Critically debate the following question:
“Is the Resource-Based View of the Firm Useful to Management?”
– Compare and contrast researchers’ views and opinions concerned with
the issue of the Resource-Based View.
Resource-based view termed as RBV as a foundation of a firm’s competitive advantage relies primarily on the use of resources that are valuable. These resources can be tangible or intangible and are available for the disposal of the company (Lin, et al., 2014). Transforming a competitive advantage for a short-run into one that can be sustained in the future demand that the resources are heterogeneous in nature but least mobile. According to Wu, L., & Chiu, M. L. (2015), these are implications of resources that not imitable perfectly and do not substitute easily with much effort. Meeting these conditions ensures that the resource bundle can sustain the average returns of the firm. Resource based view has been greatly adopted in management and marketing.
However, this paper addresses the concept of resource-based view by looking at the previous research concerning the defense of resource-based view, criticism and applications of the theory. This brings about literature reviews from past research on the same field.
The VRIN model is part of the RBV and forms a major component. The resources that are valuable to the management should possess some of a set of distinct characteristics. The resources should be valuable. The resource should have the ability to enable the firm to employ a strategy that is value creating. This can either outperform the competitors of the firm or be able to reduce the weaknesses available (Hunt & Davis, 2012). The costs of transaction related to the venture in the resource should not be more than the rents discounted in the prospect flowing out of the value-creating tactic.
The resources should also be rare. The achievement of value requires a resource to be rare in the definition. The resource’s price in a perfectly competitive factor market gives a indication of the discounted potential above average proceeds that are expected. The resource should also be inimitable. A precious resource proscribed by only one firm gives it a cutthroat advantage. The sustainability of the spirited advantage depends on the inability of other firms to duplicate the strategic asset rightly. The isolating mechanism gives firms inability to duplicate the resource into levels that they can battle with the firm owning the precious resource (Wiengarten, et al., 2013).
An underlying factor of inimitability that is important is causal ambiguity. This arises if the source of the competitive advantage of the firm is unknown. If the given resource is socially complex or based on knowledge, causal ambiguity can occur because the resource is likely to be personal to the organization of residence. The resources should further be non-substitutable. Despite the resource being rare and value-creating and imperfectly imitable, lack of close substitutes is another important factor. According to Fraj, et al., (2013), when the competitor can defy the value creation strategy of the firm by bringing in a substitute, it can lead to zero economic profits because prices are driven down and equal the rents discounted in the future.
Verbeke, (2013) suggests that RBV can better be broken down into resources and capabilities. Resources in this essence are those things that are non-specific to the firm but are tradable. Capabilities are specific to the firm are useful in the engagement of resources around the firm and include the transfer of knowledge resources within the firm. The distinction is greatly embraced within the literature of Resource-based view (Crilly, et al., 2013). Capabilities are the special types of resources that are embedded within the organization are not transferrable, and their main duty is to improve the productivity in the other resources of the organization. Therefore, the capability is the capacity of the firm to deploy the resources.
Attaining competitive advantage requires that the strategy existing creates value and is not implemented by competitors present now and possible future competitors. A competitive advantage can be sustainable, but competitors can enter the market with resources that can invalidate the competitive advantage of the firm thus, reducing the rent of the firm. Sustainability of a competitive advantage is independent of the time and depends on the efforts of a competitor to make the competitive advantage redundant and have ceased. The sustainable competitive advantage of a strategy arises when the imitative actions have ended without any disruption of the competitive advantage of the firm.
The resource-based theory views the firm as a set of capabilities or assets. In the current economies, these capabilities and assets of a firm are not tangible, and the success of any organization is based on their distinctive capabilities. An organization with distinctive capabilities has attributes that cannot be replicated by other corporations. The other firms cannot replicate it even after the realization of the benefits they offer to the original company possessing them (Wu, et al., 2015).
The strategy of the business involves the identification of the capabilities of the firm by bringing together the set of complementary assets and capabilities. This is by maximization and defense of the resultant economic rents. According to Backman, et al., (2015), Economic rent concepts are central links between a firm’s conventional measures and the competitive advantage. Resources that are uniquely but highly efficient form an effective resource barrier due to the low expected returns on a similar resource acquired by a competitor ((Somsuk, et al., 2014). The chance of a firm to maximize the imperfections in the market and obtaining cheap resources is high when it tries to build its unique resources and the position of these resources. Viewing firms as resource portfolios rather than as product portfolios brings a better perspective on their prospects of growth.
Strategy for Diversified Firms
Using the resource viewpoint gives a ground under which some key formulation issues of the strategy can be diversified in the firm. The bases are key to decisions such as the basis for the diversification of the current resources of the firm. It states the resources categorically that the firm can develop through diversification and the sequence of the markets to undertake the diversification (Son, et al., 2014). It goes further to give guidelines on the firms desirable for acquisition by the firm. The strategy for large organizations entails creating a balance between the exploitation of the resources present and creation of new ones. Visualization of this is possible through a matrix that links resources and the products in the form of a growth-share matrix (Bloodgood, 2014).
Criticisms of Resource-Based View
RBV focuses mainly on immobility and heterogeneity of capabilities that are competitive in the production of resources that earn rent. Firms are viewed as entities whose main aims are to make supernormal profits under a competitive market that is shared. It assumes that knowledge of the unforeseen value of a resource can be estimated by managers better compared to the competitor. Despite its developments, RBV has been greatly criticized through the creation of amendments (Ferlie, et al., 2015).
The first critique is that resource-based view has no implications on management and validity of operations. It encourages management to develop and acquire a VRIN model but does not clearly indicate how this can be achieved. It, therefore, invokes the fantasy of total control and trivializes the issue of property issues through the exaggeration of the manager’s extent of controlling resources and prediction of their future values. RBV, therefore, suffers from tensions of prescriptive and descriptive theorizing (Hinterhuber, 2013).
The second critique is that RBV implies an infinite regress to the firm. Given a firm that can develop structures that in turn innovates the will of a product will one day overcome a particular firm with the leading innovation in the capability of products today. RBV suggest that organizations should struggle to obtain a subsequent order capability (Bloodgood, 2014). The appraisal comes in handy that firms can extend this step to infinity making firms to search endlessly for capabilities of a higher order.
The third critique is that the applicability of RBV is too limited. The notion of uniqueness in resources refutes potential for any generalization, and one cannot generalize about uniqueness. RBV also applies to organizations that are large and have fairly large market power. Small firms are majorly not footed to their still property and fall beyond RBV’s boundaries. The resources required by a firm to create SCA are the assets that are tough to obtain and a firm already having a VRIN capital can get and utilize the supplementary resources given that the competitor can acquire them with equal ease (Zheng, et al., 2013).
According to Backman, et al., (2015), the fourth critique is that SCA cannot be achieved through RBV. The main objective of RBV is to achieve SCA that can be sustained beyond the efforts of other to copy and eliminate it. This assumption of achieving the SCA has brought about much critique. Researchers argue that the skills and resources should constantly be varied to achieve continuous changing advantages in the market. According to Héritier & Prakash, (2015), However, sustainability of a competitive advantage can be achieved through dynamic capabilities that are advantageous and enable fast adaptation compared to competitors. This denies entrepreneurs to make repeats in decisions pertaining acquisition of resources and their allocation and development (Foss, et al., 2014).
Another evaluation is that RBV reaches for a firm’s hypothesis unsuccessfully. Its sufficiency as a theory of the company is limited and explains the variations between organization and reasons for some firm’s ability to create rent than other organizations. The knowledge-based RBV provides explanations on coordinative and interactive capabilities of organizations as per Rehbein & Schuler, 2015).
Furthermore, the VRIN/O is not sufficient and unnecessary for SCA. The key to resource-based view is that the achievement of SCA is through the application of resources and capabilities given that they are rare and valuable, not easily imitable, and they do not substitute each other. The organization existing should be a good one. There is a lack of empirical support for the RBV due to sufficiency issues in the VRIN/O (Almarri, et al., 2014). Owning a basic resource is not sufficient, and the ability to deploy these resources ensures the achievement of SCA. RBV does recognize individual judgment’s role in entrepreneurs and their mental models by narrowing the decisions of managers into planning for future uncertainties (Lockett, et al., 2014).
According to Heine & Rindfleisch, 2013), Another critique is that the worth of a resource is undefined and cannot provide a useful theory. It totally fails to complete the criterion for a factual theory and has no generalizations that are to be expected in a law-like form. It only relies on analytical statements that are only true by definitions but testing them is not possible. RBV has an indefinite notion of value and three main value concepts are perceived worth by a customer and the total financial value a client is willing to pay plus the trade value.
Furthermore, the definition of the resource is unworkable because of the resource-based view’s axiomatic definitions. This is a weakness because it drives the theory towards tautology and acceptance of all the definitions leaves nothing of use in association with the organization that is not a resource. The inclusive definitions do not acknowledge the difference between the inputs and the capabilities required to position and select these inputs. Also, it fails to discuss the variations in resources may differently contribute to the SCA of a firm. It considers the various types of resources of a firm and treats them in a similar way (Henard & McFadyen, 2012).
Applicability to Strategy
According to Coleman, et al., (2013), Firms develop business strategy whose main plan is to effectively utilize resources and gain competitive advantage. These resources encompasses of capital, human capital, unique capability, and strong brands among others. Resource based view is therefore, essential and applicable to strategy as it provides valuable information concerning the organization resources, what constitute valuable resources and how to utilize these resources to gain maximum benefits. Resource-based view enables organization to identify the vital resources that should be utilized in developing strong business strategies that can enable the organization to achieve both short-term and long-term goals (Chae, et al., 2014). The management is required to carefully consider and single out resources that are readily available for the firm to utilize. On the same note, the management should factor out ways in which these assets are utilized to equate operational value. All these are done through the strategic process that helps the organization to attain business sustainability. Therefore, firms should take good care of valuable resources and utilize them in the right way in order to improve the firm’s performance (Foss, et al., 2014).
Defense of Resource Based View
Many researchers and managers have had interest on Resource Based View for a long period of time. This explains why there are numerous researches done on the concept of resource based view. Resource-based view helps management to understand how resources can be managed in such a way that their results are unique and cannot be copied by other key players in the industry (Lai, et al., 2012). This way, the firm will be in a position to create a competitive barrier which ultimately leads to sustainable competitive advantage. Resource based view extensively elaborates that a company’s sustainable competitive advantage is gained by feature of unique firm resources that are ‘valuable, rare, non-tradable, non-substitutable and inimitable’ (Lin, et al., 2014). On the same note, such resources are not easily copied, transferred, or purchased. Resource-based view also point out the notion that not all the possessions of an organization may add value to a firm’s sustainable competitive advantage. Difference in performance of firms arises because of the heterogeneity of resources thus, resource-based view focus more on the aspects that make these differences to triumph.
Resource-based view is a valuable tool when it comes to providing insight on segmentation of the market to bestow certain firm’s sustainable competitive advantage as per Barrutia & Echebarria (2015). Different markets in the world have different characteristics and may perform contrarily. However, Resource-Based view (RBV) may not be in a position to fully explain the concept of market segmentation and how it makes firms to obtain competitive edge due to cultural and social issues in different countries that may result in change of the competitive scene. Resource-Based View is a static view yet competitive advantage is more of a dynamic process and keeps on changing from time to time (H. Netland, et al., 2013).
According to Hunt & Davis, (2012) Resource-Based View enables organizations to single out key organization resources. These resources can be in form of knowledge-based obtained through development of human capital. Or it can be unique brand accepted by customers thus creating loyal customers. Strong powerful brand exist as a result of many factors but, primarily because of first-mover advantage. First-mover advantage refer to the competitive edge an organization obtain for being the first to create a unique product or to be the first firm to explore new markets no other competitor has explored before (Droli, et al., 2014)..
Resource-based view is also important when it comes to evaluating if organization resources can meet the set criteria requisite for obtaining competitive advantage. This criterion is done by analyzing the organization resources based on the VRIN core characteristics. The resources found to contain these characteristics should be protected and guarded as they form the basis for organization performance (Somsuk, et al., 2014).
Review and suggestions for future theorizing and research indicate that review-based theory is clinging to a narrow neo-classical economic rationality that is inappropriate. This has served in reducing the chances for progress over the past years. The most productive and sharp critiques come from researchers who are seeking to clinch to the economic positions that are non-mainstream (Lai, et al., 2012). Resource-based view gives a clear understanding of the existence of certain unique resources that will result in huge performance and hence, building a sustained competitive advantage.
Wu, L., & Chiu, M. L. (2015). Organizational applications of IT innovation and firm’s competitive performance: A resource-based view and the innovation diffusion approach. Journal of Engineering and Technology Management, 35, 25-44.
Lin, Y., & Wu, L. Y. (2014). Exploring the role of dynamic capabilities in firm performance under the resource-based view framework. Journal of Business Research, 67(3), 407-413.
Hunt, S. D., & Davis, D. F. (2012). Grounding supply chain management in resource‐advantage theory: in defense of a resource‐based view of the firm.Journal of Supply Chain Management, 48(2), 14-20.