UNIVERSITY OF NAIROBI

SCHOOL OF BUSINESS
MASTER OF BUSINESS ADMINISTRATION (MBA)

DIS 605 MANAGEMENT INFORMATIONS SYSTEMS SEMINAR

MACRH - JUNE 2017 Semester

TERM PAPER/PRESENTATION: RESOURCE BASED THEORY

LECTURER: Dr.J.T Kariuki

NAME: VICTOR KINGORO LUMBUKU

REGISTRATION NUMBER: D61/84186/2015

 Resource Based Theory
The resource-based view (RBV) is a model that sees resources as key to superior firm
performance. If a resource exhibits VRIO attributes, the resource enables the firm to gain and
sustain competitive advantage

RBV is an approach to achieving competitive advantage that emerged in 1980s and 1990s,
after the major works published by Wernerfelt, B. (The Resource-Based View of the Firm),
Prahalad and Hamel (The Core Competence of The Corporation), Barney, J. (Firm
resources and sustained competitive advantage) and others. The supporters of this view
argue that organizations should look inside the company to find the sources of competitive
advantage instead of looking at competitive environment for it.

The following model explains RBV and emphasizes the key points of it.

According to RBV proponents, it is much more feasible to exploit external opportunities

using existing resources in a new way rather than trying to acquire new skills for each
different opportunity. In RBV model, resources are given the major role in helping companies
to achieve higher organizational performance. There are two types of resources: tangible and
intangible.

Tangible assets are physical things. Land, buildings, machinery, equipment and capital all
these assets are tangible. Physical resources can easily be bought in the market so they confer
little advantage to the companies in the long run because rivals can soon acquire the identical
assets.

Intangible assets are everything else that has no physical presence but can still be owned by
the company. Brand reputation, trademarks, intellectual property are all intangible assets.
Unlike physical resources, brand reputation is built over a long time and is something that
other companies cannot buy from the market. Intangible resources usually stay within a
company and are the main source of sustainable competitive advantage.

The two critical assumptions of RBV are that resources must also be heterogeneous and
immobile.

Heterogeneous. The first assumption is that skills, capabilities and other resources that
organizations possess differ from one company to another. If organizations would have the
same amount and mix of resources, they could not employ different strategies to outcompete
each other. What one company would do, the other could simply follow and no competitive
advantage could be achieved. This is the scenario of perfect competition, yet real world
markets are far from perfectly competitive and some companies, which are exposed to the
same external and competitive forces (same external conditions), are able to implement
different strategies and outperform each other. Therefore, RBV assumes that companies
achieve competitive advantage by using their different bundles of resources.

The competition between Apple Inc. and Samsung Electronics is a good example of how two
companies that operate in the same industry and thus, are exposed to the same external
forces, can achieve different organizational performance due to the difference in resources.
Apple competes with Samsung in tablets and smartphones markets, where Apple sells its
products at much higher prices and, as a result, reaps higher profit margins. Why Samsung
does not follow the same strategy? Simply because Samsung does not have the same brand
reputation or is capable to design user-friendly products like Apple does. (heterogeneous
resources)

Immobile. The second assumption of RBV is that resources are not mobile and do not move
from company to company, at least in short-run. Due to this immobility, companies cannot
replicate rivals resources and implement the same strategies. Intangible resources, such as
brand equity, processes, knowledge or intellectual property are usually immobile.

VRIO framework

Although, having heterogeneous and immobile resources is critical in achieving competitive

advantage, it is not enough alone if the firm wants to sustain it. Barney (1991) has identified
VRIN framework that examines if resources are valuable, rare, costly to imitate and non-
substitutable. The resources and capabilities that answer yes to all the questions are the
sustained competitive advantages. The framework was later improved from VRIN to VRIO
by adding the following question: Is a company organized to exploit these resources?

VRIO framework adopted from Rothaermels (2013) Strategic Management, p.91

Question of Value. Resources are valuable if they help organizations to increase the value
offered to the customers. This is done by increasing differentiation or/and decreasing the
costs of the production. The resources that cannot meet this condition, lead to competitive
disadvantage.

Question of Rarity. Resources that can only be acquired by one or few companies are
considered rare. When more than few companies have the same resource or capability, it
results in competitive parity.

Question of Imitability. A company that has valuable and rare resource can achieve at least
temporary competitive advantage. However, the resource must also be costly to imitate or to
substitute for a rival, if a company wants to achieve sustained competitive advantage.
Question of Organization. The resources itself do not confer any advantage for a company
if its not organized to capture the value from them. Only the firm that is capable to exploit
the valuable, rare and imitable resources can achieve sustained competitive advantage.

Difference between resource-based and industrial organization views

RBV holds that sustained competitive advantage can be achieved more easily by exploiting
internal rather than external factors as compared to industrial organization (I/O) view. While
this is correct to some degree, there isnt definite answer to which approach to strategic
management is more important. The chart [1] below shows how industry, firm and other
effects explain firms performance. From ~30% to ~45% of superior organizational
performance can be explained by firm effects (resource based view) and ~20% by industry
effects (I/O view). This indicates that the best approach is to look into both external and
internal factors and combine both views to achieve and sustain competitive advantage.

Criticisms

Criticisms of the RBV are:

There is insufficient focus on depreciating resource value, i.e. the negative effect of
external change on the resource/asset base of the SBU.

As described earlier, perhaps the entire focus of the RBV on achievement of

sustainable competitive advantage should be re-considered. Competitive survival is more
important.

It is perhaps difficult (if not impossible) to find a resource which satisfies all of the
Barney's VRIN criteria.
 There is the assumption that a firm can be profitable in a highly competitive market as
long as it can exploit advantageous resources, but this may not necessarily be the case. It
ignores external factors concerning the industry as a whole; a firm should also
consider Porter's industry structure analysis (Porter's five forces).

Long-term implications that flow from its premises: A prominent source of

sustainable competitive advantages is causal ambiguity (Lippman & Rumelt, 1982,
p420). While this is undeniably true, this leaves an awkward possibility: the firm is not
able to manage a resource it does not know exists, even if a changing environment
requires this (Lippman & Rumelt, 1982, p420). Through such an external change, the
initial sustainable competitive advantage could be nullified or even transformed into a
weakness (Priem and Butler, 2001a, p33; Peteraf, 1993, p187; Rumelt, 1984, p566).

Premise of efficient markets: Much research hinges on the premise that markets in
general or factor markets are efficient, and that firms are capable of precisely pricing in
the exact future value of any value-creating strategy that could flow from the resource
(Barney, 1986a, p1232). Dierickx and Cool argue that purchasable assets cannot be
sources of sustained competitive advantage, just because they can be purchased. Either
the price of the resource will increase to the point that it equals the future above-average
return, or other competitors will purchase the resource as well and use it in a value-
increasing strategy that diminishes rents to zero (Peteraf, 1993, p185; Conner, 1991,
p137).

The concept of rarity is obsolete: Although prominently present in Wernerfelt's

original articulation of the resource-based view (1984) and Barneys subsequent
framework (1991),[2] the concept that resources need to be rare to be able to function as a
possible source of a sustained competitive advantage is unnecessary (Hoopes, Madsen
and Walker, 2003, p890). Because of the implications of the other concepts (e.g. valuable,
inimitable and nonsubstitutability) any resource that follows from the previous
characteristics is inherently rare.

Sustainable: The lack of an exact definition of sustainability makes its premise

difficult to test empirically. Barneys statement[2]:102103 that the competitive advantage is
sustained if current and future rivals have ceased their imitative efforts is versatile from
the point of view of developing a theoretical framework, but is a disadvantage from a
more practical point of view, as there is no explicit end-goal..

Application in MIS

When RBV is applied to analyze the value of IT, information systems are usually considered to be a
type of resources. Barney (Barney 1991) argues that organizational resource that can create advantage
must have the following attributes:

Valuable: the resource can enable a firm to conceive or implement strategies that improve its
efficiency or effectiveness;
 Rare: the resources should not be possessed by a large number of competing firms;

Imperfectly Imitable: the resources should not be easily imitated due to unique historical
conditions, causally ambiguous, or social complex;

Non-Substitutable: The resource should not be easily replaced by other substitutes.

IS/IT resources that can offer a sustainable competitive advantage to a firm are:

1. IT investment, IS adoption, and IT infrastructure as resources

2. Intangible resources such as management skill, staff training, and knowledge

management.

3. Teamwork

4. Alignment of IT processes, governance and operations to the business/firm strategy

and goals

References

1. Rothaermel, F. T. (2012). Strat.Mgmt.: Concepts and Cases. McGraw-Hill/Irwin, p. 5

2. Barney, J. B. (1991). Firm Resources and Sustained Competitive Advantage. Journal

of Management, Vol. 17, pp.99120.