Category: Definition Essay

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.

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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.

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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.

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Limitations/ Weaknesses

Without any doubt, the resource-based view offers a useful framework that aids in the understanding of strategy formulation and application across organizations. However, just like any model it also has some limitations. For instance, with closer scrutiny of the framework, it becomes evident that without proper integration of the approach into a firm’s competitive environment some concerns might emerge. In particular, the unit of analysis, the theory’s tautological nature, negligence of environmental factors, exogenous aspect of value, the status of heterogeneity and other assumptions on inimitability cause problems.

The RBV method does not overcome the general problem associated with establishing a suitable unit of analysis. Thus, it is not surprising that many contributions to the theory assume that an individual resource is the appropriate focal unit when studying competitive advantages. However, such a choice is legitimate only if all the relevant resources are defined as sufficient and independent from each other. On the contrary, resources depict a strong association in terms of complementarity or co-specialization. The manner in which resources are interconnected plays a significant role in the emergence of competitive advantage. More importantly, the extent to which a collective cluster of resources fits into an organizational system is critical in the establishment of competitiveness.

RBV’s exogenous basis is also highly questionable. According to Foss, Foss, Klein, and Klein (2007), the determination of the value of resources of a firm is exogenous to the model. The tautology accompanied by the exogenous value determination negates or minimizes the contribution of the framework in reference to explaining competitive advantage. Foss (2007) observed the need to address the link between a resource and its environment gave that resources reflect what is doable to compete in a bid to satisfy the customer’s needs effectively. Moreover, RBV needs to limit its application domain to firms given that it can introduce fine ingrained analyses towards the comprehension of the dynamics that characterize industries. For example, the model can direct attention to resources that underlie mobility barriers or entry into an industry. Ghoshal (2005) also noted that RBV focuses on the lack of the ability of rivals to match or erode the dominant position held by an entity as a requisite condition for the sustainability of the competitive edge. The theory assumes that rivals can erode the position without any restraint. In practice, it is not reflective of the prevailing conditions in competitive industries.

RBV and the Lack of Its Managerial Applicability

The RBV framework encounters much criticism that underlies its weakness as well as its strengths. According to Gibbert (2006), the theory is poorly advanced because it lacks substantial implications for management. In other words, the model has no operational validity. Asking managers to provide VRIN resources as well as an appropriate organization is commendable. However, being silent on how it should be achieved is a major weakness. Additionally, the RBV invokes the idea of total control, which trivializes issues pertaining to property rights besides exaggerating the degree to which management has control over resources, or are in a position to foresee events. Lado et al. (2006) also determined that RBV is deficient based on the tension it creates regarding descriptive and prescriptive theory.

the resource continuum diagram

According to the resource continuum diagram, resources have different attributes/ aspects that make them more or less p