Literature Review

Role of firm’s recourses and capabilities in sustaining competitive advantage

The main objective that business organizations in particular should strive to attain is
achieving a competitive advantage position relative to their competitors (Ismail, Rose &
Abdullah 2012: 151). Globalization of world markets and the internationalization of
companies inevitably led to changes in the management of the enterprises. Because of this,
there are numerous challenges that the companies must deal with in order to survive and
create a sustainable competitive advantage (Ristovska 2013: 235).

To attain a competitive advantage level that can match those of their business rivals,
business organizations initially must understand their internal strengths and weaknesses and
their potential effects on the firm's competitive advantage. With information on the relative
internal strengths and weaknesses of their organization, management can be guided in the
process of making strategic business decisions to improve their overall position (Ismail,
Rose & Abdullah 2012: 151). Competitive strategy of companies consists approaches and
initiatives which need to be taken in order to attract more customers and to satisfy their
needs, while opposing to competitive pressures and strengthen its market position
(Ristovska 2013: 235).

Strategy and objectives of the company are directed towards the proper management and
use of resources, reduce of costs, maintain market position, meeting the demands of the
consumers and above all, maintain long-term competitive advantage over its rivals. In
achieving this goal, the company approaches towards utilization of advanced technologies
and information systems, as well as proper utilization, allocation and development of
resources and capabilities of the company (Ristovska 2013: 235).

Achieving competitive advantage which will be maintained enables the company to

increase its profitability. The question of how to increase the profitability of the company
and how to maintain a competitive advantage in terms of resources, the answer lies in the
possession of certain key resources that have specific characteristics such as value, inability
to copy and uniqueness. Competitive advantage can be maintained to obtain if the company
effectively deploy these resources to its products and markets (Ristovska 2013: 236).

Resource Based View

RBV strategy focuses on the optimization of the role of resources and capabilities as the
principal basis for a sustainable competitive advantage (SCA). The RBV is a theory
centered on the nature of firms based on its resources, as opposed to theories such as
transaction cost economics, which seeks to explain the reason why firms exist (Enríquez
2015: 51). Another way to define the RBV is as a determined collection of assets or
resources that are tied “semi-permanently” to the firm (Wernerfelt 1984: 172).

The RBV has had a major impact on strategy because the typical product/market
orientation is no longer suitable due to the constant and rapid change of the external
environment and customer preferences. It is easy to catch this if we consider that it is more
feasible to control internal resources and capabilities to face the real world, than changing
the world to adapt to the firms’ needs (Enríquez 2015: 52). The RBV of the firm allows us
to respond significant questions such as: On which of the firm´s resources should
diversification be based? Which resources should be developed through diversification?
(Wernerfelt 1984: 172).

Dynamic Capabilities Approach

RBV strategy seems to be not enough to support significant and sustained competitive
advantage, especially in rapidly changing environments. The problem with RBV is that the
view of the firms as a bunch of resources is very static and limited and does not provide
explanations on how successful firms endure over time with an increasing competitive
environment. Those firms that have sustained good positions seem to demonstrate timely
responsiveness and rapid adaptation to environment through internal changes in their
structure and resources. It seems that they have mastered the management capability to
coordinate and redeploy internal and external resources and competences. This ability to
achieve new forms of competitive advantage through the renovation of based resources and
competences belongs to dynamic capabilities approach. (Enríquez 2015: 52).

According to Barney (1991: 110), dynamic capabilities follow the theory of RBV of the
firm. As a matter of fact, DC can be seen as a complement to RBV approach. Dynamic
capabilities are not capabilities by themselves neither are they resources. When referring to
the term dynamic capabilities, we always must use both words together; otherwise the
meaning surely is not going to be the correct. (Enríquez 2015: 53).

Organizational Resources

Figure 1: A Resource Based Approach to Strategy Analysis (Grant 1991: 115)

Resources are inputs into the production process of the company investment equipment,
skills of employees, patents, finances and talented managers. Resources include a range of
individual, social and organizational phenomenon (Ristovska 2013: 236). As mentioned,
the resource-based view (RBV) of the firm predicts that certain types of resources owned
and controlled by firms have the potential and promise to generate competitive advantage,
which eventually leads to superior organizational performance. Organizational resources
are categorized as tangible resources, (namely human, physical, organizational and
financial), and intangible resources, (namely reputational, regulatory, positional, functional,
social and cultural) (Ismail, Rose & Abdullah 2012: 153).

Tangible Resources
The Resource Based View (RBV) of the firm predicts that certain types of resources it
owns and controls have the potential and promise to generate competitive advantage, which
eventually leads to superior organizational performance (Ismail, Rose & Abdullah 2012:
153). Physical resources such as the plant, machinery, equipment, production technology
and capacity contribute positively towards organizational competitive advantage and
eventually result in superior organizational performance (Morgan, Kaleka & Katsikeas
2004: 94). In addition, financial resources such as cash-in-hand, bank deposits and/or
savings and financial capital (e.g., stocks and shares) also help explain the level of
organizational competitive advantage and performance (Ismail, Rose & Abdullah 2012:
153). However, Ristovska (2013) argues that physical assets alone usually cannot enable
the company to maintain competitive advantage (Ristovska 2013: 237).

Intangible Resources
Intangible resources are deemed to be the more important and critical ones in attaining and
sustaining a competitive advantage position because of their natures, which are not only
valuable but also hard-to-copy relative to the other types of tangible resources (namely
physical and financial). In short, conceptually and empirically, resources are the foundation
for attaining and sustaining competitive advantage and eventually superior organizational
performance. Human resources such as top and middle management, and administrative
and production employees were also able to explain the extent of organizational
competitive advantage and the resulting organizational performance (Ismail, Rose &
Abdullah 2012: 154).
Organizational Capabilities
Studies have shown that there is a significant relationship between capabilities and
competitive advantage. Capabilities are conceptualized and categorized as, inter alia,
organizational skills and collective learning, core competencies, resource development
competence, organizational integration, strategic decision making and alliance-building,
product development, relationship-building and informational and technological
capabilities (Prahalad & Hamel, 1990: 82). With excellent strategic manufacturing practices
and strategic integration, deployment of resources and capabilities, firms can attain
competitive advantage and better performance. Organizational capabilities are indeed an
important element in a firm’s strategy, and a firm's knowledge is one of the vital
ingredients in attaining competitive advantage and good performance (Ismail, Rose &
Abdullah 2012: 154).

Competitive Advantage
The competitive strategy of the company consists of business approaches and initiatives
taken to attract customers and to meet their needs, to counter competitive pressures and
strengthen its market position. The basis of competitive strategy of the company consists of
internal company initiatives that lead to superior value for customers. But also it contains
offensive and defensive moves to counter competitors, actions for exchange of resources to
improve the long-term competitive ability of the company and market position, as well as
efforts to respond to any market conditions (Ristovska 2013: 237).

Role of Strategy in Achieving Competitive Advantage

The pursuit of competitive advantage is indeed an idea that is at the heart of strategic
management literature. Understanding sources of sustained competitive advantage has
become a major area of study in strategic management. The resource-based view stipulates
that in strategic management, the fundamental sources and drivers of firms' competitive
advantage and superior performance are mainly associated with the attributes of their
resources and capabilities, which are both valuable and costly-to-copy. Furthermore, it is
important to have a good strategy to attain competitive advantage from the resource-based
view. A well-formulated and implemented strategy can exert a significant effect on
attaining a level of competitive advantage. The resource-based view provides an avenue for
organizations to plan and execute their organizational strategy by examining the position of
their internal resources and capabilities towards achieving competitive advantage (Ismail,
Rose & Abdullah 2012: 152).

Creating Competitive Advantage through Resources and Capabilities

When managers will identify the resources and strengths of the company, should be
carefully assessed their competitive value and their importance in building strategy. Some
advantages of resources and competitive capabilities are more important than others
because they give more power to the strategy or they are major factors in participating in a
stronger market position and higher profitability. Most companies are well supported with
competitive valuable resources, much less a competitive superior resources. Many
businesses have a mix of resources - one or two valuable resources, some good, satisfactory
to the average. Only a few companies, usually the strongest leaders in the industry, possess
competitive superior resources. The principle of building the strategy is simple: the
company strategy should be tailored to align with company resources - taking into
consideration the strengths and weaknesses. Managers should build their strategies
exploiting capabilities - its most valuable resources and avoid strategies that have tough
requirements in areas where the company is weakest (Ristovska 2013: 237). Companies
who are lucky enough and have specific skills or other competing superior resource must
wisely implement their strategy, because their value will decrease with time and
competition. Consider what happened to Xerox. During what has become known as its "lost
decade," the 1970s, Xerox believed its reprographic capability to be inimitable. And while
Xerox slept, Canon took over world leadership in photocopiers. In a world of continuous
change, companies need to maintain pressure constantly at the frontiers -building for the
next round of competition. Managers must therefore continually invest in and upgrade their
resources, however good those resources are today, and leverage them with effective strate-
gies into attractive industries in which they can contribute to a competitive advantage
(Collis & Montgomery 1995: 124).

The issue of firm performance has been central in strategy research for decades and
encompasses most other questions that have been raised in the field, as for instance, why
firms differ, how they behave, how they choose strategies and how they are managed
(Porter 1991: 95). In the 1990s, with the rise of the resource-based approach, strategy
researchers’ focus regarding the sources of sustainable competitive advantage shifted from
industry to firm specific effects. As it was initiated in the mid-1980s, the resource-based
view (RBV) has since become one of the dominant contemporary approaches to the
analysis of sustained competitive advantage. A central premise of the resource-based view
is that firms compete on the basis of their resources and capabilities (Bridoux 2004: 1).

Competitively Valuable Resources

In some cases, resources or capabilities help the company to increase its revenues and
reduce costs, but the company gets only a temporary advantage because competitors can
quickly imitate. Many e-businesses in the early 21st century have seriously reduced their
profits because of the new (or existing) competitors who very easily copied their business
models. A significant example is Priceline.com, which offers to the consumers to buy
online tickets and a wide range of other products. It was too easy for competitors (for
example, the association of major airlines) to copy the products and services of Priceline
(Ristovska 2013: 237). Resources and capabilities must be rare and valuable, difficult to be
imitated or difficult to replace in order the company to achieve competitive advantage
which will be maintained over time (Gregory, Lumpkin & Marilyn 2005: 88). Because all
resources lose their value, an effective corporate strategy requires continuous investment in
order to maintain and build valuable resources (Ristovska 2013: 237).
 Figure 2: what makes resources valuable (Collis & Montgomery 1995: 120)

Managing Resource to Build Competitive Advantage One of the main strategic decision-
making processes that the managers are facing is deciding which resources to develop and
direct. Top managers spend a lot of time analyzing, selecting, developing and directing the
necessary resources to enable the company's competitiveness. These resources and
competitive advantages must be constantly upgraded or modified to enable the company to
maintain its competitive advantage over other companies in the market (Charls & Jones
2007: 93). Managing the process of identifying and developing resources required from the
managers examining the weakness of resources that must be corrected to ensure that the
current strategy of the company will be competitive in the future. It is therefore important
to evaluate the quality of competitive advantages, resources and skills needed in the current
and desired strategy and competitive position in the future (Ristovska 2013: 238).

Resources cannot be evaluated in isolation, because their value is determined in the

interplay with market forces. A resource that is valuable in a particular industry or at a
particular time might fail to have the same value in a different industry or chronological
context. For example, despite several attempts to brand lobsters, so far no one has been
successful in doing so. A brand name was once very important in the personal computer
industry, but it no longer is, as IBM has discovered at great cost. Thus the RBV
inextricably links a company's internal capabilities (what it does well) and its external
industry environment (what the market demands and what competitors offer). Described
that way, competing on resources sounds simple (Collis & Montgomery 1995: 120). Two
issues must be considered when determining specific strengths required for the strategy: Do
the strengths support the competitive advantage position, resources and capabilities of the
company and whether they can be implemented effectively? Starting with the strengths that
the company possesses, strategist determines the unique features of the company's current
strengths - those that are different from those of competitors. These features can include
competitive advantages and capabilities. Once you determine the critical advantages, the
strategy has been developed to use the same (Ristovska 2013: 239).

Capabilities and Competitive Advantage

Previous studies have illustrated that there is a significant relationship between
informational capabilities and competitive advantage in organizations, where informational
capabilities are measured in terms of human resource training programs, contact and job
rotation among employees (Ismail, Rose & Abdullah 2012: 155).

However, research has also shown that there is a significant relationship between product-
development capabilities and competitive advantage in organizations (Morgan, Kaleka &
Katsikeas 2004: 94), where product development capabilities are measured in terms of the
research and development capacity, adoption of new methods in the manufacturing process
and product promotional and marketing activity. Indeed, studies have also shown that there
is a significant relationship between organizations’ relationship-building capabilities and
competitive advantage, where relationship-building capabilities are measured in terms of
the networking and relationship between the firms and their suppliers, distributors and
customers (Ismail, Rose & Abdullah 2012: 155).