Resource-Based View (RBV)of Competitive Advantage

Learning Objectives:

The RBV has become the dominant ‘theory’ in strategic management. Our main interests are in understanding (1) the theoretical bases of the RBV, and (2) how managers might apply this framework in their pursuit of competitive advantage.

Prior to RBV -- Three Traditional Perspectiveson Firm’ Strengths and Weaknesses

1. Theories of distinctive competence

– General managers – their decisions have great impact• Pros – high appeal and validity• Cons – positive traits are ambiguous

– Institutional leadership - creates vision, organization and structure• Pros – intuition, strong appeal• Cons – sr. managers not only source of advantages

Three Traditional Perspectives on Firm’Strengths and Weaknesses

2. Ricardian Economics

– Little role for management– “Original, indestructible gifts of nature” (land)– Inelastic supply function– High quality factors of production

– Pros: quantitative, testable theory

numerous resources are inelastic– Cons: natural shift in demand curve

other contributing factors

Three Traditional Perspectives on Firm’Strengths and Weaknesses

3. Penrose’s Theory of Firm Growth– administrative framework– bundle of productive, heterogeneous resources

– Pros: introduced heterogeneity,

broad definition of ‘productive resource’– Cons: deemed important, but limited in scope

Other theories of the firm– Population Ecology– Transaction cost– Agency theory

Firm Resources and Sustained Competitive Advantage – According to J. Barney

Internal Analysis

Strengths

Weaknesses

External Analysis

Opportunities

Threats

Resource-based model

Environmental models

Relationship between traditional SWOT analysis and RBV models

What Determines Profitability of a Firm?

Resource Based View of the Firm

Dominant theoretical perspective

Resources, capabilities, competencies may be more important than industry effects

Assumptions– Resource heterogeneity– Resource immobility– Firms are bundles of productive resources

• Financial capital• Physical capital• Human capital• Organizational capital

Resource Based View of the Firm:Some Definitions

Firm resources Competitive advantage Sustained competitive advantage

RBV Model:

Heterogeneity

Immobility

Value

Rare

Imitability

Substitutable

Sustained

Competitive

advantage

VRIS or VRIO ?

Discovering Sustained Competitive Advantage:The VRIO Framework

Value – when resources and capabilities enable the firm to respond to threats and opportunities

Rarity – when resource is controlled by a small number of competing firms

Imitability – the degree that the resource can be duplicated or substituted– ‘unique history’– ‘causal ambiguity’ (numerous small decision)– ‘social complexity’

Organization – how the firm is structured, organized and managed to exploit valuable, rare and costly to imitate resources.

Applying the VRIO Framework

Valuable Rare

Costly to

Imitate

Competitive

Implication *

Economic

Performance

No -- -- DisadvantageBelowNormal

Yes No -- Parity Normal

Yes Yes NoTemporaryAdvantage

AboveNormal

Yes Yes YesSustainedAdvantage

AboveNormal

•Assumes firm is organized to exploit resource

Some Examples…

Applying the VRIO Framework:Some Examples

Telephone systems ?

Formal strategic planning systems ?

Information processing systems ?

Firm reputation ?

Firm culture ?

Strategy Implications of the Resource-based View

Broader responsibility for competitive advantage Better to exploit firm’s existing valuable, rare and costly to

imitate resources, rather than mimic other successful firms Relative cost of difficult to implement strategy should be

compared to its value Socially complex resources can be source of competitive

advantage Firm’s structure, control systems and compensation

policies should change if they conflict with firm’ resources or capabilities