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Resource-based view

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The major influence of the concept of the resource-based view started to take place in the 1980s (see Donohue, 2002: 37-41).

Barney (1991), Grant (1991), Penrose (1959), Peteraf (1993) and Wernerfelt (1984) are important contributors to this field.

The resource-based view derives from economic roots and has an explicit orientation to economics.

With regard to principal assumptions of the resource-based view, it can be stated that various axioms of rationality are utilized, generally acknowledging bounded rationality to a different extent.

It is further assumed in this theoretical perspective that firms maximize while available choices are known, but the selection of an appropriate choice is uncertain.

The objective of this theoretical approach is the efficient allocation of resources. The principal concern of the resource-based view is to provide an alternative synthesis to competitive strategy.

With this perspective the attention is shifted from the exercise of economic market power derived from barriers to competition as a source of advantage, to the factor market impediments to the resource flows due to specialized, unique and difficult to imitate resources as the ultimate source of advantage.

The starting point of research in this field is the analysis of firm differences due to different resource endowments and their utilization.

The resource-based view shows the central importance of assets, skills and capabilities using the term “resource” as well as the terms “capabilities” (e.g. Grant, 1995) and “core competencies” (e.g. Prahalad and Hamel, 1990: 82).

Different authors often use these terms differently, which leads to a certain degree of confusion and makes communication between scholars in the field difficult (Peteraf, 1993: 180).

Up to now no clear definition of “resources” has been developed in the literature. Resources are, for instance, described as “anything which could be thought of as a strength or weakness of a given firm” (Wernerfelt, 1984: 172), as “inputs into the production process” (Grant, 1991: 118), or as including “all assets, capabilities, organizational process, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness” (Barney, 1991: 101).

In this book Barney’s definition is taken as the working definition. However, no matter how resources are defined in the different approaches, all these approaches develop characteristics of resources that are valuable.

Further, they appreciate that the management of resources requires different treatment depending on their value, uniqueness and complexity.

Resource-based view approaches from this perspective also investigate the field of diversification by developing the concept of resource “relatedness” (e.g. Montgomery and Wernerfelt 1988; Wernerfelt, 1984).

The resource-based view is the most integrating approach so far developed in the strategy field and it has contributed substantially to advances in knowledge about the conditions for competitive advantage and the appropriate configuration which organizations should assume in different circumstances.

This approach dominates the recent advances in the strategy development literature. Attention has shifted from how firms determine competitive advantage to what is required by firms to compete and sustain strategic advantage in the marketplace.

The concept focuses on rents in terms of above-normal rates of return that an owner of scarce firm-specific resources can gain instead of focusing on the economic profits that can be accrued from product market positioning (Teece et al., 1997: 513).

The theoretical approaches in this tradition still regard market power as an important explanation for sustaining superior performance, but they shift the focus of attention to what are considered to be the ultimate sources of competitive advantage.

From this perspective the reason for competitive advantages lies in the efficient utilization of tangible and especially intangible resources in the form of assets and skills.

The resource based view can be seen as complementary to industry organization research (Cockburn et al., 2000: 1127; Mahoney and Pandian, 1992: 371, 373; Spanos and Lioukas, 2001: 911).

The resource-based view is a comprehensive perspective that integrates findings from different fields of the strategy literature, including the insights from early strategy literature (e.g. Andrews, 1971) or different streams of organizational economics literature (e.g. Lieberman and Montgomery, 1988; Nelson and Winter, 1982; Schumpeter, 1934; Williamson, 1975).

In the resource-based view, strategy is seen as a process that integrates and aligns resources, businesses and organizational arrangements.

Competitive advantage is secured through capabilities, which link resources with businesses.

Configuration aligns resources with organization arrangements, while control is achieved and exercised through consideration of inter-relationships between businesses in their external environment and organizational arrangements.

The resource-based view has been able to find specifications for the necessary and sufficient conditions to secure and maintain competitive advantage (Peteraf, 1993).

The first step of specification makes it necessary to recognize the interdependence between resources and the nature of the firm’s business in the marketplace.

A second step has to be recognition of the necessary and sufficient conditions which allow individual firm performance to deviate persistently from the only theoretical possible market outcome for firms operating in perfectly competitive markets.

In perfectly competitive conditions, markets will converge towards equilibrium and individual firms operating under conditions of market equilibrium cannot earn other than normal profits.

These assumptions underpin the model of perfect competition and are responsible for the derivation of the theoretical profitability outcome.

However, it is the real world violation of several of these assumptions which creates the conditions for competitive advantage.

In the following paragraphs these assumptions are further elaborated to come to a better understanding of competitive advantage realization.

There are three assumptions of traditional economics that are relaxed with regard to the resource-based view of the firm.

The most important of these is that firms produce identical products, produce and supply them in an identical manner, and are endowed with identical resources (i.e. complete homogeneity).

This is replaced by the assumption that firms are heterogeneous, in which the necessary condition involves the heterogeneous component that firms possess different resources and capabilities (Barney, 1991: 103-5).

This modification leads to the result that firms produce at different levels of efficiency and/or supply customers with different levels of satisfaction so that profits between firms are distributed along a continuum that delivers superior firm profitability at one extreme and inferior firm profitability at the other.

Firm differences with regard to information, luck or capabilities make tent generation by firms possible (Mahoneyand Pandian, 1992: 365).

Superior profits derive from the ability of some individual firms or a cooperative selection of firms to limit the supply of their resources and capabilities so as to generate normal economic rents through more efficient modes of production and distribution.

Firms with superior resources earn Ricardian rents (Peteraf, 1993: 180). Superior profits can also derive if firms use their resources and capabilities to restrict the market output of goods so as to generate monopoly rents through creating competitive barriers to market entry and exit.

The second traditional assumption that is replaced with regard to the resource-based view is that economic factors have perfect knowledge about past, present and future events.

This assumption is replaced by the assumption that there is imperfect knowledge, i.e. the level of knowledge is distributed unevenly between firms.

By relaxing this assumption, situations can be considered which range from the previous assumed state of certainty to uncertainty and in which all available choices may or may not be known or understood.

If perfect knowledge is not assumed this gives rise to two more necessary sub-conditions for realizing long-term competitive advantages, which are both concerned with dynamics and relate to creating competitive limits prior to and following entry to a market by an individual firm. Peteraf (1993) in this context speaks about ex post and ex ante limits to competition.

The first of these “sub-conditions” of the second modified assumption derives from uncertainty about the prospects which individual firms may experience about entering a new market r producing a new product.

This uncertainty delivers superior profits for some firms by giving them a competitive cost advantage prior to market or product entry, i.e. a first-mover advantage.

The advantage derives from a situation where one firm recognizes the potential of a particular resource which is not recognized by other firms and is able to secure the property rights to the resource at a price which is substantially less than would be the case if other firms recognized the potential and bid for the same resource.

The second “sub-condition” of the second outlined assumption derives from the inability to reproduce the heterogeneous resources and capabilities which provided some firms with the initial potential to obtain superior market performance.

No competitor should be able to imitate or substitute the underlying resources of the firm, i.e. the resource needs to be inimitable.

Rumelt (1984: 567) calls characteristics that prevent imitation of resources by other firms “isolating mechanisms,” which he defines as “phenomena that limit the ex post equilibration of rents among individual films” (Rumelt, 1984: 567).

Examples of criteria to systematize different isolation mechanisms include physical uniqueness, path dependency, causal ambiguity and economic deterrence (Collis and Montgomery, 1995).

Physically unique resources are virtually impossible to imitate because of their singular character.

Examples of such resources are certain locations or access to scarce raw materials. Resources that are path-dependent cannot be copied because they have been developed over time in a very particular manner.

Examples are brand names or the development of technological knowledge. Causal ambiguous resources are protected against imitation because competitors do not know exactly what to imitate or how to imitate a resource (Lippman and Rumelt, 1982).

Another factor of inimitability is the possibility economically to deter competitors from duplicating the valuable resource because of limited market size.

A limited market size in combination with huge investments is a credible signal to fight new entrants.

In summary, heterogeneity has to be preserved so that superior firms continue to derive rents from either restricting the supply of resources or restricting the amount and quality of output demanded, or both.

Firm value derives from the ability to maintain these restrictions, and therefore resources and capabilities to have any lasting value must contribute to the preservation of these restrictions.

They do this by becoming difficult to replicate or imitate, and by making it difficult for other firms to produce alternatives which act as effective substitutes.

The opportunities to create these circumstances, while not infinite, are numerous and include such restrictions as patents, brands, reputation, routines, processes, cultures, climates and systems and forms of governance (e.g. Barney, 1992; Grant, 1991; Hall, 1992).

A third modification of traditional economic assumptions happens with regard to the assumption that resources (factors) are perfectly mobile.

Relaxing this assumption gives rise to the fourth necessary condition of the resource-based view, which requires that resources be immobile (i.e. unable to be traded in the market place) or imperfectly mobile (essentially less valuable in any alternative use) (Barney, 1991; Wernerfelt, 1984).

Situations which involve asset specificity, excessively high transaction costs, jointly specialized assets and firm-specific assets, for example, embody elements of resource immobility and mean these types of resources cannot be purchased by other firms at prices which reflect the value placed on them by the firm which employs the resources.

Dierickx and Cool (1989) in the context of imitability, for example, focus on valuable but non-tradeable asset stocks.

For them the imitability of an asset depends on the kind of process in which it was accumulated, and is determined by time-compression diseconomies, asset mass efficiencies, interconnectedness of asset stocks, asset erosion, and causal ambiguity.

It is seen as relevant that valuable resources result in rents that can be captured by the firm itself.

Only if customers, suppliers or cooperative partners of the firm cannot appropriate the rent themselves can competitive advantages can be based on resources (e.g. Collis and Montgomery, 1995).

The contributions of the resource based view to the explanation of competitive advantage realization have not been without criticism.

Such criticism is directed to the state of the art of theory development in the resource-based perspective.

Empirical studies on the resource-based view are still seen as a major field for future research.

Meanwhile, the first promising approaches to operationalization have been made (e.g. Henderson and Cockburn, 1994) and empirical tests of the resource-based view have been undertaken (e.g. Maijoor and Witteloostuijn, 1996).

Furthermore, Lieberman and Montgomery (1998) mention the body of empirical studies of first-mover advantages as evidence for the accumulation of resources and capabilities by market entrants after explaining the relevant links between the concept of first-mover advantages and the resource-based view.

Some authors see inconsistencies with regard to particular statements of the resource-based view.

Here Porter’s (1994) circularity criticism can be mentioned. Porter summarizes the contribution of the resource-based view by the statement that “successful firms are Successful because they have unique resources.

They should nurture these resources to be successful” (Porter, 1994). However, this criticism simplifies the approaches of the resource-based view far too much and is based on taking only one relevant aspect of the resource-based view into account.

Finally, critics point out the neglect of relevant aspects and problematic implications of the resource-based view.

In this context it is often argued that the resource-based view neglects firm external variables with regard to strategic direction.

For example, it is seen as problematic that distribution and marketing aspects are neglected (e.g. De Loe, 1994: 47-8).

However, at least implicitly, even early concepts of the resource-based view acknowledge the necessity of customer benefit. Recent contributions even fully internalize the orientation toward sales markets.

In summary, the resource-based view of the firm in spite of the outlined criticism contributes in various ways to the explanation of long-term competitive advantage realization.

In Peteraf’s (1993) terminology there are four cornerstones of competitive advantage from a resource-based perspective:

(1) Resource heterogeneity that leads to rent creation for single firms;
(2) Ex ante limits to competition that prevent costs from offsetting the rents;
(3) Ex post limits to competition that are necessary to sustain the resulting rents; and
(4) Imperfect mobility that ensures that the created rents stay in the firm and are appropriated by it.

None of the necessary conditions alone is enough to obtain sustainable (i.e. long-term) competitive advantage, but together the few necessary conditions are sufficient to produce sustainable competitive advantage.

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