IO vs. RBV Industrial Organization (IO) Resource Based View (RBV)Some Authors: Porter, Rumelt Barney, WernerfeltFocus External—describes environmental Internal—describes firm’s internal conditions favoring high levels of firm characteristics and performance performanceAssumptions: Firms within an industry have identical Firms have idiosyncratic, not strategic resources. identical strategic resources. Resources are highly mobile (easily Resources are not perfectly mobile bought and sold) and therefore and therefore heterogeneous. homogeneous.
Business Level Strategy How do we compete in a specific business arena? Four objectives of business-level strategy Generate sustainable competitive advantages Develop and nurture (potentially) valuable capabilities Respond to environmental changes Approval of functional level strategies
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. Types of assets: Physical: plant equipment, location, access to raw materials Human: training, experience, judgment, decision-making skills, intelligence, relationships, knowledge Organizational: Culture, formal reporting structures, control systems, coordinating systems, informal relationships
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.
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: AssetsCapabilitiesCompetenciesCompetitive 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
Sustainable Competitive Advantage1. 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 Advantage2. 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 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 (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 Advantage4. 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 Advantage5. 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 Exploited by Costly to the Competitive EconomicValuable Imitate? Rare? Organization? Implications Performance? CompetitiveNo -- -- -- Below Normal Disadvantage CompetitiveYes No -- -- Normal Parity TemporaryYes Yes No -- Competitive Above Normal Advantage SustainedYes Yes Yes Yes Competitive Above Normal Advantage