Insights From Micro-Foundation Building RBT

Competitive advantage is the central theme of strategy research and the resource-based theory (RBT) is one of the dominant approaches to competitive advantage. However, RBT is under increasing criticism despite its ascending status. The attack comes from three directions. Firstly, definitions of resources, competitive advantage and performance by resource scholars are vague and inconsistent, which sometimes results in circular reasoning. Critics declare that RBT is a tautology. Secondly, by imposing overly strict conditions on sustainable competitive advantage, RBT makes itself a victim of the factor price fallacy, the causal ambiguity paradox, and the resource sustainability and attainability paradox, which has seriously weakened the explanatory power of RBT. The last major criticism focuses on the hypothesis of resource heterogeneity on which RBT is based. RBT starts theoretical building from this hypothesis, but has spent few resources to explicate the origin of the heterogeneity. Owing to this drawback, RBT is likened to"roughly an ex-post account of the way in which a winning gambler chose to put her money on the red rather than on the black on the roulette table". In addition to these criticisms, RBT's contributions to research on competitive advantage lack organization and fail to form into a coherent body of knowledge. Scholars are still debating whether RB is a theory of rents or a theory of competitive advantage. Further development of RBT as a theoretical construct is negatively affected by this lack of coherency.Building on RBT, this paper has makes an in-depth study into the micro-foundations of competitive advantage, reinterpret ed the connotations and conditions of competitive advantage, established a micro-system of research on competitive advantage, solved some of the problems of RBT and highlighted some misconceptions by theoreticians and practitioners.Organization and logic of this paperResearch questions and ways to solve them are outlined in the preface of this paper, followed by a summary of the evolution and the latest developments of the underlying theory. With the theoretical background thus laid, the subsequent chapters of this paper are organized according to the logic behind the conceived micro-system on competitive advantages.Research on connotations of competitive advantage is the logical starting point of the micro-system. A majority of problems of RBT have something to do with the evasion definition of competitive advantage. This paper defines competitive advantage in terms of payments to resources, which constitutes the baseline for subsequent research on units of analysis and conditions of competitive advantage.After clarifying the connotations of competitive advantage, the next question is where competitive advantage originates, which is answered by research on units of analysis. Different levels of units of analysis mean different answers to the origin of competitive advantage. Units of analysis are the most import criterion to classify different thoughts on competitive advantage.While research on units of analysis traces the origin of competitive advantage to firm resources, studies on the conditions of competitive advantage reveal what kind of resources has the potential to generate sustained competitive advantage. The sustainability condition of competitive advantage centers on isolation mechanisms, and contents related to this topic form the core of this paper. Finally, the paper studies resource-picking and capabilities-building mechanisms, answering the question of the origin of the origin of competitive advantage and adding substance to the heterogeneity hypothesis.In short, this research on the connotations, units of analysis, conditions and building mechanisms of competitive advantage constitutes a logically consistent micro-system of competitive advantage. Applicable theories and research methodologiesTheories utilized by this paper include the social network theory, the positioning school, transaction economics, evolutionary economics and learning theories as well as RBT. Major conclusions of this paper are derived from normative reasoning supplemented by mathematical derivation.Major results achieved by this paper1. Boundary of the RBTThis paper has traced the evolution of the RBT and provided insights into the latest development of RBT. Based on a careful analysis of the close relationship CBV, KBV and NBV has with RBV, the author of this paper integrate these views into the unifying framework of RBT, which provides a useful lens through which resource-based research on competitive advantage can be conducted.2. Micro-system for research on competitive advantageThis paper has made an in-depth analysis of the micro-foundations of resource-based research on competitive advantage, examined the major hypotheses of RBT, reinterpreted the conditions of sustained competitive advantage, and constructed a micro-system of research on competitive advantage, which is evidently relevant to further research, both theoretical and empirical, on competitive advantage in the tradition of resource advantage.3. Major conclusions(1) Connotations of competitive advantageProblems of RBT are more or less related to the evasive definitions of competitive advantage. The payment perspective to competitive advantage proposed in this paper both solves the problems of the profit approach to competitive advantage and simplifies the issues of model operability.(2) Conditions for sustained competitive advantage.Conditions for sustained competitive advantage can be broken down into the generation conditions and the sustainability conditions of competitive advantage. Resource value is the only condition for generating competitive advantage while imperfect imitability is the only condition for sustaining competitive advantage. Imperfect mobility, while no longer considered as necessary for competitive advantage, may actually turn into an impediment to competitive advantage under certain circumstances.(3) Isolation mechanism of competitive advantageSustainability of competitive advantage is predicated on the existence of isolation mechanisms. Isolation mechanisms derived from barriers to imitation, collusion, barriers to cognition and comparative advantage weaken the converging force exerted on competitive heterogeneity and prolong or magnify the initial firm heterogeneity.Competence-based isolation mechanisms and collusion-based isolation mechanisms are sub-additive, which implies that firms with efficiency advantage will see their advantage eroded by pursuing market power-based strategies.(4)Barriers to resource imitationBarriers to resource imitation are the most basic and most important isolation mechanism. The higher the characteristics ambiguity of the key resource or capability is, the more ambiguous the relationship between firm performance and the key resource or capability, the more path dependent the formational process of the key resource or capability is, the complex the key resource or capability is, the higher the barrier to imitation.Inter-firm causal ambiguity is asymmetrical. If the characteristics ambiguity of the key resource is high, but the linkage ambiguity is low, barrier to imitation does not seriously impede the owner of the resource from leveraging the resource.(5) Origins of the originTraditional RBT only answered half of the question. The other half of the question that has been neglected is where resources come from. Strategic resources can be acquired from the strategic factor market, but the precondition is that asymmetrical expectations exist. Resources can be accumulated and the characteristics of the accumulation process determine the imitability of the resources. Resources can originate from asymmetries, which particularly applies to resource-poor firms. Inter-firm networks are also sources of resources, but the accessibility of network resources depends largely on the position the resource-seeker occupies in a certain network.Capability building is essentially a learning process, which in turn is the process of endogenous changes in firm routines. Organizational learning is composed of deliberate learning and improvisational learning. Experience accumulation, knowledge articulation and knowledge codification are mechanisms of deliberate learning, the effectiveness of which depends on task features. Organizational improvisation is more frequently resorted to by de novo firms. Organizational improvisation is necessitated by the dire needs of the moment, so improvisational failures should be no rare occurrence. When ad hoc problem solving becomes the dominant means of capability learning, firms should be prepared to learn from failures.Innovations of this paper1. Systems innovationThe major innovation of this paper lies in the systematic nature of the research. The positioning school of competitive advantage has established a grand macro-system of competitive research embodied in the master pieces of Michael Porter. The approach of transaction cost economics lacks a coherent body of knowledge on competitive advantage, but transaction cost economics is a well-established economics discipline. RBT is in an awkward situation in that it has neither evolved into a theory of the firm, as it was originally intended to, nor developed a systematic knowledge on competitive advantage. RBT is a micro-level theory of competitive advantage and therefore should have its own research agenda on competitive advantage. This paper, following the tradition of RBT, has delved deeply into the micro-foundations of competitive advantage and reinterpreted the resource-based view of competitive advantage. More importantly, this paper has constructed a micro-system on competitive advantage, incorporating connotations of competitive advantage, units of analysis of competitive advantage, conditions of competitive advantage, isolation mechanisms of competitive advantage and acquisition mechanisms of competitive advantage into a coherent body of knowledge. This is the first ever attempt made in the tradition of resource advantage.2. Innovative modelingBy extending and integrating existing models of RBT and models from other disciplines, this paper has designed the following new models on competitive advantage:(1) Integrative model on units of analysis of competitive advantage(2) Parsimonious model of conditions of competitive advantage(3) Integrative evolutionary model of isolation mechanisms of competitive advantage(4) Systems model of causal ambiguity base competitive advantage (5) NK model of barriers to resource imitation3. Innovative conclusionsThis paper shows that many problems of resource-based research on competitive advantage can be solved through micro-foundation building and theoretical reinterpretation. Specifically, innovative conclusions of this paper include:(1) Tautology of RBT partly originates from the definitional multiplicity of competitive advantage, which can be solved to a certain extent by redefining competitive advantage from the payment perspective. This redefinition can also relax the stringent conditions of sustained competitive advantage, eliminating the Factor Price Fallacy.(2) Imperfect mobility is neither necessary nor sufficient for the sustainability of competitive advantage. Resource value is the only necessary condition for a resource to generate competitive advantage while imperfect imitability is the only necessary condition for sustaining competitive advantage. This parsimonious model of competitive advantage helps solve Factor Price Fallacy, causal ambiguity paradox, and resource sustainability and resource controllability paradox.(3) Firm heterogeneity can be traced to firm prehistories. Post-entry evolution of firm resources and capabilities is a result of interactions among initial resource endowments and resource acquisition and capability building mechanisms. There is no"rule of riches"for competitive advantage. The relativity of competitive advantage determines only a handful of firms possess superior resources. The paradox of attainability and sustainability is a bogus preposition, as this paradox cannot be solved by any theory of competitive advantage if competitive advantage is defined as relative efficiency.