Resource-based view

The resource-based view (RBV) is a business management tool used to determine the strategic resources available to a company. 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; Penrose, 1959). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (:p105-106; Peteraf, 1993, p180). Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort (Barney, 1991;:p117). If these conditions hold, the firm’s bundle of resources can assist the firm sustaining above average returns. The VRIO and VRIN (see below) model also constitutes a part of RBV. There is strong evidence that supports the RBV (Crook et al., 2008).

Key Points

The key points of the theory are:

1. Identify the firm’s potential key resources.
2. Evaluate whether these resources fulfill the following criteria (referred to as VRIN):
   • Valuable – A resource must enable a firm to employ a value-creating strategy, by either outperforming its competitors or reduce its own weaknesses (:p99; :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 rare by definition. 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;:p100).
   • In-imitable – If a valuable resource is controlled by only one firm it could be a source of a competitive advantage (: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;:p110). Conner and Prahalad go so far as to say knowledge-based resources are “…the essence of the resource-based perspective” (1996, p477).
   • Non-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;: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; sheikh, 1991, p137), resulting in zero economic profits.
3. Care for and protect resources that possess these evaluations, because doing so can improve organizational performance (Crook, Ketchen, Combs, and Todd, 2008).

The VRIN characteristics mentioned 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 requires the resource to display each of the four characteristics to be a possible source of a sustainable competitive advantage (:105-107).

Definitions

A subsequent distinction, made by Amit & Schoemaker (1993), is that the encompassing construct previously called "resources" can be divided into resources and capabilities. In this respect, resources are tradable and non-specific to the firm, while capabilities are firm-specific and are used to engage 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).

What constitutes a "capability"?

Makadok (2001) emphasizes the distinction between capabilities and resources by defining capabilities as “a special type of resource, specifically an organizationally embedded non-transferable firm-specific resource whose purpose is to improve the productivity of the other resources possessed by the firm” (p389). “[R]esources are stocks of available factors that are owned or controlled by the organization, and capabilities are an organization’s capacity to deploy resources” :p.35. Essentially, it is the bundling of the resources that builds capabilities.

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 (:102). 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 regard to the time frame. Rather, a competitive advantage is sustainable when the efforts by competitors to render the competitive advantage redundant have ceased (: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 in contrast to views of others (e.g., Porter) that a competitive advantage is sustained when it provides above-average returns in the long run. (1985).

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 regard 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 referenced directly, the statements made by Barney about strategic factor markets and the role of expectations can 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 upon which others might build, and its theoretical underpinnings were strengthened by Conner (1991), Mahoney and Pandian (1992), Conner and Prahalad (1996) and Makadok (2001), who positioned the resource-based view with regard 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).

The resource based view has been a common interest for management researchers and numerous writings could be found for same. A resource-based view of a firm explains its ability to deliver sustainable competitive advantage when resources are managed such that their outcomes can not be imitated by competitors, which ultimately creates a competitive barrier (Mahoney and Pandian 1992 cited by Hooley and Greenley 2005, p. 96 , Smith and Rupp 2002, p. 48). RBV explains that a firm’s sustainable competitive advantage is reached by virtue of unique resources being rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (Barney 1999 cited by Finney et al.2004, p. 1722, Makadok 2001, p. 94). These authors write about the fact that a firm may reach a sustainable competitive advantage through unique resources which it holds, and these resources cannot be easily bought, transferred, or copied, and simultaneously, they add value to a firm while being rare. It also highlights the fact that not all resources of a firm may contribute to a firm’s sustainable competitive advantage. Varying performance between firms is a result of heterogeneity of assets (Lopez 2005, p. 662, Helfat and Peteraf 2003, p. 1004) and RBV is focused on the factors that cause these differences to prevail (Grant 1991, Mahoney and Pandian 1992, , cited by Lopez 2005, p. 662).

Fundamental similarity in these writings is that unique value-creating resources will generate a sustainable competitive advantage to the extent that no competitor has the ability to use the same type of resources, either through acquisition or imitation. Major concern in RBV is focused on the ability of the firm to maintain a combination of resources that cannot be possessed or built up in a similar manner by competitors. Further such writings provide us with the base to understand that the sustainability strength of competitive advantage depends on the ability of competitors to use identical or similar resources that make the same implications on a firm’s performance. This ability of a firm to avoid imitation of their resources should be analyzed in depth to understand the sustainability strength of a competitive advantage.

Barriers to imitation of resources

Resources are the inputs or the factors available to a company which helps to perform its operations or carry out its activities (, Black and Boal 1994, Grant 1995 cited by Ordaz et al.2003, p. 96). Also, these authors state that resources, if considered as isolated factors, do not result in productivity; hence, coordination of resources is important. The ways a firm can create a barrier to imitation are known as “isolating mechanisms”, and are reflected in the aspects of corporate culture, managerial capabilities, information asymmetries and property rights (Hooley and Greenlay 2005, p. 96, Winter 2003,p. 992). Further, they mention that except for legislative restrictions created through property rights, the other three aspects are direct or indirect results of managerial practices.

King (2007, p. 156) mentions inter-firm causal ambiguity may results in sustainable competitive advantage for some firms. Causal ambiguity is the continuum that describes the degree to which decision makers understand the relationship between organizational inputs and outputs (Ghinggold and Johnson 1998,p. 134,Lippman and Rumelt 1982 cited by King 2007, p. 156, Matthyssens and Vandenbempt 1998, p. 46). Their argument is that inability of competitors to understand what causes the superior performance of another (inter-firm causal ambiguity), helps to reach a sustainable competitive advantage for the one who is presently performing at a superior level. Holley and Greenley (2005, p. 96) state that social context of certain resource conditions act as an element to create isolating mechanisms and quote Wernerfelt (1986) that tacitness (accumulated skill-based resources acquired through learning by doing) complexity (large number of inter-related resources being used) and specificity (dedication of certain resources to specific activities) and ultimately, these three characteristics will result in a competitive barrier.

Referring back to the definitions stated previously regarding the competitive advantage that mentions superior performance is correlated to resources of the firm (Christensen and Fahey 1984, Kay 1994, Porter 1980 cited by Chacarbaghi and Lynch 1999, p. 45) and consolidating writings of King (2007, p. 156) stated above, we may derive the fact that inter-firm causal ambiguity regarding resources will generate a competitive advantage at a sustainable level. Further, it explains that the depth of understanding of competitors—regarding which resources underlie the superior performance—will determine the sustainability strength of a competitive advantage. Should a firm be unable to overcome the inter-firm causal ambiguity, this does not necessarily result in imitating resources. As to Johnson (2006, p. 02) and Mahoney (2001, p. 658), even after recognizing competitors' valuable resources, a firm may not imitate due to the social context of these resources or availability of more pursuing alternatives. Certain resources, like company reputation, are path-dependent and are accumulated over time, and a competitor may not be able to perfectly imitate such resources (Zander and Zander 2005, p. 1521 , Santala and Parvinen 2007, p. 172).

They argue on the basis that certain resources, even if imitated, may not bring the same impact, since the maximum impact of the same is achieved over longer periods of time. Hence, such imitation will not be successful. In consideration of the reputation of fact as a resource and whether a late entrant may exploit any opportunity for a competitive advantage, Kim and Park (2006, p. 45) mention three reasons why new entrants may be outperformed by earlier entrants. First, early entrants have a technological know-how which helps them to perform at a superior level. Secondly, early entrants have developed capabilities with time that enhance their strength to out-perform late entrants. Thirdly, switching costs incurred to customers, if they decide to migrate, will help early entrants to dominate the market, evading the late entrants' opportunity to capture market share. Customer awareness and loyalty is another rational benefit early entrants enjoy (Lieberman and Montgomery 1988, Porter 1985, Hill 1997, Yoffie 1990 cited by Ma 2004, p. 914, Agarwal et al. 2003, p. 117).

However, first mover advantage is active in evolutionary technological transitions, which are technological innovations based on previous developments (Kim and Park 2006, p, 45, Cottam et al. 2001, p. 142). The same authors further argue that revolutionary technological changes (changes that significantly disturb the existing technology) will eliminate the advantage of early entrants. Such writings elaborate that though early entrants enjoy certain resources by virtue of the forgone time periods in the markets, rapidly changing technological environments may make those resources obsolete and curtail the firm’s dominance. Late entrants may comply with the technological innovativeness and increased pressure of competition, seeking a competitive advantage by making the existing competencies and resources of early entrants invalid or outdated. In other words, innovative technological implications will significantly change the landscape of the industry and the market, making early movers' advantage minimal. However, in a market where technology does not play a dynamic role, early mover advantage may prevail.

Analyzing the above-developed framework for the Resource-Based View, it reflects a unique feature, namely, that sustainable competitive advantage is achieved in an environment where competition does not exist. According to the characteristics of the Resource-based view, rival firms may not perform at a level that could be identified as considerable competition for the incumbents of the market, since they do not possess the required resources to perform at a level that creates a threat and competition. Through barriers to imitation, incumbents ensure that rival firms do not reach a level at which they may perform in a similar manner to the former. In other words, the sustainability of the winning edge is determined by the strength of not letting other firms compete at the same level. The moment competition becomes active, competitive advantage becomes ineffective, since two or more firms begin to perform at a superior level, evading the possibility of single-firm dominance; hence, no firm will enjoy a competitive advantage. Ma (2003, p. 76) agrees stating that, by definition, the sustainable competitive advantage discussed in the Resource based view is anti-competitive. Further such sustainable competitive advantage could exist in the world of no competitive imitation (, Peteraf 1993 cited by Ma 2003, p. 77, Ethiraj et al., 2005, p. 27).

Based on the empirical writings stated above, RBV provides the understanding that certain unique existing resources will result in superior performance and ultimately build a competitive advantage. Sustainability of such an advantage will be determined by the ability of competitors to imitate such resources. However, the existing resources of a firm may not be adequate to facilitate the future market requirement, due to volatility of the contemporary markets. There is a vital need to modify and develop resources in order to encounter the future market competition. An organization should exploit existing business opportunities using the present resources while generating and developing a new set of resources to sustain its competitiveness in the future market environments; hence, an organization should be engaged in resource management and resource development (Chaharbaghi and Lynch 1999, p. 45, Song et al., 2002, p. 86). Their writings explain that in order to sustain the competitive advantage, it is crucial to develop resources that will strengthen the firm's ability to continue the superior performance. Any industry or market reflects high uncertainty and, in order to survive and stay ahead of competition, new resources become highly necessary. Morgan (2000 cited by Finney et al.2004, p. 1722) agrees, stating that the need to update resources is a major management task since all business environments reflect highly unpredictable market and environmental conditions. The existing winning edge needed to be developed since various market dynamics may make existing value-creating resources obsolete.

Criticism

Priem and Butler (2001) raised four key points of criticism:

• 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). For more info on the tautology, see also Collins, 1994
• 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 criteria.
• 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; a firm should also consider Porter’s Industry Structure Analysis (Porter's Five Forces).
• 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 of rarity 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 an exact definition of sustainability makes its premise difficult to test empirically. Barney’s statement (: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 is a disadvantage from a more practical point of view, as there is no explicit end-goal.

The relational view is an extension of the resource-based view for considering networks and dyads of firms as the unit of analysis to explain relational rents, i.e., superior individual firm performance generated within that network/dyad.

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
• David J. Collis and Cynthia A. Montgomery (1995), Competing on Resources: Strategy in the 1990s, Harvard Business Review, July-August
• 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

See also

• Core competency
• Delta Model
• Knowledge-based theory of the firm
• Porter's Five Forces
• Sustainable competitive advantage
• Theory of the firm
• Dynamic capabilities

Links

• Resource-based theory vs. supply chain management

References

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