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Resource-Based View

The Resource-Based View (RBV) holds that firms can earn sustainable above average returns only if they have superior resources and those resources are protected by some form of isolating mechanism preventing their diffusion throughout industry.This theory emphasizes strategic choice, charging the firm’s management with the important tasks of identifying, developing and deploying key resources to maximize returns. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal. According to Barney, organizational resources that are valuable, rare, difficult to imitate and non-substitutable can yield sustained competitive advantage.

The resource based view can also be interpreted as pushing for a deeper understanding of the underlying internal sources of the firm's positional advantage. While it could be noted that, resources are a source of competitive advantage only if they create positional advantage or advantageous capabilities and using resource based view to justify a focus on the firm's assets in and of themselves is a mistake. The RBV also says that the sources of value creation in a firm are its resources and capabilities.

Strategic Management has been increasingly characterized by an emphasis on core competences, wherein the firms are advised to divest unrelated businesses and return to core business. The resource based approach of competitive advantage in strategy is seen as a matter of efficiently applying scarce knowledge resources to product markets.

Also called

Resource-based Theory (RBT)

What is a Resource?

There are several definitions of what constitutes a resource. Some of the popular and more widely accepted ones are mentioned below: According to Wernerfelt, a resource from a firm's perspective can be anything which could be thought of as its strength or weakness. A Firm's resource at a given time could be defined as those (tangible and intangible) assets which are tied semipermanently to the firm. For example, brand names, in house knowledge of technology, machinery, employment of skilled personnel etc." ^[1]

According to Barney, firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc; controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness, and to downplay strategic threats. ^[2]

According to Amit and Schoemaker, the firm's resources will be defined as stocks of available factors that are owned or controlled by the firm. Resources are converted into final products or services by using a wide range of other firm assets and bonding mechanisms such as technology, management information systems, incentive systems, trust between management and labor, and more. These Resources consist, inter alia, of knowhow that can be traded (e.g., patents and licenses), financial or physical assets (e.g., property, plant and equipment), human capital, etc. ^[3]

Assumptions or Axioms of RBV

According to Barney, two assumptions are elemental to the resource based view:

• The resources are distributed heterogeneously across firms
• These productive resources cannot be transferred from firm to firm without cost ^[4]

Limitations of RBV

• RBV is presented as static concept - however, many firms need to be able to cope with turbulent and unpredictable environments (however, there is a dynamic capabilities extension to this theory)
• It suggests that managers may have limited ability to create sustained competitive advantages (empirical support by "perpetually failing firms" - firms that consistently earn normal or below-normal returns).

Relevance to software business

The Resource based view could be very useful in IT alignment in a firm and could help understand how the strategic IT alignment can produce enhanced organizational strategies that yield competitive advantage. ^[5]

Related Readings

• BARNEY, J.B., 2001. Resource-based theories of competitive advantage: A ten-year retrospective on the resource-based view. Journal of Management, 27(6), pp. 643.
• GRANT, R.M., 1999. The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation. Knowledge and Strategy, .

Links

• York University wiki, RBV entry
• Wikipedia, Resource based view entry
• http://www.ecofine.com/strategy/RBV%20of%20the%20firm.htm

References

1. ↑ Wernerfelt, B. (1984), The Resource-Based View of the Firm. Strategic Management Journal; 5, (2), pp. 171-180.
2. ↑ Barney, J.B., (1991), Firm Resources and Sustained Competitive Advantage. Journal of Management; 17, (1), pp.99-120.
3. ↑ AMIT, R. and SCHOEMAKER, P.J.H., 1993. Strategic assets and organizational rent. Strategic Management Journal, 14(1), pp. 33-46.
4. ↑ Richard L. Priem and John E. Butler, Is the Resource-Based "View" a Useful Perspective for Strategic Management Research?, The Academy of Management Review, Vol. 26, No. 1 (Jan., 2001), pp. 22-40
5. ↑ KEARNS, G.S. and LEDERER, A.L., 2003. A Resource-Based View of Strategic IT Alignment: How Knowledge Sharing Creates Competitive Advantage. Decision Sciences, 34(1), pp. 1-29.