Resource-Based View (RBV) and Dynamic Capability View (DCV)

The RBV is an influential theoretical framework for understanding how competitive advantage is achieved by firms (Barney 1991; Nelson 1991; Peteraf 1993; Prahalad & Hamel 1990; Schumpeter 1934; Teece et al. 1997; Wernerfelt 1984). The central proposition of RBV

41 focuses on the existing organisational resources as the determinants of sustained performance (Henderson & Cockburn 1994; Porter 1979). It is suggested that the fundamental drivers of a firm’s competitive advantage and superior performance are mainly associated with its resources that are heterogeneous and costly-to-copy (Amit & Schoemaker 1993; Mahoney & Pandian 1992). These resources are valuable, rare, inimitable and non-substitutable (VRIN) attributes, so they cannot be easily duplicated by competing firms (Barney 1991; Conner & Prahalad 1996 ; Nelson 1991; Peteraf 1993).

Scholars have extended RBV to dynamic markets (Helfat et al. 2007). The RBV has been criticised for not explaining well how certain firms remain competitive in today’s rapidly changing environment (D'Aveni et al. 2010; Eisenhardt & Martin 2000; Priem & Butler 2000). The RBV has been called conceptually vague and tautological, with inattention to the mechanisms by which resources actually contribute to competitive advantage (Augier & Teece 2007). These scholars have pointed out that the factors surrounding resources are not included in the RBV but instead are simply assumed to exist (Eisenhardt & Martin 2000).

To advance the RBV, clear definitions of resources and capabilities are needed (Kraaijenbrink et al. 2010). ‘A resource is an observable asset that can be valued and traded’ (Hoopes et al. 2003, p. 890). According to Helfat and Peteraf (2003), a resource is an asset or input to production that an organisation owns, controls or has access to on a semi-permanent basis. Resources can also be the technology, methodologies, skills, communication and interaction that are available to the firm and that, when combined, can be used to create competitive advantage (Lowson 2002). The sustainability of this advantage depends on the ease with which a resource can be imitated or substituted (Beckman & Rosenfield 2008).

According to Hoopes et al (2003, p. 890) ‘A capability, on the other hand, is not observable, cannot be valued, and changes hands only as part of its entire unit’. Capabilities

42 can be the processes, activities or functions of a system. They indicate the ability of an organisation to perform a coordinated set of tasks, utilising organisational resources for the purpose of achieving a particular end result (Protogerou et al. 2011). Capabilities are enacted through a mixture of people and practices that are represented in systems such as management and operational systems. Examples are American Airlines’ yield management system and Wal-Mart’s docking system (Beckman & Rosenfield 2008). A capability can be valuable in enhancing the value of a resource. Nike’s marketing capability, for instance, increases the value of its brand (Hooper et al. 2008).

Grant (1996) argued that assets do not contribute to a firm’s competitive advantage unless they are used to do something. In a dynamic environment with robust competition and unpredictable market forces, resource advantage may not be sufficient for sustainable advantage, which also requires a unique and difficult-to-copy dynamic capability (Teece 2007). Consequently, the DCV was introduced in 1943 in Schumpeter’s innovation-based model of competition where competitive advantage is based on the creative destruction of existing resources and a novel recombination of resources to produce new operational capabilities (Schumpeter 1934). In other words, capability is developed through a firm’s experience, focus and efforts over time. As firms learn, they tune their capability, giving them a competitive advantage that is difficult to replicate without going through a similar long- term learning process (Beckman & Rosenfield 2008). This dynamic capability enables firms to adjust their resource mix, which otherwise might be easily duplicated by competitors. Finally, when this capability and its related activity systems have complementarities, the potential to create sustained competitive advantage is enhanced (Collis & Montgomery 1995; Collis & Montgomery 1998; Milgrom et al. 1991; Porter 1998).

43 DCV attempts to bridge the gaps in the RBV by adopting a practice approach and acting as a buffer between firm resources and the business environment (Winter 2003). While RBV emphasises resource choice or the selection of appropriate resources, DCV emphasises the organisational practices necessary to utilise resources and competencies (Lowson 2002; Makadok 2001). These practices are important for enabling internal and external resources to be integrated and reconfigured so that a rapidly changing environment is addressed (Teece et al. 1997).

Although there are many possible ways to think about a firm’s capabilities, there are four essential dimensions to consider; system-based, organisation-based, network-based, and process-based, (Hayes & Upton 1998; Lowson 2002).

 System-based capabilities derive from a firm’s skill in seamlessly executing the multiple elements of its production process to deliver high-quality customer experience, short lead times and rapid new product introduction (Hayes & Upton 1998). Firms with system-based capabilities integrate activities across the firm to achieve competitive advantage (Heizer & Render 2011). With system-based capabilities, firms achieve integrated production through a cross-functional production team (Eisenhardt & Martin 2000). This source of expertise is essential for superior products because each member of the team addresses a particular aspect of product quality or production. Implementing integrated product development practice achieves speed and flexibility of production as well enhanced organisational performance (Tan and Tracey, 2007, Krishnan and Ulrich, 2001).

 Organisation-based capabilities are organisation-wide skills in product design and/or processes which bring products to the market faster than competitors

44 (Hayes & Upton 1998). In addition to developing an effective operational system for product development, several practices are important to the design of a product. Increasingly, operations managers have moved towards product and process modularity (Gershensona et al. 2003; Jose & Tollenaere 2005). Both operations and marketing managers find modularity helpful because it makes product development, production and subsequent change easier. Moreover, modularity adds flexibility to the ways customers’ needs can be satisfied (Heizer & Render 2011).

 Network-based capabilities are those that reach outside the bounds of a single organisation and encompass an entire value chain or supply network (Lowson 2002). Firms with strong network-based capabilities can guide the other players in their value chain to improve the value chain’s overall efficiency (Heizer & Render 2011). Through the DCV, this supply chain network is employed by operations managers to copy, transfer and recombine resources, especially knowledge-based resources, across organisations (Eisenhardt & Martin 2000). Network-based capabilities can also refer to external linkages in the form of significant coordinated relationships which lead to superior performance (Teece et al. 1997).  Process-based capabilities are anchored in the activities a firm executes to

transform materials or information into a product and/or service. These capabilities are often focused on developing organisational processes for delivering highly flexible and fast delivery outcomes (Hayes & Upton 1998). An example of a process-based capability is a technology that none of the firm’s competitors has been able to imitate (Hayes & Upton 1998; Teece et al. 1997). In the volatile market environment, the use of information technology (IT) has been increasingly necessary for firms to retain competitiveness. This includes the

45 integration of IT in production area to enable information to be captured and retrieved in response to customers’ enquiries (Heizer & Render 2011). Firms with process-based capabilities can attract and retain customers through superior service (Hayes & Upton 1998).

The following section discusses manufacturing practices and their relationships to agile capabilities and subsequent organisational performance, in terms of both operational and financial performance outcome.