The Resource Based View Analysis

This report reviews empirical studies of the resource-based view (RBV) and examines the benefits and limitations of RBV as the “best” strategy route in the developing a firm’s strategy. By having a clear and focused strategic intent, it mobilises an organisation towards achieving the desire position. Through analysing its internal and external environment using the resource based view and Porter’s industry analysis respectively, firm would be able to achieve sustainable competitive advantage.

The key to a resource based view is through an understanding the relationships between resources, capabilities, competitive advantage, and economic rent. The RBV identified characteristics of “advantage-creating” resources such as value, rarity, imitability and Organisation (Clulow et al, 2007; Barney, 1991). In contrast, porter’s industry analysis focuses on lower cost and product differentiation in achieving sustainable competitive advantage.

Despite the conflicting issues, the resource based view has examined issues and new directions that will help to clarify the value and boundaries of the RBV by integrating with Porter’s industry analysis. Porter’s framework and the RBV of the firm basically perceived the primary role of strategy as achieving a unique competitive advantage (Hax A. C. and Wilde II D. L., 2003). Thus, both frameworks can complement each other as they emphasise in different dimensions of strategy (Hax A. C. and Wilde II D. L., 2003).

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Introduction

The resource based view of the firm (RBV) is one of the contemporary strategic management concepts to develop a firm’s strategy. The primary objective of this report is to accept or reject the contention that resource-based view analysis (RBV) has a strong relationship with firm’s performance in achieving a sustainable competitive advantage.

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This report reviews the literature on competitive advantage and firm performance. It is divided into five main components. The first section summarizes the literature on competitive advantage from two viewpoints, the Resource Based View (RBV) and Porter’s Industry Analysis (IA). The second section discusses on the strengths of the RBV in reviews with the literature on strategic intent, threshold resources, capabilities, competitive advantage, core competencies, sustainable competitive advantage and VRIO. The third section illustrates Porter’s IA in reviews with cost, differentiation, and market focus. The fourth section deliberates the criticisms of the RBV and illustrates how researchers have or have not overcome some of these boundaries. The fifth section is a review of an integration of the RBV and Porter’s IA in the proposed model of core competencies, competitive advantage and firm performance (Chabert J. M., 1998)

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The Resource Based View of the Firm

Thompson et Al (2010) point out that RBV [1] uses a company’s VRIO [2] strengths and competitive capabilities to deliver value to customers in way that rivals find it difficult to match. The RBV emphasises the internal capabilities of the organisation in formulating strategy to achieve a SCA [3] in its markets and industries (Henry, 2008). It holds that firms can earn sustainable abnormal returns if and only they have superior resources and those resources are protected by some form of isolating mechanism preventing their diffusion throughout industry (Value Based Management.net, 2011).

The Resourced Based View Assumptions

The RBV of firms is based on two main assumptions involved resource diversity and resource immobility (Barney, 1991; Mata et al, 1995). According to Mata et al. (1995), resource diversity concerns whether different firms possess bundles of different resources and capabilities; while resource immobility refers to a resource is difficult to obtain by competitors because it is inelastic in supply or costly. These two assumptions can be used to determine whether an organisation is able to create a SCA by providing a framework for determining whether a process or technology provides a real advantage over the marketplace (Brown, 2007). Thus, the RBV tends to focus on the types of resources and the characteristics of these resources that make them strategically important, the dynamic capability perspective which focuses on how these resources need to change over time to maintain their market relevance (Powell, 2007).

The RBV as the “best” strategy route in developing a firm’s strategy

Today managers are moving manufacturing offshore to lower costs of labour, rationalising product lines to capture global scale economies, instituting quality circles and just in time production, and adopting Japanese human resource practices. It was believed that the application of concepts like ‘strategic fit’ (between resources and opportunities), ‘generic strategies’ (low cost, differentiation and market focus) and the ‘strategy hierarchy’ (goals, strategies, and tactics) have often aided the process of CA [4] (Hamel and Prahalad 1989; Andrews, 1971). Most companies have approached competitor analysis that focuses on the existing resources like human, technical and financial of present competitors. Whereas, the only threat those companies aware are those with the resources to erode margins and market share in the future. There are few Japanese companies possessed RBV, manufacturing volume or technical competence of U.S. and European leaders. For instance, Canon’s first halting steps in reprographics business looked pitifully small compared with the $4 billion Xerox powerhouse (Hamel and Prahalad 1989).

Strategic Intent

Strategic intent envisions a desired leadership position and establishes the criterion the organisation will use to chart its progress where Komatsu set out to encircle Caterpillar. The concept emphasises an active management process that involved focusing the organisation’s attention on the essence of winning, motivating people by communicating the value of the target, leaving rooms for individual and team contributions, sustaining enthusiasms by providing new operational definitions as circumstances change and using intent consistently to guide resource allocations (Hamel and Prahalad, 1989).

Strategic intent captures the essence of winning. For example, the Apollo program where landing a man on the moon ahead of the Soviets was as competitively focused as Komatsu’s drive against Caterpillar. It is stable over time, in order to challenge global leadership; one of the most critical tasks is to lengthen the organisation’s attention span. It provides consistency to short term action, which leaving a room for reinterpretation as new opportunities emerge (Hamel and Prahalad, 1989).

A firm is said to have a CA when the firm can produce more economically and higher customer satisfaction, and thus enjoy superior performance relative to its competitors (Barney, 1991; Peteraf, 1993). Whereas, Porter (1985) defined CA as the ability to earn returns on investment consistently above the average for the industry by focusing on the company’s external competitive environment and how they position themselves against that structure (Halawi L. A., Aronson J. E, and McCarthy R. V., 2005). In contrast, the RBV of strategy points not to industry structure but to the unique cluster of R&C [5] that each organisation possesses (Henry, 2008; Collis and Montgomery 1995; Stalk et al, 1992).

Firms Outperform and Maintain Competitive Advantage

The Benefits of RBV

RBV is best applied for the kind of assessment of a firm’s existing resource portfolio discussed by Barney (2001) or when exploiting the firm’s stock of resources to move into new product markets, as in the tradition of Penrose (1959) (Sheehan and Foss, 2007). There are two fundamental reasons for making the R&C of the firm the foundation for its strategy. First, it provides the basic direction for a firm’s strategy and second, they are the primary source of profit for the firm. The RBV perceives the value derived from management skills, information capabilities, and administrative processes can also be regarded as scarce factors able to generate economic rents (Sheehan and Foss, 2007). The concept of a dynamic capability was developed to explain why some firms have been able to outperform their competitors over long periods of time and despite significant changes in the marketplace (Teece et al, 1997).

Firms as bundle of Resources

Threshold resources are defined as the unique combination of assets and capabilities within a firm that enable firms to develop and implement strategies to meet customers’ minimum requirements and to improve its overall performance (Scholes J. G., and Whittington, R., 2008). It can be classified as either tangible or intangible resources. Tangible resources refer to the physical assets that a firm possesses and can be characterised as physical resources. In order to add value, these physical resources must be capable to respond to marketplace changes. Intangible resources comprise of human and organisational capitals. It may be embedded in routines and practices that have developed over time within the organisation (Henry, 2008).

It includes knowledge based economy, the tacit knowledge and specialist skills of many employees which are difficult for competitors to imitate (Henry, 2008). Nonaka and Takeuchi (1995) differentiate between knowledge that can be seen as tacit and explicit. An explicit knowledge or ‘knowing about’ is shown through communication that can be readily transferred therefore it requires some form of protection like copyright. Whereas, tacit knowledge or ‘know how’ cannot be codified and it is revealed through its application and acquired through practices such as beliefs and perspectives (Henry, 2008).

RBV and Organisational learning

The RBV stresses the significance of developing and enhancing those resources that are distinctive, in particular, distinctive capabilities (Olavarrieta and Ellinger, 1997). Ten3 Business e-Coach (2001) defined capabilities as the capacity for a set of resources to interactively perform a business process. Capabilities, are the type of resources that is a source to SCA because they are based on organisational routines and processes, which are socially complex, knowledge-based (explicit and tacit) and difficult to observe and imitate.

A firm is able to possess dynamic and operational capabilities, where dynamic capabilities are defined as those processes that allowed the firm to change its resource base in some ways to meet the differences in strategic and competitive challenges (Zubac et al, 2010; Helfat et al, 2007). The concept of a dynamic capability was developed to explain why some firms have been able to outperform their competitors over long periods of time and despite significant changes in the marketplace (Teece et al, 1997). It is specific and identifiable processes involved conceptualisation, product development, strategic decision making and alliancing (Eisenhardt and Martin, 2000, p. 1105).

Conversely, operational capability is the firm’s capacity to combine, assemble and deploy the firm’s assets using pre-determined activities, routines, processes and the skills of its employees to make products and services that are a source of potential profits to the firm available to its customers (Spanos and Lioukas, 2001). However a firm will usually focus on certain capabilities consistent with its strategy such as if a firm is pursuing a differentiation strategy, they would focus on new product development, whereas a firm which adopting low cost strategy would focus on improving manufacturing process efficiency (Henry, 2008). Capabilities, however, are not built in short term basis, they are dependent on a firm’s personnel, its knowledge and understanding of the marketplace and customers’ requirements and operations (Olavarrieta and Ellinger, 1997).

The Competitive Advantage of RBV

Competitive advantages and disadvantages in resources are equivalent to strengths and weaknesses respectively, which stimulate cost and differentiation advantages or disadvantages in competitive product markets (Valentin K. E., 2001). An understanding of industry structure guides managers toward productive possibilities for strategic action, which may include positioning the company to be better cope with the current competitive forces, anticipating and exploiting shifts in the forces, and shaping the balance of forces to create a new industry structure that is more favourable to the company (Porter, 2008). The CA gained by these key intangible assets and capabilities is then reflected in superior performance of the firm in financial terms such as higher profits, increased sales or market share (Clulow et al, 2007; Hunt and Morgan, 1995; Collis and Montgomery, 1995; Fahy, 2002; Wilcox-King and Zeithaml, 2001).

The Competencies of an Organisations

Henry (2008) evaluated competency as the internal capabilities that firms require in order to be able to compete in the marketplace. In addition, Zubac et al (2010) defined CC [6] as the collective learning of individual members within the firm and their ability to work across organisational boundaries. Prahalad and Hamel (1990, p. 82) stated that:

The skills that together constitute core competence must coalesce around individuals whose efforts are not so narrowly focused that they cannot recognise the opportunities for blending their functional expertise with those of others in new and interesting ways.

Thus, a CC or strategic capability can be thought as a collection of features that a firm possesses which enable them to achieve CA. Honda and BMW are examples of the organisations that have achieved CC in a way they configure their value chain respectively (Henry, 2008).

RBV and Sources of Sustainable Competitive Advantage (SCA)

Barney (1991) suggested that there can be heterogeneity or firm-level differences among firms that allow some of them to SCA. Ten3 Business e-Coach (2001) describes SCA as the continued benefit when an organisation is implementing a value-creating strategy that is not being implemented by current or potential competitors and when these competitors are unable to imitate the benefits of this strategy. Therefore, the RBV emphasises strategic choice, changing the management of the firm with the important task of identifying, developing and deploying key resources to maximise returns (Powell, 2007).

Bharadwaj et al. propose a framework of SCA for a firm is derived from the assets and capabilities of the firm. The extent of the service firms’ SCA is basically determined by the degree of imitability inherent in the firm’s resources. Kerin et al (1992) presented an integrative framework of the literature on first mover advantage, suggesting that the realisation of SCA, through market pioneering, is contingent on the resources that a firm possesses (Olavarrieta and Ellinger, 1997).

Strategic resources and Superior performances

As a source of CA, R&C must have four attributes which is VRIO in order to outperform others. A resource must be valuable as it enables the firm to conceive or implement strategies that improve its efficiency and effectiveness through lower costs and incline of revenue (Ecofine, 2010). Substitutability refers that there must be no strategically equivalent valuable resources that can be exploited to implement the same strategies (12manage, 2008). For instance, Wal-Mart sells most of the same merchandise as its major competitors, but the effectiveness and innovation of its logistics system ensures that it is the market leader in its field. Wal-Mart’s valuable and imitability point-of-purchase inventory control systems and cross-docking distribution plants have resulted in competitive advantage relative to its major US competitor, K-Mart (Olavarrieta and Ellinger, 1997; Barney, 1995).

Porter’s Framework

Porter’s Industry Analysis

There are three sources that is irreproducible such as market structure that limits entry, a company’s history which by definition will require time to replicate and tacitness in relationships refers to the routines and behaviours which cannot be imitate since the organisations themselves are unsure how they work (Henry, A., 2008). Porter’s mentioned that there are only two generic studies to compete either through low cost or product differentiation that lead to superior performance (Hax A. C. and Wilde II D. L., 2003). To assist managers in understanding, improving, and implementing a low cost or differentiation strategy, Porter (1985) developed the value chain framework; it is a generic activity template that is used to decompose the firm into the individual activities it undertakes to create value for the customer (Sheehan and Foss, 2007).

Economies of Scale

Cost leadership is achieved through the aggressive pursuit of economies of scale, product and process simplification, and significant product market share that allows companies to exploit experience and learning effects (Hax A. C. and Wilde II D. L., 2003). Dell being one of the organisation are protected by scale economies in their direct-sales method, efficient lean-manufacturing approach, expertise in logistics and supply-chain management. Hence, these capabilities provide it with CA and which its competitive rivals have found difficult to imitate (Henry, 2008).

Differentiation and Core Competencies

A differentiation demand for creating a product that customer perceives as highly valuable and unique (Hax A. C. and Wilde II D. L., 2003). The first-mover advantage refers to firms which benefit from the learning and experience they acquire as a result of being first in the marketplace like Toyota has achieved CC in the production of petrol-and-electric hybrid cars (Henry, 2008). Hence, a CC should provide access to a wide variety of markets, make significant contribution to perceived customer benefits of the end products and difficult to imitate. Honda is one of the organisations that focuses on the technical excellence of 4-cycle engines, have enabled it to leverage its CC to compete in markets from motorcycles to automobiles to a broad range of gasoline-engine products (Grant, M. R., 2001).

Market focus

Strategy can be viewed as building defences against the competitive forces or finding a position in the industry where forces are weakest. For instance, Paccar, a firm with heavy-truck market, has chosen to focus on one group of customers that is owner-operators. They have customised every single part of the value chain to work well with the forces in its segment. Thus, Paccar has earned a long-run return on equity above 20 % (Porter, 2008).

Criticisms

RBV Implications

The RBV of the firm is a contemporary theory that provides insights on both strategic and organizational issues. An often-recurring critique on the RBV is that its core logic contains circular reasoning in the specification of the relationship between rents and resources (Truijens, 2003). Foss (2000) argued that the VRIO attributes in the RBV that valuable and rare resources can be sources of SCA is tautological. RBV has little attention on the important issues of how resources can develop and change over time. Likewise, the dynamic role played by individuals within organisations is often assumed to be self-evident and therefore seldom addressed (Henry, 2008). Another critique is that it is not sufficient clear in the RBV on how resources contribute to firm-level value creation and that operationalisation is therefore difficult (Sheehan and Foss, 2007; Priem and Butler, 2001)

The RBV emphasises on the role of human capital in the creation of CA, which at the same time caused issues for accountants in terms of total business and intangible asset valuation (Toms, 2010). Accountants similarly are concerned with controls which prevent misappropriation of resources that ultimately are shareholders’ property. Thus, a theory of value also needs to be one of accountability (Toms, 2010).

Conclusion

Activity drivers and resources share many similarities, both resources and drivers influence a firm’s cost and differentiation position, and both need managerial involvement in the sense that drivers must be made controllable, while resources must be organized (Sheehan and Foss, 2007). Although these frameworks have often been presented as conflicting views; they can contribute greatly to the development of a strong business strategy. Since they emphasised different dimensions of strategy, they can complement each other.

By integrating these frameworks, it enables activity-based view solves implementation issues that are unresolved when using the RBV (Sheehan and Foss, 2007; Barney and Arikan, 2001). It enhances many of the individual weaknesses of the two views. The activity-based view is weak in its assumptions about factor markets, which would be addressed by the RBV (Sheehan and Foss, 2007; Teng and Cummings, 2002). Thus, Porter’s industry analysis remains crucial and the choice should not be seen as one of either but rather one of complementarity.

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