Resource-based strategy (RBS), also known as the resource-based view (RBV), emphasizes the manner and reasons why resources play a crucial role in a successful corporate strategy. Armstrong and Shimizu (2007) observed that, if used appropriately, the RBS guarantees to attain substantial gains, values or competitiveness. However, Baker and Nelson (2005) contended that based on the framework of perfect competition, sustainable competitive advantage can rarely be achieved in the long run. On the other hand, under monopolistic competition, the possibility of earning abnormal profits remains. Apart from describing the RBS model, the paper also explores its strengths and weaknesses.
The Notion of Resource-Based Strategy
In the subsequent step, the focus is on displaying the key attributes of the resource-based view of the firm. The following framework is critical in understanding the resource-based strategy.
In terms of heterogeneity, firms’ resources differ in various aspects although all of them generate rents. In ordinary circumstances, rents from land vary due to different reasons such as fertility levels. Such differences have been applied to resources other than land. Ex Post Limits to Competition also contributes to the understanding of the strategy. Apart from occupying a superior position that facilitates earning extra rent, other forces must be in action to limit competition in the area of operation. For instance, imperfect imitation is one of the factors that contribute to limitations on the competition. Isolating mechanisms and causal ambiguity are among the other contributing factors that undermine competition, leading to the generation of above-average earnings. Imperfect mobility is closely linked to the issue of imperfect imitation. However, in this regard, reference is made to specific difficulties encountered by a company in switching resources. In this case, the cost attributed to switching resources across different firms or industries is limited. Thus, there exists a possibility of earning excess profits due to the fact that companies are reluctant to establish production ventures.
Ex-ante limits also play a significant role in limiting competition levels within a given sector. Before an entity acquires a position of influence, there is little competition in the industry in question. Distinguishing features that lead to rent gaining include inimitability, path dependency, durability, physical uniqueness, causal ambiguity, and low substitutability. However, the main attribute is that distinctive capabilities account for competitive advantage. In this regard, it is acknowledged that heterogeneous resources exhibit distinctiveness. Such uniqueness is attainable in architecture, innovation, reputational and possession of strategic assets. In architecture, contracting issues such as spot contracts, classical contracts, and relational contracts assume significance.
The rivalry between the American Apple Inc. entity and the Korean Samsung Electronics is illustrative of the RBV strategy. The two companies operate in the same environment and thus are exposed to similar external forces. However, the difference in their resources implies that they achieve different results. Both companies compete on smartphones and tablets, however, Apple charges higher prices for its products and thus enjoys bigger profits. Although Apple’s products might not outweigh in terms of quality, Samsung cannot apply the same strategy because Apple has taken time to build its reputation.
Based on the RBV framework, higher feasibility exists in a bid to exploit external opportunities through the employment of existing resources in an innovative manner as opposed to bidding to acquire novel skills for every opportunity that emerges. Under the RBV framework, resources play a critical role in improving the organizational performance of a company. Foss and Foss (2008) observed that the model advocates for viewing resources as either tangible or intangible. Whereas tangible assets are physical, intangible assets lack a material form. Tangible assets include capital, equipment, machinery, land, and buildings, while intangible resources include brand reputation, intellectual property, and trademarks. While physical resources can be availed at markets, they yield limited advantage to a company in the long-run. By contrast, intangible assets depend on what the company does for a long time. Thus, they constitute the main drivers of competitive advantage.
RBS and Efficiency in Markets
The primary aim of any successful strategy is the creation of a sustainable competitive strategy. Although the RBV theory suggests that it is possible to earn extra profits in the long term, the efficient market hypothesis does not align with the position. Based on the latter position, competition takes place even within an environment of a few firms. As a result, if there is one firm that is earning excess profits, the other participants of the market will engage in efforts to copy the competitive approach, and, ultimately, the edge will be erased. Barney and Clark (2007) also noted that although the possession of unique resources is possible, they cannot be sustained over a long period of time. In this regard, reference is made to the idea that asset costs are not static. Prices change over time, with the possibility of price reduction being high. It is also noted that given a high level of dynamism within any industry, innovations emerge over time, which in many instances render the existing ones less competitive or obsolete. Consequently, the possibility of earning excess profits in the long-run based on the possession of unique resources is questionable.
The graph below is useful in highlighting that in the long-run, it is not possible to earn abnormal profits within a competitive environment characterized by perfect market conditions.