Main Concepts Underlying Resource-Based View of Strategic Management - Essay Example

? Business Strategy Resources are the inputs that allow the firms to manufacture products. Looking from the point of view of the firm, resources and produces can be considered as the two faces of a single coin. While most of the resources can be employed into production of several products, the production process of many goods within a single firm require services of most of the resources. Given the activity level of the firm in different markets to which it caters, analysts can make an estimate of the minimum level of necessary resources that has to be devoted to the production process of the firm for maintaining its activity level. Alternatively, through specification of the resource profile of the firm, one can predict the optimal mix of product-market activities for the firm. The vast existing literature based on strategic management reflects both these perspectives from the firm’s point of view. The traditional economic theories embrace the firm’s resource position while conceptualizing strategies to be adopted by the firm (Andrews, 1971). On the other hand, a majority of the formal tools used in economics nowadays emphasize upon the product-market facet of a firm. Although these are two different perspectives of studying a firm’s resource position and its market activities, these are both focused on the role of resources used by the firm in determining its strategic decisions. Hence, one might expect to yield the same insight on following either of these two perspectives of the resource based view of a corporate organization. However, these insights might arrive with differing levels of ease, depending on which perspective the analyst has chosen. Literature review Economists traditionally consider economic units (firms) in terms of the resource endowments each firm has. These resource endowments are typically confined to three factors, namely, land, labour and capital. Authors that espouse the resource based perspective of the firm accredit Edith Tilton Penrose for laying the building blocks of this theory (Rugman and Verbeke, 2002). Penrose (1959) has made direct contributions to develop the modern view of resource based management. She has as well indirectly influenced the proposition by contributing further into these theories; the theory of creating competitive advantage, theory of sustaining the competitive advantage for the firm and the relationship between economic rents and competitive advantage (Penrose, 1959). There are debates regarding the work by Penrose. Rugman and Verbeke (2002) have put forth the argument that Penrose’s work was not aimed at providing strategy prescriptions for the creation of a sustainable flow of rents. The ideas put forth by Penrose have been used by several scholars as the foundation for models depicting the relationship between rents and competitive advantage of firms and they emphasise that this relationship plays a significant role in the achievement of sustainable competitive advantage. However, the argument against the espousing of the resource-based view (RBV) of Penrose by these scholars, is that, she had given a rigorous description of the growth process of firms in her works and did not intend to build up a strategy prescription for firms (Rugman and Verbeke, 2002). Till 1984, when Wernerfelt presented his work ‘A resource-based view of the Firm’ this perspective of looking at firms did not become well accustomed with economists and analysts. While other papers did not yet receive much formal attention, the paper by Penrose (1959) had received wide acclamation from contemporary and modern economists. According to Wernerfelt (1984), some of the resources used in firms have certain properties that are unpleasant and unhelpful for modelling purposes. Due to this reason economists might not have considered these resources as a good measure for strategizing competitive advantage of firms’. While products of a firm are easy to identify and the characteristics of their production and sales can be categorised and measured easily, a firm’s resource base is diverse and it is not very easy to identify and categorise all the resources (Wernerfelt, 1984). The focus of firms is changing along with advances in technology. Organizations are displaying increasing tendency towards upgrading themselves technologically. At present there are several firms that are developing cross-divisional strategic organizations and technology groups for the achievement sustainable competitive advantage (Wernerfelt, 1984). Main concepts underlying resource-based view of strategic management The resource based view of strategic management says that the competitive advantage enjoyed by a firm is affected by the resource endowment under the firm’s control. The resource base possessed by each firm is unique and does not match the resource base of the other firms in the industry. Hence each firm employs different strategies and experiences varied outcomes in terms of performance (Farag, 2009). This view examines the strong points and limitations of the organization and focuses on the supposition that a firm can earn above-average gains and boost its competitive advantage by concentrating on its unique potentials and enhance its core competencies. These core competencies are present within the organizations in the shape of resources (Salonen, 2010). A firm gains competitive advantage when it can successfully implement a strategy that its competitors have not implemented. A firm can sustain this advantage when other firms are prevented from duplicating this advantage either due to their natural position in the industry or due to the strategy implemented by the firm (Barney, 1991). Contrast with the market based view The market based view lies in contrast to the RBV of strategic management. According to Barney (1991), the market based view rests on two simple assumptions. Firstly, within the same industry all firms are likely to possess resources that are strategically similar to one another and are relevant in pursuing identical strategies. Secondly, the resources are assumed to be mobile in the sense that these can be traded in the factor market. Hence these characteristics of the functioning of firms within an industry would make any resource allocation homogeneous. Any heterogeneity in this sphere would be wiped away since resources would be equally accessible to each of the firms through market interaction. These assumptions are contrary to the assumptions held by the resource based view of the firms. The primary assumption of this view is that the strategically relevant resources controlled by each firm in an industry are the cause of heterogeneity since these are not identical to one another. The implication of this proposition is that strategic resources are available to the firms only partially through factor markets rather than being fully accessible to all. Besides, since the resources are not completely imitable by all the firms, they in effect become immobile or firm specific. Thus, the heterogeneity in resource distribution remains effective for a long period of time. Secondly, factor markets are also imperfect, which renders asymmetric allocation of information and resources leading to difference in expectations and strategies adopted by firms (Barney, 1991). In other words, RBV is an inside-out perspective to organizational strategy while the market based strategy adopts the traditional outside-in view. In RBV the cause of variation in performances among firms is attributed to firm-specific resources (Das and Teng, 2000). Importance of resource-based strategic management Resource-based view of strategic management seems predominantly appropriate in examination of strategic alliances. This is because firms essentially make use of alliances in order to get access into other firms’ precious resources. The resource-based view of the firms’ strategic differences bears relation with the strategic alliance between firms within an industry (Das and Teng, 2000). Of late, the RBV has surfaced as an alternative approach to the understanding of the competitive strategies adopted by industrial organizations. According to this approach, a firm can be identified with the “broad set of resources that it owns” (Das and Teng, 2000, p. 32). Rather than the competitive environment in which the firm operates, strategic management of organizations takes into consideration “the analysis of various resources possessed by the firm” (Das and Teng, 2000, p. 32). Thus, firm resources are very a relevant basis on which organizational management can be studied. Sustained heterogeneity in organizational resources, can potentially act as a source and support for competitive advantage, which brings economic rents to the entrepreneurs or entitle them to earn above normal returns. According to some theorists resource-based view of strategic management is a new aspect of the existing theories pertaining to organizational strategies, while others consider that this approach is a totally new approach and is a part of the constantly developing paradigm of strategy research (Conner and Prahalad, 1996). Researchers are indeed still under the process of testing applications of this resource-based view. For instance, sustainable differences in profitability of a firm cannot be always endorsed by external factors causing industrial differences. Using this context Peteraf (1993) has shown that the resource-based view can be useful in attempting to explain such differences. The example of Toyota can be highlighted in this context. Toyota handles its raw materials and maintains an excellent inventory control. This allows the firm to manage its inbound logistics and admirable manufacturing system. The entire management system works in a synchronized manner to make sure that the level of inventory is sufficient so that the suppliers can always meet the consumer demand readily on time. Along with proper management, other activities in the value chain, like operations, are efficiently run. The process is supported by the marketing team of Toyota that takes care of the networking activities and linkages. Toyota’s linkages both within the value chain activities and across the activities are so configured that it renders a distinctive capability to the company, which acts as its core competence in the industry. This capability allows the company to enjoy a competitive advantage over other players in the industry. These firms have not been able to match with Toyota’s strategic management mechanism. This has happened because all firms in an industry are not homogeneous and resources belonging to a firm are unique to it and are not imitable. Toyota can derive benefits from the value added by its activities and is capable of making a sum of profit that is larger than the combined profit made by the USA’s largest three automobile manufacturing companies (American International University-Bangladesh, n.d.). Approach of RBV Firms have to consider both internal characteristics and external environment while making decisions on its strategic management. Internal characteristics include the firm’s strengths and limitations and exterior environment includes the outside opportunities and hazards. The traditional approach of strategy research advocate that firms must seek to make a strategic fit between these two factors. Researchers in the past have dedicated considerable amount of time and effort on understanding and describing the competitive positioning of a firm amidst the competitive environment of the industry (Kor and Mahoney, 2004). In contradiction to this view, the resource-based approach puts more emphasis on the internal features of the organization. Barney (1991) has pointed out that the traditional strategy models are build on the foundation of environmental and industrial scrutiny and hence make assumption about firm homogeneity which is not possible in a real world industry. According to Barney (1991), the parameters that are known to influence the competitive strategy of a firm lie beyond the boundaries of competitive environment. Accumulated resources of a firm critically influence its competitive decision making more significantly than competitive environment. In other words, the possessions of a firm are defined by its individual accomplishments. Homogeneous allocation of resources cannot play a significant role in this situation. This subsequently implies that it is necessary for a firm to devote extra attention towards assessing its resource base and perhaps more attention than the way it studies the competitive environment in the industry. The input made by this resource-based view of strategic management is the development of the idea that “a firm’s competitive position is defined by a bundle of unique resources and relationships” (Rumelt, 1984, p. 557). This model creates a balance between the competitive strategy models and the environmental models of strategic firm management. Penrose’s contribution to our understanding of RBV Penrose (1959) has provided three central arguments that create a link between the resources possessed by the firm, its productive opportunities and profitability of the firm. All three factors operate in relation with one another and define the growth path of the firm. Firstly, according to Penrose (1959) effective management of resources and innovative resource utilization can lead firms to create greater economic value than merely possessing a huge reserve of resources. In this context, Penrose (1959) establishes that a given bunch of resources can extend various kinds of services, which would be dependent on the pattern in which the resources have been employed into these services. There is a contrast between “productive resources and productive services” as explained by Penrose (1959 cited in Kor and Mahoney, 2004, p. 182) and the outcome of productive services depends on the deployment of productive resources. This difference gives rise to intra-industry heterogeneity. Deployment of resources in a creative way spurs differences among firms in terms of their productive opportunities and their financial performances (Penrose, 1959). The second argument provided by Penrose (1959) relates to the linkage between resources possessed by the firm and creation of productive opportunities, which allows the firm to make further innovations and to grow. Managers act as catalysts in the process of converting the resources possessed by the firm into capabilities of the firm and generate new product lines. In this development, managers’ experiences hold significant value and cast an impact on the kind of productive opportunities that would become available to their firms. This develops a dynamic capability in the firms in terms of their resource utilization and it helps them to bring a combination in their resources so as to make further innovations and economic value creation. Lastly, Penrose (1959) identifies and explicates the drivers of organizational growth and explains the factors that influence the direction and rate of growth. Lack of availability of good managerial skills and technological knowhow become those factors that create a bottleneck in the growth path of a firm in a certain time frame. The existing knowledge base and utilization of resources helps managers to assess the direction of growth of their organization. Limited knowledge base and under-utilization of resources are the limiting factors that create inefficiencies and lead to “loss of competitive advantage” (Kor and Mahoney, 2004, p. 185). The tie between organization level performance and resource-based view of strategic management has been clearly explained by Penrose (1959). The decisions made by managers determine the growth pattern of the firm and these choices put direct consequences on the economic rents earned by them. Penrose’s (1959) argues in this context that firms can achieve profitable growth only after it has settled on its optimal growth rate. It must be clarified that in their arguing against the relevance of Penrose’s (1959) proposition to economic rent in the theory of RBV, Rugman and Verbeke (2002 cited in Kor and Mahoney, 2004, p. 185), although admitted that Penrose has provided “a theory of optimal growth”, have avoided investigation into the issue that the theory relates to optimization of which factor. This factor is the growth rate of the firm (Kor and Mahoney, 2004). Penrose (1959) has dedicated close attention towards explaining the competitive forces acting behind the firms’ functioning and profitability and also the possibility of erosion of their competitive advantage. The author has stressed on the fact that it is very important for firms to maintain their existing capabilities and technical knowhow continuously in order to protect their competitive advantage. While taking initiatives to enter a new field of commerce, it is essential for an organization to consider “the rate of return it might expect on its new investment” (Penrose, 1959, p. 136). Simultaneously, the management also has to study the characteristics of its resource base so as to be able to judge whether its resources are sufficient to maintain its investment rate in the existing field alongside the new venture. In order to succeed in the new field of investment, the firm would be required to compete with the incumbents and keep pace with their innovations. Sometimes a firm decides to penetrate into a new business zone if it finds itself equipped with some revolutionary form of technical advantage or innovation. Although such an advantage secures its competitive positioning in the new industry initially and wards off competition from incumbent firms that are protected with patents and similar restrictive devices, the advantage would be wiped off with time if the firm fails develop further on its technologies and innovations. This shows that resource based view of a firm’s competitive advantage is capable of explaining the differences in firm profitability. Conclusion The resource-based view emphasises on the fact that internal capabilities of an organization influences its strategy formulation that helps the firm to achieve sustainable competitive advantage (American International University-Bangladesh, n.d.). The above discussion shows that one can view organizations from two perspectives; outside in view and inside out view. If one views the organization as made up of a pool of resources, she would find that these resources can be transformed into capabilities and be configured several times so as to allow the firm to enjoy competitive advantage. This perspective indeed becomes an inside out way of viewing the firm’s capabilities. In this perspective the researcher would emphasise more on the factors internal to the firm that would affect the firms competitive advantage rather than on the external industrial and environmental factors. Putting it differently, the internal capabilities of the firm play a decisive role in the determination of strategy choices that would help the firm to compete in the external environment. In certain situations, the internal capabilities of a firm advances the firm in the pathway of discovering new markets or add value to its products and services so as to woo the customers of the existing markets. Some well-known international organizations have set example in this regard. Apple has introduced the iPod and Toyota has launched the hybrid car, which are all examples of exploitation of internal resource base for the creation of new markets. These organizations’ capabilities have been realised as paramount in the process of creating competitive advantage for the firms. In such cases the organizations pay more attention to “the configuration of its value chain activities” (American International University-Bangladesh, n.d.). Since these companies are emphasising on creation of new value rather than on scoring high in a competitive environment, they pay more attention on the value chain in order to capture competitive advantage. References American International University-Bangladesh, n.d. The internal environment: A resource based view of strategy. [online] Available at: [Accessed 29 March 2013]. Andrews, K. R., 1971. The concept of corporate strategy. Homewood: Dow Jones-Irwin. Barney, J., 1991. Firm Resources and Sustained Competitive Advantage. 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