Part One – Introduction
The key research question how firms create and maintain competitive advantages, i.e., the firm’s source of future cash flows generation, is paramount to strategic management (Teece, 2014, p. 329). Many schools of thought of strategy formation, such as the schools of Design, Planning, Positioning, Entrepreneurial, Cognitive, Learning, Power, Cultural, Environmental or Configuration have tried to answer the above question (Mintzberg, Ahlstrand, & Lampel, 1998, p. 27). None succeeded so far. It does not mean it is unimportant. Yet, it is difficult to answer with substantial fundaments (p. 329). For example, Boston Consulting Group is proactively working in this quest with its forward looking ”Fortune Future 50 Index”, based on revenue forecasting, which is the best factor to drive shareholder’s returns in the long-term (Reeves, Hansell, Whitaker, Parikh, & Lotan, 2018), but so far, the question is still to be found.
Strategic management, also designated as policy, or simply stated as strategy, deals with direction of business companies and other organizations (Fleming, Rumelt, Schendel, & Teece, 1996, p. 1). One can find a myriad of definitions of strategy, with few standing out for being more acute and concise in capturing its essence. This is the case of Igor Ansoff’s definition crafted in 1968:
A pure strategy is a move or a specific series of moves by a firm, such as a product development programme in which successive products and markets are clearly delineated. A grand or mixed strategy is a statistical decision rule for deciding which particular pure strategy the firm should select in a particular situation (Ansoff, 1968, p. 105).
or the improved definition of Andrews (1980, p. 18), which includes elements of: strategy definition - pattern of decisions in a company that determines and reveals its objectives, purposes, or goals; strategy implementation - produces the principal policies and plans for achieving those goals; external context - defines the range of business the company is to pursue; internal context - kind of economic and human organization it is or intends to be; and enterprise governability - nature of the economic and noneconomic contribution it intends to make to its shareholders, employees, customers, and communities (António, 2006, p. 48).
The concept of strategy was originally crafted in the military field, where it was generically applied to coordinate considerable contingents of troops in combat campaigns against enemy forces. In fact, the etymology of the word strategy comes from Greek “strategos” that means general, commander of an army, being decomposed by “stratos” meaning army, and “agos”, the leader (Hoad, 1996) . Its use in business lingo appears in 1948 with the theory of games, introduced by Von Neumann and Morgenstern (Ansoff, 1968, p. 105).
As mentioned above, the introduction of the concept of strategy to corporate and business management happened after WWII, which created a new field of research with an individual identity, the strategic management of firms. Since those days, several strategy schools of thought blossomed (Rosa & Teixeira, 2002, p. 30). Some of those schools were more prescriptive, portraying how strategies should be developed rather than how strategies are developed. Other schools were more descriptive, by considering aspects of strategy formation and helping managers to understand how strategies are created (Mintzberg, Ahlstrand, & Lampel, 1998, p. 3). Resources as the basis for competitive advantage are included in a descriptive school, which a team coordinated by Mintzberg classified as the school of Culture (p. 274).
The literature about Resource-Based View and Dynamic Capabilities is vast and proficuous, with authors theorizing about the subjects through different angles, and adding concepts and definitions that sometimes create more confusion than clarity. For the sake of simplicity and understanding, the comparative study presented in this paper is based on literature review of four papers from the following authors: Teece, Pisano and Shuen (1997); Eisenhardt and Martin (2000); Cardeal and António (2012); and Teece (2014). The purpose of this paper is twofold: to highlight the similarities and differences of each view and to try to explain the fundamental reason and origin of those similarities and differences, contributing to shed some light with a succinct, and certainly biased, comparison of concepts.
Part Two - Research-Based View (RBV) reconnoitre
The seminal author of RBV is considered to be Penrose, who wrote in 1959 The Theory of the Growth of the Firm. This book, as the title suggests, is about the growth of firms, emphasising the fact that resources are manipulated by management to deliver products and services to customers, and as a function of management experience, the resources will render accordingly.
The resource discussion was taken back to the table by Birgir Wernerfelt, in 1984 with the paper A Resource-Based View of the Firm, retaking the perspective of “looking at firms in terms of their resources rather than in terms of their products”(p. 156). Also, Rumelt in 1984, in his paper Towards a Strategic Theory of the Firm became influential in retaking RBV back to discussion. Later on, Barney, another important author of RBV, with his work Firm Resources and Sustained Competitive Advantage (1991), restarted a sequence of debates that have been growing since. Also, important contributions of Chandler, Peteraf, Prahalad, Teece, Pisano, Shuen are worthwhile mentioning.
As it was referred above, RBV theory has been gaining adherence among scholars, since the seeds launched by Penrose in 1959. The expectation is that it can enlighten managers and practitioners in the search of the management “Holy Grail”, i.e., the sustained competitive advantages of a firm. The RBV must be understood as a reaction to the school of Positioning. While the school of thought Positioning is basically worried about the environment around the firm, the economic theory RBV focuses on the firm itself, without ignoring the outside (António, 2006, p. 105).
As a theoretical framework, RBV is designed to explain how companies can achieve and sustain competitive advantages over their competitors (Eisenhardt & Martin, 2000, p. 1105). Understanding a competitive advantage through a firm’s resources necessarily presupposes an internal perspective (p. 1105). In contrast with RBV, the Porter’s competitive forces approach (1980), which emphasis in positioning strategies to defend against competitors, or the Shapiro’s strategic conflict approach (1989), which deals with competitors by keeping them unbalanced through strategic investments, pricing, signalling and information control (Teece, Pisano, & Shuen, 1997, p. 509), both entail an external perspective of gaining competitive advantage.
Essentially, RBV articulates firms as bundles of resources. These resources are distributed differently between firms, persisting over time (Penrose, 1959; Wernerfelt, 1984). If those resources, or bundles of resources, are valuable, rare, inimitable, and non-substitutable (i.e., so-called VRIN attributes) (Barney, 1991, p. 105), they can contribute to sustainable competitive advantage, by being combined with value strategies that cannot be easily copied by competing firms (Eisenhardt & Martin, 2000, p. 1105).
Many other authors have tried to define RBV. Teece stands out as a strong contributor, by defining RBV as an approach to building competitive advantages through focus on the exploitation of firm-specific capabilities and assets, to define a firm’s performance above market (Teece et al., 1997, p. 510). Thus, what a firm can do, depends on what resources it can assemble and use. It is not just a matter of seizing the opportunities it captures along the way (p. 513). Each firm possesses heterogenous bundles of resources. Therefore, to begin preparing a competitive strategy, it must follow a sequence of actions: i) identify the unique resources; ii) allocate those resources to the most profitable markets; iii) take the decision in face of the returns of the assets to a) integrate in related markets; b) sell the intermediate output to related firms or c) sell the assets to a firm in a related business (p. 514).
Barney, with his continued work on RBV since 1991, has been contributing substantially to clarify the theoretical concept of RBV. According to Barney and Hesterly, RBV is an economic theory based in justifying a firm’s performance as a function of resources and capabilities. They defined resources as tangible and intangible assets (such as factories, products, reputation among customers, or teamwork among managers) to create and deliver strategies, and capabilities as a subset of resources to potentiate other resources. These resources and capabilities can be grouped into financial, physical, human, and organizational categories. They also consider that heterogeneity and immobility of resources and capabilities are conditions under which firm can gain competitive advantages (Barney & Hesterly, 2015, p. 116).
One of the most important aspects of RBV is the value of combining internal analysis of a firm (something that many strategy authors since mid-eighties have claimed) with the external analysis of the competitive environment (the focus of earlier strategy approaches). Hence RBV does not replace, but builds on pre-existing theories of sustaining competitive advantage (Collis & Montgomery, 2008, p. 142).
Underlying concepts of RBV
In this section, two important elements of RBV are presented to help clarifying the theory: resources, and competitive advantage.
Starting with resources of a firm, they are defined as physical (such as machinery, location), human (for example technically skilled), and organizational (like a specialized salesforce) assets that firms use to deliver their value-creating strategies (Eisenhardt & Martin, 2000, p. 1106). Overall, a resource is anything that can be either a strength or a weakness of a firm. They can be tangible or intangible assets which are tied semi-permanently to the firm, enabling efficiency and effectiveness improvements (Wernerfelt, 1984, p. 173). Resources are firm-specific assets nearly impossible to imitate, such as trade secrets, specialized production facilities or engineering experience. These resources are non-transferable or difficult to transfer because of costs and potential asset tacit knowledge (Teece et al., 1997, p. 516).
Naturally, not all different aspects of resources are strategically relevant resources. Some of them may hinder completion of winning strategies, reducing accomplishment of efficiency and effectiveness initiatives, or simply not having any effect on strategizing processes (Barney, 1991, p. 102).
Furthermore, António postulates that resources as assets of a firm are difficult or impossible to imitate, such as commercial secrets, specialized machinery or employees’ experience. By nature, they are hard to transfer between firms, due to high transactional and/or transfer costs. Assets contain what António called firm’s tacit knowledge. A valuable resource in an industry in a certain moment may not have the same value in another industry in a different timing (António, 2006, p. 102).
Another relevant concept regarding RBV is competitive advantage, and when a firm considers it holds this advantage over its competitors. A competitive advantage is created when a firm implements a value creating strategy that is not being implemented by any current or potential competitor. This competitive advantage becomes sustained if the competing firms are unable to reproduce the benefits of that strategy. In the event of an industrial structural change, a sustained competitive advantage might succumb and become irrelevant or a weakness. However, if indeed a sustained competitive advantage, it will not be eliminated by attempts of duplication by competitors (Barney, 1991, p. 103).
The definition of a firm’s competitive advantage can also take a materialistic route, by being seen as creating more economic value than a marginal competitor that achieves only break-even. According to the definition presented by Cardeal and António in their case study of a mid-sized Portuguese firm, “a firm has competitive advantage if systematically achieves net profits” (Cardeal & António, 2012, p. 10162).
In brief, having competitive advantage over its competitors means creating more economic value through its business activity. Economic value is translated by the difference between benefits perceived by customers (the price they pay) of a certain product or service and the cost of the firm in producing or servicing it (Barney & Hesterly, 2015, p. 33).
Resources as sources of competitive advantage
As mentioned above, not all resources of a firm have the potential to become sources of sustained competitive advantage. They need to have specific characteristics that Barney (1991) defined as VRIN, the acronym for valuable, rare, imperfectly imitable and non-substitutable. Barney sustained that a resource to be valuable should exploit opportunities and/or eliminate threats in the firm’s market environment. Rare resources means being possessed by a limited number of competitors, if not only, by the firm’s current and potential competitors. The attribute of a resource being imperfectly imitable (or inimitable) means that competitors, that do not possess it, will not be able to obtain it. By the non-substitutable attribute, he purported that there is absence of a strategically equivalent resource (Barney, 1991, p. 106). Complementing his work about RBV later in 1997, Barney initiated the development of a tool for analysing the different resources and capabilities of a firm, which he called VRIO (Value, Rarity, Imitability, and Organization) framework, being the acronym for four questions presented in table 1. These questions were created to help managers to determine if the resources and capabilities have potential to construct sustained competitive advantage (Barney & Hesterly, 2015, p. 89).
Table 1. VRIO Framework Questions (Abridged from Barney & Hesterly, 2015)
Type of Question | Question |
V - Value | Does a resource enable a firm to exploit an environmental opportunity and/or neutralize an environmental threat? |
R - Rarity | Is a resource currently controlled by only a small number of competing firms? |
I - Imitability | Do firms without a resource face a cost disadvantage in obtaining or developing it? |
O - Organization | Are a firm’s other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources? |
VRIO framework is part of the extended strategic management process. The process starts with a vision statement, then follows with the definition of the firm’s objectives, continuing with an internal and external analysis, then the firm makes strategic choices, and finally moves to strategy implementation. VRIO framework, with the strategic questions mentioned in table 1, adds value to the internal analysis, and in theory the full process should create competitive advantage (p. 27).
Moreover, RBV principles also suggest that to create and maintain competitive advantage every employee should be actively responsible, not only management team, as long as they feel empowered. Empowerment, teamwork and culture being valuable can be sources of competitive advantage. Therefore, a key point in VRIO framework, in case of conflict between VRI resources and its organization, the undisputed change should the organization (p. 117).
Unfolding slightly the third part of this paper, about dynamic capabilities, one must add that in 2012 Cardeal and António complemented the understanding of Barney’s VRIO resources framework. These authors clarified that dynamic capabilities defined as capabilities, which allow a firm to create and maintain competitive advantage in high-velocity markets, and independently of the hierarchy of those capabilities, they are integral part of the organization of the firm. Therefore, dynamic capabilities are the VRIO’s “O” of Barney’s framework. They proved the latter point in the case study of a mid-sized Portuguese company: dynamic capabilities to be a source of competitive advantage must be VRI. The dynamic capability of new product development passed the VRI test of their study, but the resources of that capability did not pass the VRIO test (the firm under study needed organization to take full advantage). The more complex a dynamic capability is, the more difficult its imitability is. They concluded that, in the case of the firm in their study, the competitive advantage is originated from a VRI capability and not from VRIO resources (Cardeal & António, 2012, p. 10169).
Critique of Resource-Based View
The extensive literature about RBV corroborates solid theory grounds that explain how competitive advantages can be achieved and sustained over time. However, it has not gone without criticism. RBV has been called conceptually vague, pleonastic, ignoring the mechanisms that contribute to transform resources in valued competitive advantage, and specifically not relevant in dynamic markets (Eisenhardt & Martin, 2000, p. 1106). The prominent critics have been D’Aveni (1994), Mosakowski and McKelvey (1997), Williamson (1999), and Priem and Butler (2000). Particularly by the latter authors, terms like “routines to learn routines” have been criticized as being tautological, endlessly recursive, and non-operational.
Connor is another author that evaluates RBV with criticism. In one of his articles The Resource-Based View of Strategy and its Value to Practising Managers, he states that the abstract words used to guide managers defining intangible resources, a touchstone of RBV, are highly generalized, of qualitative nature, rhetorical and with vast potential meanings. Furthermore, he believes that the theory only provide ex post factoanalysis of successful firms. It is practically impossible to know a priori if an asset will be strategic. As culprit, he argues that RBV theory can hardly be applicable to small firms, where most frequently the stimulus to act comes from external pressure (Connor, 2002, p. 312).
Part Two – Dynamic Capabilities (DC) reconnoitre
Seminal authors of DC can be traced back to Schumpeter (1934), with his work The Theory of Economic Development, where he described economic development as a historical process of changes driven by innovation. The dynamic entrepreneur is at the centre of that economic development by creating new opportunities for investment, growth and employment (Schumpeter, 1934, p. 388).
After Schumpeter, the most relevant contribution to DC came from Richard Nelson and Sidney Winter with An Evolutionary Theory of Economic Change (1982). In their seminal book they argue that the world is too complex to be understood perfectly. Therefore, the strategic efforts of firms need to be seen as subjective interpretations of the managers. Due to that subjectivity, strategies differ from firm to firm. They defend that capabilities are embedded in the organizational structure, which is adapted to each strategy. If the strategy changes, the organizational structure will likely change too (Nelson & Winter, 1982, p. 37). Other significant contributions to DC were postulated during the eighties and early nineties with scholars like Teece, Dosi, Prahalad, Hamel, Hayes, Wheelwright, Dierickx, Cool and Porter.
A team coordinated by Teece considered the DC approach as an extension of RBV (Teece et al., 1997, p. 513), introducing a perspective of continuity of the theoretical framework launched by Penrose. For these authors, the term “dynamic”, when referring to capabilities, reinforces the continuous renewal of management competences in order to adapt the firm to a changing business environment, where response time to act is vital. The term “capabilities” encapsulates key actions of management to adapt, integrate, and remodel the organization, internally and externally, to face high-velocity markets constant change (p. 515). DC framework aims to provide a reasonable explanation on how firms build and sustain competitive advantages, while creating and maintaining enterprise value for stakeholders, in a complex and mutating business context, driven by fast paced technological innovation, and competing in a global world (Teece, 2014, p. 328). In 2014, Teece introduced additional elements to the DC framework. He states that it addresses three key issues: innovation and co-creation; how resources can be built; and how resources should be deployed. DC framework responds to these issues by using strategy, to define the resource allocation targets, and organizational structure and processes to mediate resource deployment (p. 341). He states that the hypothesis that strong DC synchronized with good strategy tied up with difficult-to-imitate resources, being in the basis of sustained competitive advantage was confirmed by empirical studies, with a few long-term resilient firms (p. 328).
The same as in RBV theory framework, the emphasis of DC are the internal processes of a firm, bearing in mind their organizational configuration and their evolution over time. Hence, obtaining sustained competitive advantage is not only a function of how to run a business, but also depends on the resources (assets) available, and the flexibility to use those resources in different ways in a constantly evolving market (Teece et al., 1997, p. 529). Later on, Teece enriched the concept of DC by introducing two different classes of capabilities: ordinary and (truly) dynamic. While ordinary capabilities are those necessary to complete simple tasks, like administrative or operational tasks, dynamic capabilities involve activities that are focused in directing ordinary capabilities to generate high rents, involving managers “orchestrating” resources to adapt and recreate in high-velocity market environments (Teece, 2014, p. 328). Moreover, Teece framed two classes of capabilities by comparing them against a set of criteria. He considered that the purpose of ordinary capabilities is to assure technical efficiency in business functions. The simplest way to attain ordinary capabilities is either to buy them, or to build them via learning processes. They are in place to operate, administrate and govern the basic resources of a firm. The managerial goal is to keep ordinary capabilities at lower cost, prioritizing in doing things right. The level of imitability of ordinary capabilities is high and can be classified as sharable best practices. While, in his opinion, the purpose of dynamic capabilities is to achieve congruence with customer needs and with technological and business opportunities. DC are attained only by internal building, cannot be acquired externally. They ought to seize, sense and transform the resources of a firm by means of signature processes. The management focus is on resources orchestration and leadership, and their priority is “doing the right things”. They are inimitable and bound to evolutionary fitness (p. 332).
The approach of Cardeal and António, regarding different hierarchies of capabilities is straightforward. They consider that capabilities are “organizational processes (skills, expertise, know-how, management) firms use to explore their resources and lower level capabilities in the conduction of day-to-day operations” (Cardeal, 2012, p. 10161). António had already postulated DC as the capacity of the firm to integrate, build and reconfigure internal and external resources and capabilities to survive in high-velocity environments. DC reflects the firm’s potential to find out new and innovative ways of creating competitive advantages, bearing in mind its historical path and current competitive position (António, 2006, p. 103).
Underlying concepts of DC
The section being introduced explores relevant elements of DC framework in order to better understand the definition of DC theory framework and its discussion. Henceforth, it is important to clarify the meaning of capabilities and how to identify them, and the concept of moderately dynamic markets and high-velocity markets.
As already mentioned, one of the critiques appointed to RBV is related to the key outcome of the theory fundaments being the intangibility of the resources. This raises the question, among others, of how managers can identify, design and reconfigure the intangible (Connor, 2002, p. 312). To help overcoming this and other potential theory caveats in DC, a team coordinated by Teece, who view DC as an extension of RBV, organized a firm’s distinctive capabilities in three categories: processes, positions, and paths. The fulcrum to develop competitive advantages lays in the organizational processes of a firm, yet they are shaped essentially by the available assets (internal and external) and the evolving path the firm has developed or inherited (Teece et al., 1997, p. 518). The above mentioned distinctive capability categorized as “processes”, refers to patterns of practice and learning activities, in a nut shell, organizational and managerial processes, that should not be confused with corporate culture. These processes have three roles: coordination/integration (a static concept); learning (a dynamic concept); and reconfiguration (a transformational concept). On the other hand, the category “position”, includes specific technological, complementary, financial, reputational and product-market assets, patents and intellectual rights, customer portfolio, relationship with primary stakeholders and organizational boundaries. And finally, the category “paths”, refers to the strategic alternatives a firm can follow, the chance of obtaining increasing returns and attendant path dependencies (p. 520-524).
Teece, in 2014, reinforced his definition of capabilities. He postulated that a firm’s capability is composed of current and potential activities that combine resources to deliver products or services, demanded by customers. One cannot correctly classify a current production facility as capability, since capabilities also imply what can be accomplished in the future by that asset. In sum, capabilities grow and develop from learning, nurture from organizational resources and they are a consequence of organizational histories (Teece, 2014, p. 328).
In the context of DC, capacities of a firm can simply be translated into what the firm produces, as a result of the combined work of several resources (António, 2006, p. 102). Later on, Cardeal and António proposed a definition of capabilities bringing light to some confusion in related resource literature around the terms resources, capabilities, skills and assets. In their opinion, as capabilities are the way a firm integrates bundles of resources, they are “intermediate outputs between resources and competitive advantage” (Cardeal & António, 2012, p. 10169).
The next important concept to elaborate is concerned with the complexity of a market where a firm can operate. A moderately dynamic market relates to a market where change occurs with frequency, but the effects of that change can be predicted with high level of certainty. These markets have relatively stable structures, and the constituent players are generally known. The development processes usually happen in a linear progression of stages and gates, and change is embedded in the concept of routines (Eisenhardt & Martin, 2000, p. 1110). Managers continuously increase their experience, in a routinized linear process, to the point that the processes become sustained and even inertial (p. 1113).
Differently, a high-velocity market has no clearly defined boundaries, the constituent players are ambiguous and continuously changing. There are no patterns to define successful businesses, to deal with uncertainty modelling, and even the industry structure is unclear (p. 1111). DC rely on specific situational knowledge, that each manager acquires with simple (but coherent and structured) experiential processes, with repeated iterations with unpredictable outcomes. DC in high-velocity markets fructify from experiences, managing real-time data and alternatives testing (p. 1112). Since the value of resources of a firm in high-velocity markets tend to depreciate rapidly, the inference is that competitive advantages are mostly captured by DC (Collis & Montgomery, 2008, p. 145).
Controversy about transferability of DC
The concept of DC as redefined by Eisenhardt and Martin posits that DC have commonalities, though with some idiosyncratic details, by opposition to the traditional view that relies on firm specific DC, fully influenced by idiosyncrasy. Their definition of “routines to learn routines” was changed to “specific organizational and strategic processes” by which managers alter the resources. The outcome depends on market dynamism, rather than being sufficiently predicted as it was in the traditional view of DC. The core concept for traditional DC being VRIN has changed to DC being valuable, somewhat rare, equifinal, substitutable and fungible (Eisenhardt & Martin, 2000, 1111).
Moreover, to Eisenhardt and Martin, DC are transferable. In common lingo, they are “best practices”. They argue that managers take unique paths to develop DC, but they end up with similar capabilities in terms of key attributes (equifinality). They claim that DC are substitutable and fungible across different market contexts. They also state that DC are substitutable, suggesting that DC can be a source of competitive, but not sustainable, advantage. Based in empirical literature review, from Brush, Bromiley, and Hendrickx (1999), McGahan and Porter (1997), Roquebert, Phillips, and Westfall (1996), Schmalensee (1985), Wernerfelt and Montgomery (1988), they all concluded that the “idiosyncratic firm effects” are probably overstated (p. 1110). Therefore, Eisenhardt and Martin argue that, since DC can be replicated among firms, their value to define a sustained competitive advantage is intrinsic to the multiple resource combinations they generate, not in the capabilities themselves (p. 1106). Bearing in mind the arguments of a team coordinated by Teece that distinctive capabilities (or the corollary of competitive advantage and rents generator) of a firm rests on processes, shaped by positions and paths, that are difficult to imitate (Teece et al., 1997, p. 524), one can detect a sort of disagreement between these authors.
In 2014, Teece responds in his article that Eisenhardt and Martin misinterpreted DC framework by conflating the concepts of ordinary and dynamic capabilities. He argues that they are quite distinct both analytically and in practice (Teece, 2014, p. 342).
By affirming that sustained competitive advantage comes from the resource configuration that management recreates while using DC, not in the capabilities themselves (Eisenhardt & Martin, 2000, p. 1117), Eisenhardt and Martin are giving back credits to RBV theory, as the trigger for building long-term competitive advantage, since the VRIN resources, with special configurations devoted to deliver value strategies is at the heart of the framework. Their logic of RBV breaking down in high-velocity markets due to the assumption of the firm being a bundle of resources (p. 1118) does not sustain when they conclude that DC are not the source of sustained competitive advantage, albeit the resource configuration of a firm.
Characteristics and evolution of DC
The non-tradability characteristic of a DC such as an intangible asset like values, culture or organizational savoir-faire, implies necessarily an internal build up. This endeavour takes years to consolidate, and in some circumstances, when intellectual property is safeguarded, becomes impossible to replicate by a competitor, hence a barrier to access to the technology (Teece et al., 1997, p. 528).
DC can be divided into three clusters with different characteristics: sensing, seizing, and transforming. The process of identification and opportunities assessment in the market refers to sensing. By seizing, it is understood the process of arranging the resources to address the opportunities identified during sensing. And lastly, transforming means the continuous improvement of the processes (Teece, 2014, p. 332). Another important characteristic of DC is the fact that they are intertwined with knowledge, usually of individual managers and top level management, and thus, they are scarce and often difficult to imitate. DC generally need to be built internally (p. 333).
From the DC perspective, embarking in a strategic path entails a long-term commitment to trajectories of competence development. Any adding value strategic change is seen as costly and hard. Moreover, strategic movements occur incrementally. This premise inducts the conclusion that the focus needs to be oriented to distinctive capabilities, not to products or services, since products and services are a result of the capabilities evolution. (Teece et al., 1997, p. 529).
DC are not static, and managers can evolve by learning from mistakes, by repeated experience and by the pace of experiences (too fast can be overwhelming and lead to inability). DC also evolve in sequences, that is, managers need first to learn foundational and simpler capabilities to be able to combine them and evolve to more complex capabilities (Eisenhardt & Martin, 2000, p. 1116).
Part Three – Comparative study
Combining previous relevant literature review about RBV and DC, this work will proceed to a comparative study, highlighting main simililarities and differences of both theories, and elaborating on potential reasons that justify them. The comparative study is summarized herebelow in table 2.
Table 2. Comparative study of RBV and DC (Source: Author)
Criteria | Resource-Based View | Dynamic Capabilties |
Classification | Economic Theory | Economic Theory extended from RBV |
Required Combination | Strategy and resources | Strategy, Organizational Structure, Processes and Resources |
Environment Emphasis | Internal Processes | Internal processes, bearing in mind their organizational configuration and evolution over time |
Main Assumptions | Heterogeneity and immobility of resources | Non-tradability and tacit knowledge of capabilities |
Objective of Framework | Explain how firms can achieve competitive advantage in the environment they operate | Explain how firms create and maintain competitive advantage, while providing value to stakeholders, in a complex and mutating business context, driven by fast-paced technological innovation, and competing in a global world |
Explanation of Framework | Bundles of resources, that are VRIN, by being combined with value strategies that cannot be easily copied by competing firms, can contribute to sustainable competitive advantage | Organizational processes of a firm, that were shaped by the available assets (internal and external) and the evolving path a firm has developed and inherited, can create and maintain competitive advantages |
Source of Competitive Advantage | Firm-specific Resources (Tangible and intangible assets grouped in financial, physical, human and organizational) | Firm-specific Dynamic Capabilities (Organizational and strategic routines and processes of management to adapt, integrate, and remodel the organization, internally and externally, to face high-velocity markets constant change) |
Critique | Vague, pleonastic, not relevant in dynamic markets, tautological, endlessly recursive, non-operational, only provides ex post facto analysis, hardly applicable to small firms, theory for temporary competitive advantage | DC have commonalities, are transferable, substitutable and fungible, can be considered best pratices |
Similarly to RBV, DC is classified as economic theory, though not considered to be a theory per se but an extension of RBV (Teece et al., 1997, p. 513). A possible explanation for the development of a Capability-Based theory (Endres, 2018, p. 26) as a continuity of RBV derives from the difficulty of identifying intangible resources, as mentioned by Connor. In his view, RBV fails to meet a fundamental criteria that management academic work should follow: “help improve managerial productivity and effectiveness” (Connor, 2002, p. p314).
In the same way that RBV requires value strategies combined with VRIN resources (Eisenhardt & Martin, 2000, p. 1105), DC conflate both concepts, and go beyond by connecting them with firm-specific processes and organizational structure (Teece, 2014, p. 341). By emphasing the combination of organizational structure and processes with strategy and resources, DC is reinforcing the importance of managerial orchestration creating signature processes to face high-velocity markets constant change (p.332), and in part, resolving the criticism that RBV is specifically not relevant in dynamic markets (Eisenhardt & Martin, 2000, p. 1106).
Differently from RBV, DC not only conceive competitive advantage through a firm’s resources, presupposing an internal perspective (Eisenhardt & Martin, 2000, p. 1105), which goes further, underlining internal processes bearing in mind their organizational configuration and evolution over time (Teece et al., 1997, p. 529). The aspect of resource evolution over time strengthens the argument of high-velocity markets applicability for DC, as opposed to RBV relating more to moderately dynamic markets. This argument is consubstantiated in main assumptions difference for each theory. On the one hand, RBV claims that in a certain market, resources are heterogenous and immobile (Barney & Hesterly, 2015, p. 116). On the other hand, DC argue that resources’ main assumptions are non-tradability (Teece et al., 1997, p. 528) and tacit knowledge (António, 2006, p. 102). The logic behind this difference is explained by the argument of RBV breaking down in high-velocity markets. In fast-paced technology innovative markets the challenge is maintaining the competitive advantage under unpredictable circumstances, where time is critical for strategy definition and DC are inherently unstable processes arduous to sustain (Eisenhardt & Martin, 2000, p. 1108).
Whereas RBV is focused in explaining how firms can achieve competitive advantages and maintain them over time (Eisenhardt & Martin, 2000, p. 1105), DC concentrate efforts in explaining how firms create and maintain competitive advantage in a complex and mutating business context, driven by fast-paced technological innovation, and competing in a global scale (Teece, 2014, p. 328). The reason behind this difference is sustained by the above mentioned argument postulated by Eisenhardt and Martin, in which RBV breaks down in high-velocity markets, and by the argument of the team coordinated by Mintzberg that RBV discourages necessary change, favouring the management of staying on track (Mintzberg et al., 1998, p. 281).
The explanation of RBV postulated by Eisenhardt and Martin, bundles of resources, that are VRIN, by being combined with value strategies that cannot be easily copied by competing firms, can contribute to sustainable competitive advantage (Eisenhardt & Martin, 2000, p. 1105) differs from the explanation of DC proposed by the team coordinated by Teece, organizational processes of a firm, that were shaped by the available assets and the evolving path, which a firm has developed and inherited, can create and maintain competitive advantages (Teece et al., 1997, p. 518) from the capabilities evolution point of view. While RBV theory gives credit to the evolution of the organization, i.e., its culture, the DC approach, as posited by Prahalad and Hamel, emphasizes capabilities being developed through a strategic learning process (Mintzberg et al., 1998, p. 277).
When it comes to sources of competitive advantage, they are relatively well differentiated between each theory. In contrast to RBV, rooting the sources of competitive advantages in firm-specific resources, grouped as tangible and intangible assets clustered in financial, physical, human and organizational (Barney & Hesterly, 2015, p. 116), DC affirm that they stem from firm-specific dynamic capabilities, set down as organizational and strategic routines and processes of management to adapt, integrate, and remodel the organization, internally and externally, to face high-velocity markets constant change (Teece et al., 1997, p. 515).
Finally, alluding to the most common critique of RBV, it is often brought up its vagueness, pleonastic, and tautological rhetoric. Moreover, it only provides ex post facto analysis and it is hardly applicable to small firms (Connor, 2002, p. 312). Divergently from subjectivisms and practicalities, DC are criticized for being interpreted as best practices, with commonalities that can be transferred between firms (Eisenhardt & Martin, 2000, 1111), hence not attaining long-term competitive advantages.
Part Four – Conclusion
Many schools of thought of strategy formation have tried, but could not yet answer how firms create and sustain competitive advantage. This predicts a bountiful research field to be explored for the years to come by scholars and practitioners. Strategic management, or simply strategy, has been the weapon to fight in the battle for that research, apparently applying the concept as if business is a war. What if it isn’t? This lead can conduce to different social constructs.
RBV has the merit of contributing to reverse the strategic management discussion from outside-in to inside-out, that is, moving from the prominent view in the 1980s, the Positioning school of Porter, too much prescriptive. Despite the roots of RBV being traced back to the 1950s, it only gained traction in 1984 with strong contributions of Wernerfelt and Rumelt.
Criticized of ignoring the mechanisms that contribute to transform resources in valued competitive advantage, especially in dynamic markets (Eisenhardt & Martin, 2000, p. 1106), RBV gave way to a DC in a sort of continuity or its extension (Teece et al., 1997, p. 513). DC emphasized the role of management in adapting, integrating and remodelling the organization, internally and externally, to face high-velocity markets constant change (Teece, 2014, p. 328), and this explains how resources are transformed in competitive advantage.
RBV and DC approaches are bound to appraisal and criticism, and are not so distinct one from the other, since they both emerge from the internal perspective of a firm to draw a strategic management process. Insofar as today, they have the merit of reinvigorating the discussion of strategy formation, independently of the source of competitive advantage coming from firm-specific resources or firm-specific dynamic capabilities. The business world is too complex, global and made of people, idiosyncratic by nature, hardly depicted in theoretical models. Perhaps strategy formation is a never-ending change journey.
The proposed objectives of this paper, to highlight the similarities and differences of RBV and DC, while trying to explain the fundamental reason and origin of those similarities and differences, were accomplished as per Table 2. However, the ambition to contribute to shed some light to the concepts, somehow confusing and unclear in the literature, might as well turned to be upside-down.
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