Resource-Based View

Managers often ask themselves: What makes us distinctive or unique? Why do some and not other customers buy from us? What are the Key Success Factoes in our business?

Typical Answers Excellent Service Technical know-how Responsiveness to market needs Design and engineering capability Financial resources

Business-Level Strategy The primary objective of business-level strategy is to create “sources of sustainable competitive advantage”. What is sustainable competitive advantage?  There are many definitions, used by different people in different ways.  What follows is a practical description. But first, we need to back up a bit…

Sustainable Competitive Advantage An asset is anything the firm owns or controls.  Loosely, “Asset” is to Accounting as “Resource” is to Management. Resources  Are defined as stocks of firm-specific assets  Cannot be easily duplicated  Cannot be easily acquired in well-functioning markets Examples :  Patents and trademarks, Brand-name, reputation, Organizational culture, Workers With specific expertise or knowledge

Sustainable Competitive Advantage Contribute either directly (e.g., reputation) or indirectly (e.g., through serving as the basis of capabilities) to value creation Are converted into final products or services using bonding mechanisms such as IT, incentive systems, trust, etc. Sometimes non-specific resources (like buildings, raw materials, unskilled labor, etc.) are included in the definition of "resources"

Sustainable Competitive Advantage Resource categories : Financial capital Physical capital Human capital Organizational Capital

Sustainable Competitive Advantage A capability is usually considered a “bundle” of assets or resources to perform a business process (which is composed of individual activities)  E.g. The product development process involves conceptualization, product design, pilot testing, new product launch in production, process debugging, etc. All firms have capabilities. However, a firm will usually focus on certain capabilities consistent with its strategy.  For example, a firm pursuing a differentiation strategy would focus on new product development. A firm focusing on a low cost strategy would focus on improving manufacturing process efficiency. The firm’s most important capabilities are called competencies.

Sustainable Competitive Advantage A capability is usually considered a “bundle” of assets or resources to perform a business process (which is composed of individual activities)  E.g. The product development process involves conceptualization, product design, pilot testing, new product launch in production, process debugging, etc. All firms have capabilities. However, a firm will usually focus on certain capabilities consistent with its strategy.  For example, a firm pursuing a differentiation strategy would focus on new product development. A firm focusing on a low cost strategy would focus on improving manufacturing process efficiency. The firm’s most important capabilities are called competencies.

Sustainable Competitive Advantage Key success factors (KSF)  Refer to the skills and assets a firm must have to achieve profitability in a particular market  Market-level rather than individual characteristics  Necessary, not sufficient for achieving competitive advantage (e.g., KSF in athletic footwear are development of new designs, management of a network of suppliers and distributors, creation of marketing campaigns)  Predictors of firm profitability (like resources and capabilities) Resources and capabilities  Are conceptually different from KSF  Sometimes overlap with KSF

Competencies vs. Core Competencies vs. Distinctive Competencies A competency is an internal capability that a company performs better than other internal capabilities. A core competency is a well-performed internal capability that is central, not peripheral, to a company’s strategy, competitiveness, and profitability. A distinctive competence is a competitively valuable capability that a company performs better than its rivals.

Examples: Distinctive Competencies Toyota, Honda, Nissan  Low-cost, high-quality manufacturing capability and short design-to-market cycles Intel  Ability to design and manufacture ever more powerful microprocessors for PCs Motorola  Defect-free manufacture (six-sigma quality) of cell phones

Where are we? We are discussing sustainable competitive advantage, and have defined Competencies:  Assets  Capabilities  Competencies  Competitive Advantage Next is competitive advantage.  A competitive advantage is simply an advantage you have over your competitors.  A competency will produce competitive advantage provided: A) it produces value for the organization, and B) it does this in a way that cannot easily be pursued by competitors.

Sustainable Competitive Advantage However, we said the primary objective of business- level strategy was to create sources of sustainable competitive advantage (SCA). How do we know SCA when we see it? What is it? When is it considered “sustainable”? To produce SCA, the capability must: 1.Produce value 2.Be rare 3.Imperfectly imitable, i.e. not be easily imitated or substituted 4.Be exploitable by the organization

A FRAMEWORK FOR ANALYSIS : VRIO Resource-based analysis of the firm determines which resources and capabilities result in which strengths or weaknesses Strategies are to be implemented which exploit (or build) strengths and avoid (or eliminate) weaknesses What constitutes a strength or weakness is partially a function of the external environment Framework for analysis: VRIO - resources and capabilities should be  o Valuable o Rare o Inimitable o Organization can effectively exploit them

Sustainable Competitive Advantage 1.The Question of Value:  Capabilities are valuable when they enable a firm to conceive of or implement strategies that improve efficiency and effectiveness.  Value is dependent on type of strategy: Low cost strategy: lower costs (Timex) Differentiator: add enhancing features (Rolex)  To be valuable, the capability must either Increase efficiency (outputs / inputs)  Information system reduces customer service agents required, or increases the number of calls the same number of agents can answer Increase effectiveness (enable some new capability not previously held)  Opening a new regional campus enables outreach to a new market of students

Sustainable Competitive Advantage 2.The Question of Rareness:  Valuable resources or capabilities that are shared by large numbers of firms in an industry are therefore not rare, and cannot be a source of SCA.  Given the following, which are rare? A web server An MIS instructor A state-of-the-art stamping press  None of these are rare. Some researchers think only organizational assets or resources are rare (such as culture). What do you think?

Sustainable Competitive Advantage 3.The Question of Imitability  Valuable, rare resources can only be sources of SCA if firms that do not possess them cannot obtain them. They must be “imperfectly imitable”, i.e. impossible to perfectly imitate them.  Ways imitation can be avoided: Unique Historical Conditions (Caterpillar, e.g.) Causal Ambiguity (why resources create SCA is not understood, even by the firm owning them)  Imitating firms cannot duplicate the strategy since they do not understand why it is successful in the first place. Social Complexity (trust, teamwork, informal relationships, causal ambiguity where cause of effectiveness is uncertain)  E.g. A competitor steals all the scientists in an R&D lab and relocates them to a new facility. But, the “dynamics”, “culture” and “atmosphere” are not the same.

Sustainable Competitive Advantage 4.The Question of Substitutability  There must be no equivalent resources that can be exploited to implement the same strategies.  Forms of substitutability: Duplication: Although no two management teams are the same, they can be strategically equivalent, produce the same results. Substitution: Very different resources can be substitutes, e.g.  A charismatic leader with a clear vision vs. a strategic planning dept.  A superior marketing strategy for a recognized brand name.  A superior technical support group for an intelligent diagnostic software package

Sustainable Competitive Advantage 5.The Question of Exploitation:  Later research qualified this as another critieria for SCA. Is a firm organized to exploit the full competitive potential of its resources and capabilities?  Are systems in place to enable firms to support the execution of a particular strategy? Xerox, e.g

Notes on “Sustainable” Sustainable is not measured in calendar time. Sustainable does not mean the advantage will last forever. Sustainable suggests the advantage lasts long enough that competitors stop trying to duplicate the strategy that makes the advantage sustained.

Economic Performance Valuable?Rare? Costly to Imitate? Exploited by the Organization? Competitive Implications Economic Performance No-- Competitive Disadvantage Below Normal YesNo-- Competitive Parity Normal Yes No-- Temporary Competitive Advantage Above Normal Yes Sustained Competitive Advantage Above Normal