The RBV has been proposed to be a sounder route to strategy development as compared to the externally focused industrial organisation model advocated prominently by Michael Porter. As opposed to the RBV which focused on a firm's internal resources and capabilities, the industrial organisation model emphasises on industry attractiveness as a primary source of superior profitability (Grant, 2001). It is concerned with identifying favourable industries, locating lucrative segments, and moderating competitive forces by influencing industry structure and competitors' behavior (Grant, 2001). This perspective has been criticized for being inadequate to devising a strategy that results in significant performance difference between firms. This stems from the concern that other firms tend to adopt similar strategies when industry selection and positioning were the focus in strategy formulation (Grant, 2005, p.136). As such, any economic rents generated as a result of strategic positioning will dissipate as competitive pressures increase in the industry (Schoemaker, 1990 cited in Fahy, 2000).
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On the other hand, the RBV's approach which emphasises the uniqueness of each firm suggests that the heterogeneity in resources between firms can give rise to imperfect competition and the attainment of above-normal profits (Fahy, 2000). It contends that when distinctive bundles of resources underlie the competitive advantage created by the firm, superior performance will persist (Fahy, 2000). Towards this end, the RBV presents a more feasible approach to explaining and creating differential performance between firms. This is supported by empirical evidences which show that internal factors influence performance more substantially than industrial factors. In a study conducted by Hansen and Wernerfelt in 1989, it was found that organisational factors accounted for twice the variance in firm profit rates as market factors (Fahy, 2000). Rumelt's study of 2800 business units in 1991 also showed that 44 per cent of the variance in profitability was attributed to business unit effects, as compared to industry effects which only accounted for 4 per cent (Fahy, 2000).
This provides a clear explanation to why some firms outperform others and maintain their competitive advantage. Given the adoption of the RBV in strategy formulation, firms with unique bundles of strategic resources are able to develop SCA (Barney, 1991 cited in Smith, Vasudevan and Tanniru, 1996). This, along with a competency in making decisions regarding the allocation, deployment and maintenance of these resources (Penrose, 1959 cited in Julienti, Bakar and Ahmad, 2010), bundled in a well-conceived strategy, will help firms to outperform rivals and achieve superior profitability (Fahy, 2000; Collis and Montgomery, 1994 cited in Julienti, Bakar and Ahmad, 2010). For example, one company which has clearly outperformed its competition and has managed to secure an unrivaled market position by focusing on its internal resource is Intel. Intel is a company that manufactures 80% of the microprocessors found in the world's personal computers (Kotler et al., 2009, p.43). The company heavily invests in research for its microprocessors (Smith, Vasudevan and Tanniru, 1996). This has resulted in not only many new generations of microprocessors, but also an increased capability in processor design (Smith, Vasudevan and Tanniru, 1996). This capability is regarded as a strategic resource of the company because it cannot be duplicated by competitors. Each successive generation of microprocessor is based on learning from previous efforts (Smith, Vasudevan and Tanniru, 1996) and this tacit knowledge that spans across a large time frame reduces its imitability and mobility (Rungtusanatham et al., 2003). As a result, this capability has established for it a SCA which maximizes its growth and performance (Dierckx and Cool, 1989; Hoopes et al., 2003 cited in DeSarbo, Benedetto and Song, 2007).
A More Secure Foundation for Strategy in a Volatile Economic Environment
Enterprises today operate in a hypercompetitive and turbulent environment (Volberda, 1996 cited in Rungtusanatham et al., 2003). Customers' preferences are more volatile given the array of product choices in the market (Rungtusanatham et al., 2003). Customer's identities are changing, so are the technologies used to serve them (Grant, 2001). In an environment with such high rate of change, many have suggested that internal resources and capabilities may be a more secure basis on which to construct strategy as compared to an external market focus (Grant, 1991 cited in Ortega, Azorin and Cortes, 2010). Where intense competition is prevalent, a firm's competitive advantage drawn from an externally focused strategy may be quickly undermined and the firm's internal resources may constitute a more solid foundation for an advantage-creating strategy. In light of this, the RBV accounts for sources of competitive advantage better than an externally focused orientation (Ortega, Azorin and Cortes, 2010). It provides a more stable and constant direction for a long term strategy (Lewitt, 1960).
A Sounder Approach to Diversification Strategy
Always on Time
Marked to Standard
When exploring new market opportunities, it is important for firms to venture into markets where its resources can deliver on its desired positioning strategy. An expansion will be of little value if firms cannot develop the resources and capabilities needed to serve the customers within its target market (Grant, 2001). In light of this, a resource-influenced diversification would be a sounder approach as compared to a market-influenced diversification (Andersen, 2010). Evidence has demonstrated that taking the RBV approach in strategy allows diversifying firms to be more adept at adjusting to and exploiting changes in the external environment (Grant, 2001). By developing and applying clearly defined internal capabilities to new product development, firms such as Honda and 3M have managed to achieve profitable growth with a widening array of new products (Grant, 2001). In contrast, companies which aimed to serve a market in which they do not have the necessary resources to deliver on their positioning end up with costly failures (Grant, 2001). For example, financial companies such as American Express, Sears, Citicorp and Prudential-Bache which once attempted to serve the full range of customers' financial needs ended up with severe management issues (Grant, 2001).
DEMERITS OF THE RBV IN STRATEGY FORMULATION
Static and Introspective
In spite of its merits, the RBV has received criticisms in several areas. One such criticism is that it is static and introspective (Sheehan and Foss, 2007). The inward-focused model is said to have the tendency to overlook the nature of market demand (Fahy and Smithee, 1999) when developing strategy. According to Porter (1980), some industries have a structural make-up that makes it inherently more profitable than others (Fahy, 2000). By taking an overly introspective view, firms may neglect these industries, hence forgoing the opportunity to optimise their performance (Fahy, 2000). Additionally, an overdependence on the RBV may result in a firm's failure to identify and develop strategic resources which are congruent to strategic industrial factors (Amit and Schoemaker, 1993 cited in Fahy, 2000). For example, a firm with superior production capabilities and high quality products would not be able to make a difference in performance if it does not deploy its products in the most appropriate product markets (Andersen, 2011). Besides that, the internal orientation of the RBV also causes it to lack an effective mechanism to analyse how changes in the environment affect the market value of the firms' resources (Sheehan and Foss, 2007). As a result, resources that once created SCA for firms could become obsolete as external demand changes. In a nutshell, adopting the RBV approach alone and neglecting external factors is not sufficient to achieve above-average performance.
STRENGTHS OF THE RBV IN ACHIEVING SCA AND CREATING VALUE
As delineated previously, the RBV approach is said to be able to create SCA as companies look to developing and deploying bundles of strategic resource which are valuable, rare, inimitable and non-substitutable (Barney, 2001 cited in Toms, 2010). SCA is a desired outcome of companies because it is linked to performance in the form of economic rents or above-normal returns (Grant, 2000). Despite the many criticisms that it is an overly simplistic view for dictating the relationship between resources SCA and performance (Andersen, 2011), the RBV can, to some extent, create SCA. This is because in pursuing resources which possess the advantage-creating attributes, companies continuously develop new strategic resources and reinforce the strategic properties of existing resources. Over time, the new resources and capabilities will become more sophisticated as tacit knowledge regarding effective resource utilisation is developed over long term organisational learning (Smith, Vasudevan and Tanniru, 1996). This will give rise to resource immobility (inimitability and non-substitutability) (Rungtusanatham et al., 2003) which deters competitors from duplicating the firm's competitive advantage originating from these resources, hence making the advantage sustainable (Barney, 1991 cited in Smith, Vasudevan and Tanniru, 1996).
WEAKNESSES OF THE RBV IN ACHIEVING SCA AND CREATING VALUE
Although it is nonetheless true that RBV can create SCA, the shortcoming that persists in this theory is that it is over-simplified. It neglects to mention the highly specific conditions that need to be fulfilled in order for SCA to exist. For example, the concept of value is one which bears significant importance. The ability of resources to create value for customers is integral to achieving SCA. Resources cannot generate SCA if they do not enable value creation (Fahy, 2000). Consequently, such resources will not result in superior performance even though they fulfil all other advantage-creating attributes highlighted by the RBV (Fahy, 2000). An example would be Euro Disney in Paris which in the past lost $921million due to its combination of core strengths that did not create as much value for European customers as in its other establishments (Fahy and Smithee, 1999).
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Additionally, there are also the issues of resource fit and managerial competence that needs to be addressed before SCA can be attained. According to Andersen (2011), firms have different resource configurations that create differences in their ability to make use of strategic resources. A strategic resource with advantage-creating attributes may result in different levels of SCA depending on its fit with the resource configuration of the firm that utilises it, making it entirely possible for firms to not attain SCA if its resources do not fit with its internal configuration (Andersen, 2011). Additionally, managerial competence within the firm also influences resources ability to result in SCA. Differences in managerial capacity to utilise resources between firms can result in different performance, given the same set of strategic resources.
Besides that, the link between SCA and performance is also made more complex when the issue of rent appropriation is included. It is said that rents generated as a result of resource-based competitive advantage may not always be reflected in high performance due to appropriation by stakeholders with bargaining power (Andersen, 2011). For example, rent is appropriated mostly by individuals or groups which possess skills or knowledge critical to the firm (Coff, 1999). As a result, the value added generated by strategic resources is dissipated through salaries to these individuals instead of turned into profit for the firm (Fahy, 2000), causing actual performance to be mediocre despite the SCA attained by its strategic resources. In a nutshell, the relationship between strategic resources, SCA and performance is more complex than is proposed by the RBV (Andersen, 2011). As such, strategic resources may not always be able to lead to SCA and performance, given the above circumstances.
In analysing the merits and demerits of the RBV in strategy formulation, as well as its strengths and weaknesses in creating value and SCA for the firm, it is found that RBV alone is not a sufficient approach to developing strategy that would result in SCA and superior performance. Instead, it is proposed that rather than taking a single approach, it is more feasible to adopt both the RBV and the industrial organisation model in formulating strategy as both are said to complement each other (Mills, Platts and Bourne, 2003). For example, the RBV's overly introspective view (Sheehan and Foss, 2007) and its limitation in customer-level value creation (Sheehan and Foss, 2007) can be corrected with a balance of Porter's externally-oriented view which takes into account the customer's perspective of value (Zubac, Hubbard and Johnson, 2010). In conclusion, given that both the RBV and Porter's model share the same aim in exploiting factors to achieving superior competitive positions (Sheehan and Foss, 2007), and both offer complementary ways to explain firm-level value creation (Sheehan and Foss, 2007), it is best if both approaches are adopted when devising a strategy. This route to strategy would be more effective in creating SCA and above average firm performance.