firms in the same sector are much more important than inter sector profitability differences which was its founding idea. The resource-based view (RBV) has become one of the most influential and cited theories in the history of management theorizing.
It aspires to explain the internal sources of a firm’s sustained competitive advantage (SCA). Its central proposition is that if a firm is to achieve a state of SCA, it must acquire and control valuable, rare, inimitable, and non substitutable (VRIN) resources and capabilities, plus have the organization (O) in a place that can absorb and apply them (Barney, 1991a, 1994, 2002). This proposition is shared by several related analyses: core competences (Hamel & Prahalad, 1994), dynamic capabilities (Helfat & Peteraf, 2003; Teece, Pisano, & Shuen, 1997), and the knowledge-based view (Grant, 1996b). Given its elegant simplicity and its immediate face validity, the RBV’s core message is appealing, easily grasped, and easily taught.
1 FUNCTIONAL ASPECTS OF THE RESOURCE BASED VIEW :Models based on resources and skills, Resource Based View and Competence Based View
The resources and competences are expressed through certain knowledge (know-how , know-machine ,distribute knowledge) Resources are defines as assets owned or controlled permanently by the firm to develop and implement its strategy. There are six types: Financial Resources : CAF, debt ratio, volume TR ;
Human Resources : number of employees, qualification, experience,intelligence ; Physical resources : production sites and their geographical location, land,stocks ; Organizational Resources : information systems, ISO standards, procedures,coordination mechanisms ; Technological resources : know-how, patents ;
Reputational Resources : brand, reputation ;
The approach based on the resources considers that the company more than the industry, constitutes the relevant level of analysis to explain the performance (Barney, 1991; Rumelt, 1984; Wernerfelt, 1984). The organization is rehabilitated as an actor ; the firms are able to accumulate resources and competences which are transformed into advantage on the competitors if they are rare, creative of value, non-substitutable and difficult to imitate (Barney, 1991; Dierickx and Cool, 1989) see figure 1.
5 tests to assess the strategic value of competencies:
Figure 1. Barney J.B. (1991), Firm resources and sustained competitive advantage, Journal of Management, vol. 17, pp.99-120
The firm is not designed any more like a wallet of products or markets, but like a wallet of resources. It is not the customer requirements who determines the strategy, but the resources and competencies which the company possess : the competing advantage is to be sought in-house (See Table 1).
Competencies indicate the organizational capacity to deploy the resources in the form of combination to achieve a goal, which implies the idea of a training by combining several resources.
2 A CRITIQUE OF THE RESOURCE BASED VIEW APPROACH
The Resource based view approach has been subject to several critiques ,some of which suggest that it is a very limited model , very hard to apply and its variables cannot be clarified. All of these critiques could be faced with more explanations of the (RBV)’s variables,boundaries,and applicability. On the other hand, some critiques are threatening the (RBV) model, these critiques are concerned with the limitations of the defining two concepts of the (RBV) model which are : resources and value which entail some problems and affecting the explanations of a firm’s competitive advantage. These critiques could be categorized as follow :
Studies argue that (VRIN) criteria is not essential to the understanding of SCA as (Kraaijenbrink et al) (2010) mention (Foss and Knudsin) (2003) arguing that it’s mainly uncertainty is one of the basics to achieve SCA , Furthermore, stating that other conditions simply additional . These comments suggest ‘ fundamental disagreement about the nature of markets , individuals , and resources and the roles these play in generating SCA (Kraaijenbrink et al, 2010). Individual’s, entrepreneurs, and manager’s judgement and models are not sufficiently recognized by the (RBV) to the critique which argues that the (RBV) limits the entrepreneurial and managerial skills.
This critique outlines the importance of a firm’s environment whilst arguing that (RBV) is mostly focused inward and dismisses the external environment which is important for assessing the main strength and weaknesses of an organization , which essentially leads to achieving competitive advantage ; it also leads to the issue of value creation , and environmental assessment , internally and externally , are essential to value creation and strategic positioning. Connor (2002) argues that the (RBV) is limited to large firms (with significant market power) , furthermore, SME’s cannot be sometimes assessed by their resources when it comes to SCA resulting in their fallout of the (RBV) . Finally , adding that (RBV) applicability can , in most cases, relate to firms pursuing SCA.
1 PORTER’S FIVE FORCES (P5F) AND RBV
On one hand, the RBV model supports the idea that a firm can sustain competitive advantage by having highly superior resources and these resources are represented in the VRIN criteria . In other words, sustaining a competitive advantage depends on the ability to integrate a group of extreme resources to provide the firm with its leading position . According to Barney (1991,1994,2002) “RBV central proposition is that a firm is to achieve a state of SCA , it must acquire and control valuable, rare, inimitable,and non-substitutable (VRIN) resources and capabilities , plus have the organization (O) in place that can absorb and apply them” , which would lead the firm to earn a massive surplus. On the other hand, Micheal Porter believes that for a firm to achieve a sustainable competitive advantage it has to focus on its external environments, have a strategic positioning in its industry or intended industry and this strategic positioning is guided by five industry-level forces namely;
Entry barriers, Buyers bargaining power, Suppliers bargaining power, Threats of substitutes and Rivalry among existing industry. He specifies that finding a strategic fit within an industry gives a firm an edge over its rivals and can lead to a sustainable competitive advantage. A company can outperform rivals only if it can establish a difference that it can preserve (Porter, 2000) and how can you establish this difference? By deliberately choosing a different set of activities to deliver a unique mix of value e.g. Southwest Airlines, IKEA. However, It is clearly noticed that one of the big differences between both models (Resource based view and Porter’s five forces) is that they differ in the approach used. The RBV focus only on the firm’s resources but the P5F model is based on the industry itself.
Another similarity between both views are the description of resources in the RBV that it’s inimitable matching the concept of threat of new entrants in P5F . Also the threat of substitute in the P5F model sounds similar to the attributive of resources that it is non-substitutable in the RBV. Both models put the concept of earning superior profits as an objective of any firm, similarly both agree that the way to achieve that surplus is by sustaining competitive advantage , but when it comes to how to sustain this competitive advantage they differ ; P5F SCA by gaining a high profit on the long-term , contrarily the RBV considers SCA by preventing rivals or competitors to acquire the same advantage . At some point, both RBV and P5F may look contradictory , in reality both complement each other when integrated .
2 JAY BARNEY AND RBV
According to Barney,Mcwilliams & Turk (1989) it is stated that a sustained competitive advantage has been defined as to be an advantage obtained as a result of a firm’s strategy not being implemented by other firms as well but that cannot be replicated but point out the fact that it does not refer to “how long” that advantage is in fact sustained. Porter (1985) and Rumelt (1984) said that the basis for sustaining a competitive advantage in the market is to understand its sources. Porter mostly believes that focusing solely on external factors (opportunities, threats of new intrants,etc…) gives a firm better chances of reaching a sustained competitive advantage. For Barney (1991), the basis to sustaining a competitve advantage is by formulating a strategy that is based on internal strenghts but acquired through responding to external factors such that there is synergy between internal and external factors and thus heterogeinity and immobility to the firm’s resources (Barney & Hoskisson, 1989).
He argues that a firm simply cannot rely on the even distribution of its resources (same strategic capabilities, human and organizational capital (Barney,1991)) throughout the organization (focus that gives homogeinity and mobility of resources) to achieve a sustained competitive advantage as any other firm with the same resources can have the same competitive advantage in the market. Also, efficiency and effectiveness can be improved to the same extend and therefore the competitive advantage cannot be described as “sustained” (Barney,1991). However, it can be argued that an homogenous and mobile set of resources can also lead a sustained competitive advantage on a “first come, first served” basis where the firm that has access to distribution channels, develop good will customers and a positive reputation first gains a sustained competitive advantage as they would have established themselves before other firms had a chance to do so.
Barney (1986) also highlights the concept of “Strategic Factor Market.” He explained that according to the strategy, strategic factor market in which the company must draw differ. For example, for an innovation strategy, the factor to consider may be the competence in research and development. He added that if the strategic factor market is not perfect, it will not be possible for a firm to extract superior economic performance. Barney is therefore concerned with allowing the firm to distinguish themselves from others, and it sets up the theory of competitive advantage “sustainable”. This type of benefit resulting resources respecting the criterion called “VRIN” (resources must be: valuable, rare, difficult to imitate and imperfectly substitutable to provide the firm a sustainable competitive advantage).
3 ISSUES FOR PRACTICING MANAGERS IN ADOPTING THE RBV APPROACH
Having looked at the critique of the RBV one can undoubtedly say that practicing managers may encounter some issues in adopting this approach. The RBV is a very complex approach. Thus to attain or maintain a competitive advantage managers must often and extensively simplify (Russo & Schoemake, 1989). Managers are often faced with the challenges of identifying, developing, protecting and deploying of firm’s resources and capabilities such that they can gain a sustainable competitive advantage over rivals. What are the criteria for identifying? Often times they ask what resources or capabilities do we have that rivals do not have or cannot immediately imitate and how can we achieve a sustainable competitive advantage with it.
They run the risk of retaliation from rival firms which can render their competitive advantage static or useless as it is sometimes impossible for them to know the level or worth of their rivals resources or capabilities. What capabilities to develop, what resources to deploy are issues which can result to intra organizational conflicts among various departments in the firm. In adopting the RBV approach managers are likely to face a considerable uncertainty and ambiguity arising from shifts in buyers’ preference or taste, social values, economic and political trends, recent/ upcoming technologies, rivalry in the industry (competitive actions) etc… (strategic management Journal Vol 14,1993).
Barney, J.B. 1991. Firm resources and sustained competitive advantage, journal of management 17:99-120. Barney, J.B. McWilliams,A. , Turk,T. 1989.
On the relevance of the concept of entry barriers in the theory of competitive strategy. Paper presented at the annual meeting of the strategic managemt society, San Francisco. Lieberman,M.B, & Montgomery, D.B. 1998. First mover advantages, Strategic management journal, 9:41-58. Porter,M. 1980. Competitive strategy. New York. Free Press.
Porter, M. 1985. Competitive advantage. New York. Free Press. Porter,M. 2000. What is Strategy? Harvard Business Review.
Rumelt,R. 1984. Towards a strategic theory of the firm. In R. Lamb (Ed.), Competitive strategic management: 556-570. Englewoods Cliffs, NJ : Prentice-Hall. Wernerfelt, B. 1984. A resource based view of the firm. Strategic management Journal. 5:171-180.
Subject: Human resources,
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 25 October 2016
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