The resource based view of the firm (RBV) Essay

The resource based view of the firm (RBV) deals with the concept that by understanding the internal resource base and core competences, the management of a business will be able to employ this specific knowledge to create and sustain a competitive advantage. The RBV promotes the idea of firm heterogeneity and the notion that the conscious and tacit development of idiosyncratic bundles of resources and competences will provide competitive advantage. This is in contrast to the traditional analysis and strategy formulation that considered, in a neo-classical light, each firm to be a representative entity whose strategy was guided by the selection of a profitable industry followed by the pursuit of a generic strategy.

It has been shown that intra-industry differences in profits are greater than inter-industry differences in profits, strongly suggesting the importance of firm-specific factors and the relative unimportance of industry effects? (Teece et al, 1997, p.514). Ultimately the RBV helps to create an understanding of how a firm relative to its peers generates a sustainable competitive advantage.

I intend to elucidate upon the fundamental elements of the RBV, including its strengths and limitations and hopefully prove that its internal focus should be considered as ?a complement to the traditional emphasis of strategy on industry structure and strategic positioning as the determinants of competitive advantage? (Eisenhardt & Martin, 2000, p.1105).

The concept of strategy formulation and the RBV are inextricably linked; Grant (1998) identifies three ways in which the resource-based approach can be tailored to develop a successful and revealing long term strategy. Firstly companies should adopt a strategy that takes advantage of the internal primary resources and core competences. A prime example of this is the company BMW, which has consistently maintained resources and competences closely linked to the manufacture and sale of luxury cars. Next it is very important that the company ensures that it fully utilizes the available resource base and therefore operates efficiently. Finally the firm must routinely evaluate the effectiveness of long-standing resources and the need for new resources. Many firms that have managed to perform well in the long-term share the following commitments ?nurturing talent, developing technologies and building capabilities? (Grant, 1998, p.111), which provide flexibility to adapt to changing market conditions.

The RBV examines two distinct levels of the firm structure, firstly the resources followed by the manner in which ?resources are deployed to create competences? (Johnson & Scholes, 1999, p.155). There are three distinct groups of resources, tangible, intangible and human resources. Tangible resources are quite simply the physical and financial assets of the company, however in terms of understanding the value of these resources the associated factors must be comprehended. Namely the ?age, condition capability and location of each of these resources? (Johnson & Scholes, 1999, p.155). Inherently the value and benefit conferred by intangible resources is difficult to classify, the two major categories are reputational assets and technology rights owned by the firm. Both the products and company can be supported by a favourable reputation that among other things will allow the firm to charge a premium price relative to the industry.

Thirdly each firm possesses human resources, these are the skills and knowledge that the employees provide, examples include team work and the level of ability to efficiently achieve set objectives. Equally important is the internal environment in which operations take place, known as the organisational culture, the term encompasses the ?values, traditions and social norms of an organisation? (Grant, 1998, p.117). The culture of a firm strongly influences the capability to successfully manipulate resources; Pensrose (1959) has suggested that imaginative vision combined with a practical approach to new products and markets fosters firm growth.

The next level of analysis concerns the competences of the firm, sometimes known as the invisible assets, these involve the coordination of the firm?s resources to undertake a productive activity or service. Of particular interest to the RBV are core competences that ?make a disproportionate contribution to ultimate customer value, or to the efficiency with which value is delivered and provide a basis for entering new markets? (Grant, 1998, p.118).

The profits that a firm obtains from its resources and competences depend on three factors: the ability to establish a competitive advantage, to sustain a competitive advantage, and to appropriate the returns to that competitive advantage? (Grant, 1998, p.128). If a firm manages to effectively fulfil the preceding conditions it will maintain economic profits in the long run. For a resource or competence to create a competitive advantage it must satisfy two essential requirements, these being scarcity and relevance. Scarcity means that other firms find it either impossible or near impossible to compete, allowing the firm to earn superior returns. The relevance of resources relates to the fact that they must create value for the firm and consequently enhance profitability.

In order to sustain competitive advantage the resources and competences must comply with certain determining factors. The more conclusively these conditions are adhered to the greater the chance that a firm can achieve sustainable competitive advantage by implementing fresh value creating strategies that can not be easily duplicated by competing firms. The first factor is the durability of the resources, for example the reputation of a firm can prove to be a highly durable form of competitive advantage. Furthermore the resources and competences must be inimitable and non-substitutable. If the knowledge and skills of a firm are embedded within the culture and routines, known as tactic knowledge, then competitors will face ?an ambiguous picture of the connections between actions and results (Fahy & Smithee, 1999). Finally the firm must ensure that it appropriates the value from the competence and generates superior profits.

The RBV provides a detailed understanding of specific outperforming firms in an industry, with regard to the effective deployment of resources and competences that create a profit increasing competitive advantage. The strength of the RBV has been further promoted by the weakening of the traditional industry analysis approach. This concerns the internationalisation of many modern industries which leads to ?vigorous price competition? (Grant, 1998, p.110), hence making it more difficult to identify an attractive industry. Similarly ?technological and demand changes? (Grant, 1998, p.110) have resulted in ambiguous industry boundaries, further complicating analysis. However the RBV is not a fully conclusive method of analysis, I will highlight a number of limitations. ?The emphasis on analysing a firm?s unique internal resources and capabilities has drawn all the attention of the RBV, and thereby left a little attention to the environment? (Chen, 1997).

This is particularly relevant to the failure of the RBV to identify the wide environmental context in which resource selection decisions take place. For example the RBV does not consider the possibility that government intervention through regulatory pressures might prescribe uniform resource standards, competences, and ways of deploying resources across given industries? (Oliver, 1997, p.707). The RBV suggests a high degree of firm heterogeneity, this contrasts with the institutional perspective that emphasises a number of harmonising influences. Namely the growth of strategic alliances between firms, the mobility of human capital and the tendency of firms to copy market leaders. When a firm participates in an alliance, scarce resources and access to tacit competences become freely available. Similarly the transfer of key personnel from a successful competing firm will allow the procurement of profit enhancing core competences; the impact of this method depends on the extent to which competences are embedded within the operations and knowledge base of the original firm.

When the risks and development costs of pioneering are high? (Oliver, 1997, p.708) there is a strong incentive for firms to reduce the level of uncertainty by imitating the competency blueprints of competing firms. A prime example is the pharmaceutical industry where the advent of a new drug is quickly followed by the release of near identical generic drugs form rival firms. From the preceding factors it is apparent that ?both resources and the institutional context of resources determine firm heterogeneity and economics rents? (Oliver, 1997, p.708). In addition the RBV shows weakness in high velocity markets, where the duration of scarce resources and core competences is inherently unpredictable. In this situation the RBV, which heavily depends on the relevance and durability of resources and competences, can not be used as a method for strategy formulation.

The traditional focus on the environment would be better suited to the understanding of dynamic industry conditions. With the additional use of scenario planning, based on historical conditions, complexity could be reduced and an effective strategy could be formulated. At the other extreme, where the firm has a distinctive set of established and proven competences there will be an incentive to favour new strategies which utilize these, instead of taking an innovative approach to the opportunities and threats that face the firm. Johnson & Scholes (1999) refer to this situation as strategic drift. Therefore if a firm adopts a strategy based on the RBV there is a strong possibility that the traditions of the firm will have a significant psychological effect, leading to poor resource selection and development followed by sub optimal profits.

The resource based view of the firm provides a revealing insight into strategy formulation based on the concept that sustainable competitive can be achieved through the leveraging of scarce resources and core competences. Equally the resource based view of the firm helps to explain the existence of firm heterogeneity and importantly the reasoning behind specific firms generating superior economic profits. Despite the apparent benefits of the resource based view, I believe a complete and accurate analysis requires the additional study of environmental influences. When the understanding of the competitive environment is combined with the knowledge of a firm?s key strengths, uncertainty is diminished and an efficient and highly focused strategy can be employed. Ultimately this leads me to concur with Porter?s (1984) argument that stress on the resources must complement, not substitute for, stress on market positions.

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