Resource Based View of the Firm

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Earning sustainable supra-normal returns by superior resources. Explanation of Resource Based View (Perspective) of Barney. ('91)

Economic theory holds that in the normal course, and in the absence of market imperfections, abnormal economic rents will get competed away by rivals or new entrants to an industry. The Resource Based View holds that firms can earn sustainable supra-normal returns if and only if they have superior resources and those resources are protected by some form of isolating mechanism preventing their diffusion throughout industry.

Early adopters of the Resource Based View

Edith Penrose contributed to the RBV field as early as 1959, when she argued: "a firm is more than an administrative unit; it is also a collection of productive resources the disposal of which between different users and over time is determined by administrative decision. When we regard the function of the private business firm from this point of view, the size of the firm is best gauged by some measure of the productive resources it employs". And Birger Wernerfelt coined the term in 1984.

Jay Barney's Resource Based View of the Firm

However most scholars consider Jay Barney as the father of the modern Resource-Based View of the Firm (RBV). His theory ('91) suggests that there can be heterogeneity or firm-level differences among firms that allow some of them to sustain competitive advantage. Therefore, the RBV emphasizes strategic choice, charging the management of the firm with the important tasks of identifying, developing and deploying key resources to maximize returns.

Barney (1991: "Firm resources and sustained competitive advantage") made clear that abnormal rents can be earned from resources to the extent that they are VRIN:

• Valuable (when they enable a firm to conceive or implement strategies that improve its efficiency or effectiveness)
• Rare (valuable firm resources possessed by large numbers of competing firms can not be sources of either a competitive advantage or a sustainable competitive advantage)
• Imperfectly Imitable (because of {a combination of} three reasons: unique historical conditions, causally ambiguous, social complex)
• Non-Substitutable (there must not be strategically equivalent valuable resources that are themselves either not rare or imitable)

Other strategists on the Resource Based view of the firm

Differences may occur in the form of resources such as patents, properties, proprietary technologies, or relationships. Most scholars claim that it is only/mainly intangible resources that explain performance heterogeneity among firms and thus are the likely sources of competitive advantage. (Galbreath and Galvin recently discovered that while RBV theory largely associates firm performance with intangible resources, the association may not always hold true empirically. One explanation may be that the strength of some resources are dependent upon interactions or combinations with other resources and therefore no single resource - intangible or otherwise - becomes the most important to firm performance. (Academy of Management Best conference Paper 2004 BPS: L6))

'VRIN resources' are tough to find. This becomes especially clear when we look at the work done on strategies sometimes characterized as 'economizing' (Porter, 1996). These include reengineering, enterprise systems, benchmarking, downsizing, and other similar approaches of efficiency. Unfortunately, such techniques are available to all competitors in an industry. They merely raise the bar for everyone, usually in a transparent way, and do not produce long-term competitive advantage.

There is a dilemma in attainable resources not being sustainable. Clearly valuable resources that sustain advantage must be hard or impossible to imitate -and therefore not available to those who do not already have them. Imitable resources, on the other hand, can be attained by their aspirants. But as soon as they show clear promise, they risk being competed away: their strength becomes their weakness. Thus attainable resources are not sustainable.

Recent developments on the Resource Based View

More recently, the dynamic capability perspective has extended the Resource Based View to the realm of evolving capabilities. By developing capabilities based on sequences of path-dependent learning, a firm can stay ahead of its imitators and continue to earn superior returns (Dierickx and Cool, 1991; Teece et al., 1997). There is nothing to say, however, that most firms have the capacity to place themselves on a learning curve that would prevent rivals from leapfrogging them. To do so they would have to pick an optimal capability development trajectory that is (a) strictly path dependent to sustain first mover advantage, and (b) nonsubstitutable with an equally efficient trajectory. Bounded rationality conditions might obstruct the first aim, conditions of equifinality the second. Again the goal of inimitability is highly demanding, and asks the question of how to achieve it with assets, resources, or capabilities the firm does not already have. Thus notwithstanding major advances in the field of strategy, practitioners are left with a dilemma: how to develop sustainable advantage that they do not possess, but is nonetheless attainable.

A study by Danny Miller of a number of firms shows how some of them were able to build not so much on resources and capabilities as on asymmetries. Asymmetries are typically skills, processes, or assets a firm's competitors do not and cannot copy at a cost that affords economic rents. They are rare, hard or impossible to imitate and non-substitutable, although not connected to any engine of value creation, and, in fact, often act as liabilities. By discovering and reconceptualizing these asymmetries, embedding them within a complementary organizational design, and leveraging them across appropriate market opportunities, many firms were able to turn asymmetries into sustainable capabilities.

Resource Based View of the Firm Special Interest Group

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Resource Based View of the Firm Forum

- Belgium

RBV and the HC, Must They Be Rewarded?

"RBV, competitive strategies, ... etc. They are all linked with the human resource, the human capital, the intrinsic or extrinsic knowledge. Must they/it be rewarded? Can TRM help execute the strategy during an economic downturn? Is TRM a strategic tool, a differentiator, a resource, a knowledge? Is the psychological contract with the employee the basis for a perennial company? I am really interested in this topic, and am researching it. Please take the survey, and I will most definitely share the results with you!! If you follow this link you will be taken automatically to the survey: Surveygizmo.com/s/176130/kf97i"

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Cornelia - Austria

Challenges of Managing Conglomerates...

"I am currently dealing with following question: what are the challenges of managing conglomerates, starting from the resource based view? Any ideas, where to start?"

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Stanley - England

Relevance of RBV to Healthcare SMEs

"What could one describe as core competences of a small business engaged in caring and looking after patients? How would one apply the RBV model to that business e.g a nursing home or residential care business?"

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Warren - Australia

Relevance of RBV when facing Low Cost Competition

"Is the RBV still relevant given the rise of competition from low wage countries (ie China)? (New competitors are not imitating incumbents resources so much as redefining them)."

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Julie - Netherlands

How to avoid imitation?

"I need to sort out all factors that make it more difficult to imitate a valuable strategic resource... How can barriers to imitation be created? Or: How can we make a competitive advantage into a sustainable one? Here's my list so far: - Conceal the resource or its influence on your competitive advantage, for example if the resource is a business process, by making it in-transparent. Hide the strategic logic. - Patents or other legal permits, set an industry standard - Combine the resource with brand, reputation, installed base, distribution channels, use historical advantage - Use economies of scale as first mover - Use economies of scope, use network externalities - Use social complexity (organ. culture, social networks) - Conceal complex and rare technical know-how. Who has more ideas? Thanks"

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assefa - Ethiopia

Core competency

"The Value, rarity, nonimitablity and nonsubstitutablity as attributes of business organization.."

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