Critically review how the resource-based view has developed our understanding of strategy.

University Degree Business and Administrative studies

A key area of concern for businesses is how to obtain a competitive advantage and furthermore retain that advantage for a sustained period of time. Much strategic management research has focused on understanding sources of “sustained competitive advantage” for firms (Porter,1985; Rumelt, 1984). Strategists in recent times have traditionally based their research (Andrews, 1971; Ansoff,1965; Hofer & Schendel 1978) on a “single organizing framework” (Barney 1991) which first surfaced in the 1960s.

Figure one. The relationship between traditional “strength-weaknesses-opportunities-threats” analysis, the resource based model, and the model of industry attractiveness.

Strategy from this perspective involves responding to both opportunities and threats, and to internal strengths and weaknesses, as a means of achieving competitive advantage. (De Wit. and Meyer. 2002 p30) Most research on sources of sustained competitive advantage (prior to the Resource-based view (Wernerfelt, 1984)) have followed this “outside-in perspective” (De Wit and Meyer. 2002) to strategy formulization. (Hofer & Schendel, 1978; Penrose, 1958; Porter, 1980, 1985; Stinchcombe 1956) The most influential work in this area was published by Michael Porter in 1985 in his book Competitive Advantage, which built upon the original concepts he put forward in his previous book Competitive Strategy. The fundamental concepts of his work suggest that for a firm to secure sustained competitive advantage, they must first select a market with attractive characteristics. Next, they should position themselves in the market in accordance to his Five Forces Framework. Porters influential framework aids strategists in evaluating competitive forces such as; the threat of new entrants, buyers bargaining power, threat of substitutes, suppliers bargaining power and the rivalry between existing competitors; present in a particular industry or sector. The ultimate profit potential is determined by the collective strengths of these forces. (Porter, 1979 pp34-50). These forces can range from ‘intense’ in industries where little ROI is made, to ‘mild’ in industries where there is greater opportunity for superior performance and consequently increased ROI is realised.

Finally, once the competitive forces in the industry have been identified, the strategist is then in the position to evaluate his company’s strengths and weaknesses and formulate a plan of action. According to Porter, such a plan may include: (1) positioning the firm so that it can defend against competition; (2) moving strategically in order to influence the balance of forces, and thus improve the firm’s position; (3) anticipate changes influencing the competitive forces, responding quicker and thereby exploiting changes in the markets new balance of powers before other realise. Porters approach was widely accepted, however it subsequently lead to the alternative ‘inside-out’ perspective of the Resource-based view being developed. The Resource-based view first appeared in an article entitle “A Resource-Based View of a Firm” be Wernerfelt in 1984. It was further developed by Rumelt (1984), Barney (1986,1991), Dierickx and Cool (1989). However, “Barney provides what is arguably the most detailed and formalized depiction of the business-level resource based perspective”. (Priem, R, L. and Butler, J, E. 2001 pp23) His “organizational framework”-“that organizational resources that are valuable, rare, difficult to imitate and non-substitutable can yield sustained competitive advantage” (Meyer 1991, in Priem and Butler 2001) has lead to many further studies on the RBV.

This essay aims to (1) Detail the fundamental differences between the RBV and previous works such as Porters five forces. (2)Highlight the key areas of debate that have arisen from Barneys work. Primarily those put forward by Butler and Briem. (3)Evaluate how the RBV has developed our understanding of strategy.

The Resource-Based View

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The Resource-Based View

The Resource-based view ‘inside-out perspective’, is fundamentally different from Porters ‘out-side in’ view of strategy formulization. Therefore, it’s not surprising that the simplifying assumptions used by Porter are contradictory to the key assumption made by Barney. Porter’s five forces method implicitly assumes that (1) all firms within an industry are identical in terms of the strategic relevant resources they control and the strategies they pursue. (Porter, 1981. In Barney, 2001). (2) That if resource heterogeneity were to develop in a industry, it would be very short-lived because the resources a firm used to implement their strategy would be highly mobile, thus it could be obtained by other firms. (Barney, 1986a; Hirshleifer, 1980. In Barney, 1991p 100). These assumptions made by Porter are not suitable in the case of the RBV framework, as they disregard firm resource heterogeneity and immobility characteristics as sources of competitive advantage.(Penrose, 1958, Rumelt, 1984; Wernerfelt, 1984, 1989. In Barney 1991). Conversely, Barney (1991) uses two very different assumptions in analysing sources of competitive advantage. (1)Firstly, firms can be heterogeneous with respect to resources they control. (2) Secondly, it is assumed that resources may not be perfectly mobile across firms, resources maybe ‘sticky’ (Priem and Butler, 2001), thus heterogeneity can last for a period of time. In summary, Porter assumes organisations in an industry or group are homogeneous in nature and Barney assumes the opposite, in that all firms are heterogeneous in nature. Porters use of poor simplistic assumptions on the resource-side of the framework and Barney’s similar use of poor simplistic assumption on the environment-side of the framework, has consequently lead to strategies that are very one-sided. Firstly Porters (1979) five forces theory, which simplified analysis with implicit assumption of homogeneous and mobile factor markets, fails to recognise that barriers to entry can only exist when firms in the industry are heterogeneous in terms of strategically relevant resources they control. (McGee and Thomas 1986 In. Barney 1991p105). Thus by using simplistic assumptions on the resource side of the framework, Porter (1991) has weakened the overall framework. Likewise, Barney uses simplistic assumptions that are on the demand (environment) side of the framework regarding homogeneous and immobile product markets, implying that demand never changes. (McWilliam & Smart ,1995. In Briem and Butler. Pp22-40) This simplifying assumption also weakens barneys framework, as demand does change and influences the value of firms resources. The main difference between Porters five forces model (along with other environment-focused models) and Barney’s resource-based model is essentially straightforward. Porter suggests that the key to obtaining a competitive advantage is through better understanding of the external environment (environment focused). On the contrary, Barney suggests that competitive advantage is linked to firm’s internal resources. Barney suggests that if a firm’s resources are both ‘rare’ and ‘valuable’ they can produce a competitive advantage for that firm. Moreover, if these resources are also simultaneously not imitable (replicated), not substitutable and not transferable, those resources may generate a competitive advantage that is sustainable.(Barney 1991.In Briem and Butler. 2001). Since the publication of Barneys Resource-based model, many scholars have questioned the apparent link, suggested by Barney, between internal resources and sustained competitive advantage.

Areas of Debate

So what has fuelled this fiery debate? Well, essentially the RBV has been a popular and well accepted among strategists. However, it does have some critics, in particular Richard Priem and John Butler. They have shown concern regarding the lack of critical evaluation of the RBV, in terms of its theory status, and also its potential contribution to the field of strategic management. They only refer to two studies that have considered these issues; one published by Ryall in 1998 and the other by McWilliams and Smart in 1995 respectively. Priem and Butlers’ article aims to provide a more rigorous critique and clarification of the RBV by addressing two elemental questions. (1) Is the RBV actually theory? (2) Is the RBV likely to be useful for building understanding in strategic management? The “degree to which the RBV is likely to enrich strategy research depends, in part on the extent to which it becomes a theory of competitive advantage” (Briem and Butler 2001 p25).

At this point it is important to clarify the criteria the RBV has to meet, to receive theory status by definition. I will rely on the schemes and definitions proposed by Runder. “a theory is a systematically related set of statements, including some lawlike generalizations, that is empirically testable” (1966:10 In. Briem and Butler. 2001). The first issue highlighted by Briem and Butler (2001 pp 22-40) is regarding the fundamental RBV statements in terms of their “Lawlike” status. For the resource-based view’s system of statements to have the force of a scientific theory, some of the statements must be lawlike in that they (1) are generalized conditionals (“if/then” statements), (2) have empirical content and (3) exhibit nomic necessity. After assessing the RBV against these criteria Briem and Butler state that the RBV does have generalized conditions. Although, they claim that in its current state it doesn’t meet the overall lawlike status, as it doesn’t contain empirical content and thus cant be evaluated against the third criterion of nomic necessity. (Briem and Butler. 2001pp22-40)

Barney responded to this article and focused his attention on whether or not the fundamental, business-level RBV is or is not tautological. His purpose of this was to restate the RBV as a theory. Barney suggests that all strategic management theories at definition level are tautological as Priem and Butler describe. (Barney. In Briem and Butler. 2001 p57-65). This claim was refuted by Priem and Butler. Regarding the issue of the RBV theory status and to prevent the continued emphasis on tautology I will use the following quote. “It may be that we [Butler and Briem] and Barney are talking past one another because of different training and involvement in different research traditions” Kuhn (1970. In Briem and Butler 2001pp57- 65). Briem and Butler go on to further provide evidence that the RBV is “not yet theory” by comprehensively dismissing Barney’s second claim, regarding testability and tautology. Therefore, as the RBV is “not yet theory”, does it have any value as a strategic management tool?

RBV Value as a Strategic Management Tool

Firstly, it is important to clarify that “perspective” or “views” don’t necessarily have to have theory status in order to contribute to the field of strategic management. One example is SWOT analysis; this perspective has improved strategist understanding and also been useful for practitioners. (Briem and Butler 2001 pp22-40) However, a notable problem with the RBV is regarding usability. This stems from Barney (1989) suggestion that sustained competitive advantage is linked to “casual ambiguity”. Casual ambiguity arises when a firm has a competitive advantage, but doesn’t know which ‘rare’ and ‘valuable’ resources are generating their competitive advantage. Therefore, these resources are not imitable and thus the firm can sustain their competitive advantage. However, if a firm can pinpoint the ‘valuable’ and ‘rare’ resources that provide competitive advantage, then that competitive advantage wont be sustainable, as ‘casual ambiguity’ will disappear. Subsequently, the RBV as a tool for practicing strategist doesn’t appear very useful. Briem and Butler (2001) evaluate its usefulness of the RBV in terms of Thomas and Tymon’s (1982. In Breim and Butler 2001) “Operational Validity” definition; “the ability of the practitioner to implement the actions of a theory by manipulation its casual (or independent) variables”. According to Briem and Butler, with reference to Thomas and Tymons’ definition, “Simply advising practitioners to obtain rare and valuable resources in order to achieve competitive advantage and, further that those resources should be hard to imitate and no substitutable”, in order to sustain that competitive advantage, does not meet the criteria of operational validity set out by Thomas and Tymon (1982 In. Briem and Butler 2001 p31). This further exemplifies the complexity of using the RBV in practice.

I suggest that although the RBV may not be very useful for practitioners and that in agreement with Briem and Butler that the RBV isn’t yet a theory; the RBV has still been very influential in the field of strategic management. Next I will discuss why this may be, and also how the RBV has developed our understanding of strategy.

RBV and our Developed Understanding Strategy

The RBV was extremely influential when it was first published because it served as a reminder that a Firms resource can also be sources of competitive advantage. Prior to the publication of the RBV strategist attention had been directed towards focusing on the external environment by Porters publication and his five forces framework. The introduction of the RBV highlighted fundamental flaws in Porters model and also allowed strategist to compare and critique two contrasting perspectives, the ‘out-side in’ against the ‘in-side out’ (De Wit and Mayer. 2001). As highlighted earlier, it is possible to see how each framework is very one-sided. Although the RBV is one-sided, it still provided a crucial insight into the concepts of ‘value’ and ‘rarity’ of internal resources and there link to sustained competitive advantage. Although, Briem and Butler (2001) have disputed this apparent link put forward by Barney (1979), at least the publication of the RBV has fuelled further investigation and debate into the theoretical link. Further investigation in this area can only be beneficial to our understanding of strategy.

I believe the debates generated by the publication of the RBV have highlighted some key issues about theory status and the use of simplifying assumptions. In particularly that “practicing strategist do not have the luxury of ceteris paribus assumptions that all aspects of strategic situations remain equal”. (Priem and Butler. 2001p31). The publication of the RBV has lead to a selection of studies which are trying to combine and strengthen out understanding of internal and external analysis (Brush and Artz 1999, Miller and Shamine 1996. In Briem and Butler 2001). Future research needs to be equally balanced without unrealistic simplifying assumptions. Whether future research of this type is too complex to obtain theory status is yet to be seen, however I suggest that comprehensive evenly balanced model would benefit our understanding further.

In summary, the RBV (Barney 1991) has benefited our understanding of strategy as it has given rise to much debate in the area of internal resources and their associated values and link to competitive advantage. It will be interesting to see how further research attempts to deal with the shortfalls of the RBV and Porters (1979) five forces theory. Already, there are many studies taking a more dynamic approach, as the original RBV was intended. It will be interesting to see if these can be link with important environmental influences as well.

Bibliography

Barney, J. (1991) Firm resources and sustained competitive advantage. Journal of Management. Vol. 17, No. 1, pp.99-120.

Porter, M, E. (1979) How Competitive forces shape strategy. In: The McKinsey Quarterly, March-April Issue 1979.

Priem, R, L. and Butler, J, E. (2001) Is The Resource-Based “View” a useful perspective for strategic management research?. Academy of Management Review, Vol. 26. No 1, pp.22-40.

Priem, R, L. and Butler, J, E. (2001) Tautology in the Resource-Based View and the implications of externally determined resource value: Further comments. Academy of Management Review, Vol. 26. No 1, pp.57-65.

De Wit B & Meyer R,(2002) Strategy Process, Content and Context: An international Perspective (2nd Edition) Thomson Learning