Indian Management Research Journal, Vol. 1, No 2 ...

Resource based view (RBV) of Competitive Advantages: Importance, Issues and Implications Pankaj Madhani ICFAI Business School (IBS), Ahmadabad [email protected], [email protected] The Resource based view (RBV) analyzes and interpret internal resources of the organizations and emphasizes resources and capabilities in formulating strategy to achieve sustainable competitive advantages. Resources may be considered as inputs that enable firms to carry out its activities. Internal resources and capabilities determine strategic choices made by firms while competing in its external business environment. According to RBV, not all the resources of firm will be strategic resources. Competitive advantage occurs only when there is a situation of resource heterogeneity (different resources across firms) and resource immobility (the inability of competing firms to obtain resources from other firms). Keywords: Resource Based View, Market Based View, Dynamic Capabilities

Introduction Resource based view (RBV) analyze and interpret resources of the organizations to understand how organizations achieve sustainable competitive advantage. The RBV focuses on the concept of difficult-to- imitate attributes of the firm as sources of superior performance and competitive advantage (Barney, 1986; Hamel and Prahalad, 1996). Resources that cannot be easily transferred or purchased, that require an extended learning curve or a major change in the organization climate and culture, are more likely to be unique to the organization and, therefore, more difficult to imitate by competitors. According to Conner, performance variance between firms depends on its possession of unique inputs and capabilities (1991). Following example explains applicability of RBV: Example Honda, the world’ s largest engine manufacturer is following a RBV strategy. Honda built its business strategy around the firm’ s strength, capability and expertise in building petrol based engines. Honda initially started with small clip-on engines for bicycles then moved to two wheelers such as scooters and motorbikes, marine engines, generators, lawn and garden equipment, and cars (Honda and Acura automobiles) and even jet planes. Each of these products competes in quite different product verticals, but leverages a unique resource and capability of Honda to build world class petrol based engines. Foundation of Resource Based View The RBV takes an ‘ inside-out’ view or firm specific perspective on why organizations succeed or fail in the market place (Dicksen, 1996). Resources that are valuable, rare, inimitable and non substitutable (Barney, 1991) make it possible for businesses to develop and maintain competitive advantages, to utilize these resources and competitive advantages for superior performance (Collis & Montgomery, 1995; Grant, 1991; Wernerfelt, 1984).

Indian Management Research Journal, Vol. 1, No 2, May- August 2009

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According to RBV, an organization can be considered as a collection of physical resources, human resources and organizational resources (Barney, 1991; Amit and Shoemaker, 1993). Resources of organizations that are valuable, rare, imperfectly imitable and imperfectly substitutable are main source of sustainable competitive advantage for sustained superior performance (Barney, 1991). A resource must fulfill ‘ VRIN’ criteria in order to provide competitive advantage and sustainable performance. A ‘ VRIN’ criterion is explained below. 1. Valuable (V): Resources are valuable if it provides strategic value to the firm. Resources provide value if it helps firms in exploiting market opportunities or helps in reducing market threats. There is no advantage of possessing a resource if it does not add or enhance value of the firm; 2. Rare (R): Resources must be difficult to find among the existing and potential competitors of the firm. Hence resources must be rare or unique to offer competitive advantages. Resources that are possessed by a several firms in the market place cannot provide competitive advantage, as they can not design and execute a unique business strategy in comparison with other competitors; 3. Imperfect imitability (I): Imperfect imitability means making copy or imitate the resources will not be feasible. Bottlenecks for imperfect imitability can be many viz. difficulties in acquiring resource, ambiguous relationship between capability and competitive advantage or complexity of resources. Resources can be basis of sustained competitive advantage only if firms that do not hold these resources cannot acquire them; 4. Non-substitutability (N): Non-substitutability of resources implies that resources can’ t be substituted by another alternative resource. Here, competitor can’ t achieve same performance by replacing resources with other alternative resources. According to Barney valuable resource ‘ must enable a firm to do things and behave in ways that lead to high sales, low costs, high margins, or in others ways add financial value to the firm’ (1986, 658). Barney also emphasized that ‘ resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness’ (1991, 105). RBV helps managers of firms to understand why competences can be perceived as a firms’ most important asset and, at the same time, to appreciate how those assets can be used to improve business performance. RBV of the firm accepts that attributes related to past experiences, organizational culture and competences are critical for the success of the firm (Campbell and Luchs, 1997; Hamel and Prahalad, 1996). Table 1 provides brief outline of prior work on RBV. Table 1: Prior work on the RBV Authors (year) Penrose (1959)

Andrews (1971)

Major Contribution Emphasizes the internal resources of a firm. A firm’ s growth is based on a firm’ s resources and limited by managerial resources Emphases management of internal resources


Electronic copy available at: http://ssrn.com/abstract=1504379

Lippman and Rumelt (1982)

Wernerfelt (1984) Rumelt (1984) Barney (1986) Rumelt (1987) Rumelt (1987), Dierickx and Cool (1989)

Day and Wensley (1988), Aaker (1989), Grant (1991), Wernerfelt (1989) Prahalad and Hamel (1990)

Hansen and Wernerfelt (1989), Rumelt (1991)

Barney (1991)

Conner (1991)

Peteraf (1993)

Day (1994)

Sustained competitive advantage results from rich connections between uniqueness and causal ambiguity Firms as bundles of resources Strategic theory of the firm based on the idea of firms as resource bundles Characteristics of the factors market determine possibilities for a firm to earn rents Firms as rent-seekers. The importance of isolating mechanisms to earn rents Summary article on imitability barriers (e.g., causal ambiguity and isolating mechanisms like asset interconnectedness, asset stock efficiencies, etc.) that impede (or make very costly) imitation from other competitors Strategic formulation models that have firm resources as the central concept and as the sources of sustainable competitive advantage Core-competencies as the drivers of corporate strategy and diversification. Business should exploit and leverage core competencies. Corporations should diversify in related businesses which can make use and enhance the core competences of the organization Empirical studies that support the hypothesis that firm-specific resources or organizational factors are more important than industry variables for explaining firm superior performance Key strategic resources can be sources of strategic competitive advantage if they are scarce, difficult to imitate, non-substitutable, and valuable Comparison of the resource based theory of the firm with other strategic approaches derived from economics. Clarification of assumptions of the resource based theory and its implication for rent earning strategies An integrative resource based framework for strategic competitive advantage. Proposes that firms obtain superior performance, by earning rents from scarce and efficient resources and/or form market power in the product markets Capabilities framework of strategic competitive


Collis and Montgomery (1995) Grant (1996)

Teece, Pisano, and Shuen (1997)

advantage. Distinguishes between outside-in, spanning and inside-out capabilities Managerially-oriented review of the RBV Knowledge based view develops considering knowledge as the key or strategic asset of firms Dynamic capabilities as sources of competitive advantage (Source: Adapted from Olavarrieta & Ellinger, 1997; Mahoney, 2004)

Resource Based View: Types of Resources and Capabilities According to RBV, resources can be broadly defined to include assets, organizational processes, firm attributes, information, or knowledge controlled by the firm which can be used to conceive of and implement their strategies (Learned, Christensen, Andrews, & Guth, 1969; Daft, 1983; Barney, 1991; Mata et al., 1995). Examples of resources are brand names, technological abilities, efficient procedures, among others (Wernerfelt, 1984; Olavarrieta & Ellinger, 1997; Spanos & Lioukas, 2001). Other researchers have classified different resources as tangible and intangible (Itami & Roehl, 1987; Hall, 1992; Hall, 1993). When identifying resources, several researchers have grouped specific types of resources that may enable firms to conceive and implement value creating business strategies (e.g., Hitt & Ireland, 1985; Grant, 1991; Amit & Schoemaker, 1993; Black & Boal, 1994; Bogaert, Maertens, & Van Cauwenbergh, 1994; Wade & Hulland, 2004). Barney (1991) categorises three types of resources: 1. Physical capital resources (physical, technological, plant and equipment), 2. Human capital resources (training, experience, insights) and 3. Organizational capital resources (formal structure). Brumagim (1994) presents a hierarchy of resources with four different levels of corporate resources; 1. Production/maintenance resources (considered the most basic or lowest level), 2. Administrative resources, 3. Organizational learning resources, and 4. Strategic vision resources (considered the most advanced or the highest level). All firms possess a wide spectrum of resources and capabilities. For better understanding of resources it is necessary to distinguish such varied resources. One useful approach for such classification is to group resources in two categories viz. tangible resources and intangible resources (Table 2). Table 2: Types of Resources and Capabilities Tangible resources and capabilities Financial

Examples - Ability to generate internal funds


Physical

Technological Organizational Intangible resources and capabilities Human Innovation

Reputational

- Ability to raise external capital - Location of plants, machines, offices, and their geographic locations - Access to raw materials and distribution channels - Possession of patents, trademarks, copyrights, and trade secrets - Formal planning, command, and control systems - Integrated management information systems Examples - Managerial talents ?- Organizational culture - Research and development (R & D) capabilities to innovate new product, process and services - Capacities for organizational innovation and change - Perceptions of product quality, durability, and reliability among customers - Successful product branding and positioning with satisfied and loyal customer base - Reputation as a good employer - Reputation as a socially responsible corporate citizen

(Sources: Adapted from (1) J. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; (2) R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 135-144.) Identification of Resources and Capabilities: A Strategy for Sustainable Competitive Advantages The RBV has been useful in identifying the basis by which the resources and capabilities of a firm serve as sources of sustained competitive advantage (e.g., Wernerfelt, 1984; Barney, 1991; Peteraf, 1993). As such, resources and capabilities are fundamental underpinnings of any source of advantage (Rumelt, Schendel, & Teece, 1991). Valuable resources are termed strategic assets (Barney, 1991; Amit & Schoemaker, 1993). The RBV asserts that ownership and control of strategic assets determines which organizations will earn superior profits and enjoy a position of competitive advantage over others. Three major questions are asked of resources to identify the impact they have: 1. Is the resource or capability valuable? 2. Is it heterogeneously distributed across competing firms? 3. Is it imperfectly mobile? As shown in Figure 2, it is only when the three questions are confirmed that a sustained competitive advantage is likely to be gained.


Is a resource or capability valuable?

No

Yes Is it heterogeneously distributed across competing firms?

Yes

No

Competitive Disadvantage

Is it imperfectly mobile?

No

Yes

Sustained Competitive Advantage

Competitive Parity

Temporary Competitive Advantage (Source: Adapted from Mata et al., 1995)

Fig. 2: Identification of Resources and Capabilities The question of a resource’ s value is generally confirmed in two ways. First, if a resource is used to reduce a firm’ s cost it can be seen as valuable (low cost resources). Second, if a resource is used to increase a firm’ s revenue it can be seen as valuable (differentiated resources). As such, valuable resources may be used to implement new strategies to improve efficiency and effectiveness (Barney, 1991), improve customer satisfaction (Bogner & Thomas, 1994; Verdin & Williamson, 1994), or reduce cost (in relation to competitors) (Barney, 1986; Peteraf, 1993). In essence, a resource is valuable if it helps an organization to improve its performance relative to their competitors. If the resource meets these conditions the second question is examined. If not, and the resource is exploited, at worst, a competitive disadvantage may be gained – this is because the resource is not valuable to the organization. Indian Management Research Journal, Vol. 1, No 2, May- August 2009

The second question regarding the distribution of a resource examines whether the given valuable resource is freely available. If the resource is freely available to all firms, then a competitive parity may be gained, allowing the firm to have the same resources as its competitors. However, if it is not freely available (heterogeneously distributed), then the resource may be a source of competitive advantage (given the third question). While some firms may enjoy resource based advantages (due to their resource base) others will be in a position of resource based disadvantage (Michalisin et al., 1997). Put another way, the resource heterogeneity implies that firms have varying capabilities. Therefore, firms with marginal resources can expect to breakeven, while firms with superior resources should expect to earn rents (Peteraf, 1993). The differences in firm resource endowments can be attributed to several factors: the time the firm enters the marketplace, different sets of knowledge, products and systems of learning, as well as decision made over time (Helfat, 2000). The third and final question measures the degree of competitive advantage which may be gained from the given resource. This is achieved by questioning the mobility or inimitability of a resource. If the resource is perfectly mobile then the resource is likely to be only a source of temporary competitive advantage, at best (Mata et al., 1995). This temporary nature is attributed to the advantage because the resource could, due to its mobile nature, change hands. Michalisin et al. (1997) states that since a firm’ s advantage is based on a firm having strategic assets that are superior to one’ s competitors, therefore, the ability to sustain the advantage is a function of the heterogeneity of such resources. Barney (1991) defines sustained competitive advantage as a non-duplicatable advantage. This follows from Lippman and Rumelt’ s (1982) and Rumelt’ s (1984) definitions that outline a sustained competitive advantage as an advantage that continues to hold after efforts of others to duplicate the advantage have ceased (Barney, 1991). Barney’ s (1991) definition of sustained competitive advantage does not mean it will last forever. Rather, it suggests that it will not be competed away or easily duplicated by the efforts of others (Barney, 1991). Barney states that sustained advantages may be challenged when unanticipated changes in the economic structure of an industry occur. Such unanticipated changes therefore, can make what was a source of sustained advantage no longer a source of advantage. Rumelt & Wensley (1981), and Barney (1997) call these unanticipated changes ‘ Schumpeterian Shocks’ . Therefore, a firm enjoying a sustained competitive advantage when faced with a Schumpeterian Shock may experience a major shift in the nature of competition and any sources of sustained competitive advantage may be nullified. A sustained competitive advantage may only be made when resources are strategic and valuable, are heterogeneously distributed and imperfectly mobile and firms should sustain the advantage notwithstanding periods of Schumpeterian Shock. Resource Based View (RBV) Vs Market Based View (MBV) The resource based view (RBV) is a way of viewing the firm and consecutively of imminent strategy. The resource based view (RBV) was popularized by Hamel and Prahalad in their book ‘ Competing for the Future’ (1996). RBV considers the firm as a bundle of resources. These resources, and the way that they are combined, make firms different from one another and in turn allow a firm gain competitive advantage. This concept of RBV is quite different from the Indian Management Research Journal, Vol. 1, No 2, May- August 2009

traditional Market Based View (MBV). According to MBV perspective, firms are considered as fairly homogenous and driving force for market competition is branding and positioning efforts of competing firms. Further, according to MBV, identifying alternative market as characterized by Michael Porter’ s five forces model is major strategic issue. MBV does not take into account whether firm is in position to exploit available market opportunity i.e. whether firms have enough resource and capabilities to compete in the market place. RBV in Changing Environment: Dynamic Capabilities As market is dynamic, firm’ s resources also need to change over a period of time to make them relevant to changing market condition. This perspective is based on the dynamic capabilities and is outcome of RBV (Teece, Pisano, & Shuen, 1997). Dynamic capabilities have been defined as firm’ s processes that use resources specifically the processes to integrate, reconfigure, gain, and release resources. While RBV primarily concentrates on types of resources and capabilities for its strategic importance, the dynamic capability concentrates on how these resources and capabilities need to change or update over a period of time to keep their relevance in the changing market place. The RBV considered resources and competencies as static that can be pointed as stationary at certain time frame work and will remain so over a period of time also. The focal point is that when firms are having resources that are valuable, rare, inimitable and non substitutable, it enables firms to develop value enhancing strategies that are not easily copied by competing firms (Barney, 1991; Conner & Prahalad, 1996; Peteraf, 1993; Wernerfelt, 1984). However in this era of dynamic economy, there is need for firms to build up new capabilities or competencies for sustaining such competitive advantage. (Teece, Pisano & Schuen, 1997).

Degree of Change

Static Market Based View

Resource Based View

Market Forces

Dynamic Capabilities

Dynamic Market

Firm Unit of Analysis (Source: Model Developed by Author)

Fig. 1: Characteristics of RBV, MBV and Dynamic Capabilities Indian Management Research Journal, Vol. 1, No 2, May- August 2009

Dynamic capabilities thus are the organizational processes or strategic routines by which firms develops new configuration for updating resources as per market requirement (Eisenhardt & Martin, 2000). Such dynamic capabilities require that organizations establish processes that enable them to change their routines, services, products, and even markets over time. The RBV, MBV and dynamic capabilities perspective all focus on different unit of analysis and degree of change as shown in Fig. 1. Initially to cope up with market forces, MBV was conceptualized, subsequently focus shifted to RBV. Finally, to respond to challenges of ever changing globalized world, concept of Dynamic Capabilities became popular. This transition is shown by direction of arrow in Fig. 1. The dynamic capabilities approach, examines competitive advantage in the globalized environment of rapid market change. In such dynamic marketplaces, where the competitive environment is rapidly changing, managers of firms need to develop capabilities embedded in the firm which are based on sequences of path dependant learning in order to achieve periods of competitive advantage (Teece et al., 1997; Eisenhardt & Martin, 2000; Miller, 2003). Dynamic capabilities are strategic and organizational processes like product development and strategic decision making that create value for firms by manipulating resources inherent with firms (Eisenhardt & Martin, 2000, p 1106). Winter (2003) views dynamic capabilities as process of extending, modifying, or creating new capabilities. The key differential between ordinary capabilities and those that are dynamic is that dynamic capabilities are linked with change and more particularly, changing the resource base of a firm (Collis, 1994; Winter, 2003). The dynamic capabilities approach is especially relevant today when global competitive forces are changing landscapes of industries. In this globalized environment ways of achieving competitive advantage are changing fast. As such, firms in this marketplace need to have timely strategies, flexible infrastructures, and an ability to utilize resources and capabilities in coupled and innovate ways (Teece et al., 1997). Therefore, in contrast to traditional RBV assumptions competitive advantages gained in the dynamic marketplace may be based on capabilities, which have greater homogeneity and substitutability across firms (Eisenhardt & Martin, 2000). Competitive advantages achieved through dynamic capabilities are therefore based on the ability to change the resource base of the firm. This means dynamic capabilities alter resource bases by creating, integrating, recombining, and releasing resources (Eisenhardt & Martin, 2000). Dynamic capabilities have been tightly coupled with a dynamic or rapidly changing environment (Teece et al., 1997; Sher & Lee, 2004). However, Zahra et al. (2006) also discuss the applicability of such capabilities in non dynamic marketplaces and suggest that while organizations which operate in more dynamic marketplaces would gain greater value from dynamic capabilities; it does not exclude organizations in slower to change marketplaces from gaining value from dynamic capabilities. Limitations of the RBV Limitations of the RBV can be grouped into following three main areas1: 1

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1. The vagueness of terminology associated with the RBV, 2. The tautological nature of some of the views underlying assumptions, 3. Methodological issues. Vagueness of terminology The lack of commonality of terms with RBV research has received a lot of criticism in the literature (e.g., Foss, 1998; Williamson, 1999; Fahy, 2000; Priem & Butler, 2001; Montealegre, 2002; Rugman & Verbeke, 2002; Foss & Knudsen, 2003; Hoopes et al., 2003; Wade & Hulland, 2004). Collis (1994) and others (e.g., Coates & McDermott, 2002; Ray et al., 2004) describe the number of definitions as vast. The use of different terminology to explain results of RBV studies makes it very difficult to compare the results of various studies. For example, while some researchers outline distinct meanings for the core terms; resources, competencies, and capabilities (e.g., Helfat & Peteraf, 2003), other researchers use the terms interchangeably (e.g., Ray et al., 2004). Nanda (1996) suggests that the lack of commonality of terms limits the usefulness of results of RBV research to strategic thinking. Conner comments that since everything in a firm may be seen as a resource ‘ resources lose (their) explanatory power’ (1991, p 145). Similarly, Hax and Wilde (2001) suggest a significant limitation of RBV research is the vagueness of the theory. Tautological nature Another significant assessment of the RBV is that the view is essentially a tautology (Porter, 1991; Foss, Knudsen, & Montgomery, 1995; Mosakowski & McKelvey, 1997; Priem & Butler, 2001; Bromiley & Fleming, 2002) in nature. Porter claims that ‘ at its worst, the resource based view is circular’ (1991, p 108). The researchers also challenge the premise of the RBV suggesting that the view “ seems to assume what it seeks to explain” (Hoopes et al., 2003, p 891). Furthermore, the researchers posit that the lack of clarity about core aspects of the RBV impede the development of theory and fruitful debate. Methodological issues Each of the studies of resources and firm performance vary substantially in terms of the methodology employed and the way the RBV research is designed. Rouse and Daellenbach (1999) question the strong bias towards quantitative research methods suggesting that such a methodology is not appropriate for RBV research in general. The researchers suggest that the nature of advantages in organizations should be firm based and complex and, as such, qualitative and field based methodologies are much appropriate. Chan (2000) supports this position suggesting that the field of research may not be fully understood until more qualitative contributions are added to the conversation. Conclusion The RBV deals with competitive business environment faced by firms but take an inside-out approach i.e. it starts with analysis of firm’ s internal environment. As such RBV is often considered as an alternate to Porter’ s five force model. The RBV emphasizes internal resources and capabilities of firm in formulating strategy to achieve sustainable competitive advantages in


the market place. Internal resources and capabilities determine strategic choices made by firms while competing in its external business environment. Firm’ s abilities also allow some firms to add value in customer value chain, develop new products or expand in new market place. When firm’ s capabilities are considered as paramount in the creation of competitive advantages, it will focus on reconfiguration of value chain activities. This is necessary as it provides opportunity to identify the capabilities within value chain activities which provide it with competitive advantages. The RBV draws upon the resources and capabilities that reside within the organizations in order to develop sustainable competitive advantages. Resources may be considered as inputs that enable firms to carry out its activities. According to RBV, not all the resources of firm will be strategic resources and hence sources of competitive advantage. Competitive advantage occurs only when there is a situation of resource heterogeneity (different resources across firms) and resource immobility (the inability of competing firms to obtain resources from other firms). If the resource is not perfectly mobile (i.e., the resource is not free to move between firms, or if a firm without a resource faces a considerable cost burden in developing, acquiring or using it, that a firm already using it does not), then the resource is likely to be a source of sustained competitive advantage. If a resource is imitated or substituted then any advantages gained may be short lived. In short, the more mobile a resource is, the less sustained the advantage gained from that resource will be. In this current era of fast changing globalized world, if an organization is able to change swiftly and be more alert to changes in the competitive market, then they are more likely to gain and sustain competitive advantage.


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