From Industry to Firm Resources: Resource-Based View of Competitive Advantage From Industry to Firm Resources: Resource-Based View of Competitive Advantage

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From Industry to Firm Resources: Resource-Based View of Competitive Advantage From Industry to Firm Resources: Resource-Based View of Competitive Advantage
  From Industry to Firm Resources: Resource-Based View of Competitive Advantage7   © 2011 IUP. All Rights Reserved.  From Industry to Firm Resources:Resource-Based View of Competitive Advantage The emergence of resource-based view of the firm in strategic management during 1980s has become a dominant framework and it shifts our attention from the industry to the firm level as a prime determinant of firms’ profitability. The theory is still in the evolving phase and its epistemology is getting richer day-by-day. The papertraces the roots of resource-based view, elucidates its economic logic and presents the critics’ views. In addition,the theory’s empirical assessment is presented and the methodological concerns of the research are discussed.Finally, its managerial significance is elaborated and a conclusion is drawn with regard to its contribution inthe field of strategic management. Siddhartha S Brahma *  and Haimanti Chakraborty** *Instructor, Corporate Training, Saudi Industrial Development Fund, Saudi Arabia; and is the correspondingauthor. E-mail:**Assistant Professor, Department of Commerce, Bangabasi Morning College, University of Calcutta, Kolkata700064, India. E-mail: Introduction Since the advent of the Resource-Based View (RBV) of the firm in strategic managementliterature, much has been debated, written and tested to validate this theoreticalperspective. During its long journey, we have also witnessed the proliferation of differentdomains like dynamic capability (Teece  et al. , 1997), strategic leadership (Finkelstein andHambrick, 1996) and knowledge-based view (Kogut and Zander, 1992) within the RBVframework. Breaking the influence of Porter’s (1980) Structure-Conduct-Performance(S-C-P) paradigm and establishing itself as a stand-alone model of competitive advantageis not an easy task to the RBV scholars, yet this stream of research has shown an immensepotential with regard to the strategic implication of the firm’s resources. Though RBV isstill in its infancy, it is imperative for the strategy scholars to assess its past so as to embarkits future path. Keeping this need in mind, this paper traces the srcin of RBV, elicits itsunderlying economic rationale and presents the critic’s views. Finally, we also find theanswers as to what extent the empirical tests support the theory and how far it helpsmanagers in crafting strategies. RBV: A New Era in Strategic Management During 1980s, the field of strategy has seen a paramount shift from the traditionalconcepts of Ansoff (1965), Andrews (Learned et al.,  1965) and Chandler (1962), who haveprovided the foundation of strategic management (Rumelt et al. , 1994). Porter (1980) inhis framework has explicitly recognized that a firm’s performance is determined by theindustry attractiveness and to some extent by firm effects (Grant, 1991a). As industrystructure to some extent is susceptible to firm’s strategy, these two determinants of performance are interrelated. Therefore, once the firm gains its competitive advantage  The IUP Journal of Business Strategy, Vol. VIII, No. 2, 20118 over its rivals either by ‘cost leadership’ or ‘differentiation’, it will try to cope with theindustry forces and ideally changes those industry forces in its favor to sustain thecompetitive advantage. Though, it is well-understood now that Porter’s (1980) frameworkis primarily based on the Bain-Mason’s Industrial Organization (IO) economics concept(S-C-P paradigm), it differs from it in several ways. First, unlike Bain-Masonian concept,Porter focuses on the role of firm activities and positioning as a fruitful way for thedevelopment of the dynamic theory of strategy (Spanos and Lioukas, 2001), even thoughindustry structure still remains the central tenet in explaining the firm’s performance.Second, his five-forces framework of industry is much more tangible as compared to theunclear industry structure of the IO economics (Hoskisson et al. , 1999). According toBarney (2002), the contribution of Porter is most influential in the strategic managementfield to make strategy from an ‘informed conversation’ to an ‘academic discipline’ withimportant managerial implications. However, the central tenet of Porter’s model isquestioned whether industry factors are primary determinants of firm’s profitability. Theamount of evidences in support of S-C-P paradigm is few. On the contrary, a number of studies (Schmalensee, 1985; Cubbin and Geroski, 1987; and Jacobsen, 1988) have indeedfound that it is the firm-level factors and not the industry factors that explain greatervariance in firm’s profitability. In more recent studies (Rumelt, 1991; Powell, 1996; andHawawini et al. , 2003), the earlier view is again echoed that firm-specific factors have adominant effect on firm performance. Though not clearly reflected, McGahan and Porter(1997) have found in their study that industry represents an important factor inexplaining firm’s economic performance and more specifically industry effects are moreimportant in accounting for firm’s performance in service industry than in manufacturingindustry. Therefore, the question whether performance is driven by industry or firm-specific factors remains the central issue in strategic management and the debate is stillopen.In search for the answer, scholars have started looking inside the firm and it gives riseto a new approach in strategic management field. Closely in line with the Chicago schoolof thought, this approach sees industry structure as the efficiency outcome instead of market power, to indicate that performances vary among firms due to the differences inresource endowments (Rumelt et al. , 1991). This new approach is known as RBV. Thoughthe footprints of RBV is found much earlier works of Penrose (1959) and Wernerfelt(1984), it has not gain popularity until it has been diffused single-handedly by Prahaladand Hamel (1990) explaining the business world how a firm like NEC becomes the worldleaders by seeing themselves in terms of core competencies (Wernerflet, 1995). The Underlying Core of RBV The founding base of RBV is given by Penrose (1959) when she describes a firm as acollection of resources and goes on arguing that it is the heterogeneity of the servicesavailable from resources that gives each firm its unique character. She adopts a broaddefinition of resources to include managerial skills as well as entrepreneurial skills. Lateron, Wernerfelt (1984) defines firm’s resources as tangible and intangible assets which are  From Industry to Firm Resources: Resource-Based View of Competitive Advantage9 tied semi-permanently to the firm and posits that it is possible to develop a theory of competitive advantage based on the resources that a firm controls in accordance with thedualistic reasoning of economics. The implication of his thought is that competition forresources and among firms based on their resource profiles can have an importantimplication for the ability of the firms to gain competitive advantage in implementing theproduct-market strategy. Following his work, a group of researchers (Rumelt, 1984; Barney,1986a; and Diericx and Cool, 1989) have been trying to build a normative theory of RBVto explain the logic of rent generation. Rumelt (1984) in his paper also views firms as abundle of resources and asserts that economic values of resources vary depending on thecontext in which they are used and introduces the concept of ‘isolating mechanism’ forinimitability of resources. As opposed to the Porter’s (1980) view of superior firm-performance as a result of entering and operating in an attractive industry, Barney (1986c)argued that if the factor market of resources are perfectly competitive, it is not possiblefor a firm to get economic rent even if it is successful in creating an imperfect product-market because the price paid to such resources will be equal to its value that the resourcewill create in the product-market. There is an imperfection in the factor-market whichis result of luck or insights of the firm. An extended view of Barney’s concept is reflectedin Diericx and Cool’s (1989) paper where the authors show how a resource, already in thepossession of a firm, can create rent. According to them, if a resource is causallyambiguous, characterized by interconnected asset stocks or asset mass efficiencies and aresubject to time compression diseconomies, it is less likely that the resource would beaffected by the factor-market competition.In parallel, another group of researchers emphasize on examining which specificresource gives rise to sustainable competitive advantage. They identified the followingresources: human resources (Amit and Schoemaker, 1993), response lags (Lippmen andRumelt, 1982), organizational routines (Nelson and Winter, 1982), organizational culture(Barney, 1986b) and invisible assets which are difficult to imitate (Itami, 1987). Thoughadvancement is made in several fronts, this theoretical perspective is lacking anintegrative and comprehensive framework. Barney (1991) first presents a framework of theRBV of the firm, which subsequently became an authoritative literature in the strategyfield. His seminal work is considered as the first formalization of the fragmented resource-based view into a comprehensive, empirically testable theoretical framework (Newbert,2007).Barney (1991) in his framework has made two fundamental assumptions: (1) firmresources and capabilities are heterogeneously distributed among firms; and (2) resourcesand capabilities are imperfectly immobile (i.e., resources are sticky). Following these twoassumptions, he made two arguments. First, resources and capabilities that are bothvaluable and rare will attain competitive advantage. Second, the resources and capabilitiesthat meet the first criteria and if they are simultaneously inimitable and not substitutable,generate sustained competitive advantage. Therefore, rarity and value are each necessarybut not sufficient condition of competitive advantage, whereas inimitability and non-substitutability are each necessary but not sufficient condition for sustainable competitive  The IUP Journal of Business Strategy, Vol. VIII, No. 2, 201110 advantage. From the strategic perspective, the RBV then suggests that a firm shouldidentify its strategically relevant resources and capabilities which are valuable, rare,inimitable and non-substitutable. These resources and capabilities would enable the firmimplementing a strategy to generate sustainable competitive advantage (Barney, 1991; andSpanos and Lioukas, 2001). The above resources are sometimes called critical resources(Welnerfelt, 1989) and they help the firm to participate in its product-market relativelymore efficiently (more economically) and effectively (better satisfy customer wants)(Barney, 1991; and Peteraf, 1993). The two words, efficiently and effectively haveimportant connotation in RBV. To gain competitive advantage, the firm has to creategreater economic value to the customers, as compared to the least efficient competitorcapable of braking even (Pereraf, 1993; and Peteraf and Barney, 2003). In RBV, greatereconomic value (competitive advantage) is created from the efficiency of the resourceswhich enable the firm to produce greater perceived benefits for the same cost (efficiencyin differentiation) or same perceived benefits for a lower cost (lower cost). Therefore, inRBV, the firm competes in the product-market either by offering differentiated productsor by attaining low cost position relative to its rivals (Conner, 1991) and the competitiveadvantage it gets arises from the efficiency of the critical resources. So RVB is essentiallyan efficiency-based theory (Peteraf and Barney, 2003). At this point, one must rememberthat competitive advantage requires both—valuable and rarity—of resources. Thisargument follows the following logic. A resource may be valuable but not scare. In thiscase, all firms competing in a product-market will get the resource in question and henceimplement the common strategy resulting no firm to get competitive advantage. On theother hand, a resource may be scare but not valuable. It means that the firm holding suchresource will not be able to use it efficiently and effectively to create economic value thanits rival. The opportunity cost of such resource to the firm may be sufficiently high tooffset much of the perceived benefit produced. Thus, little or no competitive advantagewill be created despite the scarcity of such resource.The RBV views competitive advantage (i.e., creating the greater value than rivals) asa rent to the critical resources which are valuable and rare. If competitive advantage is notcreated due to use of such resources, RBV cannot be applied. Once a firm establishescompetitive advantage, the next question would obviously be whether it is sustainable ornot. The answer to this question lies in the fact that to what extent the resources areinimitable and non-substitutable. The RBV scholars suggest that the rent that is createdby the superior resources (valuable and rare) may be temporary or short-lived becausescarcity need not be a long-lived phenomenon. For instance, a newly invented technologymay be a scare resource to the firm. If this technology is easy to imitate, it becomes nolonger a scare resource. If the firm enforces strict secrecy, rarity may be a long-termphenomenon. At the same time, if the valuable and rare resources are substitutable,sustainability of competitive advantage is not possible. Therefore, sustainability requiresboth inimitability and non-substitutability of resources.  From Industry to Firm Resources: Resource-Based View of Competitive Advantage11 The central tenet for explaining the sustainability of competitive advantage in theresource-based framework is this ‘barriers to imitation’ (Mahoney and Pandian, 1992).According to Barney (1991), a firm’s resources are imperfectly imitable for one or moreof the following reasons: (1) resource obtained through unique historical conditions;(2) causal ambiguity; and (3) social complexity. Unique historical conditions may createan opportunity to acquire or develop a resource for a firm which may not be recreated andhence make the resources difficult to imitate. For instance, Caterpiller was chosen as a solesupplier of construction equipments to military bases around the world, at a time whenno supplier had global presence. History may be viewed as creating a path-dependency, sothat the development of the resource arises from a series of events, occurring over timethat would be difficult to replicate. Causal ambiguity arises when the linkage between thefirm resources and competitive advantage is not understood or imperfectly understood.Thus it would be difficult for firms to imitate the actions to duplicate the strategies totap competitive advantage. To be source of sustained competitive advantage, it is necessarythat both the firms that possess these kind of resources that create competitive advantageand the imitating firms must have the same level of causal ambiguity. If the link isunderstood by any of these firms, it will be diffused in the long run to eliminate the causalambiguity. However, Reed and DeFillippi (1990) argued that even if the firm that possessresources understands better the underlying causal relationship than its rivals, it cansustain the advantage by reinvesting in sources of ambiguity (tacitness, complexity andasset specificity). Many firm resources are socially complex to systematically manage andinfluence and this acts as a barrier to imitation. Social complexity arises from theinterpersonal relations among managers, firm culture, relationship with suppliers andrelationship with customers. For instance, Hewlett Placard (HP) has a strong and enablingculture which promotes teamwork and cooperation across divisions. HP uses thiscapability to enhance the compatibility of various products. This is very difficult to imitatethis culture for others.The final requirement of sustainable competitive advantage is non-substitutability. Itsignifies that there should not be any equivalent valuable resources that are not rare orimitable. If there is any substitute, then other firms will pursue the same strategy whichwill eventually dissipate the competitive advantage.It is very interesting to note the several changing perspectives of strategic managementorientation. Porter’s framework is based on IO which does not allow firms’ heterogeneitywithin an industry. Seth and Thomas (1994) have commented clearly that theories whichassume firm homogeneity may have a little use in strategic management research. Fromthis perspective RBV allows this flexibility to understand what is going inside the ‘blackbox’. RBV treats resource heterogeneity as an outcome of luck as opposed to strategicbehavior of the firm (resources to strategy), whereas Porter’s framework suggests that afirm accumulates productive resources from a combination of some strategic behavior andstochastic processes (strategy to resources). There is another way to look into these twotheoretical perspectives. Porter emphasized on the creation of imperfection of a firm’s
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