Resource-based views of competitive strategy, Assignment for Executive MBA Competitive Strategy

1. Resource-based views of competitive strategy
Assignment for part-time MBA Competitive Strategies, week 3
By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman
September 16, 2012

2. The reasons for differences in performance of firms in the same industry have been subject to
research for more than fifty years. Building on earlier positioning views of strategy, we will
compare and contrast some leading resource-based views with each other and with the
positioning views.
For all authors (Barney (1995), Peteraf (1993), Grant (1996), Prahalad and Hamel (1990) and
Stalk, Evans and Schulman (1992), the unique aspects which make up a firm‟s competitive
advantage are not just its physical resources but also the intangible aspects which make a firm
unique.
Each author has a similar view of where the differences come from, although they may use
different names for it. Pralahad & Hamel (1990) use the term “core competencies” which
refers to the activities, knowledge and internal organizational structure that a firm is better at
than its competitors. These core competencies are not visible at first glance as they are deeply
rooted in the firm, and they provide the basis from which successful products can be
developed and allow a firm to compete in many and varied markets. Stalk, Evans and
Schulman(1992) have a similar way of thinking when they discuss “capabilities”, meaning the
behaviour and culture at a firm, its key processes, and infrastructure. They explain that the
essential aspects to outdo the competition are reliable product quality, insight into customer
needs, exploitation of emerging markets and new ideas and innovations. Barney (1995) refers
to the resources and capabilities which are physical, financial, human and organizatorial, and
the four issues to consider are the questions of value, rareness, imitability and organization.
Peteraf (1993) talks about the “cornerstones of competitive advantage” and these are also the
differences between firms in terms of their resources and capabilities. Grant (1996) is mainly
concerned with internal, specialist knowledge as a resource.
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3. Each view is mainly concerned with internal performance drivers and hardly considers
external circumstances, except to say that strategy cannot be static because the environment is
constantly changing.
The business processes at a firm are a very important aspect of its unique capabilities. Each
author somehow argues that competitive advantages can only be enhanced when a corporate
strategy is applied, i.e. across the whole company and across functions. Pralahad & Hamel
(1990) show that the core competencies should shape the structure of the firm itself, viewing
the company as a portfolio of core competencies rather than a portfolio of SBU‟s. For Grant
(1996), competitive advantage is based on knowledge integration, rather than knowledge
itself. Grant emphasizes that production – the creation of value through transforming input
into output – requires a wide array of knowledge, usually through combining the specialized
knowledge of a number of individuals. Grant discusses the scope of integration and explains
the wider the span of the knowledge being integrated within a capability, the greater the
difficulty faced by competitors in replicating that capability. Therefore, he suggests building
entry barriers by large scale knowledge integrations to gain competitive advantage against
new entrants. Stalk, Evans and Schulman (1992) also argue that the essence of strategy is not
in products and markets but in business processes and therefore firms should invest in
creating a cross-functional infrastructure. Three of Barney‟s (1995) most important questions
about resources and capabilities involve the key business processes. Rareness means of
information and knowledge at the firm‟s disposal. Imitability refers to the ability of the firm‟s
resources to be duplicated or substituted and there are three aspects. Firstly, he shows that a
firm‟s history can make it difficult to emulate because knowledge and resources may have
been built up over time and this can be costly to compete with. Next is the importance of
small decisions and namely the cumulative effect of multiple small decisions. It can be easy
for one firm to “copy” another‟s “Big Decisions” as these are announced publicly, but small
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4. decisions determine the culture within the company and cannot be seen (and copied) by
competitors. The final issue which determines imitability is what Barney calls “The
Importance of Socially Complex Resources”, i.e. the company culture, reputation, and so on.
The fourth aspect is the way the firm is organized, such as its compensation policies and
management. This alone cannot make a firm competitive but it can help to support the other
aspects. Peteraf (1993) is the only one who does not refer to the business processes
themselves.
The role of employees is one important aspect of some resource-based views of competitive
strategy. According to Grant (1996), knowledge is found in individual employees, making
each employee key to a firm‟s unique knowledge. According to Pralahad & Hamel (1990),
employees can themselves be one of the core competencies of a firm. For Stalk, Evans and
Schulman (1992), the CEO is the driver of the implementation of a cross-functional, long-
term view which will differentiate a firm and cement its competitive advantage. Peteraf
(1993) does not focus on the role of employees although she does entertain the possibility of
the employees themselves being a resource and she does mention “the spirit of the workers”
and “the unique culture of the firm” (p.187). For Barney (1995), competitive advantage
depends on small decisions made by all employees.
There are a few differences if the views are regarded on a more detailed level.
Differences exist between authors in how they describe what organizations should look like.
Prahalad and Hamel (1990) argue in favour of viewing a company as a portfolio of core
competencies. How to transform from a portfolio of SBU's to a portfolio of core competencies
is a matter of what they refer to as 'strategic architecture' and will be different for every
organization. Barney (1995) recognizes the importance of a fitting organization in order to be
competitive (the Question of Organization), but does not elaborate on what the organization
should look like. Stalk, Evans and Schulman (1992) are more detailed in their description of
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5. what they call a capabilities-based competitor and provide four steps how companies can
transform themselves into such an organization. Grant (1996) indicates that the essence of
organizational capability is the integration of individuals‟ specialized knowledge. This makes
it difficult to yield a description of what a firm looks like and where its boundaries are. Hence
he quotes Demsetz who refers to 'firm-like organizations'.
Both Grant (1996) andPeteraf (1992) agree that imperfect mobility of resources, especially
knowledge, is an important asset and should be retained internally as much as possible.But
later on in both papers, they differentiate from the idea where, for Grant,knowledge can be
external unless it is not directly involved in a firm‟score products or services, because
otherwise, the firm will be more dependenton external resources, or worse, it will not be itself
anymore. Peteraf (1993) discusses the idea more on the economic aspects and explains that
internalresources are good to keep because their transaction costs are lower.
However,according to Peteraf, as her approach is based on the economics, if the transaction
costs of external resources are lower, those can easily replace theinternals.
For Barney (1995), history is very important. He shows that in some cases a firm's history
can still be relevant today and form part of its competitive advantage even now, creating an
entry barrier for potential competitors, however in other cases, new firms can overtake the
traditional leader. Peteraf (1993) mentions Diederick and Cool's 1989 paper and concludes
that in the case of intangible and inimitable assets such as knowledge, "history matters". In
contrast, Stark, Evans and Schulman (1992) and Prahalad and Hamel (1990) show that firms
can completely turn things around so that those who were traditionally the best performers
can lose out to new competitors. Grant (1990) seems to agree with both views, because for
him the key is both extending existing capabilities to incorporate new knowledge and vice
versa (p.382) especially as markets and external circumstances are constantly changing,
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6. sometimes radically. We can surmise, then, that if a firm can leverage its history to its
advantage it can continue to be successful; if it cannot, it is likely to be overtaken.
The resources-based theories all concentrate on competitive advantages within the firm,
whereas the positioning views were more about the environment in which a firm operates.
Both Barney (1995) and Stark, Evans and Schulman (1992) et al build on Porter‟s five forces
model (1979), which focuses primarily on the environment and competition between firms,
and use many of the same aspects he discusses, but more focused internally than externally.
For example, it is not just the products which should be unique and difficult to copy, but also
the structure and strengths of the firm itself. Conner‟s (1991) resource-based theory also
posited that firms are a unique blend of resources and their performance depends on their
uniqueness. Unlike Bain Type IO, which defends efficiency that is mainly stemmed from
monopolistic power, the heterogeneity condition of the resource based view discussed by
Peteraf (1993), claims that without restricting the output level and producing higher amounts
it is possible to earn more than competitors through having access to more efficient resources.
The resource based view discusses ex post limits to competition as an enhancing factor for a
firm‟s performance which consists of imperfect imitability and imperfect substitutability.
Imperfect imitability is also discussed by Porter (1979); one of his five factors of competition
is “substitutes”, utilized to explain the better performance of companies whose products are
hard to copy.
As refered to in Conner (1991), in terms of similarities, Bain defines entry barriers which
separate firms from potential entrants and in Peteraf‟s article (1993), Caves&Porter derive the
notion of “mobility barriers” which separate groups of similar firms from potential entrants
and Rumelt discusses isolating mechanisms to protect firms. Additionally, Ghemawat
discusses size advantages in the context of creating inimitable positions in the market by
providing access to more efficient resources and more customers, similar to the Bain Type IO
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7. approach. Grant‟s (1996) view of knowledge and the way it can be used as an entry barrier
extends Porter‟s (1979) new entrants threat in terms of knowledge integration.
One other similarity between the explanations of resource-based view in Peteraf‟s (1993)
article and Coase‟s (in Conner 1991) approach is the effect of having imperfect mobile
resources. According to Peteraf, imperfect mobile resources are available within the firm and
create rent; similarly Coarse argues that asset specification is a prerequisite for a firm to
generate opportunistic potential. Additionally, it may be also argued that imperfect mobile
resources somehow resemble Schumpeter‟s (in Conner 1991) suggested requirement of
innovation to maintain market dominance.
Lastly while discussing ex ante limits to competition it is noted that efficiency is a result of
having efficient inputs for production and effective implementation of the strategies in line
with Chicago School‟s argument of deriving efficiency from efficient production and
distribution.
This paper aims to provide an overview of sources of performance, as suggested by various
authors, and the similarities and differences between their views. This is a complex task so we
have included as appendix 1 a comparison matrix which summarizes some key aspects. We
have also tried to link (parts of) these theories to the positioning views.
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8. References
Barney, Jay (1995), „Looking Inside for Competitive Advantage‟, Academy of Management
Executive, 9(4): 49-61.
Brandenburger, Adam M. & Harborne W. Stuart (1996), Value-based Business Strategy,
Journal of Economics & Management Strategy, 5(1): 5-24.
Brandenburger, Adam M. (2002), Porter‟s Added Value: High Indeed, Academy of
Management Executive, 16(2): 58-60.
Brandenburger, Adam M. and Barry J. Nalebuff (1995), The Right Game: Use Game Theory
to Shape Strategy, Harvard Business Review (July-August): 57-71.
Conner, Kathleen R. (1991), „A Historical Comparison of Resource-based Theory and Five
Schools of Thought within Industrial Economics: Do We Have a New Theory of the Firm?‟,
Journal of Management, 17: 121-154.
Grant, Robert M. (1996), „Prospering in Dynamically-Competitive Environments:
Organizational Capabilities as Knowledge Integration‟, Organization Science, 7(4): 375-387.
Peteraf, Margaret A. (1993), „The Cornerstones of Competitive Advantage: A Resource-based
View‟, Strategic Management Journal, 14: 179-191.
Porter, Michael E. (1979), How Competitive Forces Shape Strategy, Harvard Business
Review, (March-April): 137-145.
Prahalad, C.K. and Gary Hamel (1990), „The Core Competence of the Corporation‟, Harvard
Business Review, (May-June): 79-91.
Stalk, George, Philip Evans and Lawrence E. Schulman (1992), „Competing on Capabilities:
The New Rules of Corporate Strategy‟, Harvard Business Review, (March-April): 57-69.
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9. Appendix 1 Comparison Matrix
Key aspects Prahalad & Hamel Grant Stalk et al. Peteraf Barney
Performance of a firm comes from: Core competencies: the Process through Capabilities, as set Four conditions: superior Internal strengths of
combined recourses, activities, which firms of business resources, ex post limits to a firm, 4 questions: of
knowledge, way of internal integrate processes competition, imperfect resource value, of rareness, of
organizing that a company gives it specialized strategically mobility, ex ante limits to imitability, of
a competitive advantage. They are knowledge understood. competition. organization
rooted deeply in the organization
and provide the basis from which
the company develops successful
products.
Definition of resources Core competencies are about the Knowledge is Behaviour and Resource must be 4 kinds: physical,
way resources are managed. principle culture, internal heterogeneous to have human, financial and
These resources are skills and productive structure, and key differences between firms and organizational
knowledge which can be applied resource. processes create ricardian/monopoly
across markets and are difficult for rents, competition is limited to
competitors to copy. prevent rents being competed
away, (ex post) immobility
makes sureresources stay at
the firm, limited competition in
order for costs not to exceed
rents (ex ante).
Focus on internal / external performance drivers internal internal internal internal internal
Role of employees Employees can be 'core Knowledge is Employees must None described. Competitive
competencies'. Top management stored in have necessary skill advantage depends
adds value by enunciating individuals to achieve chosen on small decisions by
strategic architecture. capability. No all employees
leading role, except
for CEO as the one
who oversees
everything.
Role of internal competitors Other SBU's are competition in Transcending
companies that are viewed as a traditional SBU's
portfolio of SBU's
Role of outside competition Competition is Ex post and ex ante
extremely dynamic competition
Business process Strategic architecture: unique to Systems of Business process is None described explicitly Firms organization
every organisations. Administrative knowledge building block for must allow for exploit
infrastructure should be integration corporate strategy - of full competitive
appropriate to the adequate (important must adapt to fit potential.
allocation of resources element!) capability
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