Theory of Resources and Firm Behavior
Knowledge Resources and ICT: Internal and External Assessments and Action
Abstract
Description and analysis of the internal and market operations of a firm takes many forms and yet the resource-based view of a firm has been one that has gained widest adoption within business literature due to its explanatory advantages. One of the primary methods that enables companies to continue operating despite the pressures of competition is the application of strategic management principles based on such a theory to enable firms to develop sustained competitive advantages. By navigating the market and ensuring smooth operation via intra-firm negotiations – adequate resources are able to be maintained and developed such that the firm can continue operations under pressure of competition.
Key Words: Strategic Management, Market Advantage, Firm resources
- Introduction
In the United States, there are nearly 28 million small and medium-sized firms and roughly 19,000 firms with over 500 employees competing to provide customers goods and services within local, national, and international markets. A small group of these firms in the ICT field operates alongside the majority in a Business to Business (B2B) fashion assisting these firms with their information. Competitive pressures exist to ensure the replication of profitable activity and to successfully develop and manage innovation internally, as will be discussed below. I also include reflections on ICY firms below given that adoption of particular services providers is a significant choice that leads to path dependency.
Body
Edith Rose’s book has had a major impact in the business world and the field of innovation. The theoretical framework she developed overturned many of the traditional assumptions of neoclassical economics and proposed alternatives explanatory frameworks for how firms operate. By challenging the motivations and cognitive assumptions of firm theory by empirically investigating firms, she produced research that was more accurate in understanding the organizational drives and limits of firms. She viewed firms to be shaped by conscious actions by economic actors, who operate dynamically between induction and deduction while framed within a historic context that has path-dependency elements informing evolutionary change (Penrose 2009).
How firms are now responding to the economic crisis caused by the coronavirus pandemic is a good example by which to demonstrate the indicators that must be dealt with in order to ensure survival.
Most firms that rely upon central, physical locations in order to provide their services are pressured to let large percentages of their employees go as operations cannot continue as usual, and yet great damage can be caused to their reputation should they do that. There are pressures to invest in new technologies that can allow for some degree of the continuation of operations, and yet a short length of time of the quarantines can make such expenditures spurious and thus a waste. Edith Rose would likely argue that such considerations – which are deeply informed by culture, ideology, shared moral values and a vision of corporate leadership – are all part and parcel of how a firm is able to survive and grow in the market. These organizational, psychological elements – how work is to be done when forced to do it a new way, how to treat workers in crisis conditions – are part in parcel with understanding how to operate a firm understood to be a pool of resources creating knowledge.
Such claims as this ought not to be interpreted to mean that a behavioralist theory of the firm is advocated within Theory of the Growth of the Firm. Rose states that she is sympathetic to aspects of it, but agnostic in others. While the central operating structure of the firm is its administrative organization, this is does not make it analogous to the heart. Rather it is a place where routine and non-routine managerial decisions are made that affect all of those involved in the profitmaking activities. Developed via the use of resources, these profits provide a means of objectively judging the service performance of those involved. In the interactions between human and material resources knowledge increases about the resources and the consumers of this. It’s in these changes of knowledge that new services become available (Penrose 2009).
To give a trifling example of this, I’ll share a work experience. My first job at 15 was at Taco Bell. I worked as a cashier there and quickly noticed that on the weekends the number of college students was higher than during the week and that they often came in high and ordered cinnamon twists with their order. It was easy for me to discern that the liked the fried sweetness, so it was no surprise to me when shortly after I’d started they launched the Chalupa. This took something that they already sold, flatbread, and threw it in the fryer to make their normal meals taste more savory. I’m certain that they did extensive market and process testing before introducing it – but as my co-workers and I were already doing the same thing before the official launch we liked to joke that we were the true inventors of this treat. This little change from prior operations is an example of diversification that stays within Taco Bell’s core Area of Specialization – Tex-Mex fast food.
Looking at these issues in the context of ICT, it’s apparent that such firms need to have significantly broader research capabilities in order to develop their products. Rather than just market testing within small regions a certain product to see if it will sell or not, they need to plan their diversifications around the features made available by their competitors. This is all the more important as such adoption of such ICT software leads to soft determinism due to the adoption of a specific means of understanding how to engage in technological activities. As will be discussed more later – such choices lead to path dependency that can incur high transfer costs. This incentivizes ICT companies to be on the cutting edge of vigilance, research, and development.
In Wernerfeld’s article A Resource-Based View of the Firm we learn it’s important to view the firm not from the products that it makes, but from the resource side. Doing so allows for a broader analysis of the diversification capabilities inherent with a firm to adapt to external market pressures and to internally innovate. By analyzing the firm from the position that they are a bundle of resources it becomes possible to locate the areas of high-value add, poorly performing activities, and where the barriers and opportunities for expansion are. Some of the
At the end of his article, Wernerfeld shares a series of dynamic resource management practices that have been used by businesses to obtain first-mover advantages – an attractive activity that typically yields high profits in the markets where the resources being deployed operated. The resource-product matrix, diversification via sequential entry, the exploit and develop strategy, and stepping stones process are all means of diversifying offerings and helping to ensure that such actions are successful. All of these are predicated on market research and the consideration of mergers and acquisitions – an imperfect but effective means of obtaining supplementary and complementary resources for the firm (Wernerfelt 1984).
Robert M. Grant sees the key to a resource-based approach to strategy formulation as having a deep understanding as to the relationships between resources, capabilities, competitive advantage, and profitability. For him it is most important to has an understanding of the mechanisms through which competitive advantage can be sustained over time. By designing strategies that exploit to maximum effect each firm’s unique characteristics, the basis for corporate profitability is expanded and more effectively achieved.
Grant makes an insightful statement in the section Resources as the Basis for Corporate Profitability when he states that strategy should be viewed less as a quest for monopoly rents and instead as a quest for Ricardian rents. In the case of ICT, the subscription model over the purchasing model could be seen as a means of encouraging Ricardian rents within companies. While certainly influenced by pirating of software in their choice of having monthly revenues rather than purchases – this also creates an internal incentive to ensure that product improvement is continuous. Because the competitive advantages of companies even like Adobe, Slack, and Firefox are ever fleeting – as evidenced by the recent rise of adoption rates of Microsoft Edge over Firefox- this helps to ensure that the firm’s profit-making processes are not replicated by mimicry, do not become obsolescent or end up depreciating that the value-adding work processed should be identified, appraised and examined for alteration in the framework of strategic capabilities (Grant 1991).
Identification and appraisal of capabilities can be difficult given the personal investment of section-chiefs as well as thinking based in the past successes or future hopes, thus leading to activities beyond or beneath the true scope of its capacities. And yet this analysis combined with the determination of the most effective organizational routines allows for durable marketplace percentages even when faces with an increasing pace of technological change or evolving product demands made by customers (Grant 1991). If firms are able to do this and keep barriers to entry sufficiently high that they discourage competitors from seeking to imitate their business model – then they are reasonably secure in their competitive advantage.
Human capital is one always one of their weaknesses, and employee mobility means that it is risky for firms to be too unduly dependent upon the contributions of the specific skills of a few employees who can bargain to obtain a greater share of the value they contribute and whose transfer to another firm would mean more intense competition and the potential loss of clients. The dynamics implied in this are not fully explored here, but suffice it to say that this fact is evident in the salaries and benefits given to full-stack developers in the ICT field. Because high quality, integrated software developing coding skills are so rare – those with such skills are able to demand greater authority on projects along with recompense. Suffice to say here it is important to fill resource gaps and, once processes are harmonized into an effective strategy it’s important for firms to maintain this “dynamic resource fit”.
Jay Barney’s article develops a framework wherein managers, as human capital, are crucial for reaching higher levels of firm performance. Recognizing that they are limited in their abilities to command and control all of the attributes that compose the characteristics of the firm as well as its place within the market – their analysis is largely what drives its economic performance engine. The three forms of resources that they have control over are organizational capital human capital and physical capital(Barney 1991).
From the standpoint of strategic relevance not all are equally important and sometimes these resources can actually inhibit the implementation of a value-creating strategy. Regarding the first point, it depends upon the type of business the firm is in, i.e. how it is creating value, that this comes into play. For instance, a firm that only requires low skill-levels to operate machines and process materials, i.e. the fast-food service industry, doesn’t need to invest much into the human capital of its front-line employees. Investment in the organizational and strategic workforce is important, however, as it allows them to adequately adjust form operations according to changes in the marketplace or to find new opportunities. For example, a managerial workforce that was agnostic or antagonistic to the new lines of business made possible from the internet revolution could have missed out on a new income stream developed via home delivery or pick up orders.
Firms obtain sustained competitive advantages by implementing strategies that exploit their internal strengths by responding to environmental opportunities. To have the potential for sustained competitive advantage a firm must have four attributes:
- It might be able to exploit opportunities and/or neutralize threats in a firm’s environment
- It must be rare among a firm’s current and potential competition
- It must be imperfectly imitable
- There cannot be strategically equivalent substitutes for this resource that are neither rare or imperfectly imitable.
If they manage to do all this while also avoiding internal weaknesses – such as employee turnover, which is also a loss of resources – and neutralizing external threats sustained competitive advantages is obtained (Barney 1991).
A path to sustained competitive advantage by harnessing these value-chain attributes. Barney is explicit, however, in his description that sustained competitive advantage isn’t something that once obtained cannot be lost. New knowledge must be constantly sought for in order to continue one’s place at the top and steps taken to maintain customer relations and positive brand recognition. Missteps occur, and there are always other firms looking to expand their percentage of goods or service provision within the market.
Conclusions
As skills are learned and refined through repetition, skills are automatically developed through the search for the particular strategy, which operates as a push for the company to go a little beyond its limits and constantly renew itself regarding its capabilities and resources, pursuing a dynamic adjustment.
Having the above, the company will be able to build an identity through strategy, which will not strictly depend on market signals, which are not only volatile but also subjective; Due to the permanent changes in customer preferences, but the company can clearly define its identity by identifying its resources and capabilities, to establish what challenges it can face and where to aim in the medium and long term.
The advantages that tourism companies face physical and historical place for some are absolute advantages that when exploited in the proper way can potentially be sources of profitability.
Recommendations
All in all the picture presented by these authors, to make a somewhat stretched analogy in the sphere of gaming, is that similar to a Go board. Each move changes the larger balance of forces in such a way that while there appears to be clear winners – those with sustain competitive advantages – there is also the need to be forever vigilant in order to keep them. The moves must be complex, and hard to discern by one’s competitor and thus imperfectly imitable from a strategic viewpoint. This means that it is important to know one’s competitors and have deep insight into one’s own operations and where it is that one’s core competencies lie. With the application of resources and strategy, market share is won.
Resource-based theories of the firm supply the concepts required for businesses to flourish as it provides insight on how best to exploit the knowledge that they create it in the marketplace as well as how to develop internally and externally. Strategy formulation along these lines requires a scientific mindset, while implementation strategies require a humanistic one that recognizes the variables involved in firm interactions and personal and group motivations (Penrose).
In the field of Information and Communication Technology, knowledge plays an oversized role as it is imperative in understanding how to frame strategy in such a way that prospective clients are assured that the services and products provided are able to fill business needs in a manner that is superior to that offered by competitors.
- Bibliography
Barney, Jay B. Firm Resources and Sustained Competitive Advantage. S.n., 1991.
Penrose, Edith. The Theory of the Growth of the Firm. Oxford University Press, 2013.
Grant, R. “The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation.” Knowledge and Strategy, 1999, pp. 3–23., doi:10.1016/b978-0-7506-7088-3.50004-8.
Wernerfelt, Birger. A Resource-Based View of the Firm.