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Running Head: SUMMARY, OF RESEARCH

Resource Based View of Information Systems: A critique Avimanyu Datta, Washington State University Fall semester, 2007

Electronic copy available at: http://ssrn.com/abstract=1029228

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RESOURCE BASED VIEW The resource-based view (RBV) argues that firms possess resources, a subset of which enables them to achieve competitive advantage, and a subset of those that lead to superior long-term performance. Resources that are valuable and rare can lead to the creation of competitive advantage. That advantage can be sustained over longer time periods to the extent that the firm is able to protect against resource imitation, transfer, or substitution. In general, empirical studies using the theory have strongly supported the resource-based view. Further the Resource based view makes a useful distinction between information technology and information systems. The former is asset based, while the later comprises a mixture of assets and capabilities formed around a productive use of IT. Resource Based View (RBV) and Sustained Competitive Advantage Barney (1991) specified conditions under which firm resources can be source of sustained competitive advantage. While resource homogeneity at best can lead to competitive parity, resource heterogeneity is a necessary condition for competitive advantage. To have a competitive advantage across successive strategic inflection points, resources in the firm must be inimitable. Barney categorized resources as: physical capital, human capital and organizational capital. He asserted that resources per say do not create competitive advantage; rather its unique usage and interaction among the three types create idiosyncrasies that makes them unique and imitable. While two organizations may share similar resources both may not yield a competitive advantage that is sustainable. By sustained competitive advantage, Barney means, that a firm is implementing a value creating strategy not simultaneously being implemented by any current or potential

Electronic copy available at: http://ssrn.com/abstract=1029228

Summary

competitors and when these other firms are unable to duplicate the benefits of this strategy. In order for a resource to be a source of competitive advantage it must be: 1. Valuable: A resource is valuable when it enables a firm to conceive or implement

strategies geared towards increasing efficiency and effectiveness. 2. Rare: A firm enjoys a competitive advantage when it is implementing a strategy that

is not simultaneously being implemented by large number of competitors. If a resource is abundant, then its usage could lead to perfect competition, where the low margins by each player will not lead to an advantage. Thus, if a particular bundle of form resource is not rare then large number of firms can actually be able to conceive and implement strategies in question. 3. Imperfectly inimitable: A recourse can become imperfectly inimitable through (a)

historical conditions by which the resources is captured, e.g. unique scientific breakthroughs (nano -Fabrication), unique capabilities;(b) Causal ambiguity, that is when the link between resources controlled by the firm and a firms sustained competitive advantage is understood imperfectly (secret recipes at traditional restaurants); (c) social complexity, competitive advantage could result from interaction among employees within organizations, among suppliers and customers. While the resource per say might be bought off the shelf, the interactions, and the associated idiosyncrasies do not have a clear price tag. 4. Non substitutable: The absence of a strategically equivalent resource makes

competitive advantage sustainable as opposed to temporary. Resource Based view in context of Information Systems Mata, Fuerst, and Barney (1996), extended Barneys (1991) work and superimposed the resourced based analysis and studies the capabilities of IT as a resource in creating sustained competitive advantage. In other words they developed the resource based model, identified some attributes of

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IT as a resource and mentioned if they are source of sustained competitive advantage. They identified that early literature lined sustainable advantage can be reached through deployment of IT by locking customers. Mata et al. however, argued that firms cannot gain advantage by playing games with customers. They will sooner or later find a better substitute or another supplier could find opportunity by offering improved services. Further, they mentioned that since Information Technology can easily be duplicated, like any other resources will not create any value that is sustainable competitively. The four attributes they studied as possible sources of sustained competitive advantage are, Access to Capital, Proprietary Technology, Technical IT skills and IT Managerial Skills. They found that access to capital is not a source of sustainable competitive advantage, because capital can be raised through numerous means, not competitive advantage. Similarly, diffusion of IT and expiration of patents, and gradual commonality makes IT quite easily imitable, making it diverge from being a prerequisite to sustained competitive advantage. The mobility of technical IT skill shows that such skills are explicit and easily codifiable, and thus cannot generate competitive advantage. IT managerial skills, which are a skill that is very tacit by nature, developed through years of understanding or realizing the ability of IT and requirements of business can become a source of sustained competitive advantage. IT capability and Resource Based view Bharadwaj (2001) linked the IT capability with firm performance. IT capability according to her is the ability to mobilize and deploy IT-based resources in combination or co-present with other resources and capabilities. She classified IT resources into three categories:

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1.

IT infrastructure: This is simply the physical IT infrastructure that forms the core of the

firms IT assets. She criticized Mata et al.s (1996) work that IT per say cannot be a source of sustained competitive advantage. She mentioned that such view is nothing but reductionist that seeks to value the infrastructure solely in terms of individual components, ignoring the synergistic view of benefits from integrated systems. The author compares integrated versus none integrated IT and mentioned that the non integrated category constrains an organizations choices and clearly has little impact on a firms overall performance. Some of the key benefits of IT were infrastructure are: (a) develop key apps rapidly, (b) share info across products, services, and locations, and (c) exploit opportunities for synergy across business units 2. Human IT resources: It comprises both Technical and managerial skills. She agreed with

Mata et al.s view that Managerial skills are tacit in its nature and cannot be codified. Some of the core functions of the Human IT resources were: (a) integrate IT with business planning processes more effectively, (b) develop reliable and cost effective applications that support business needs of the firm faster than competition, (c) communicate and share work with other business units more efficiently, and (d) anticipate future business needs of firm, innovate valuable new product features before competitors. Thus we see that it is from the Human IT resources that IT can start to become imperfectly imitable by making the link between resource and performance ambiguous and through sharing and collaboration construction of a socially complex procedure. 3. IT enables Intangibles: Citing Brynjolfsson and Hitt (1998), Bharadwaj mentions that

usage of IT can result in improved customer service, enhanced product quality, increased market responsiveness, and better coordination between buyers and suppliers. The author integrates research findings and classified the Intangibles in three categories: (a) customer orientation (ITenabled relationship management through CRM) (b) development of knowledge assets (3) synergy, that is ability tp collaborate and among departments (groupware systems).

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Using matched sample methodology, the author and using the Wilcoxon Rank Sum Test, she found she proved the following hypotheses: 1. Superior IT capability is associated with higher profit ratios 2. Superior It capability is associated with lower cist rations. With few exceptions the hypotheses were supported. It was concluded that mere investment in IT will not result in superior performance, but one must work and identify innovative ways to create firm-wide IT capability. While IT must support business processes, organizational restricting is mandated. Further the benefits from IT are usually implicit that it improves product design, better customer satisfaction, increased market responsiveness, so synergy across organizational units and with suppliers and customers is necessary, to grab the potential of IT. Extension of the Resource based view Inclusion of Environmental factors into Resource based view Melville et al (2005) proposed a unique view where IT created value within a Focal firm but the impact will be moderated by Competitive Environments: comprising of the Industry characteristics, and Trading Partner Business Processes; and the Country characteristics. This bigger picture is extremely important to assess alignment of IT strategy from investment and deployment point of view in a greater more constant macro moderating characteristics. Wade and Hulland (2004), extended Mata et al.s and Barneys work, by mapping the parameters of resources that make them vehicle of sustainable competitive advantage, with three types of IT resources: Inside out, Outside in and Spanning. They showed that for advantage creation the Value of information, Rarity and Appropriability are important but for sustenance, Imitability, Substitutability and mobility are more important. Further they also showed the

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importance of environmental dynamism (turbulence), Munificence (industry maturity), and Environmental complexity towards if resources will go towards inside out or outside in. They concluded that restricting resource based view to only firm level variables will only give a restrictive picture. The reason is IS resources usually span across organizational boundaries and thus become more sensitive towards being exposed to the dynamism of discontinuous and cataclysmic environmental changes. Testing Specific Capabilities of IT in creating a dynamic organization Bhatt and Grover (2005) tested specific IT related capabilities, which are value, Competitiveness, and Dynamic Capabilities. This work went ahead with firm specific views of the organization and draws inspirition from Wade and Hullands work (under review then). While value strictly deals with creating and sustaining competitive advantage, competitive capabilities views the organization as an entity within the greater ecosystem, where the capabilities of IT resources spans across organizational boundaries. And dynamic capabilities mention the organizations competence to renew itself against environment. Value Capabilities were operationalized using Barneys work. While value and heterogeneity were necessary for sustained competitive advantage, imperfect mobility was termed sufficient. The proposed hypothesis was H1: the quality of IT infrastructure will not be related to the competitive advantage of the firm. Competitive Capabilities were measured through IT business Experience and building relationship infrastructure, which is similar to building business ecosystem. The hypotheses were; H2:higher quality of IT business experience will have a positive effect on the competitive advantage of the firm. H3: Higher quality of the relationship infrastructure will have a positive on the competitive advantage of the firm. Dynamic capabilities are the abilities associated to self renew itself against changing business environment. The proposed hypotheses were; H4:Higher level of intensity of organizational learning will have a

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positive effect on the quality of (a) IT infrastructure, (b)IT business experience, (c) the relationship infrastructure. H5: Higher level of the intensity of learning will have a positive effect on the competitive advantage of the firm. The research was conducted by collecting data from CIO from firms whose revenues ranged from $50 million to $140 billion. All but the fifth hypotheses were supported. The authors also mentioned that hypothesis five could not be proved because learning does not occur in vacuum and its useless to organization unless its project specific and put to the projects. Only path specific knowledge would lead to competitive advantage. Inclusion of Knowledge sharing in the Resource Based View Ray et al.(2005), tested the impact of Technical IT skills, Generic Technologies, IT spending, Flexible IT Infrastructure and shared knowledge on Relative Process performance. The study was conducted in the context of customer service. The study showed that Technical IT skills, generic technologies and IT spending did not explain significant variance in customer service performance. Knowledge sharing and flexibility of IT had a direct impact process performance. Knowledge sharing, however when explained though technical IT skills, Generic Technologies and It spending, showed no significance impact. There are two types of performance: Absolute and Relative. While absolute performance may increase with the IT spending, one must be cautioned that such technologies are available and will not lead to absolute performance. At best it will make a firm at par with the rest, making resource homogeneity, one significant characteristics of perfect competition. Superior relative performance from IT rests less on level of IT spending or technical skills than on deployment of resources in a firm specific manner in general and in creating effective partnerships IT and business managers in particular.

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Comparison with other models Oh and Pinsonnealut (2007), made a comparison among several competing views that are used to assess the value of IT. It compared resource based perspective with the contingency based perspective of strategic value of IT. Further they compared if nonlinear approaches capture the relationships between strategic alignment of IT (SAIT) and organizational performance better than linear approaches. They proposed two hypotheses, which are: 1. The contingency-based perspective is a better predictor of the strategic value of IT than the

resource-centered perspective. 2. In the contingency-based perspective, a nonlinear model is a better predictor of the

strategic value of IT than a linear model. On one hand contingency based approach is better at explaining the impact of cost related IT applications on firm performance. Alignment between business strategy and IS on cost reduction was found to have a significant negative association with firm expense. Resource based perspective on the other hand was has a stronger predictive capability of IT impact on firm revenue and profitability. The authors found that investments in growth oriented applications were directly and positively related to firm revenue and profitability. Non linear approaches were found to provide additional insights that help comprehend relationship between alignment and firm performance. A new Dimension Zhang et al. (2007) extended the resource based view and studied Small medium business (SMB)1 especially those who are born global. That is they are firms that from its inception has foreign clients from their inception. They linked IT capability for these firms from the dimensions of

Theyarefirmsthathaveemployeestrengthsform1through999not500.Enterpriselevelstartsat1000.

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Information Intensity, Environmental Uncertainty, International Market Orientation, International Entrepreneurial Orientation, Organizational Learning orientation, and International performance. All the hypotheses but the one related to International market orientation were supported. They also studied if Cultural differences affected attitude towards IT adoption. And they did not find any. This result was exceptional in when compared to the hue and cry where many researchers posited to include cultural and National variables in IT studies. The reasons for these exceptions were: 1. SMBs from their inception are a part of the dominant global supply chain. 2. Isomorphism: These SMBs try to model themselves after the clients and the leaders in theor industry, as a means to play safe and avoid uncertainty. The results overall suggested a convergence perspective. Because SMBs operate on low margins, a process improvement through IT deployment is the key to their success. Realizing the potential of SMBs in adopting IT, and lack of cash richness, organizations like IBM, SAP, and Oracle have come up with a gamut of Hosted IT products like Hosted ERP, SCM, CRM, ITSM. Summary Resources per say do not create values. In drawing an analogy, lets talk about the some secret delicacies. The possessions of the spices, the oils, the garlic, and the onions do not create a taste which tickles the taste buds even after decades. And so the restaurant generates sustained competitive advantage locking the customers, while its competitors keep wondering there must be something in the quality of their spiceslets buy it from where they buy it. But its the inimitable procedures of art passed on generations (history), about the complex interaction between the ingredients (causal ambiguity) that creates the taste which entices the customer.

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Barneys (1991), framework, suggests the kind of empirical questions that need to be addressed in order to comprehend whether a firms particular resource or its combination can creates advantage that is longstanding. The answer can be explored in asking a series of decomposed questions: (a) Are the resources valuable, (b) Are the resources rare, (c) Are the resources imperfectly inimitable? (d) Are there any substitutes for the resources? This concept was further extended by Mata et al (1996), who applied the Resource based view to comprehend if IT is a source of sustained competitive advantage. They asserted, access to capital, proprietary technology, IT technical skills through its availability, diffusion and spillovers are not valuable, rare or immobile denying them to be sources of sustained competitive advantage. The exception was IT managerial skill, which is tacit, requires a complex blend of education, experience and intuition whereby an individual can translate business requirements into technical terms and vice versa. Further, extending Bharadwaj (2000), linked IT capability with firm resources. While IT must support business processes, organizational restricting is mandated. Further the benefits from IT are usually implicit that it improves product design, better customer satisfaction, increased market responsiveness, so synergy across organizational units and with suppliers and customers is necessary, to grab the potential of IT. Wade and Hulland (2004) included industrial factors as moderating variables towards choice of IS resources as inside out or outside in. The factors were environmental munificence, environmental turbulence and complexity. Restricting resource based view to only firm level variables will only give a restraining picture. The reason is IS resources usually span across organizational boundaries and thus become more sensitive towards being exposed to the dynamism of discontinuous and cataclysmic environmental changes. Bhatt and Grover (2005) measured three types of capabilities that could be linked to IT resources. They are creating value, Competitive

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capabilities, and Dynamic capabilities. While value strictly deals with creating and sustaining competitive advantage, competitive capabilities views the organization as an entity within the greater ecosystem, where the capabilities of IT resources spans across organizational boundaries. And dynamic capabilities mention the organizations competence to renew itself against environment. The analysis of Ray et al (2005) showed that throwing money on IT would not increase relative advantage at best may increase absolute performance. Superior relative performance from IT rests less on level of IT spending or technical skills than on deployment of resources in a firm specific manner in general and in creating effective partnerships IT and business managers in particular. While most studies concentrated on the large firms, Zhang et al. (2007) studied Small Medium Business (SMBS), particularly those that have a significant portion of business from foreign clients. The results showed a converging philosophy towards IT adoption and usage, irrespective of cultural heterogeneity. The reasons are: (a) SMBs from their inception are a part of the dominant global supply chain; (b) Isomorphism: These SMBs try to model themselves after the clients and the leaders in theory industry, as a means to play safe and avoid uncertainty. Realizing the potential of SMBs in adopting IT, and lack of cash richness, organizations like IBM, SAP, Oracle have come up with a gamut of Hosted IT products like Hosted ERP, SCM, CRM, ITSM. This confirms to Gary Hamels title work in Harvard Business Review Funding Growth in an Age of Austerity. References Barney, J. (1991) "Firm Resources and Sustained Competitive Advantage," Journal of Management, 17(1), pp. 99-120. Bharadwaj, AS. (2000) "A Resource-based Perspective on Information technology Capability andFirm Performance: An Empirical Investigation," MIS Quarterly, 24(1), pp. 169- 196.

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Brynjolfsson, E. & Hitt, L. (1998). Information Technology and Organizational Design: Evidence from Miocrodata. MIT, Sloan School of Management. Retrieved June 1, 2004 from http://ebusiness.mit.edu/erik/ITOD.pdf Bhatt, G.D. & Grover, V. "Types of information technology capabilities and their role incompetitive advantage," Journal of MIS, 22, 2005, pp. 253-277. Mata, F.J., Fuerst, W.L., and Barney (1995) Information Technology and Sustained CompetitiveAdvantage: A Resource-based Analysis, MIS Quarterly, 19(4), pp. 487-505. Melville, N., Kraemer., and Gurbaxani, V.(2004). Review: Inormataion Technology and Organizational Pareofmance: An Integrative model of IT Business Value. MIS Quarterly, 28(2), pp.283-322. Oh, W., and Pinsonneault, A. On the Assessment of the Strategic Value of Information Technologies: Conceptual and Analytical Approaches, MIS Quarterly, 3 1(2), 2007, pp. 239-261. Ray, G., Muhanna, WA., and Barney, J.B. "Information technology and the performance of the customer service process: A resource-based analysis," MIS Quarterly, 29,2005, pp. 625652. Wade, M., and Hulland, J. "The Resource-Based View and Information Systems research: Review,Extension, and Suggestions for Future Research, " MIS Quarterly, 28(1), 2004, pp. 107-142. Zhang, M., Sarker, S. and Sarker S. Drivers and Effects of IT Capability in Born-Global Firms: A Cross-national Study, Working Paper, International Conference on Information Systems, 2007.