Relation Of Rbv And Firm Performance Commerce Essay

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The RBV defines the term 'resources' broadly as tangible (eg., specialized equipment, geographic location), human (eg., technical expertise), organizational (eg., superior sales force, supply chain management), and intangible (eg., organizational culture) assets that can be used to confer value (Gibbert, 2006). Barney (1991) established that firms' resources should have the VRIN attributes which are being 'valuable', 'rare', 'imperfectly imitable' and '(non) substitutable'. However, in 2008, Barney & Westerly re-established the VRIN attributes to VRIO, changing the last attribute to 'whether the firm is organized to exploit these resources'.

Since the RBV is also referred to as the 'inside-out' approach, it is obvious that the internal resources of the firm, competences and capabilities form its core. The strategic capability of the firm is the adequacy and suitability of the resources and competences the firm needs to obtain and maintain a sustainable competitive advantage (Clements, 2009). Based on Andersen (2011) and Clements (2009), every firm needs to have the basic threshold resources and competences in order to perform. Threshold resources and competences are defined as the minimum required resources and competences to perform in the industry (Clements, 2009). However, whether the firm achieves high performance or not, depends on the configuration of these basic threshold resources.

The rarity, imperfect imitability and non-substitutable characteristic of a strategic resource may be independent of the firm but when the resources are distributed heterogeneously, the value of the particular resource may not necessarily be similar for all the firms (Andersen, 2011). Managerially, heterogeneity has been defined as "enduring and systematic performance differences among relatively close rivals" (Hoopes et al., 2003). Managers often find it difficult to identify with any clarity the strategic capability of their organisation. They often highlight capabilities not valued by customers but seen as important within the organisation, maybe because they were valuable in the past. Or they highlight what are, in fact, critical success factors (product features particularly valued by customers) like 'good service' or 'reliable delivery', whereas strategic capability is about the resources, processes and activities that underpin the ability to meet such critical success factors. They could also even identify capabilities at too generic a level (Cox et. al., 2004).

Furthermore, the possession of a resource or a capability of some kind does not necessarily mean that the resource is actually utilized (Andersen, 2011). Based on the research done by DeSarbo et. al. (2007), to say that there is a relationship between capabilities and performance is not sufficient. However, their findings showed that the better performing firms seem to be able to exploit and utilize the capabilities they have better than other firms. Empirically, numerous studies have attempted to measure these attributes of a firm's resources and capabilities, and then to correlate them with a firm's performance. Overall, most authors show that firms that build their strategies on path dependent, causally ambiguous, socially complex, and intangible assets outperform firms that build their strategies only on tangible assets.

Merits and Demerits of RBV in Strategy Making

According to O'Riordan (2006), the VRIO approach can be used (with some variation) to assess the potential cost of perceived weaknesses in the firm and whether they are placing the firm itself at a disadvantage versus the competition. This approach could possibly represent a challenging exercise in a practical context due to the tautological issues with RBV. A critique that is widely resonating says that RBV is a tautology that fails to fulfill the criteria for a true theory (Kraaijenbrink et. al., 2010). The RBV stands on analytical statements that are tautological, true by definition, and is not able to be tested (Lockett et. al., 2009 and Priem & Butler, 2001a, 2001b as cited in Kraaijenbrink et. al., p.357). The tautological nature of the RBV can be seen in Barney (1991) where he stated 'Resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency or effectiveness'. As observed from the statement, there is no way to pre-determine the value of the resources prior to the implementation of the firm's strategy. Only when the strategy is implemented and the results analyzed, the resource can be rightly determined as valuable to the firm.

As a merit, the resource based strategy uses the firm's valuable and rare resources strengths and competitive capabilities to deliver value to customers in ways that rivals find it difficult to match (Thompson, Strickland & Gamble, 2010). This means that the firm's internal capabilities are the determinants of the strategic choices that the firm makes in competing in its external environment.

There are situations where the firm's capabilities would create new markets and add value for its customers, such as Apple's iPad. In the case of Apple's iPad which is an innovative spin on catering for the bookish consumers, by providing easy access to eBook stores online, matching it with other fun aspects such as gaming, easy downloads for various applications, as well as serving as a communication device with its introduction of FaceTime. Integrating all these features into a single lightweight contraption awed millions of customers worldwide propelled Apple Inc.'s business forward to a whole new level. As of the June quarter in 2010, Apple's iPad had generated USD$2.2 billion in revenue for Apple just after its first quarter of sales (Frommer, 2010).

Apart from that, the resource strengths and competitive capabilities can also facilitate differentiation in the marketplace (Thompson et. al.,2010). For example, ESPN, being able to dedicate more air time for football, differentiates itself from other sports channels by airing football matches live with professional sports commentators thus attracting more viewers. ESPN averaged a 3.261 million viewership in the United States alone during the 2010 World Cup season (Gaffer, 2010). ESPN has continually ensured the increase in quality of their sports telecasts and progressed with the emergence of 3D televisions to protect their competitive advantage. Another example would be Dell. With their just in time (JIT) systems, the firm has managed to differentiate itself from other personal computer (PC) manufacturing companies by allowing the consumers to put together their own PCs according to their wants and needs. This on its own has enabled Dell bring about results in cost savings, superior customer satisfaction, limited waste, and the ability to provide their suppliers with more information. In the end these benefits all result in a cost savings for Dell and higher revenue. Since Dell holds minimal inventory, they do not have to fund raw materials, work in process or finished goods inventory (Franko et. al., 2005). Since the beginning, Dell has always improved on their JIT systems and constantly seeks avenues for lowering cost therefore ensuring the sustainability of their competitive advantage.

However, all is better said than done. The RBV tells managers to develop and obtain VRIN resources to develop a proper organization but does not mention how it should be done (Kraaijenbrink et. al., 2010). Cox et. al. (2004) also mentioned this major problem of the RBV by stating that the RBV provides little guidance about the appropriate relationship management choices for suppliers who cannot do this, and who are operating in more or less competitive markets where suppliers' power over customers and competitors are not sustainable.

Achieving Competitive Advantage and Value Creation

As a continuation, firms obtain sustained competitive advantages by implementing strategies that exploit their internal strengths, through responding to environmental opportunities, while neutralizing external threats and avoiding internal weaknesses (Barney, 1991). This in its own shows that the RBV coupled with Porter's Five Forces Model (FFM) would fulfill the criteria of a SWOT analysis. Since Porter's FFM is also referred to as the 'outside-in' approach, where the firm evaluates the industry it wants to enter or it currently in before focusing on its internal processes, it is only natural that much research is done on the relationship of the RBV and the FFM. Most authors compare the resource based view with Porter's Five Forces Model (FFM) and the SWOT analysis because these two environmental models seek to indentify the firm's resources which can exploit opportunities and/or neutralize threats (Mahoney & Pandian, 1992; Barney, 2001; Verity, 2005; Madhani, 2009).

Porter's FFM is one of the most popular and effective models for strategy formulation (Daft, 2010). In his model, Porter categorized the industry's underlying structure into five competitive forces that shaped competition which are the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, the bargaining power of buyers and the rivalry among existing competitors (Porter, 2008). The resource based view, however, goes more in depth to suggest the additional characteristics these resources must have in order to achieve sustainable competitive advantage (Henry, 2008). The resource based view is often used interchangeably as the 'inside-out' approach where it focuses more on the resources, competencies and capabilities of the firm itself as to the market. Porter's FFM does not take into account whether the firm is able to exploit the available market opportunity, in other words, whether they have the resources and capability to compete in the industry (Madhani, 2009).

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 (Barney, 1991 cited in Madhani, 2009). For instance, intangible assets have relatively unlimited capacity and firms can exploit their value by using them in the firm, renting them as a licence or selling them as a brand (Wernerfelt, 1989 as cited in Fahy, 2000). According to Fahy (2000), intangible assets of the firm such as intellectual property (ie. trademarks and patents) are relatively resistant to imitation by competitors.

However, there are several shortcomings of the RBV. For instance, the VRIN/O criteria proposed by Barney (1991; 2008) have been subject to criticisms that they are neither sufficient nor necessary to explain sustainable competitive advantage (Kraaijenbrink et. al., 2010). This is due to the characteristic of RBV that does not take into consideration the way the management of the firm actually utilizes their resources.

Besides that, RBV tends to be one-dimensional. This is because it focuses primarily on what suppliers should do to achieve sustainable competitive advantage, without necessarily thinking through the likely responses of buyers or customers in any relationship. Not only that, this approach tends to be prescriptive in that it argues that suppliers have only one strategy choice and that is to pursue 'isolating mechanisms' that close markets to their competitors so that they can leverage value from buyers (Cox et. al., 2004). In other words, the RBV does not provide insight into how companies should manage their relationships when they cannot.

In his 1991 article, Barney defined that firms have competitive advantage when they implement value creating strategies not simultaneously being implemented by any current or potential competitors. A firm has sustained competitive advantage when these other firms are unable to duplicate the benefits of this strategy. Value creation occurs when the amount of the value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products (Schell, 2008).

In this concept of value creation, most firms adopt Porter's Five Generic Competitive Strategies. Porter (as cited in Schell, 2008) argued that low cost and differentiation are two of the basic strategies for creating value and achieving a competitive advantage in the industry. However, in the example of Starbucks, lower costs do not necessarily equal competitive advantage when they are targeting a market niche of coffee lovers based on differentiation. In 1995, Starbucks came out with a new Frappucino (a low fat creamy iced coffee) for diet-conscious people (Wheelen & Hunger, 2006).


The RBV on its own is not sufficient for strategy-making nor is there sufficient proof that directly links the RBV to a firm's performance. However, if it were used together with other theories such as Porter's Five Forces Analysis and the Five Generic Competitive Strategies, the firm would be able to make better decisions in their corporate strategy and to fully utilize their resources to result in higher performance, financially and strategically, as well as achieve sustainable competitive advantage. In essence, there is no one best strategy that fits all situations especially when the industry is so dynamic and ever-evolving technologically.