Resource Based View Theory

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Osorio, Corino and Vicente (2015) notes that the product diversification and firm performance relationship has been influenced by the resource based view theory for the last 20 years. This theory suggests that the specific type of diversification strategy depends on the resources and capabilities of the firm. The resource based view (RBV) provides an internal perspective that stresses the motivation firms have to maximize their provisioning of resource and capabilities for diversifying into related businesses (Wan et al, 2011). Generally, the resource based theory observes the firm from the resources point of view, instead of market or even product premises. Xiaorong (2007) acknowledges the resource based theory is a strategic theory about…show more content…
Chatterjee & Wernerfelt (2005) examined the influence of the degree of flexibility of a resource on the diversification strategy. Three classes of resources were considered in their study: physical resources, intangible assets and, financial resources. The first two of these resources types are rather inflexible, since they are relatively end-product specific. As a result, inflexible resources favor related market diversification. For instance, physical or tangible resources, such as plant and equipment, are highly inflexible, because they only can be used in a few similar industries. Therefore, if a firm has a high degree of excess of physical capacity, it is very likely that the firm will engage in related diversification (Chatterjee & Wernerfelt, 2005). Financial resources have the highest degree of flexibility, and suitable for related and unrelated diversification. However, there is a difference between the effects of the availability of internal funds and equity capital. In general, managers use internal funds for unrelated diversification. However, dependent on the type of risk and the economic environment a company is facing, internal funds may be used for related diversification as…show more content…
It consist of the negotiating, monitoring, and enforcements cost which arise when a transaction between two or more parties takes place. The presence of transaction costs causes external motivations for companies to diversify. Six main factors that cause transaction difficulties are: bounded rationality, opportunism, uncertainty, small numbers, information impact, and asset specificity (Jones & Hill, 2008; Lincoln et al, 2014). Studies point out that transaction costs theory fails to explain the diversity strategy because it is an explanation of a mode rather than a strategy. And although transaction costs are easy to argue theoretically, it is extremely difficult to evaluate and test them empirically. (Xiaorong,

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