What can the resource-based view of the firm teach managers?

A lot of academic writing in management has dealt with the resource-based view of the firm and dynamic capabilities. This short note argues that these two ideas are not very useful to understand strategic management. Instead I argue that the value chain and core competencies are much more useful ideas for managers.

In the late 1980s, management scholars correctly noted that a lot of strategic management research was about positioning in the market place. Relatively little was written about what went on inside the company. Porter noted this weakness in his 1980 book so he published another book in 1985 presenting the value chain as a tool to understand the internal underpinnings of strategic positioning. Unfortunately, he only published a managerial book and did no academic research on the topic. The mainstream academic response in the 1990s was the resource-based view of the firm and later the dynamic capabilities view of the firm. 

The original resource-based view envisioned the company as a bundle of resources. A lot of effort went into describing what kind of resources would create competitive advantage. One of the most cited papers identified four characteristics of valuable resources (Peteraf, 1993):

1. Heterogeneity. Some resources are better because with them a company can produce products cheaper or better
2. Ex-post limits to competition. After achieving the first condition, this second condition is required for the resources to remain valuable. In other words it should be difficult to imitate or substitute the resource.
3. Imperfect mobility. The resource should be stuck inside the firm and should not be easily traded.
4. Ex-ante limits to competition. The company must have bought the resource initially at a low price. Once everyone knows the particular value of a research, its current owners will only sell it at a high price.

The key problem with this literature was that it is trivial to describe a company in terms of resources. A company is technically a bundle of resources, but, practically speaking, this is not a useful metaphor. Companies normally acquire fairly generic resources (e.g. machinery, computers, software, skilled employees) and build more or less unique capabilities. In other words, ex-ante limits to competition (condition 4 above) are not required to build a competitive advantage. Instead managers in each company use generic resources and turn them into more or less valuable capabilities over long periods of time. If successful, the company gains a competitive advantage. Realising the mistake, slowly, the academic research moved toward dynamic capabilities. Unfortunately these dynamic capabilities were described in general terms (e.g. acquisition capability, alliance capability, coordination capability, learning capability). This was a more useful metaphor of a company, but the description was too general. Furthermore, nobody tried to identify a list of characteristics that identified valuable dynamic capabilities. The unsatisfactory achievements of this stream of research are clearly mirrored in all textbooks on strategic management. 

From a more practical viewpoint, I think there are two models that are really useful to better understand the internal operations of the company from a strategic perspective:

• The value chain and the realisation that a company is built from a large number of interconnected activities. By analysing the linkages between a company's activities it is possible to understand the important aspects of a company's strategy. A company should use linkage in the value chain to craft a solid business-unit strategy strategy (Porter, 1985).
• The core competence is a bundles of activities that are fairly unique to one company. These competencies take time to build and involve learning across several organisational units. Not all companies have unique core competencies. If they possess core competencies, a company should use them to diversify into new industries. (Hamel & Prahalad, 1994). 

Unfortunately, these two ideas were only introduced in books, which were targeted towards managers. The consequence of writing managerial books is that academic researchers do not read the books. It should however be noted that these books were published well in advance of most (but not all) of the academic literature. Maybe some academic read the books in secret!

In a later note, I will describe how these two ideas are related to the relatively new idea of business model.