Resource-Based View (RBV) of Competitive Advantage

1. 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.

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

3. Three Traditional Perspectives on Firm’Strengths and Weaknesses • 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

4. Three Traditional Perspectives on Firm’Strengths and Weaknesses • 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

5. Internal Analysis Strengths Weaknesses External Analysis Opportunities Threats Resource-based model Environmental models Firm Resources and Sustained Competitive Advantage – According to J. Barney Relationship between traditional SWOT analysis and RBV models

6. What Determines Profitability of a Firm?

7. 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

8. Resource Based View of the Firm:Some Definitions • Firm resources • Competitive advantage • Sustained competitive advantage RBV Model: Value Rare Imitability Substitutable Sustained Competitive advantage Heterogeneity Immobility VRIS or VRIO ?

9. 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.

10. Applying the VRIO Framework • Assumes firm is organized to exploit resource • Some Examples…

11. Applying the VRIO Framework:Some Examples Telephone systems ? Formal strategic planning systems ? Information processing systems ? Firm reputation ? Firm culture ?

12. 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