resource-based theory of the firm

resource-based theory of the firm

a THEORY OF THE FIRM developed by business strategists that presents an alternative portrayal of‘the firm’ to that presented in conventional microeconomic theory In conventional (static) theory, all firms in a market are assumed to be the same in terms of the resources they possess and their production functions and cost structures. The resource-based theory in contrast, postulates that all firms are different, to a greater or lesser degree -in essence, such a firm consists of a ‘unique bundle of resources and capabilities’, which can give them COMPETITIVE ADVANTAGES over rival suppliers. If a firm is to develop a sustainable competitive advantage, it must be underpinned by resources and capabilities that are scarce and imperfectly mobile, otherwise its advantages could be quickly replicated by other firms. Thus, firm-specific assets such as patents, brand names, human assets and systems that arise from a firm's experience become the basis of long-term competitive advantage.

It must be emphasised that the two theories are not contradictory. The ‘representative’ firm in conventional theory is an expository device to explain resource allocation processes at the level of the market; in contrast, the resource-based theory places the focus on the firm itself as it seeks to become a ‘competitive winner’ by meeting and beating rival suppliers. However, the resource-based theory is useful insofar as it allows economists to address important features of markets not explicable by conventional theory. For example, if all firms are equal, how is it that some firms decline and fail while others thrive and increase their market shares, thus leading to an increase in MARKET CONCENTRATION? The resource-based theory suggests that, looking at market processes dynamically, some firms may be more efficient than others because they possess better resources and capabilities than rivals; for example, their internal organizations may be ‘leaner and fitter’ and better able to adapt to changes in customer demands; they may possess superior production methods and techniques; and their ability to create and market new products may be greater than that of rivals.

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