Wednesday, 28 November 2007

Resource-Based View and Core Competencies: Results, not Objectives!

Resource-Based View of the firm used to be (well, still is - I guess the jury is out on this one) one of the most influential theories about understanding strategic management. Here’s one take on why I’m looking for something else.

Resource-Based View claims that sustained competitive advantage is derived from the “resources and capabilities a firm controls that are valuable, rare, imperfectly imitable, and not substitutable” (Barney et al. 2001). Resources can be things such as assets, organizational characteristics, processes, aptitudes, information and knowledge controlled by the company and its employees (Barney 1991).

Then, competitive advantage is defined as something that allows the company to earn above-average returns, compared to other firms in the same industry.

In other words, you win if you have and can continue to have something that other firm’s don’t have, and can combine those somethings into something else (that’s called the product) that is better than what your competition can do.

This leads us into the idea of Core Competency (Pralahad & Hamel 1990), which has been used often to justify all kinds of business activities from outsourcing to training. In short, it’s about the idea that there are activities what you can do better than the competition, and others where someone else is a better choice - and that you should concentrate on the things you can do really well. If that core competency is sustainable, then it is sustainable competitive advantage. In technical terms, that would indicate the presence of piles of money and stock options.

Coyne, Hall and Clifford (1997) open the definition a little by proposing that for a competency to be a core competency, “the skills or knowledge must be complementary, and taken together they should make it possible to provide a superior product.” Leonard-Barton (1992) says that core competency should differentiate a company strategically.

This is sound advice and a neat, not to mention hugely influential theory. The problem is that it doesn’t really give any directions of what to do as practicing managers or consultants.

Like many others have noted (for example, see Priem & Butler 2001), the entire resource-based view smacks of tautology and circular logic. Almost everything can be a “resource”, so you can pick any successful company and point out that those and those are the core competencies.

Even the inter-evaluator agreement inspires confidence only rarely. For example, some say that Volvo’s core competence is safety - and others tell it’s really in the sourcing process of high quality components. Probably someone else could say that it’s the managerial skill to pick good people to lead the sourcing process…I sometimes wonder how many Master’s thesis are written about the subject and how many of those agree with each other!

Other criticisms from Priem & Butler are that one can get to the same result via different resource configurations, and that - interestingly enough, since we and others are sometimes equating marketplace with battlespace - the role of product markets is underdeveloped in the argument.

What’s more damning is that resource based view and core competency thinking (incidentally, this applies to most business research) are really good at telling you what you’ve done well after the fact, but for guidance on future directions?

What I say isn’t that RBV and core competencies should be ditched, but that they (especially core competencies) should be seen as results instead of objectives.

And more specifically, they should be seen as results of long-term Boyd cycling the competition. That’s where those competences are forged: in the crucible of training, practice, and success, which leads to increased internal cohesion, elimination of needless or harmful practices, better morale, and intuitive understanding of the environment, among others.

In academic-speak, competencies are path dependent, meaning that in order to achieve similar capability, one must go through similar experiences. (Although note again that one can achieve similar outcomes through entirely different capabilities. There are water desalinization plants and aquifer drills, and both use quite different competencies to produce drinking water.)

In other words, there are no true shortcuts to happiness - and I’ve noticed that this is something that just isn’t understood by many people, no matter what their rank or bonuses. The story of General Motors trying to copy Toyota’s practices is just one case in point.

Core competencies are not something that one can just start doing and say, “we have these core competencies”. They are emergent, in other words. And here’s the rub: there’s no way of predicting company’s future core competencies from a set of resources it possesses, unless you take some absurdly abstract position and say that a company’s core competency is in creating core competencies... Which, when you think about it, brings you back to out-cycling the competition and therefore creating the capability.

So here’s a trick question: why do you need to out-cycle your competition to develop a sustainable competitive advantage?


Anonymous said...

Good work.
keep it up

Raz said...

I was really impressed. I am planning to do a research work on Resource based view in Indian context. I will like to join this group.

Anonymous said...

Have you looked at Pisano and Teece's Dynamic Capabilities?

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