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Resource Base Theory of the Firm

Presented by

Olayele Adelakun, PhD

DePaul University

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Resource Base Theory of the Firm

• The objective of this seminar is to examine the link between the resources within CGEY TMN/OS and sustained competitive advantage.

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Sources of Competitive Advantage

• Transaction cost theory

• Core competence

• Resource base theory of the firm

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Strategy

• Strategic Management Theory– Firms obtain sustained competitive

advantages by implementing strategies that exploit their internal strengths, through responding to environmental opportunities, while neutralizing external threats and avoiding internal weaknesses.

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Situational Analyzes

Strengths

Weakness

Opportunities

Threats

Resource based model Environmental models of competitive advantage

Internal Analyzes External Analyzes

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IO vs. RBVIndustrial Organization (IO) Resource Based View

(RBV)

Some Authors:

Porter, Rumelt Barney, Wernerfelt

Focus External—describes environmental conditions favoring high levels of firm performance

Internal—describes firm’s internal characteristics and performance

Assumptions Firms within an industry have identical strategic resources.

Resources are highly mobile (easily bought and sold) and therefore homogeneous.

Firms have idiosyncratic, not identical strategic resources.

Resources are not perfectly mobile and therefore heterogeneous.

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Resource base theory of the firm

• Assumptions1. Firms within an industry (or group) may be

heterogeneous with respect to the strategic resources they control

2. These resources may not be perfectly mobile across firms, and thus, heterogeneity can be long lasting.

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Resource base theory of the firm

• 3 Key Definitions– Firm Resources– Competitive Advantage– Sustained Competitive Advantage

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Resource base theory of the firm

• Firms Resources– All assets, capabilities, organizational processes, firm

attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness.

– Daft, R. (1983) Organization theory and design. NY

– Firm resources are strengths that firms can use to conceive of and implement their strategies.

– Learned, Christensen, Andrews, & Guth, 1969; Porter, 1981)

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Resource base theory of the firm

• Three categories of Resources– Physical capital resource (Williamson, 1975)

• Internal IT, Equipments, Geographical location and access to raw material.

– Human capital resource (Becker, 1964)• Training, experience, intelligence, judgment, relationships and insight of

individual managers and workers in a firm.

– Organizational capital resource (Tomer, 1987)• Firm’s formal reporting structure, its formal and informal planning,

controlling, and coordinating systems, as well as informal relations among groups within and across the firm

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Resource base theory of the firm

• Competitive Advantage

– A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors.

– A firm is said to have sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when other firms are unable to duplicate the benefits of this strategy.

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Resource base theory of the firm

• Attributes of sustained competitive advantage

1. It must be valuable2. It must be rare among a firm’s current and

potential competition3. It must be imperfectly imitable4. There cannot be strategically equivalent

substitutes for this resource that are valuable but neither rare or imperfectly imitable

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Resource Value and SCA

1. The Question of Value:– Capabilities are valuable when they enable a firm to

conceive of or implement strategies that improve efficiency and effectiveness.

– To be valuable, the capability must either• Increase efficiency (outputs / inputs)

– E.g. increase the number of calls a customer service agent can answer within a specific period of time.

• Increase effectiveness (enable some new capability not previously held)

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Resource Rareness and SCA

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?• Good management team• A complex, state-of-the-art, excellent computer system

– None of these are rare. Some researchers think only organizational assets or resources are rare (such as culture). What do you think?

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Sustainable Competitive Advantage3. 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 (Microsoft, 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.

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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.

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Sustainable Competitive Advantage

5. The Question of Exploitation:

– Later research qualified this as another criteria 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?

• Taco Bell, e.g

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Notes on “Sustainable”

• Sustainable is not measured in calendar time.

• Sustainable suggests the advantage lasts long enough that competitors stop trying to duplicate the strategy that makes the advantage sustained.

• Sustainable does not mean the advantage will last forever.

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Economic Performance

Valuable?

Rare?

Costly to Imitate?

Exploited by the Organization?

Competitive Implications

Economic Performance

No -- -- -- Competitive Disadvantage

Below Normal

Yes No -- -- Competitive Parity

Normal

Yes Yes No -- Temporary Competitive Advantage

Above Normal

Yes Yes Yes Yes Sustained Competitive Advantage

Above Normal

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CGEY RESOURCES

• Delivery Method• Knowledgeable workers• CGEY Support

Infrastructure• Sales Support• Training (internal &

external)• Communications across

organization• Customer relation

experience and Credibility• Offshore capability• CGEY AS Sprint Team

• Leadership• Application management

Organization• Diversified technical

resources• Problem solving

approach• Remote network /

Infrastructure management

• Solid PM delivery skills• Corporate values• Chicago Center • Affinity Group

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DISCUSSION

• Which of the CGEY resources are possible source of:

1. Competitive advantage• V+R+nI

2. Sustained competitive advantage• V+R+nI+nS

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DISCUSSION

• What next?

• Action plan