Economics Essays: Resource Based View (RBV) of the Firm

This essay will be critically assessing the resource based view of the firm and its possible relevance for corporate success in banking. It should also be highlighted that evidence from the banking sector in the UK and US will be used to illustrate the points covered. At this point, it is worth providing a brief explanation of the structure for this essay. Succeeding this introductory section will be a brief overview of the resource based view of the firm. Thereafter, the main body of the essay will commence where the main tasks as highlighted above will be completed. Following this section will be the conclusions section where all the key points covered during the course of the essay will be covered.
The RBV can simply be described as an economic instrument that is principally used for highlighting the key resources which are at a given organisation’s disposal. The primary foundation of the RBV postulates that the competitive advantage can be attributed to any given firm will be directly influenced by the firm’s utilisation of the array of resources which the firm owns (Barney, 2005). The RBV also suggests that before a firm can enjoy sustained competitive advantage in the long run, it is necessary for them to have at their disposal a wide range of resources which all have varying characteristics. It is also important that these resources owned by the firm are not perfectly transferable or mobile. As such, in order for any given firm to convert their short run competitive advantage into sustainable competitive advantage, the wide range of resources which they have must be difficult to reproduce, copy or substitute. At this junction, it is also worth mentioning that the VRIO framework is an integral aspect of the RBV (Barney, 2005, p 87).

There is no doubt that the RBV provides a rational explanation for how firms can turn their short run competitive advantage in to sustained competitive advantage. The principle can particularly be applied to industries which have innovation and technological prowess at its core. For example, the mobile phone and automobile industries can be used to buttress this point. As such, it can be said that the principle is not only theoretically sound in terms of explaining how the main features of a company’s core resources determine its overall profitability, but also it has a substantial amount of empirical merit (Barney, 2001, p 233). However, it has been argued by some experts on the subject that inimitable or ‘sticky’ resources are not the only factors which will determine whether a firm will be able to convert its competitive advantage in to sustained competitive advantage. In other words, there are other factors distinct from heterogeneous resources that provide firms with sustainable competitive advantage. Furthermore, it has also been put forward by some opponents of the principle that the RBV is rather vague and not precise enough in the assertions or explanations which it makes. In addition to this, the theory is also regarded as having limited comprehensibility in terms of its contributions to the area of the interrelationship between the resources of firms and their profitability. The reason for this is because it is a rather rudimentary principle since what it mostly does is define rather than hypothesise (Hoopes, 2003, p 678).
There are still further difficulties that are associated with the RBV and these include the fact that the theory seems to verify itself and as a result, the RBV does not have a substantial amount of operational validity. One of the reasons why this can be asserted is because of one dimensionality of the core principle of the theory which states that the fact that competitive advantage as a value adding strategy is determined by the resources at the firm’s disposal which have varying innate characteristics. Another critique that has been levied against the RBV is that because one firm is able to generate competitive advantage via a specific combination of resources does not mean other firms will not be able to yield the exact same competitive advantage using a different combination of resources. Under these circumstances, it is clear that competitive advantage will be non-existent (Sanchez, 2004).
Furthermore, the market structure and characteristics which is used by the RBV to explain how competitive advantage develops can be said to be rather simple in nature. In real world scenarios, markets tend to be highly developed and complex and it is quite likely that a simplistic view of competitive advantage would not hold in such scenarios. In addition to this, real world markets have a whole range of external factors that affect them and as such, the ability of firms to make the most of certain resources at their disposal in order to gain competitive advantage may not be a given. Proponents of the RBV also suggest that ambiguous positive effects of resources which are at the disposal of firms are key sources of competitive advantage. However, at the same time, if firms are not aware of what resources are providing them with the competitive advantage or how, then they would not be able to effectively manage the resources in order to yield sustained competitive advantage (Peteraf, 1993, p 122).

Other critiques of the theory include the fact that resources which can be purchased can provide a firm with sustained competitive advantage. The reason why this assertion can be made is because markets tend to be efficient in nature as postulated under efficient market models. Under such circumstances, the price of the purchases resource will eventually reflect the ’supernormal’ profits or benefit which can be yielded from the resource (Hoopes, 2003, p 677) .

It can be said that the RBV may not be readily applicable to the banking sector in the UK since this industry is not one that is based on innovation and technological ingenuity. In the banking sector here, the main source of competitive advantage tends to be the ability of firms to tailor their services to meet the precise needs and requirements of their customers. It is not conceivable that firms will be able to gain competitive advantage solely on resources alone and much less so when it comes to competitive advantage sustenance. There are also a range of external factors which determine the competitive advantage of firms in the banking sector. These include consumer confidence, interest rates, brand image, availability of information and the like.

All these factors will influence that ability of banks to obtain competitive advantage. Furthermore, the banks which could be considered to have a sustained competitive advantage over the rest have been able to accomplish this by having long track record within the industry over a number of years and have been able to build customer loyalty as a result. This fact also enables them to attract more customers than less established banks. Even in this instance, the application of the RBV is still shaky since there are a number of banks which have this same competitive advantage. For example, the ’big four’ banks in the UK; Barclays, HSBC, Nat West and Lloyds can be said to have this competitive advantage. On the whole, it is clear that the sources of competitive advantage within the UK banking sector are more intangible in nature, perhaps because of the service-based nature of the industry. This point can also be made for banking sectors in countries like the US for example, where competitive advantage is normally obtained from market knowledge and good service marketing (Priem, 2001, p 28). As a result, it can be safely said that the RBV does not wholly apply to this sector. It would seem that the theory is perhaps more applicable to manufacturing-based industries (Silver, 2000, p 33).
In conclusion, it can be safely said that the RBV provides a good definition of the relationship between competitive advantage and the characteristics of the resources that firms have at their disposal. However, in reality, there are a number of different factors that can enable firms to generate both short run and long run competitive advantage. Hence, it can also be asserted that the theory is too simplistic and even one dimensional in nature and this implies that it has a number of practical and operational flaws. The difficulties with RBV can be illustrated using the UK banking sector as an example. It is clear that there are a number of sources of competitive advantage within this industry, which tend to be more intangible in nature than resource based. In addition to this, there are several external factors that need to be taken into consideration when discussing how firms generate competitive advantage in the industry.

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