In this chapter we apply the knowledge-based view of the firm that has established itself as an important perspective in strategic management (Bock et al., 2005; Garud
& Kumaraswamy, 2005). This perspective builds on the resource-based theory of the firm. According to the resource-based theory of the firm, performance differences across firms can be attributed to variances in the firms’ resources and capabilities.
Resources are considered strategic resources if they are: (1) valuable; (2) unique;
(3) nonimitable; (4) nontransferable; (5) nonsubstitutable; (6) exploitable; and (7) combinable.
P7:. The need for knowledge management systems in an IT outsourcing relationship increases as vendor and client mobilize strategic resources in their relation- ship.
The central tenet in resource-based theory is that unique organizational resources of both tangible and intangible nature are the real source of competitive advantage.
With resource-based theory, organizations are viewed as a collection of resources that are heterogeneously distributed within and across industries. Accordingly, what makes the performance of an organization distinctive is the unique bland of the resources it possesses. A firm’s resources include not only its physical assets, such as plant and location, but also its competencies. The ability to leverage distinctive internal and external competencies relative to environmental situations ultimately affects the performance of the business.
Exploring competencies in the context of the management of information technol- ogy is a relatively recent development in the evolution of the information systems discipline. The importance of developing competencies that allow organizations to successfully take advantage of information in their specific context has been noted.
The concept of competence in the information systems literature is predominantly focused upon individual competence in the form of IT skill sets rather than treated as an organizational construct. The focus has been on the technology supply side and individuals’ skills, emphasizing the requirement for IT professionals to have not just technical skills but also business and interpersonal skills. More recently, change agentry as a skill for IT professionals has been proposed. The implication of this literature stream is that the solution to the problem of lacking benefits from IT can be solved by equipping IT specialists with additional skills. The inference is that the inability to deliver value from information arises from shortcomings in the IT function and among IT professionals.
Outsourcing gives a client organization access to resources in the vendor organiza- tion as the vendor handles IT functions for the client. Vendor resources can produce innovation, which is essential for long-term survival of the client. Quinn (2000) argues that the time is right for outsourcing innovation. Four powerful forces are currently driving the innovation revolution. First, demand is growing fast in the global economy, creating a host of new specialist markets sufficiently large to attract innovation. Second, the supply of scientists, technologists and knowledge workers has skyrocketed, as have knowledge bases and the access to them. Third, interaction capabilities have grown. Fourth, new incentives have emerged.
Transformational outsourcing is an emerging practice to bring new capabilities to the organization. Resources are required to bring new capabilities, and resources bringing new capabilities can be found in an outsourcing vendor. In this context we apply the knowledge-based view of the firm that has established itself as an important perspective in strategic management. This perspective builds on the resource-based theory of the firm. According to the resource-based theory of the firm, performance differences across firms can be attributed to the variance in the firms’ resources and capabilities. Resources that are valuable, unique and difficult to imitate can provide the basis for firms’ competitive advantages. In turn, these competitive advantages produce positive returns. According to Hitt et al. (2001), most of the few empirical tests of the resource-based theory that have been conducted have supported positive, direct effects of resources.
The essence of the resource-based theory of the firm lies in its emphasis on the in- ternal resources available to the firm, rather than on the external opportunities and threats dictated by industry conditions. Firms are considered to be highly heteroge- neous, and the bundles of resources available to each firm are different. This is both because firms have different initial resource endowments and because managerial decisions affect resource accumulation and the direction of firm growth as well as resource utilization (Løwendahl, 2000).
The resource-based theory of the firm holds that, in order to generate sustainable competitive advantage, a resource must provide economic value and must be presently scarce, difficult to imitate, nonsubstitutable and not readily obtainable in factor markets. This theory rests on two key points. First, that resources are the determinants of firm performance and second, that resources must be rare, valuable, difficult to imitate and nonsubstitutable by other rare resources. When the latter oc- curs, a competitive advantage has been created. Resources can simultaneously be characterized as valuable, rare, nonsubstitutable and inimitable. To the extent that an organization’s physical assets, infrastructure and workforce satisfy these criteria, they qualify as resources. A firm’s performance depends fundamentally on its ability to have a distinctive, sustainable competitive advantage, which derives from the possession of firm-specific resources (Priem & Butler, 2001). The resource-based theory is a useful perspective in strategic management. Research on the competitive implications of such firm resources as knowledge, learning, culture, teamwork and human capital, was given a significant boost by resource-based theory — a theory that indicated it was these kinds of resources that were most likely to be sources of sustainable competitive advantage for firms (Barney, 2001).
Firms’ resource endowments, particularly intangible resources, are difficult to change except over the long term. For example, although human resources may be mobile to some extent, capabilities may not be valuable for all firms or even for their competi- tors. Some capabilities are based on firm-specific knowledge, and others are valuable when integrated with additional individual capabilities and specific firm resources.
Therefore, intangible resources are more likely than tangible resources to produce a competitive advantage. In particular, intangible firm-specific resources such as knowledge allow firms to add value to incoming factors of production (Hitt et al., 2001). Resource-based theory attributes advantage in an industry to a firm’s control over bundles of unique material, human, organizational and locational resources and skills that enable unique value-creating strategies. A firm’s resources are said to be a source of competitive advantage to the degree that they are scarce, specialized, appropriable, valuable, rare and difficult to imitate or substitute.