Limitations Of The Resource Based View Management Essay

The resource-based view is a framework for understanding strategic management. It focuses on the firm, in contrast to traditional Industrial Economics (Barney, 1991). This paper provides an overview of what the resource-based view is about, an overview of critiques on the resource-based view, based on the paper of Kraaijenbrink et. al (2010). Finally, this paper points out several limitations of the resource-based view.

Competitive advantage & sustained competitive advantage

According to Barney (1991), a firm has a competitive advantage when they have a relative advantage over another firm and when this advantage is not being implemented by any competitor. A firm has a sustained competitive advantage when they have a relative advantage over another firm and when this advantage is not being implemented by any competitor and competitors are unable to duplicate the benefits of this strategy.

In analyzing sources of competitive advantage, the resource-based view has two assumptions. Firstly, a firm within an industry may be heterogeneous with respect to the strategic resources they control. Secondly, the model assumes that these resources may not be perfectly mobile across firms, and thus heterogeneity can be long lasting. The resource-based model of the firm examines the implications of these two assumptions for the analysis of sources of sustained competitive advantage.

Firm resources and sustained competitive advantage

The resource-based view states that the strategy of a firm needs to be based on the resources a firm owns. Not all resources are important. Only strategic resources can lead to a sustained competitive advantage. To have the potential of a sustained competitive advantage, resources have to be valuable, rare among competitors, imperfectly imitable, and there may not be any strategically equivalent substitutes.

“Resources are valuable when it enables a firm to conceive of or implement strategies that improve the firm’s efficiency and effectiveness” (Barney, 2001). Resources are to be stated rare as long as the number of firms that possess the particular resource is less than the number of firms needed to generate perfect competition dynamics in an industry. Resources that are imitable cannot deliver competitive advantage. The resource-based view distinguishes two variables that determine whether a source is strategic or not:

The imitability of a resource

Imperfect mobility

Both of these variables contribute to the uniqueness of a resource and with this uniqueness to a potential sustained competitive advantage. These variables are discussed below.

The imitability of a resource

When a resource can be imitated by a current or potential competitor, the firm loses the opportunity to gain a sustained competitive advantage. In other words, the company loses “uniqueness”. Imitability can be impeded by the following three factors:

Unique historical conditions. A leading company in technology development may be too large to be overtaken by potential and current competitors. This is because the leading company is more knowledgeable and developed and therefore, these potential and current competitors are probably not able to overtake this company.

Causal ambiguity. Imitators do not know what to imitate, because they cannot draw a causal relation between the success of the “successful” firm and the actions of that firm.

Social complexity. Resources can be social complex in a way that other firms are not able to manage and influence these resources themselves. Examples of social complexity include a firm’s organization culture and social networks.

Imperfect mobility

A resource that can be bought by another firm on a market cannot result in a competitive advantage. For example, a machine that can be bought on a market by firms cannot be unique for one of the buyers of that machine. Examples of resources that can be unique are property rights and reputation; other firms on a market cannot buy these unique resources.

An abstract form of immobility is imperfect mobility. Imperfect mobility makes certain resources more valuable to one firm compared to another firm. An example could be a product developer in a product developing team. The value of the product developer separate from the product developing team is lower than the value within his team. So, when a competitor is interested to “buy” the product developer, he is less worth for the competitive firm since he performs best in the product developing team of the current firm.

Critiques on the resource-based view

The resource-based view has been criticized for weaknesses. Kraaijenbrink et. al. (2010) assesses several critiques on the resource-based view. The following critiques will be discussed. (1) The recourse-based view has no managerial implications, (2) the resource-based view implies infinite regress, (3) the resource-based view’s applicability is too limited, (4) sustained competitive advantage is not achievable, (5) the value of a resource is too indeterminate to provide a useful theory, (6) the resource-based view is not a theory that is about the firm and (7) the definition of a resource is not clear to work with.

Critique 1: no managerial implications. According to Priem & Butler (2001), the resource-based view misses managerial implications or operational validity. The resource-based view explains that managers have to develop and obtain strategic resources that meet the criteria valuable, rareness, non-imitable an non-substitutional (VRIN criteria) and how an appropriate organization can be developed. However, the resource-based view does not explain how managers can do this (Connor, 2002).

Critique 2: infinite regress. According to Priem & Butler (2001) and Collins (1994), the resource-based view entails infinite regress. Firms who have a capability which they can put in practice best, can be overtaken by a firm that can develop that capability better than firm who is best in practice (Collins (1994) calls this second-order capabilities).

Critique 3: The applicability is too limited. The article of Kraaijenbrink et. Al. (2010) works out three points of criticism on the applicability of the resource-based view. First, Connor (2002) argues that the resource-based view does not apply to smaller firms. This because sustained competitive advantage ” cannot be basd on their static rsources, and therefore they fall beyond the bounds of the resource-based view” (Kraaijenbrink et. al, 2010).

Second, Kraaijenbrink et. al writes:

“Miller (2003) argues that the resources a firm needs to generate a sustained competitive advantage are precisely those resources that are hard to acquire in the first place. In one sense, Miller’s argument is that only firms that already possess VRIN resources can acquire and apply additional resources; otherwise competitors would acquire them with equal ease. Miller draws our attention to the implicit path dependency within the RVB in that every firm’s past shapes its present and future performance When not used to trace back to the ultimate root resources responsible for a firm’s SCA, though this does not render the RVB overly problematic. If the RVB’s scope includes the individual resources and capabilities of the entrepreneurs that constituted the firm – and we see no reason why it should not – it applies even to newly founded firms. “

Critique 4: sustained competitive advantage is not achievable. Currently, firms are in a dynamic environment where innovation and changing is needed to stay ahead of the competition. According to the resource-based view, a sustained competitive advantage can be reached if resources are meeting the VRIN criteria. However, in this constant changing environment, the competitive advantages will be temporary (and not long lasting as Barney (1991) argues).

Critique 5:

What are the limits of the resource based view?

The resource-based view offers a useful framework to gain sustained competitive advantage. However, there are limitations on the resource-based view.

Firstly, the resource-based theory is based on the incapacity to do an empirical study on measuring the performance. Because of the heterogeneity of firms, composing a homogeneous sample is hard or even impossible (Locket et. al, 2001).

Secondly, the resource-based view is focused on the internal organization of a firm and it does not consider the external factors like the demand side of the market. So even if a firm has the resources and the capabilities to gain a competitive advantage, it might be that there is no demand, because the model does not consider the “customer”.

Thirdly, the resource-based view has a limited ability to make reliable predictions (Priem & Butler, 2001). However, Tywoniak (2007) states that “the usefulness of RBV appears to be greater in terms of generating understanding and providing a structure for strategizing.” Barney (2001) states “resource-based logic can help managers more completely understand the kinds of resources that help generate sustained strategic advantages, help them use this understanding to evaluate the full range of resources their firm may possess, and then exploit those resources that have the potential to generate sustained strategic advantage”.