Revisiting the Resource-based View on the Determinants of Competitive

Advantage of a Firm

Vedastus Timothy

Institute of Rural Development Planning, PO Box 138, Dodoma, Tanzania

Tel. (255) 762 223 119 Email: vedastus.timothy@gmail.com

Abstract

This article provides a framework of integrating a firm’s strategic resources with other

traditional resources in explaining the sources of a firm’s competitive advantage. It

demonstrates that the most favourable condition for a firm’s optimal performance occurs

when tangibles and intangibles form a self-reinforcing system. Thus, the complementarity of

tangible assets to the intangible assets and capabilities held by the firm with respect to the

existing market opportunities will define the firm’s competitive advantage. This view is

different from the traditional resource-based view where intangibles are analysed in isolation.

Keywords: Resource-based view, Competitive advantage

1. Introduction

The source of performance differences among firms continues to be the focus of

attention of economic theory in the study of firms. Traditionally, strategic researchers
viewed firms as flexible entities able to adjust their strengths and weaknesses to
opportunities and threats in the market place (Porter, 1985, 1990). However, increased
competition in most markets implies that enduring advantages will increasingly
depend on firms’ ability to offer valuable products or services more efficiency than
others (Williamson, 1991). Moreover, increased volatile customer preference calls for
firms to identify, cultivate, and exploit core resources that make growth possible
(Prahalad and Hamel, 1990).

Various resources are utilised in the process of producing and or/offering value to
customer, including land, machinery, financial capital, skills, and so on. Accordingly,
the Resource-based view (RBV) views a firm as an aggregate of resources. According
to this view, different resources used by firms intrinsically bring different levels of
productive efficiency, enabling firms with superior resources to produce more
efficiently than others (Peteraf, 1993). In RBV literature, a resource refers to stock of
factors that are available and useful in conceiving and implementing strategies in
order to improve a firm’s performance (Amit & Schoemaker, 1993; Barney, 1991).
The primary role of management, therefore, is to maximise value through optimal
deployment of existing resources while developing firm’s resource base for the future
(Grant, 1996a; Wernerfelt, 1984).

A firm’s resources may be classified into assets and capabilities or skills. The criterion
for classifying resources into assets and capabilities is based on what the firm owns or
does. Assets are defined as anything tangible or intangible the firm owns and can use
in its process for producing and/or offering products to a market (Sanchez, 2002).
Capabilities refer to a firm's capacity to deploy its assets, tangible or intangible, to
perform some task or activity to improve performance (Amit & Schoemaker, 1993;
Grant, 1996a; Sirmon et al. 2008).

Based on the above criteria, tangible assets include assets such as financial capital,
machines, buildings, and so on (Itami, 1987); intangible assets include resources such
as intellectual property, contracts, reputation, organisational culture, organisational
networks, and so on (Clulow, et al. 2003; Hall, 1993); capabilities include innovation
capability, service delivery capability, market sensing capability, and so on (Cohen &
Levinthal, 1990; Day, 1994a, b; Deshpande et al, 1993; Dickson, 1992; Olavarrieta
and Friedmann, 1999; Teece et al., 1997; Williamson, 1991). Together, assets and
capabilities define the set of resource available to the firm.

The primary objective of this paper is to provide a framework of integration of a

firm’s resources in the process of value creation. First, the competitive value of
intangible resources is discussed, followed by an integrative competitive advantage
framework encompassing traditional tangible resources and intangible resources in
the process of value creation. The last section is the conclusion of the paper.

2. Competitive value of intangible resources

Traditionally, key resources were tangible assets. However, the relative ease by
which tangible assets can be acquired makes them readily imitated by competition.
More recently, intangible resources have been identified as key sources of superior
performance (Hall, 1993; Sirmon et al, 2008). It is argued that a sustainable
competitive advantage results from possession of resources that are valuable, rare,
difficult to imitate or substitute, and non-transferable (Barney, 1991; Crook &
Ketchen, 2008; Doving & Gooderham, 2009). A resource possessing these
characteristics is said to be appropriable, i.e. the owner of the resource is able to
receive a return equal to the value generated by the resource (Teece et al., 1986).
Resources holding these characteristics are usually intangible resources.

2.1 Intangible Assets

The stocks of a firm’s intangible assets are often defined by its current endowment of
intellectual property, contracts, reputation, culture, relations with suppliers, and so on
(Clulow et al., 2003; Hall, 1993; Teece et al., 1997). Several of these represent barrier
to competitors leading to reduction of competition and therefore enable realisation of
higher profits for the firms possessing them (Aaker, 1989; Koh et al., 2009).

For example, the right of appropriation of an intellectual property asset is granted by

law, providing the firm that owns the asset protection from competitor imitation (Marr
et al., 2004). Moreover, the resulting reduction of competition enables the firm that
owns the asset to extract higher profit margins from the products that utilise the asset
(Harrison & Sulivan, 2000).

In the same way, contracts limit competition by ‘locking-in’ buyers to contracts so

that other firms can no longer compete for those buyers. Contracts can give a firm the
right to receive goods or services on favourable rates, the right to supply goods at an
economically advantageous rate, the granting of exclusive or protective rights to a
firm, or the securing of future economic benefit stream (Reilly & Schweihs, 1999).

Established reputation can also be a formidable barrier to competition. A good

reputation would lead to higher profitability for the well reputed firm because it
enhances trust and confidence in the firm, leading individuals feel safe in purchasing
its products, purchasing its stock, applying for jobs within the firm, and son on
(Clulow et al., 2003; Hall, 1992; Walsh et al., 2008); leading to both higher income as
well as lower costs via reduction of both the capital costs and personnel costs through
reduced personnel fluctuation.

Organisational culture also has competitive value in the sense that it may act as barrier
to competition. A strong, positive organisational culture resulting in perception of
high quality standards and customer service, ability to manage change, ability to
innovate, teamwork, learning or participative management style can bring cost
advantages and customer loyalty to the firm (Walsh et al., 2008). Karakaya (2002)
shows that cost advantage and customer loyalty are among most important barriers to
competition.

Similarly, a network could create a barrier to competition by allowing members to the

network to access key resources within the network environment such as information,
capital, goods, services and so on that have the potential to maintain or enhance its
competitive advantage (Gulati et al., 2000; Nosella & Petroni, 2007) while refusing to
cooperate with a new entrants (Cowen & Sutter, 2005).

Intangible assets can be exploited in many ways such as increased sales revenue (e.g.
reputation that results into customer loyalty), revenue from sale of the asset (e.g. sale
of the intellectual property), and so on.

2.2 Capabilities
Capabilities denote the skills possessed by group members and the interaction within
that group which enable performance of activities that deliver value to the firm (Bhatt,
2000; Spanos & Prastocas, 2004). Grant (1991) defines them as the capacity of the
firm to deploy existing resources to perform some task or activity. Essentially,
capabilities are based on knowledge integration of many individual specialists, and
collective learning of human actors as knowledge subjects and doers within a firm
(Grant, 1996b; Prahalad & Hamel, 1990; Spanos & Prastocas, 2004). Capabilities are
also seen as productive bundles of routines that are operated by teams of individuals
for some strategic purpose (Foss, 1996). Capabilities may be developed in functional
areas or at corporate level Amit & Schoemaker, 1993).

Capabilities are required because assets, both tangible and intangible are inert; it is
only through relevant capabilities input assets are connected to each other to take
advantage of the synergies that may emerge by their working together in the process
of creating value added products or services Teece et al., 1997; Spanos & Prastocas,
2004). Capabilities are driving forces of the firm’s performance, they define a firm’s
efficiency and effectiveness — faster, more responsive, more flexible, higher quality,
and son on — that can be found the firm’s activities (April, 2002; Teece et al., 1997).

By their nature of being firm-specific, capabilities cannot be bought from the factor
market; they must be developed within the firm (Teece et al., 1997). The longevity of
competitive advantage of capability depends upon the inimitability of the capabilities
which underlies the advantage, which in turn depend on the breadth of the scope of
knowledge integrated into that capability (Grant, 1996b). The broader the scope of
knowledge integrated within a capability the more difficult imitation becomes.

In this increasingly turbulent environment, organisations need to develop the capacity

to constantly adapt to the changing business environment. Teece et al. (1997) coined
the term dynamic capability to represent the capacity to renew competences in order
to achieve congruence with the changing business environment. Prieto et al. (2009)
suggests the process of learning as a central element in the creation and renewal of
capabilities. Moreover, the increased pace of changes in the environment (competition,
technology, and so on) implies that the ability to integrate members’ knowledge to
promote ongoing adaptation of the organisation, i.e. learning, will be a key
determinant of a firm’s success and survival (Appelbaum & Gallagher, 2000).
Furthermore, given the existence of path dependence and asset stock efficiencies in
resource accumulation (Dierickx & Cool, 1989), learning lowers the cost of resource
accumulation.

Moreover, the increased volatility in customer preferences also implies that a firm’s
ability to offer superior value to customer will increasingly depend on the firm’s
ability to conceive new ways to conduct activities of the value-chain that deliver
superior customer value (Porter, 1985). The ability to conceive and implement new
ways of delivering superior value to customer, i.e. innovativeness, emanates from
integrative knowledge of customers, competitors, technologies, and so on (Deshpande
et al., 1993). Market-sensing capability is a prerequisite for successful innovation, it is
capability allows a firm to update customer needs and production technologies to
serve customer better (Day, 1994a, b). Innovations that improve the perceived quality
of product or service will enhance a firm’s competitive advantage through improved
customer satisfaction, loyalty and referrals (Duncan & Elliott, 2004; Heskett et al.,
2008).

3. Resource interdependencies

The resource-based view depicts a firm’s performance as a consequence of interaction

of various resources as illustrated in Figure 1. In order for any productive activities to
take place, a firm needs in addition to acquisition of relevant tangible assets (e.g. land,
machinery, financial capital, people, and so on) develop relevant capabilities, i.e.
ways of integrating individual employees’ skills to perform some task or activity.
Accordingly, a firm’s success depends on the quality of resources that interact in the
process of performing productive activities to deliver value to customer. In turn, a
firm loses competitiveness if competitors are able to match or surpass the resource
quality position a firm currently has.

3.1 Resource Bundles and Value Creation Process

A firm can easily acquire superior tangible assets such as people, machinery, and
financial capital from the factor market (Bhatt, 2000). However, within RBV, tangible
assets are inert; to create value, they need to interact with capabilities (Teece et al.,
1997). For example, the latest technology is worth a little without the right skills of
how to operate it (Marr, 2005). In the same way, capabilities or intangible assets
unless tradable, need to combine with tangible assets to generate value to a firm. For
example, the latest skills of how to operate technology is worth a little if employees
do not have access to the technology (Marr, 2005). Thus, the competitive value of
tangible assets can be assessed by how they complement existing intangible assets and
capabilities. Indeed, Teece et al. (1997) also notes this importance of resource
complementarity.

Thus, since intangible assets and capabilities are sticky (Dierickx & Cool, 1989), a
resource-based market entry decision process for an established firm needs to first
identify the unique intangible assets and capabilities that the firm currently has,
followed by an evaluation of alternative tangible assets available in the market in
terms of their efficiency and complementarity with existing intangible assets and
capabilities (Teece et al., 1997). In the same way, an owner-entrepreneur in a new firm
need to make decision on first what intangible assets and capabilities the firm needs to
develop, and then evaluate the alternative tangible assets available in the market that
can complement the intangible assets and capabilities for maximum value to the firm.
In the early period, the firm can be thought to utilise publicly available capabilities
through benchmarking. Indeed, benchmarking is argued to be a useful tool that can
help businesses build strong capabilities by making improvements necessary to reach
or even exceed best practices (Bhutta & Huq, 1999; Jarrar & Zairi, 2001).

3.2 Resource Bundles as a Self-reinforcing System

The current endowment of intangible assets is developed, enhanced, and maintained
through capability. For example, Hall (1992) suggests that reputational assets are built
as a result of previous managerial decisions and actions, which stem from a firm’s
management capabilities. Moreover, many authors (Bontis et al., 2007; Walsh et al.,
2008) have demonstrated that reputation is the outcome of customer satisfaction. In
turn, customer satisfaction is a result of product or service quality Anderson &
Sullivan, 1993), which stems from product or service delivery capability.

The quality of intangible assets also influences the strengths of organisational

capabilities. Spanos & Prastocas (2004) argue, for example, that organisational culture
has a direct influence on the development of new organisational capabilities, it may
tend to restrict the organisation to conform to established ways of doing things.
Moreover, reputation is often seen as a ‘bonding’ component which challenges a firm
to build or maintain capabilities required to attain a certain level of product or service
quality (Ippolito, 1990).

4. Conclusion and implication

The major contribution of this paper is the detailed description of the process of
resource integration that affords competitive advantage. It provides a framework of
integrating a firm’s strategic resources with other traditional resources in explaining
the sources of a firm’s competitive advantage. Moreover, this paper has demonstrated
that value creation within a firm is a function of both tangible and intangible resources,
and the most favourable condition for optimal performance occurs when tangibles and
intangibles form a self-reinforcing system.

In summary, the complementarity of tangible assets to the intangible assets and

capabilities held by the firm with respect to the existing market opportunities will
define the firm’s competitive advantage. In addition, the tacitness of capability and
irreplicability of intangible assets gives the firm that owns these resources a position
that is protected from imitation/competition.
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Capabilities Intangible
assets

Firm
+ success
Complementary

Figure 1. An integrative resource-based framework of firm success