The resource based theory has been an important step in strategic management, as it has provided a new point of view to explain firm’s success. According to the focus on resources, a firm’s success is due to joint resources and capabilities which an enterprise owns and which makes it different from its competitors.
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Resource based theory is approach applied in business management to choose the appropriate company’s resources. It argues that for a company to be successful in any competitive market it has to utilize all its available resources. This theory emphasizes the selecting company’s main resources.
These resources should be rare, valuable, non substitutable and inimitable. For company’s performance to grow, it is important to protect its crucial resource (Conner & Prahalad 1996, p. 485). Resource based theory is different from market focused approach in that, for it to fully benefit from growth opportunities it has to venture in new markets.
For a company to prosper, it has to frequently evaluate its weakness and strength. To enhance company‘s capabilities, it is essential to strategize on future market opportunities and improve firm’s processes and structure. Resources contribute to organizational success and competitive advantage.
Firm’s success is dependent on industry’s location attractiveness and competitive advantage over rivals. Industry attractiveness is the key basis for success.
Firms should look for environment that is favorable, and then locate attractive strategic groups and segments in the firms. Firms should moderate pressure from opponents by adjusting their firm structure and influencing competitors’ behavior (Grant 1991, p. 126).
Tangible and intangible resources and their contributions to sustainable competitive advantage
Firms have their resource based approach encroached in the organization economies literature, where theories of profit and competition focus on the firm’s internal resources as key determinant of success in a competition.
Central understanding of research based view of a firm is the definition of resources, competitive advantage, and sustained competitive advantages (Andrews1971). Anything considered of weakens or strength in a firm is a resource. Tangible resources are tied semi permanently to a firm.
It also includes all assets, capabilities, organizational processes, firm attributes, and information. Additionally, tangible resource entails knowledge controlled by a firm. This knowledge enables firm to come up with new strategies and implement them in order to boost firm’s effectiveness and efficiency (Amit & Schoemaker 1993, p. 38). There are various types of tangible resources.
They include; physical capital resources which consists of the firm plants and equipment, technology and geographic location. Tangible resources also include such things as experience, judgment, and intelligence of the individual manager and workers in a firm.
Firm’s capital resources entails planning, firm’s structure, controlling and coordinating systems, and the informal relation among groups within the firm and between the firms and other firms in its environment (Barney 1991, p. 104).
Both tangible and non tangible resources are the sources of competitive advantage. Competitive advantage is a situation in which a firm strategizes and comes up with an idea that is not being implemented by any other firm.
For competitive advantage to be realized, a firm has to have heterogeneity in resources, and resource immobility. Variance in resources among firms is referred to as firm resource heterogeneity. The prior assumption, make the difference between traditional strategic theory and resource based theory.
Contrarily, firm resources are considered homogenous in environmentally focused strategy approach. This applies to all firms in an industry. Firm resources immobility is a situation in which firms which are competing fail to secure resources from other resource market or firms.
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In the environmentally focused strategy model, resources are mobile. This means that firms can poses, buy or make resources which are owned by another firm. There a concept distinction between sustained advantage and competitive advantage.
Within the resource based theory, a sustained competitive advantage occurs due to incapability of other competing firms to have similar benefits of competitive advantage. In this case, there is sustaining of competitive advantage until all efforts by competitor to duplicate the advantage have ceased.
Therefore, four criteria are involved in providing a sustained competitive advantage: the resource must be unique and able to add positive value to the firm or rare between current and potential competitors, the resource must be imperfectly imitable, and the resource cannot be substituted with another resource by competing firm (Barney 1986, p. 1238).
In strategic management, the resource based approach suggests that organization theory and organization behavior may rich source of finding and theories concerning rare, non imitable and non substitutable resources in a firm.
The following are the qualities required for a resource to be a source of sustained competitive advantage: it must be rare, add value to the firm, it should inimitable and there must be no adequate substitutes for the resources.
Bearing in mind the concept of intangible resources and the enumeration issued it can be clearly deduced that human resources (skills, know-how, talent, and so on) are intangible resources, the importance of which has already been recognized.
However, until a few years ago, little attempt has been made to identify and give structure to the nature and role of intangible resources in strategic management. Intangible resources, as tangible ones, may create competitive advantages because they are the basis capabilities. Balance sheet does not show the actual value of intangible resources.
This document does not show the value of employees’ knowledge, know-how, talent, innovative capacity, and the like. Intangible resources may generate competitive advantages if they are strategic that is, if they comply with joint conditions (Penrose 1959).
Considering human resources’ own capabilities, skills, and potential which are crucial for a firm’s success, then these resources may be: scarce if these capacities are not suitable in the labor market; valuable because they make it possible to offer products or services highly valued by customers; difficult to imitate because a person’s job depends not only on his knowledge, but also on his satisfaction, motivation, intuition, and personality; non replaceable because it is very difficult to get the same results from different resources; or a part of the obtained rents are appropriated by the enterprise because its workers do not accurately know their value.
A problem now arises from the condition regarding acquisition. Intangible resources may be attracted to an enterprise which offers higher compensation, higher responsibility, career development programs, and the like. For this reason, some companies are adopting measures that make it more difficult for crucial workers to leave or measures that create a greater feeling of being a part of the firm.
Consider that intangible resources are able to be strategic resources. Intangible resources may generate functional and cultural capabilities due to experience, abilities, values, integration in the company, and so forth.
These capabilities are sources for a competitive advantage. So, the resource based theory suggests that intangible resources may create or sustain a competitive advantage through competency development (Witcher & Chau 2008, p. 72).
Nature and roles of intangible resources
Intangibles resources are strategic firm’s resources whose main objective is to facilitate a firm in making sustainable values which are not affordable to most of firms (rarity). They are sources of long-term benefits which cannot be possessed by other firms.
They cannot be imitated by competitors or substituted by other resources. They are immobile; this means that intangible resources cannot be replicated, traded or transferred by competitors. They are non financial, non physical, and cannot be represented in financial statement.
Additionally, they have a finite life. These make them intangible in nature. For intangible resources to be represented in financial statement, they need to be connected to firm’s services and products identifiable from other resources. Additionally, it should be a distinguishable outcome of precedent business (McGowan & Porter 2003, p. 82).
Prior to discussing the potential of intangible resources for constituting a sustained competitive advantage, it is important to clarify conception of intangible resources. Intangible resources are tools of human capital under the firm’s control in a direct employment relation.
Intangible resource practices, on the other hand, are the organizational activities oriented towards running a team of human capital and making sure that the capital is employed towards the fulfillment of organization goal. Application of resource based theory focuses directly on skills of human being in organization. It also seeks to genotypically classify organization based on competencies.
In this model, these competencies are found in the knowledge, skills, and abilities of organizational members. Mutually these approaches identify the significance of the individual member of organization as the important resource, rather than the practices or procedures used by firm (Aryee1994, p. 74).
Intangible resources and sustainability resource based approach points to intangible resources as the key controller of performance sustainability variance a cross firms. Intangible resources refer indistinctly to all concepts excluding resources that are evidently tangible for instance financial or physical assets.
Intangible resources are typically hard to codify and tacit. Mostly, they trade in imperfect factor markets and exhibit complementarities. This has made it very difficult for firms to develop, acquire, replicate and accumulate intangible resources.
Additionally, this has made it difficult for them to be understood or copied by other firms. This makes them valuable and prone to be the basis of a sustainable competitive advantage for a firm.
Resource based approach prediction about the role of intangibles resources in sustaining superior firm performance can be made formal by assuming that the higher the intangible resources a firm possess, the larger the sustainability of its competitive advantage.
However, stating the prediction in such a way does not lead to a very power fullest of the underlying theory. For instance, assumption like that could be right due to size effects linked to industry with the prior argument making intangibles resources so crucial under resource based approach.
Therefore, in formation regarding significance of intangible resource in the aggregate may not capture the gist of resource based approach (Peteraf 1993, p.186).
Rather, resource based approach arguments seem to suggest assessment on significance of intangibles resources relative to tangibles resources and the degree of intangibility of a firm’s resources.
For instance, from a resource based perspective, the tact of the firm’s knowledge base, the complexity of a firm’s activities and the complementarities among them, or the firm’s dependence on imperfect factor markets, and a recall characteristics that can be expected to translate into a greater degree of intangibility of the firm’s resource endowment.
The challenge in imitating, substituting or trading intangible resources endowment arises from such characteristics and is in turn responsible for the greater sustainability expected under resource based approach.
There are specific vehicle through which the characteristics of intangible resources reflects into sustainability of firm’s competitive advantages.
Because of because of lower tradability and higher stickiness of tangible resources they are subjected to commitment source, which are defined as the tendency of strategies to persist overtime. Commitment in turn is the general explanation for organizations sustained differences in performance (Conner & Prahalad1996, p. 479).
If intangibles resources help sustain performance differences across firms by enhancing the sustainability of competitive advantage, then competitive advantages must either stay constant or also persist in time. Radical innovation destroys the usefulness of firms existing capabilities or architectural knowledge.
Core rigidities are the innovation inhibiting downside of core capabilities. Resources management is developing and implementing new practices which motivate employees, increase their abilities, develop new capabilities, and increase their liabilities
Meaning and the nature of dynamic capabilities and how they contribute to sustainable competitive advantage
Dynamic capabilities are defined as the ability of a firm to reconfigure, build, and integrate external and internal competences to deal with dynamic environments. It refers to firm’s capacity to attain innovative and new types of competitive advantage provided that market position and path dependencies are availed.
Capabilities, includes assets, skills and gathered knowledge put in practice via organizational processes that facilitate firms to synchronize activities and make use of their resources (Coyne1986, p. 58). Empirical indicators for sustainable competitive advantage are that, it must be imitable, rare and valuable.
A capability is considered valuable or effectiveness. Resource based approach expresses value in terms of economic rents, which can be defined as returns to a factor in excess of its opportunity costs which presents two types of economic rents.
In order to be a source for competitive advantage, the capability must also be rare that is not possessed by many other competitors. The same reasoning is also valid for bundles of resources if they are all needed in order to implement a strategy.
Exactly how rare the capability or resources must be in order to form the basis for a competitive advantage is difficult to say. In general, a capability should be considered rare as long as the number of owners of the capability is lower than the number needed for perfect competitive dynamics in an industry (Barton1992, p.120).
Having a valuable and rare capability provides a company with dynamic competitors. However, in order to avoid replication by competitors, the capability at hand must also be imperfectly imitable that is too difficult or too costly for other companies to obtain.
To sustain such imitable position, resource based approach acknowledges the importance for the existence of capabilities. Thus, a particular history can explain the possession of a certain capability as well as the difficulties for other companies with another history to acquire it.
Except for history dependency, imitation may be difficult because the link between particular capabilities sustainable competitive advantage is unclear that is causally ambiguous (Stalk& Shulman1992, p.58).
An additional reason for being imperfectly imitable is when the capability is a complex social phenomenon, in which personal relationships, reputation between customers or a specific company culture plays an important role.
A part from having a valuable, rare and imperfectly imitable capability, it is also necessary to have proper organizational processes that can successfully exploit it. Understanding mechanisms through which competitive advantage can be persistent for long period.
This requires strategy design in to maximally exploit effects of firm’s unique characteristics (Eisenhardt & Martin 2000, p. 1114).
These processes are often named complementary processes and include features such as formal reporting structure, explicit management control systems, and compensation policies. In recent years, as markets and industry settings have been changing faster, the question of how to create, expand and modify operational capabilities has become increasingly important.
Dynamic capabilities may perhaps be best approached on a somewhat metaphorical level as the many, and often relatively open-ended definitions indicate advantage and do not replace the operational capabilities. Expressed differently, dynamic capabilities contribute to the sustainability of the competitive advantage, but on their own they cannot be a source for competitive advantage.
Dynamic capabilities are organizational processes. For example, things are done in the firm, or what might be referred to as its routines, or patterns of current play three roles: integration and coordination of activities both internal and external to the company, facilitation of learning on an individual as well as on an organizational level, and reconfiguration its resources or capabilities.
Dynamic capabilities are concerned with the integration of resources (Teece & Shuen1997, p. 517). For instance, strategic decision making can be regarded as a dynamic capability when managers pool different types of expertise into a strategy for the firm.
Dynamic capabilities can also be about reconfiguration of resources within firms. Also, replication can be such a dynamic capability. Another type of dynamic capability is based on knowledge creation routines. For example, how managers and others build new thinking and knowledge into the company (Yip 2004, p. 20).
During strategizing firms mainly consider capabilities and resources available. These two identities are the key aspect in which firms base their work frame. Additionally they determine firm profits and efficiency.
The main focus of resource based theory to strategy formulation is undertaking the relationships between resources, capabilities, competitive advantage, and profitability. In particular, an understanding of mechanisms through which competitive advantage can be persistent for long period.
Ever since the industrial revolution, the human resource function has suffered important changes which can be summarized by the existence of two tendencies. The hard tendency, whose key idea is the minimization of a firm’s costs, included labor costs.
The soft tendency, which considers resources as a key element to be optimized, in consequence, gives importance to the employee’s motivation and satisfaction. Tangible and intangible resources are the sources of competitive advantage. Competitive advantage is a situation in which a firm strategizes and comes up with an idea that is not being implemented by any other firm.
For competitive advantage to be realized, a firm has to have heterogeneity in resources, and resource immobility. Variance in resources among firms is referred to as firm resource heterogeneity.
The resource based theory has made it possible to mark the significance of resources for a firm since it facilitates in making competitive advantages. Consequently, resources management is developing and implementing new practices which motivate employees, increase their abilities, develop new capabilities, and increase their liabilities.
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