Resource Based View

Resource Based View 

The resource-based view is a way of viewing the firm and in turn of approaching strategy. The resource-based view was popularised by Hamel and Prahalad in their book “Competing for the Future” (1994). Essentially, the view conceptualises the firm as a bundle of resources. It is these resources, and the way that they are combined, that make firms different from one another and in turn allow a firm to deliver products and services in the market. While it might seem somewhat obvious that firms are different because they are comprised of different resources, this perspective is a significant departure from the long dominant marketbased view (see Five Forces Analysis). In the market-based view, firms are largely seen as being homogeneous, and competition is seen as occurring via positioning in markets. With the marketbased view, the strategic challenge is seen as identifying attractive markets to compete in - attractive markets being ones with characteristics identified by analysis of Porter’s five forces. What is not asked in the market-based view is whether the market opportunity is one that can be exploited by the firm in question – that is, does the firm have the resources and competencies to compete in this market? The difference in perspective is highlighted by Theodore Levitt’s famous Harvard Business Review article “Marketing Myopia” (1960). In this article, Levitt argues that the problem with many firms is that they define their market too narrowly. He gives the example of the railway industry, arguing that railway firms should see themselves as being in the transportation business, not the railway business. He argues that this change in perspective would open up new opportunities for growth; “once it genuinely thinks of its business as taking care of people’s transportation needs, nothing can stop it from creating its own extravagantly profitable growth” (Levitt, 1960). What this advice does not take into account is whether the railway firms have the resources to compete in other transportation industries. Could these firms realistically manage a fleet of trucks, an airline, a shipping fleet? Adopting the resource-based view would approach the railway question from the inside out when developing the strategy. The focus would be on what resources the railway firm has and how these resources can be leveraged in different ways. Maybe the resources of the railway firm would be better suited to expansion into real estate or telecommunications? Maybe expansion should not be undertaken at all (see diversification). A common example of a firm following a resource-based strategy is Honda. Honda built it’s strategy around the firm’s strength in building petrol based engines. Honda started with small clip-on engines for bicycles, moved to motorbikes, marine engines, generators, and cars. Each of these products competes in quite different product markets, but leverages a common resource in the ability to build quality petrol based engines. The popularity of the resource-based view has grown largely from research conducted by Richard Rumelt (1991). Rumelt’s research investigated firm profit differentials within and across industries. He found that there were greater differentials within industries than across industries. This finding implied that firm specific differences must be contributing to these differences. Firm resources are generally quite loosely defined, tending to include everything internal to the firm. Barney (1986) lists all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. as resources. So, if resources can be anything internal to the firm, what ones are more strategically important? Barney (1991) has put forward a popular checklist Encyclopaedic Dictionary of Strategic Management 2 30/06/2007 for this. He identified the following as the key characteristics for a resource to be strategically important: • Valuable – There is no point having a resource if it does not deliver value to the firm. • Rare – Resources that are owned by a large number of firms cannot confer competitive advantage, as they can not deliver a unique strategy vis-à-vis competing firms. • Inimitable – Resources can only be sources of sustained competitive advantage if firms that do not possess these resources cannot obtain them. • Non-substitutable – There must be no strategically equivalent valuable resources that are themselves neither rare nor inimitable. While resources can be purchased, it is generally argued that to achieve strategic advantage from a resource it needs to be developed internally. As “deployment of such [tradable] assets does not entail a sustainable competitive advantage, precisely because they are freely tradable" (Dierickx & Cool, 1989). Internal development of resources, however, can take long periods of time and is often unclear how to proceed. In a sense it is this uncertainty, opaqueness and development duration that adds to the potential sustainability and value of the resource once it is developed. One particular resource that is being increasingly viewed as important strategically is knowledge. So much so, that a knowledge-based view (see knowledge-based view) of the firm is emerging in it’s own right. While it is important to recognise that firms are different, and have different resources, this is not to say that the market is not also important. The challenge is to identify opportunities in the market that are relevant to the resource base of the firm. Conversely, resources need to fit with their environment to deliver competitive advantage. This could be viewed in a Darwinian sense, in that the firms that have the resources best suited to the market are likely to perform the best. Markets change, however, so this means that firm’s resources also need to change over time to continue to be relevant to the marketplace. This is the central premise of an offshoot of the resource-based view, that being the dynamic capabilities perspective (Teece, Pisano, & Shuen, 1997). Where the resource-based view tends to focus on the types of resources and the characteristics of these resources that make them strategically important, the dynamic capability perspective focuses on how these resources need to change over time to maintain their market relevance. The interrelationship of these popular competitive perspectives can be seen in the following table (Powell, Thomas, & McGee, 2004): Encyclopaedic Dictionary of Strategic Management 3 30/06/2007 static dynamic Firm market Unit of Analysis Resourcebased View Market-based View Dynamic Capabilities Temporality The market-based view, resource-based view and dynamic capabilities perspective all focus on different dimensions of strategy and competitive advantage. While some diehards will claim the superiority of one approach over the others, a more pragmatic approach is to recognize that each offers important insights that can lead to better strategy development. References Barney, J. B. 1986. Strategic factor markets: Expectations, luck, and business strategy. Management Science, 32(10): 1231-1242. Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17(1): 99-121. Dierickx, I., & Cool, K. 1989. Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12): 1504-1512. Drucker, P. F. 1963. Managing for business effectiveness., Harvard Business Review, Vol. 41: 53: Harvard Business School Publication Corp. Hamel, G., & Prahalad, C. K. 1994. Competing for the future. Harvard Business Review, 72(4): 122-129. Levitt, T. 1960. Marketing myopia. Harvard Business Review, 38(4): 45-56. Powell, T. H., Thomas, H., & McGee, J. 2004. Dynamic knowledge creation. Paper presented at the Dynamics of Strategy, University of Surrey. Rumelt, R. P. 1991. How much does industry matter? Strategic Management Journal, 12(3): 167-185. Teece, D. J., Pisano, G., & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18(7): 509-534. Encyclopaedic Dictionary of Strategic Management 4 30/06/2007 Taman Powell (1193)