Resource-Based View

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The Resource-Based View (RBV) is an economic tool used to determine the strategic resources available to a firm. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal (Wernerfelt, 1984, p172; Rumelt, 1984, p557-558). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (Barney, 1991, p105-106; Peteraf, 1993, p180). Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort (Hoopes, 2003, p891; Barney, 1991, p117). If these conditions hold, the firm’s bundle of resources can assist the firm sustaining above average returns.

Contents 1 Concept 2 Definitions 2.1 What constitutes a "resource"? 2.2 What constitutes "competitive advantage"? 3 History of the Resource-based View 3.1 Related Concepts 3.2 Complementary Work 4 Criticisms 5 Further reading 6 See also 7 References

[edit] Concept

The key points of the theory are:

1) Identify the firm’s potential key resources

2) Evaluate whether these resources fulfill the following (VRIN) criteria:

• Valuable - A resource must enable a firm to employ a value-creating strategy, by either outperforming its competitors or reduce its own weaknesses (Barney, 1991, p99; Amit and Shoemaker, 1993, p36). Relevant in this perspective is that the transaction costs associated with the investment in the resource cannot be higher than the discounted future rents that flow out of the value-creating strategy (Mahoney and Prahalad, 1992, p370; Conner, 1992, p131).
• Rare - To be of value, a resource must be by definition rare. In a perfectly competitive strategic factor market for a resource, the price of the resource will be a reflection of the expected discounted future above-average returns (Barney, 1986a, p1232-1233; Dierickx and Cool, 1989, p1504; Barney, 1991, p100).
• Imperfectly imitable - If a valuable resource is controlled by only one firm it could be a source of a competitive advantage (Barney, 1991, p107). This advantage could be sustainable if competitors are not able to duplicate this strategic asset perfectly (Peteraf, 1993, p183; Barney, 1986b, p658). The term isolating mechanism was introduced by Rumelt (1984, p567) to explain why firms might not be able to imitate a resource to the degree that they are able to compete with the firm having the valuable resource (Peteraf, 1993, p182-183; Mahoney and Pandian, 1992, p371). An important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firm’s competitive advantage stems is unknown (Peteraf, 1993, p182; Lippman and Rumelt, 1982, p420). If the resource in question is knowledge-based or socially complex, causal ambiguity is more likely to occur as these types of resources are more likely to be idiosyncratic to the firm in which it resides (Peteraf, 1993, p183; Mahoney and Pandian, 1992, p365; Barney, 1991, p110). Conner and Prahalad go so far as to say knowledge-based resources are “…the essence of the resource-based perspective” (1996, p477).
• Imperfectly substitutable - Even if a resource is rare, potentially value-creating and imperfectly imitable, an equally important aspect is lack of substitutability (Dierickx and Cool, 1989, p1509; Barney, 1991, p111). If competitors are able to counter the firm’s value-creating strategy with a substitute, prices are driven down to the point that the price equals the discounted future rents (Barney, 1986a, p1233; Conner, 1991, p137), resulting in zero economic profits.

The above-mentioned characteristics are individually necessary, but not sufficient conditions for a sustained competitive advantage (Dierickx and Cool, 1989, p1506; Priem and Butler, 2001a, p25). Within the framework of the resource-based view, the chain is as strong as its weakest link and therefore dependent on the resource displaying each of the four characteristics to be a possible source of a sustainable competitive advantage (Barney, 1991, 105-107).

3) Care for and protect resources that possess these evaluations

[edit] Definitions

[edit] What constitutes a "resource"?

Barney (1991, p101) referring to Daft (1983) says: "...firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc; controlled by a firm that enable the firm to conceive of all implement strategies that improve its efficiency and effectiveness (Daft,1983)."

A subsequent distinction made by Amit & Schoemaker (1993, p35) is that the encompassing construct previously called resources can be split up into resources and capabilities. In this respect resources are tradable and non-specific to the firm, while capabilities are firm-specific and used to utilize the resources within the firm, such as implicit processes to transfer knowledge within the firm (Makadok, 2001, p388-389; Hoopes, Madsen and Walker, 2003, p890). This distinction has been widely adopted throughout the resource-based view literature (Conner and Prahalad, 1996, p477; Makadok, 2001, p338; Barney, Wright and Ketchen, 2001, p630-31).

[edit] What constitutes "competitive advantage"?

A competitive advantage can be attained if the current strategy is value-creating, and not currently being implemented by present or possible future competitors (Barney, 1991, p102). Although a competitive advantage has the ability to become sustained, this is not necessarily the case. A competing firm can enter the market with a resource that has the ability to invalidate the prior firm's competitive advantage, which results in reduced (read: normal) rents (Barney, 1986b, p658). Sustainability in the context of a sustainable competitive advantage is independent with regards to the time-frame. Rather, a competitive advantage is sustainable when the efforts by competitors to render the competitive advantage redundant have ceased (Barney, 1991, p102; Rumelt, 1984, p562). When the imitative actions have come to an end without disrupting the firm’s competitive advantage, the firm’s strategy can be called sustainable. This is contrary to other views (e.g. Porter) that a competitive advantage is sustained when it provides above-average returns in the long run. (1985).

[edit] History of the Resource-based View

Some aspects of theories are thought of long before they are formally adopted and brought together into the strict framework of an academic theory. The same could be said with regards to the resource-based view.

While this influential body of research within the field of Strategic Management was named by Birger Wernerfelt in his article A Resource-Based View of the Firm (1984), the origins of the resource-based view can be traced back to earlier research. Retrospectively, elements can be found in works by Coase (1937), Selznick (1957), Penrose (1959), Stigler (1961), Chandler (1962, 1977), and Williamson (1975), where emphasis is put on the importance of resources and its implications for firm performance (Conner, 1991, p122; Rumelt, 1984, p557; Mahoney and Pandian, 1992, p263; Rugman and Verbeke, 2002). This paradigm shift from the narrow neoclassical focus to a broader rationale, and the coming closer of different academic fields (industrial organization economics and organizational economics being most prominent) was a particular important contribution (Conner, 1991, p133; Mahoney and Pandian, 1992).

Two publications closely following Wernerfelt’s initial article came from Barney (1986a, 1986b). Even though Wernerfelt was not referred to, the statements made by Barney about strategic factor markets and the role of expectations can, looking back, clearly be seen within the resource-based framework as later developed by Barney (1991). Other concepts that were later integrated into the resource-based framework have been articulated by Lippman and Rumelt (uncertain imitability, 1982), Rumelt (isolating mechanisms, 1984) and Dierickx and Cool (inimitability and its causes, 1989). Barney’s framework proved a solid foundation for other to build on, which was provided with a stronger theoretical background by Conner (1991), Mahoney and Pandian (1992), Conner and Prahalad (1996) and Makadok (2001), who positioned the resource-based view with regards to various other research fields. More practical approaches were provided for by Amit and Shoemaker (1993), while later criticism came from among others from Priem and Butler (2001a, 2001b) and Hoopes, Madsen and Walker (2003).

[edit] Related Concepts

Teece, Pisano and Shuen (1997) introduced the concept of dynamic capability, arguing that simply having access to resources that fullfil Barney's requirements alone is insufficient to base a sustainable competitive advantage on. More relevant is how a firm uses the resources at its disposal. For example, simply having extensive financial resources is not sufficient. By putting these financial resources to effective use within a strategic context, which enable them to generating rents is much more relevant.

[edit] Complementary Work

Building on the RBV, Hoopes, Madsen & Walker (2003) suggest a more expansive discussion of sustained differences among firms and develop a broad theory of competitive heterogeneity. “The RBV seems to assume what it seeks to explain. This dilutes its explanatory power. For example, one might argue that the RBV defines, rather than hypothesizes, that sustained performance differences are the result of variation in resources and capabilities across firms. The difference is subtle, but it frustrates understanding the RBV’s possible contributions (Hoopes et al, 2003: 891). “The RBV’s lack of clarity regarding its core premise and its lack of any clear boundary impedes fruitful debate. Given the theory’s lack of specificity, one can involke the definition-based or hypothesis-based logic any time. Again, we argue that resources are but one potential source of competitive heterogeneity. Competitive heterogeneity can obtain for reasons other than sticky resources (or capabilities)” (Hoopes et al 2003: 891). Competitive heterogeneity refers to enduring and systematic performance differences among close competitors (Hoopes et al, 2003: 890).

[edit] Criticisms

Priem and Butler (2001) made four key criticisms:

• The RBV is tautological, or self-verifying. Barney has defined a competitive advantage as a value-creating strategy that is based on resources that are, among other characteristics, valuable (1991, p106). This reasoning is circular and therefore operationally invalid (Priem and Butler, 2001a, p31).
• Different resource configurations can generate the same value for firms and thus would not be competitive advantage
• The role of product markets is underdeveloped in the argument
• The theory has limited prescriptive implications

However, Barney (2001) provided counter-arguments to these points of criticism.

Further criticisms are:

• It is perhaps difficult (if not impossible) to find a resource which satisfies all of the Barney's VRIN criterion.
• There is the assumption that a firm can be profitable in a highly competitive market as long as it can exploit advantageous resources, but this may not necessarily be the case. It ignores external factors concerning the industry as a whole; Porter’s Industry Structure Analysis ought also be considered.
• Long-term implications that flow from its premises: A prominent source of sustainable competitive advantages is causal ambiguity (Lippman & Rumelt, 1982, p420). While this is undeniably true, this leaves an awkward possibility: the firm is not able to manage a resource it does not know exists, even if a changing environment requires this (Lippman & Rumelt, 1982, p420). Through such an external change the initial sustainable competitive advantage could be nullified or even transformed into a weakness (Priem and Butler, 2001a, p33; Peteraf, 1993, p187; Rumelt, 1984, p566).
• Premise of efficient markets: Much research hinges on the premise that markets in general or factor markets are efficient, and that firms are capable of precisely pricing in the exact future value of any value-creating strategy that could flow from the resource (Barney, 1986a, p1232). Dierickx and Cool argue that purchasable assets cannot be sources of sustained competitive advantage, just because they can be purchased. Either the price of the resource will increase to the point that it equals the future above-average return, or other competitors will purchase the resource as well and use it in a value-increasing strategy that diminishes rents to zero (Peteraf, 1993, p185; Conner, 1991, p137).
• The concept ‘rare’ is obsolete: Although prominently present in Wernerfelt’s original articulation of the resource-based view (1984) and Barney’s subsequent framework (1991), the concept that resources need to be rare to be able to function as a possible source of a sustained competitive advantage is unnecessary (Hoopes, Madsen and Walker, 2003, p890). Because of the implications of the other concepts (e.g. valuable, inimitable and nonsubstitutability) any resource that follows from the previous characteristics is inherently rare.
• Sustainable: The lack of exact definition with regards to the concept sustainable makes its premise difficult to test empirically. Barney’s statement (1991, p102-103) that the competitive advantage is sustained if current and future rivals have ceased their imitative efforts is versatile from the point of view of developing a theoretical framework, but a disadvantage from a more practical point of view as there is no explicit end-goal.

[edit] Further reading

• Hoopes, D.G.; Madsen, T.L.,; Walker, G. (2003) Guest Editors’ Introduction to the Special Issue: Why is There a Resource-Based View? Toward a Theory of Competitive Heterogeneity. Strategic Management Journal; 24, pp.889-902.
• Peteraf, M. A. (1993), "The cornerstones of competitive advantage: a resource-based view". Strategic Management Journal, Vol. 14, No. 3, pp. 179-191
• Porter, M. E. (1980), "Competitive Strategy: Techniques for Analyzing Industries and Competitors", New York, NY: Free Press
• Rumelt, R. P. (1991), "How much does industry matter?". Strategic Management Journal, Vol. 12, No. 3, pp. 167-185
• Teece, D., Pisano, G. and Shuen, A. (1997), "Dynamic Capabilities and Strategic Management". Strategic Management Journal, Vol. 18, No. 7, pp. 509-533
• Wernerfelt, B. (1984), "A resource-based view of the firm". Strategic Management Journal, Vol.5, pp.171-180

[edit] See also

• Core competency
• Porter's Five Forces
• Sustainable competitive advantage

[edit] References

• Amit, R.; Shoemaker, P.J.H. (1993), Strategic assets and organizational rent. Strategic Management Journal; 14, (1), pp.33-46.
• Barney, J.B., (1986a), Strategic Factor Markets: Expectations, Luck and Business Strategy. Management Science; 32, (10), pp.1231-1241.
• Barney, J.B., (1986b), Organizational Culture: Can It be a Source of Sustained Competitive Advantage? Academy of Management Review; 11, (3), pp.656-665.
• Barney, J.B., (1991), Firm Resources and Sustained Competitive Advantage. Journal of Management; 17, (1), pp.99-120.
• Barney, J.B., (2001), Is the Resource-Based Theory a Useful Perspective for Strategic Management Research? Yes. Academy of Management Review; 26, (1), pp.41-56.
• Barney, J.B.; Wright, M.; Ketchen Jr., D.J. (1991), The resource-based view of the firm: Ten years after 1991. Journal of Management; 27, pp.625-641.
• Chandler, A.D. Jr. (1962), Strategy and Structure; Cambridge: The MIT Press.
• Chandler, A.D. Jr. (1977), The Visible Hand; Harvard University Press.
• Coase, R.H., (1952[1937]), The Nature of the Firm. In G.J. Stigler & K.E. Boulding (Eds.), Readings in price theory; pp.331-351. Chicago: Irwin. (Reprinted from Econometrica, (1937), 4, pp.386-405.
• Conner, K.R. (1991), A Historical Comparison of Resource-Based View and Five Schools of Thought within Industrial Organization Economics: Do We Have a New Theory of the Firm? Journal of Management; 17, (1), pp.121-154.
• Conner, K.R.; Prahalad, C.K. (1996), A Resource-Based Theory of the Firm: Knowledge versus Opportunism. Organization Science; 7, (5), pp. 477-501.
• Dierickx, I.; Cool, K. (1989), Asset Stock Accumulation and Sustainability of Competitive Advantage. Management Science; 35, (12), pp.1504-1511.
• Hoopes, D.G.; Madsen, T.L.,; Walker, G. (2003) Guest Editors’ Introduction to the Special Issue: Why is There a Resource-Based View? Toward a Theory of Competitive Heterogeneity. Strategic Management Journal; 24, pp.889-902.
• Lippman, S.A.; Rumelt, D.P., (1982), Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency Under Competition. The Bell Journal of Economics; 13, (2), pp.418-438.
• Mahoney, J.T.; Pandian, J.R. (1992), The Resource-Based View Within the Conversation of Strategic Management. Strategic Management Journal; 15, (5), pp. 363-380.
• Makadok, R. (2001), Toward a Synthesis of the Resource-Based View and Dynamic-Capability Views of Rent Creation. Strategic Management Journal; 22, pp.387-401
• Penrose, E.T., (1959), The Theory of the Growth of the Firm, New York: Wiley.
• Peteraf, M.A. (1993), The Cornerstones of Competitive Advantage: A Resource-Based View. Strategic Management Journal; 14, (3), pp.179-191.
• Porter, M.E. (2004 [1985]), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, reprinted in abridged form in: De Wit, Bob & Meyer, Ron, Strategy. Process, Content, Context. An international perspective, 3rd edition, London: Thomson, p.258-267.
• Priem, R.L., Butler, J.E. (2001a), Is the Resource-Based Theory a Useful Perspective for Strategic Management Research? Academy of Management Review; 26, (1), pp.22-40.
• Priem, R.L., Butler, J.E. (2001b), Tautology in the Resource-Based View and Implications of Externally Determined Resource Value: Further Comments. Academy of Management Review; 26, (1), pp.57-66.
• Rugman A.M.; Verbeke, A. (2002), Edith Penrose’s Contribution to the Resource-Based Views of Strategic Management. Strategic Management Journal; 23, pp.769-780.
• Rumelt, D.P., (1984), Towards a Strategic Theory of the Firm. Alternative theories of the firm; 2002, (2) pp. 286-300, Elgar Reference Collection. International Library of Critical Writings in Economics, vol. 154. Cheltenham, U.K. and Northampton, Mass.: Elgar; distributed by American International Distribution Corporation, Williston, Vt.,
• Stigler, G.K., (1961), The Economics of Information, Journal of Political Economy, pp.213-225.
• Wernerfelt, B. (1984), The Resource-Based View of the Firm. Strategic Management Journal; 5, (2), pp. 171-180.
• Wernerfelt, B. (1995), The Resource-Based View of the Firm: Ten Years After. Strategic Management Journal; 16, (3), pp. 171-174.
• Williamson, O.E., (1975), Markets and hierarchy: Analysis and antitrust implications, New York: Free Press.