Resource-based view (RBV) is a tool to determine strategic resources and how it affects the performance of the firm based solely on reviewing its internal environment while the external environment remains fixed. Firm's using RBV competes in terms of their resources and capabilities. The aim of this paper is to study the factors that influence firm's performance. The RBV emphasizes on the firm's resources as the essential elements of competitive advantage and performance. It assumes two assumptions in examining sources of competitive advantage which are that the firms are heterogeneous in terms of the resources they control and that resource heterogeneity can continue over a period as the resources used to implement their strategies are not easily portable across firms (Bridoux, F, n.d)..
The RBV method of analyzing firm's performance is focused that other vital factors tend to be disregarded. Resources are not valuable of themselves; instead they are valuable because they allow firms to perform activities that in return create advantages for them. The competitive value of resources can be enhanced or eliminated by changes in technology, competitor behavior, or buyer needs which an inward focus on resources will overlook (Sheehan, N & Foss, N, 2007). Resource uniqueness is essential as this differentiates between the firms. However, resource uniqueness is not sufficient to achieve sustainable competitive advantage and thus the resources must also be valuable, rare, imperfectly imitable and non-substitutable. RBV suggests that business processes that exploit valuable but common resources can only be a source of competitive equality; business processes that exploit valuable and rare resources can be a source of temporary competitive advantage; and business processes that exploit valuable, rare, and costly-to-imitate resources can be a source of sustained competitive advantage (Bridoux, F, n.d).
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The merits and demerits of RBV as the best strategy route
One of the important contributions of RBV is the ability of it to measure and identify the internal environment of the firm. The importance of using RBV as a strategy route is to be able to work the inside-out approach. This means that companies using RBV focus on their internal strengths more as it is the root of their competitiveness. Furthermore, RBV recommends that effective management of operations can create uniqueness in the firm's resources. Louis Vuitton is one firm in a competitive industry which has the edge over their competitors because of their product uniqueness. Louis Vuitton's expertises are their design skills and manufacturing efficiency (R. Duane Ireland, Robert E. Hoskisson, & Michael A. Hitt, 2008). While they may not be able to control the external environment, Louis Vuitton can use the RBV model and analyze their position and work on their strategies.
Many organizations have been faced with dilemmas on how to use their resources strategically. Organizations that fail to efficiently convert their resources and capabilities into business processes cannot expect to recognize the potential competitive advantage of these resources. The RBV has little contribution in terms of predicting firm performance because of its nature of being tautological (Truijens, O. (n.d) and its focus is too narrow. Also, as a measure which only focuses on the internal environment, the RBV cannot be taken as the 'best strategy' route. Many firms which focus mainly on the internal environment encounter competitive disadvantages to their business. For example, when IBM, a successful company achieved its success many of their competitors entered into the market. IBM's competitors included other big names such as Hewlett Packard (HP), Dell and Compaq (McNeilly, 2000). IBM did not pay close attention to their competitors because they were focused greatly on their internal strengths and not those of their competitors. Some other firms which have experienced failures from the strategies are Marlborough. Marlborough took the price cut strategy too far as they did not consider their competitors possible moves. The CEO of Marlborough started a price war by reducing their prices to attract consumers and gain more market share. However, their competitors also followed in reducing their prices which resulted in Marlborough facing losses. (McNeillly, 2000).
RBV is not the only factor which determines performance of the firm. In industries such as the airline industry, other external factors such as timing and marketing are also essential. Entering into the industry requires good timing and this can be influenced by the economic position and consumer choice of quality and lower price. For example, Southwest airlines which are one of the well-known low cost carriers in the United States used the niche market strategy to maintain competitive advantage from its rivals. They avoided large airports, focused mainly on short flights which are ideal for families and business people, as well as excluded seating requirement and on flight meals to reduce their cost (Anonymous, 2010).
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Porter also mentions the common strategy of lowering cost, and product differentiation allows firms to access its strengths. Firms achieve superior positions based on being a cost leader or earning price premiums at the activity level (Anonymous, 2010). In the cost leader method of achieving sustainable competitive advantage, the firm would sell its products either at the average price to earn profits or below the average price to gain market share. The broader market usually adopts cost leadership. Wal-Mart is a cost leader. Their strategy was to form a close relationship with their suppliers which allowed them to reduce cost when purchasing in bulk (Walden University, 2010). Differentiation is another strategy mentioned by Porter. Firms produce products that vary from others and have unique features to compete against their competitors. This uniqueness of the product also allows firms to charge higher prices for their product. However, there are a few different types of differentiation strategies. The few common ones include differentiation based on additional features, packaging, and design and positioning (Scribd, 2011). Louis Vuitton is an example of a firm that applies differentiation through design and positioning.
Exploring processes, capabilities and the ability to appropriate rent and Porter's industrial analysis
Porter's framework discusses the role of firms in formulating appropriate competitive strategy to achieve superior economic performance, and competitive approach. Also, the source of profits is not to be found in the firm but rather in the structure of the industry, especially the nature and balance of its competitive forces (Bridoux, F, n.d). However, the assumption of any relationship between firm performance and rent generation may be inaccurate. The RBV states that performance consists of rent generation and rent appropriation and we cannot predict firm performance from rent generation only. One such example is IBM. IBM assembled the strategic capabilities that built most of the modem for the personal computer industry. Yet Intel and Microsoft were ultimately able to appropriate a lot more of the related rent (Russell W. Coff, 1999).
The factors that allow resources to generate rents should be valuable, rare, imperfectly imitable and non-substitutable. This issue was addressed by identifying the conditions under which a firm's resources become valuable by bringing the external environment into the resource-based view. Through nurturing the internal competencies and applying them to an appropriate external environment, a firm can develop a viable strategy. Thus, for a firm's resource to become valuable, it must allow the firm to "exploit opportunities or neutralize threats" in the firm's environment (Russo, M & Fouts, P, 1986). Resources as an option or real options refer to resources which are bought in present time and are either used or kept to be used in a later period. For example, land can be bought and used right away or it can be kept for use later. Real options create strategic flexibility for firms and when used effectively they can retain or increase in value. These types of resources are very useful in industries that have high competitiveness and use high technology. The pharmaceutical industry is one industry where there is high competitiveness. Firms such as Johnson & Johnson, and Pfizer invest hugely in research and development in order to develop large numbers of drugs which can used to treat different illnesses although most of the time these drugs fail. Due to the uncertain nature of the products, these firms have to focus widely (R. Duane Ireland, Robert E. Hoskisson, & Michael A. Hitt, 2008).
However, firm's resources on their own accord do not contribute to competitive advantage. Thus, these resources must be combined to form capabilities which in turn develop into core competencies and are used by firms to create value. Capabilities result from combining resources. Honda uses its capabilities in product design, engineering and manufacturing. Moreover, they place a great deal of emphasis on their workforce. Honda encourages their engineers to 'dream'. This allows their employees to discover new things which add to their knowledge. This knowledge in turn will simplify their daily work. Core competencies are the capabilities which the firm pursuits and performs well. Core competencies have a competitive edge when the firms add value and outperform their competitors. The factors of core competencies which lead to a competitive advantage are valuable, rare, imperfectly imitable and non-substitutable (R. Duane Ireland, Robert E. Hoskisson, & Michael A. Hitt 2008).
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In conclusion, the RBV cannot be accepted as the 'best strategy' route due its nature of being narrowly scoped and ignorant of the external environment. This measure does not provide accurate information on the firm's performance. However, in a stable industry the RBV can be considered as one of the best strategy route. A firm's performance should undertake many other factors which include timing, marketing, and advancement of technology, competitor behavior as well as the needs of consumers. I disagree that RBV is the 'best' route as external factors are also very crucial in determining the performance and rent generation of firms as other external factors must also be considered. Porter's external environment analysis focuses on the external factors that affect a firm's performance. Dynamic industries focus more on the external environment thus preferring to use Porter's theory In order for the RBV method to be more effective and efficient; it has to be studied along together with the external environment. That way, firms are aware of their resources and capabilities and can nurture the internal competencies to apply them with appropriate external environment, which will allow the firm to develop practical approaches.