RESOURCE-BASED THEORIES OF BUSINESS STRATEGY

Resource-based business strategy theories provide an "inside out" approach to strategy formulation, emerging to help explain many of the firm performance results that could not necessarily be traced to industry-level factors proposed by industry-based theories. Resource-based theories promote development of business strategies that can leverage a firm's unique resources.

The Resource-Based View (RBV)

Key Thought Leaders: Birger Wernerfelt, 1984; Jay Barney, 1991

Although Birger Wernerfelt originally coined the term "resource-based view"16 as a useful alternative to product-based strategic analysis, it was Jay Barney who most fully developed and formalized RBV theory and proposed its significance for business strategy.17

Firm resources are defined broadly in the RBV and include all physical resources, human resources, information resources, organizational processes, and even organizational capital resources (internal and external relations) that can be leveraged by a firm for competitive advantage. Certain resources may represent unique firm strengths that can be leveraged for competitive advantage. Two key assumptions underlying the RBV are that resources are not homogeneous nor are they perfectly mobile between firms in an industry (otherwise firm capabilities would be equal and no one firm within an industry would achieve a competitive advantage over the others).

Four characteristics (the "VRIN" attributes) describing a firm's resources are relevant to how they may result in a competitive advantage or sustainable competitive advantage for the firm: valuable, rare, inimitable, and nonsubstitutable.

To be relevant to competitive advantage, firm resources must be valuable, meaning they have power to create or leverage opportunities or minimize threats inherent in the firm's operating environment.

Rarity speaks to the uniqueness of a firm's resources. The more ubiquitous a given resource is throughout an industry, the less likely that resource is to provide any one firm with a competitive advantage.

Rare and valuable resources that are hard to imitate may enable a competitive advantage to not only be achieved, but also to be sustained over longer periods of time. Some resources may be difficult for competitors to imitate because the true nature of its link to potential competitive advantage is misdiagnosed or misunderstood, either by the competitor or even by the firm itself, a condition referred to as "causal ambiguity."

As with the other resource attributes the availability of viable substitutes for a given resource diminishes the likelihood that it will be able to generate a competitive advantage for the firm.

Assuming that resources are heterogeneously distributed throughout the firms in an industry and imperfectly mobile between firms, firms with valuable and rare resources will achieve a competitive advantage. A sustainable competitive advantage can be achieved when the valuable and rare resources can be protected from imitation and substitution

Limitations of the Resource-Based View

The consideration of the impact of resource availability and value on firm competitive advantage emphasized by RBV has remained influential within the strategic literature, but as a theoretical platform RBV has faced many challenges, leading to a lively ongoing debate and continued refinement of RBV concepts, definitions, and applications.

One major area of controversy for RBV has been definitional problems in its conceptualization. Priem and Butler observed that because valuable resources and competitive advantage are defined in the same terms, a tautological problem exists within the originally conceived constructs, which compromises RBV's falsifiability.18 The theoretical generalizability of RBV due to its emphasis on resource uniqueness has also been chal-lenged,19 though as Levitas and Ndofor point out, more refinement of operationalization approaches and empirical testing is required before RBV is even ready for generalization.20

Perhaps the most significant criticism of RBV is that it is missing the external market perspective. Just as proponents of RBV have criticized the industry-based competitive advantage view for making restrictive assumptions regarding resources, RBV does exactly that regarding the product-market environment. Whereas the industry-based view assumes resource homogeneity and mobility among firms in the industry, RBV makes similar assumptions regarding demand. Because it is actually the external market environment that ultimately determines whether a particular resource is truly "valuable," as the market changes, so may the relative value of resources. To control for this, RBV makes the implicit assumption of homogeneity and immobility of product markets (unchanging demand).

But as Brouthers, Brouthers, and Werner point out in their examination of entry mode decisions, the relative nature of resource value may be a critical consideration for firms operating in diverse institutional environments, such as in the international setting.21 Their empirical results indicate that institutional influences, which may vary from country to country, impact the value of the firm's resource-based advantage on subsidiary performance, indicating that resource-based advantages are not universal, but rather context specific. In many ways, RBV represents a pendulum swing from the overly external view of industry-based theories to an overly internal one, a gap that some of the more integrating theories of business strategy that follow have attempted to reconcile.

 
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