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Resource-Based View of a Firm

Paper Outline

Conceptual Background
Characteristics of Resources

Resource creation / accumulation

Resource recombination
Microsoft Overall analysis
Analysis on a VRIO perspective

Discussion
Conclusion

Abstract
Resource-based view is a widely used view in achieving a firm’s competitive advantage. Various scholars have contributed to the development of this theory since Penrose (1959) invented it. The difference in firm’s competitive advantage is derived from the resources each of them control and their ability to use those resources to achieve competitive advantage. Characteristics of resources or capabilities that make them competencies used to build competitive advantage include; Imitability, non-substitutable, rarity and valuable. Microsoft is one such firm that has critical resources, which it has used to develop competitive advantage over its rivals. The company has tangible resources such as financial capability and technology. In addition, it has intangible resources such as innovation capability and organization which it uses to attain an edge over its rivals. The firm’s resources meet the requirement of core competencies as determined by the VRIO analysis. Lastly, the firm has developed measures that ensure that its competitive advantage is sustainable such as continued research.
 
Resource-Based View of a Firm
Conceptual Background
Penrose (1959) pioneered the resource-based view. However, Chamberlain (1939) was the first to explain explicitly the concept of unique resources and capabilities. He explained that exploiting unique skills is the best strategy of achieving competitive advantage. Wernerfelt (1984) did the first publication of Resource based theory, whereby he explained it as a compliment of the market based theory. He observed that competition for resources among firms would affect their ability to implement product market strategies. Rumelt, Schendel and Teece (1984) also made significant contribution to this theory whereby they defined firms as bundles of productive resources. They therefore suggested that the economic value of these resources would be different depending on context within which they are used. They further explained that the imitablity of these resources would depend on the extent to which they are protected by isolated mechanisms.
Mahoney and Pandian (1992) asserted that the main idea behind the Resource based view is that internal resources act as the source of a firm’s strengths and weaknesses. Therefore, for a company to have strength over its competitors it has to have resources that are different and superior to other firms. Therefore, a firm’s unique resource endowment will influence its strategic choice or its conduct, which will in turn determine its economic success or performance (Collis & Montgomery, 1995).
Characteristics of Resources
There is no generally accepted typology of the resources. However, the resources of a firm can be divided in to two broad categories – tangible and intangible resources. Tangible resources describe the physical and financial resources which include production facilities, Information technology hardware and equity base. On the other hand, intangible resources are further divided in two parts – personal and impersonal resources. Personal resources refer to skills and capabilities, Impersonal resources refer to intangible assets such as patents and rights as well as organizational processes and routines (Von Pock, 2007). The main characteristics of the resources are based on two assumptions: firms in the same industry are different with respect to the resources they control. These resources controlled by these firms may not be perfectly mobile (Barney, 1991).
Barney (1991) identifies key parameters that can be used to determine the resources of a firm that leads to competitive advantage. First, the resources must be valuable, which refers to the ability to facilitate the exploitation of opportunities as well as reduce the threats that are in its competitive environment. Secondly, the resources must be rare which means that they should not be easily available to current or potential competitors. Thirdly, imperfectly imitable, this means that they cannot be copied or obtained by competitors. Lastly, they should be non-substitutable. This means that there are no other equivalent resources which can be used to develop the same strategies. All characteristics affirm the first assumption of heterogeneity. The second assumption of imperfect mobility is affirmed by the fact that some resources cannot be obtained from the factor markets. These include strategic resources such as reputation, staff motivation and organizational knowledge. Therefore, the RBV theory is all about exploiting differences in the resources that firms control (Kirsch, 2007).
Resource creation / accumulation
            Firms can have unique resources through two ways – accumulation and acquisition. Therefore, firms become heterogeneous, because throughout their history they accumulated different assets and acquired different intangible assets of dynamic routines and tacit learning (Peteraf, 1993).Accumulation is a relatively clear process, because it entails development of internal resources to achieve competency. However, acquisition is a bit problematic. The benefit of acquiring the resources might be equal to or more than the cost of acquisition. In addition, there are limits to acquisition of resources in the factor markets. Some resources cannot be transferred as physical assets. For instance employee motivation cannot be acquired, it has to be developed (Enders, 2004).
However, firms are still different in the amount and type resources they control because not all resources can be developed or acquired. In addition, capabilities can last for long periods because creating a particular capability might be costly for that firm that lacks it. Barney and Clark (2007) explain that provided the cost of obtaining a particular capability is higher than the benefit thereof, the company may not seek to achieve it. This therefore, affirms the assumption of immobility. Shi (2007) suggests some of the reasons why acquiring a capability could be costly; first, the ability to create a capability may be dependent on unique historical conditions that are inexistent. This means that the firm will only have the capability to acquire that resource/capability in a cost-effective way if it was in existence in the right place at the right time in history. Secondly, the acquisition must be path-dependent. The ability to create that capability may require the firm to go through a long and difficult learning process or path. These resources cannot be built overnight, and hence, creating that capability now will only be cost-effective to firms that went through the required path in the past (Lei, Hitt & Bettis, 1996).
Resource recombination
A firm will have to identify its critical resources or acquire them after which it will transform them in to core competencies of the company. These core competencies are then used to build competitive advantage (Dierrickx & Cool, 1989). Enders (2004) argues that capability is formed by institutionalization of resource combination. Therefore, developing core competencies will depend on the management’s ability to combine its skills and knowledge base as well as its values, norms, technical systems and managerial systems to develop a competitive advantage. As a result, organizational competencies find their roots in organizational processes if the firm has the ability to create and acquire knowledge and efficiently and effectively transfer that knowledge to achieve competitive advantage (Collis, 1991).
Firm Analysis
Microsoft Overall analysis
Every management would like to see its firm attain a competitive advantage. Microsoft has been able to achieve competitive advantage over its competitors through the VRIO approach. The firm has resources that are immobile whose creation are path-dependent and have complex conditions, which has enabled it to develop and sustain its competitive advantage over its rivals. Some of these capabilities have been developed over along period, which makes it costly for its rivals to acquire. For instance, the company has an operating system called windows a software that runs the computer hardware. The company started working on the windows software in 1982; this has enabled it to gain vast experience and expertise that competitors cannot acquire overnight (Shi, 2007).
The company has human resources as well as human resource practices that have enabled it to have creative employees who are able to come up with innovative ideas on how to better their products. The company achieves this through job satisfaction whereby it seeks to present Microsoft as the best company to work for. It provides its staff with attractive salary packages as well as financial incentives for creativity. As a result, the company has been able to check on its competitors who are working hard to outdo the firm. The company has also made strategic acquisition as a way of accessing critical resources that it cannot develop within cost-effectively. For instance, it recently acquired Skype as a way of venturing in to the video and more interactive technologies. Microsoft acquired Skye at a value of $8 billion; most analysts see it as overvalued (Microsoft, n.d). However, this shows Microsoft’s financial resource might.
The company has also entered in to strategic alliances in order to have core competencies that will enable it to stay ahead of its competitors. For instance, the company has partnered with mobile phone giant, Nokia to develop windows phone which is projected to become the second in market leadership by 2015. This type of relationship cannot be copied. This shows Microsoft’s ability to configure the market as well as develop and implement appropriate strategies. Lastly, the company has windows and office products, which are leading in their product categories. It has achieved this through its core competency of research and development. For instance, windows has undergone a series of innovations for the past 25 years, which has enabled it to maintain market leadership (Barney & Clark, 2007).
Analysis on a VRIO perspective
VRIO is an acronym that stands for the following elements of capability, Value, Rarity, Imitability and Organization. Value seeks to find out if the resource of the firm is able to exploit an opportunity or can be use the resource to neutralize a threat in the firm’s competitive environment. Rarity seeks to explain whether relatively few firms possess the resource or capability. Imitability determines whether the resource or capability is difficult to copy and whether any firm that tries to copy, obtain or develop the capability or resource will find it disadvantageous in terms of cost. Organization checks whether the firm is organized, ready and able to exploit the capability or resource (Von Pock, 2007).
Microsoft has financial resource capability as shown by its ability to make large and costly acquisitions. However, this financial might is not enough if it cannot be coordinated to the advantage of the firm. Therefore, organization in VRIO is important in determining how the finances are spent to ensure that the company obtains a competitive advantage. Although most of its competitors cannot afford such large amounts of money, this will only be helpful if the acquisition made with it is strategic and enables the company to secure a competitive advantage. Therefore, the value of the resource is shown by its ability to acquire resources that the firm lacks such as technologies. It is rare because few firms can afford such amount of money and it is organizationally used to acquire a strategic venture (Kolakowski, n.d).
Innovation is another resource or capability that continues to give Microsoft an edge over its rivals, because it builds its reputation. This resource has been patented, which makes it a rare resource at least in the company’s product categories. The company’s dominance in the windows and office products shows Imitability of the resource, because competitors are unable to match the company’s innovation capability. This resource has value, because the company has been able to exploit the software demand market through its innovative capability. The company protects its human resource by providing for incentives for creativity and attractive remuneration packages, which enables it to protect its human resource from competitors (Microsoft, n.d).
Discussion
Resources at Microsoft’s disposal
The firm has tangible resources, such as the financial resources and intangible resources such as the employees’ innovative ability. Both of these have enabled the company to have a great reputation over its rivals. In addition, the company is able to coordinate and protect these resources through its organizational resource (Enders, 2004).
Level and characteristics of these resources
The tangible resources such as financial are so important to the company. Furthermore, its intangible resources and organizational resources are core and priority, because they determine the company’s performance. They are therefore, protected from competitors. As observed above these resources are valuable, imitable, and rare and cannot be substituted (Grant, 1991).
Creation of capabilities
The resources owned by Microsoft have the characteristics that enable them to create a sustainable competitive advantage. For instance, their innovative capability, which is an intangible resource, cannot be imitated, yet it has helped them to maintain market leadership for not less than two decades (Grant, 1991).
Sustainability Success
Microsoft’s success can last for a relatively long period before its competitors catch up with its competencies. Their continued improvement is an indication of continued dominance in the two product categories that they are leading in. Furthermore, its strategic alliances and acquisition will enable it to move to higher heights in the future (Coyne, 1986).
Conclusion
            Resource based view is a widely held theory that managers can use to manage a company to success against its rivals. Microsoft has demonstrated that it has some core competencies, which it has built to attain a competitive advantage over its rivals. The firm has the ability to identify and organize its critical resources in way that ensures that it maintains a higher performance compared to its rivals. These resources have the characteristics that make them competencies such as imitablity, rarity, value and non-substitutable. In addition, the firm has put up measures, which ensure that these advantages are sustainable. This will ensure that its performance continues to increase and that it maintains its advantage.
 
 


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