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The resource-based view of the firm and causal ambiguity'

The Resource-based view of the firm The RBV is a theoretical framework that explores the reasons for inter-firm performance differences. A firm is said to have a competitive advantage if it is able to create more economic value than the marginal competitor in its product market, and where economic value is defined as the difference between the perceived benefits gained by the purchasers of the good and the economic cost to the enterprise (Peteraf & Barney, 2003). The theory’s intellectual roots are in empirical comparative industry and firm specific resource analysis, and the resource-based theory is based on the premise that rent generating firm resources and capabilities that are heterogeneous and immobile can provide a basis for competitive advantages, both temporary and sustainable (Penrose, 1960; Lippman & Rumelt, 1982; Wernerfelt, 1984). Barney (1991) clarified the concept of resource heterogeneity and immobility by combining it with a series of questions about the business activities of the firm that can be applied to analyze potential of the firm’s resources as sources of sustained competitive advantage: the questions of value, rarity, inimitability and non-substitability (VRIN). The VRIN framework has become a new strategic management orthodoxy that specifies conditions under which sustained competitive advantage might exist. If a firm has resources that are valuable, rare, and costly or impossible to imitate, and the firm is organized to exploit and leverage these resources, then the firm can expect to enjoy a sustained competitive advantage.

However, while the RBV has become one of the main conceptual frameworks in explaining the origins of competitive advantage and superior firm performance, its contribution toward understanding competitive advantage remains unfulfilled (Bingham & Eisenhardt, 2008). The RBV has been criticized for lacking empirical support (Hoopes et al, 2003 in Bingham & Eisenhardt, 2008) and that the RBV theory is tautological (Priem & Butler, 2001a, b). According to Priem & Butler, writing from a logical positivist perspective, a theory is tautological when it is true by logic but cannot be subjected to Popperian falsification. According to Popper, a scientific system’s logical form must be such that it can be singled out by means of empirical tests in a negative sense, and that it must be possible for an empirical scientific system to be refuted by experience (Popper, 2008, pp. 18-19). Although tautology itself is not a problem, “the problem occurs when one is offering a tautological statement that is intended to have empirical content” (Priem & Butler, 2001b, pp.58). As the RBV defines competitive advantage in terms of value and rarity, and as the characteristics of resources that lead to competitive advantage are also defined in terms of value and rarity, this makes the theory tautological and hence not subject to Popperian falsification.

Others consider that the RBV is an attempt to explain a dependent variable, e.g. competitive advantage with independent variables, ambiguous competencies, that themselves are unobservable. (Godfrey & Hill, 1995; Lado, Boyd, Wright, Kroll, 2006). Thus an argument has been made that the RBV’s emphasis on unobservable resources is an attempt to indemnify the theory against falsification. In effect, if no performance causes can be isolated then these resources or competencies are said to be invisible and intangible, and if they are tangible but the causal path between the resource or competency and the performance outcome is not found, then the path is causally ambiguous (Powell, Lovallo, Caringal, 2006). Finally, the RBV has been accused on slipping into an infinite regress so that it becomes an infinite and futile search for the ultimate resources and competencies that generate competitive advantage (Collis, 1984).

The role of causal ambiguity in the RBV theory Barriers to resource imitation are one of the core assumptions of the RBV, and the importance of causal ambiguity, a situation where the causal connections between actions and performance is opaque, as an effective barrier to imitation is one of the cornerstones of resource inimitability (Lippman & Rumelt, 1982). Research in causal ambiguity has attempted to identify a positive relationship between resource inimitability and causal ambiguity as it limits imitation and hence enhances firm performance (King & Zeithaml, 2001.

Causal ambiguity exists when the link between resources controlled by the firm and its sustained competitive advantage is not fully understood. If the link between the firm’s resources and sustained competitive advantage is not fully understood, then it is difficult for competing firms to duplicate the resource through imitation, as they do not know which resources to imitate. Therefore, as causal ambiguity impairs competitive imitation it thus enables the development of sustained competitive advantage. Powel, Lovallo & Caringal (2006) define causal ambiguity as ‘the condition under which neither the firm nor its rivals can determine the causes of firm performance.’ Another definition that incorporates the role of decision makers as actors in causal ambiguity is offered by Lippman & Rumelt (1982) as a continuum that describes the degree to which decision makers understand the relationship between organizational inputs and results. Causal ambiguity has received systematic attention in strategic management literature and research (Lippman & Rumelt, 1982; Barney, 1986; Reed & DeFillippi, 1990; Mosakowski, 1997; Simonin, 1999; King & Zeithaml 2001; Ambrosini & Bowman, 2005; Powell, Lovallo & Caringal, 2006; King, 2007; Cording, Christmann, King, 2008).

Lippman and Rumelt (1982) theorized that to be a source of sustained competitive advantage, both the firm that possesses superior resources and firms that seek to imitate these resources must be faced with the same level of causal ambiguity. If the focal firm with superior resources understands the link between its resources and sustained competitive advantage better than firms without these resources, then firms without these resources can engage in activities to reduce their knowledge disadvantage. These activities can include hiring away knowledgeable managers of the firm with competitive advantage, or by engaging in a systematic intelligence gathering and analysis of the focal firm’s competitive success. In other words, if the focal firm understands the link between its resources and competitive advantage, then other firms can learn the link and acquire the needed resources and strategies, if they are not otherwise inimitable, and imitate away the focal firm’s competitive advantage (Barney, 2007). Paradoxically, if sustained competitive advantage is only achievable when the focal firm and competing firms face the same degree of causal ambiguity, then the competing firms cannot determine the causes of the focal firm’s superior performance. Under the assumption of the same degree of causal ambiguity, it is therefore also unlikely that the focal firm’s managers are able to understand the sources of their own competitive advantage and hence leverage and further enhance the value of its key resources. This situation has been termed as the causal ambiguity paradox (Reed & Fillippi1990; King & Zeithaml 2001).

Other researchers (McEvily, Das & McCabe, 2000; King, 2007) have observed that causal ambiguity may prompt rival firms to forego imitation and instead focus on creating innovative responses that may through substitution render the focal firm’s resources obsolete, known as the competence substitution dilemma. McEvily et al. (2000) also state that the failure to understand the link between a competency and its performance outcomes blocks intrafirm managers’ ability to learn about and adapt that competency. Recent empirical research and theory papers have addressed the causal ambiguity paradox and the link between ambiguity and firm performance (King & Zeithaml, 2001; Powell, Lovallo & Caringal, 2006; King, 2007; Cording, Christmann, King, 2008). The outcome of research has been the development of conceptual models for distinctions between characteristic and linkage ambiguity (King & Zeithaml, 2001, King, 2007), and lexical ambiguity and ambiguity as a property of management perception (Powell, Lovallo & Caringal, 2006).

King and Zeithaml’s (2001) research identified a dual nature of causal ambiguity in terms of linkage ambiguity and characteristic ambiguity. They defined linkage ambiguity as ambiguity among decision makers about the link between competency and competitive advantage and characteristic ambiguity as ambiguity that pertains to the resource itself. Their research found an inverse relationship between intrafirm ambiguity and firm performance. Further research by King (2007) indicated that managers in poorly performing firms had higher levels of causal ambiguity on key competencies than managers in successful firms. Cording, Christmann and King (2008) extended research in linkage ambiguity to acquisition integration. Their research focused on the importance of establishing intermediate goals in acquisition integration process as a means of reducing linkage ambiguity that would have a positive performance outcome. Powell, Lavallo & Caringal (2006) in their theory paper have argued that although empirical studies have found linkages between competencies and firm performance, the effects that are specifically attributable to ambiguity are difficult to isolate. Moreover, as empirical research findings rely on management perceptions, it is important to establish the accuracy of these perceptions, and whether ambiguity itself gives rise to judgmental biases and distortions. Powell, et al. have extended the causal ambiguity theory by introducing the concept of lexical ambiguity that arises whenever a construct is subject to a range of perceived definitions.

As causal ambiguity research deals with ambiguous resources and competencies that is conducted through management surveys based on managerial self-reports, then observed performance effects are subject to lexical ambiguity, and thus any causal inferences to construct ambiguity will be spurious unless researchers are able to isolate lexical ambiguity. This problem is further compounded by judgmental biases and managerial misperceptions that are widespread in organizations that distort the true degree of competencies by managers’ overestimation of organizational competencies or by self-serving representations of causal linkages (Powell et al., 2006).

Evidence exists to support the theory that people overestimate their abilities, known as ‘an above-average effect’ and that the ‘above-average effect’ is magnified under causal ambiguity (Bateman & Zeithaml, 1989; Bettman & Weitz, 1983; Kahneman & Lovallo, 1993; Kahneman & Tversky, 1979; Lovallo & Kahneman, 2003; Ford, 1985; Zajac & Bazerman, 1991). However, there is inconclusive evidence that the above-average effect and causal ambiguity effect operate in firms or in mangers’ assessments of the relative competencies of their own firms (Powell et al., 2006), although there is evidence to support the argument that managers attribute high performance to internal competencies and low performance to external factors or bad luck (Ford, 1985; Bettman & Weitz, 1983) These studies, although showing causal attribution to firm performance, did not measure the accuracy of competence attribution or examine the ambiguity effect. (Powell, et al, 2006)

Powell et al (2006) have extended the causal ambiguity taxonomy by introducing the concept of a self-serving bias and the impact of causal ambiguity in producing an above-average effect that overestimates the reported degree of competence relative to the true degree of competence. They have called for empirical investigation into the connection between management perception and causal ambiguity on the basis that previous empirical evidence warrants an investigation of propositions that managers systematically overestimate their own firm’s competencies and that the over-estimation of ambiguous competencies is greater than the overestimation of unambiguous, or verifiable competencies.

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