Resource-based Views of Competitive Strategy


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

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Resource-based Views of Competitive Strategy

  1. 1. Resource-based views of competitive strategy Assignment for part-time MBA Competitive Strategies, week 3By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman September 16, 2012
  2. 2. The reasons for differences in performance of firms in the same industry have been subject toresearch for more than fifty years. Building on earlier positioning views of strategy, we willcompare and contrast some leading resource-based views with each other and with thepositioning views.For all authors (Barney (1995), Peteraf (1993), Grant (1996), Prahalad and Hamel (1990) andStalk, Evans and Schulman (1992), the unique aspects which make up a firm‟s competitiveadvantage are not just its physical resources but also the intangible aspects which make a firmunique.Each author has a similar view of where the differences come from, although they may usedifferent names for it. Pralahad & Hamel (1990) use the term “core competencies” whichrefers to the activities, knowledge and internal organizational structure that a firm is better atthan its competitors. These core competencies are not visible at first glance as they are deeplyrooted in the firm, and they provide the basis from which successful products can bedeveloped and allow a firm to compete in many and varied markets. Stalk, Evans andSchulman(1992) have a similar way of thinking when they discuss “capabilities”, meaning thebehaviour and culture at a firm, its key processes, and infrastructure. They explain that theessential aspects to outdo the competition are reliable product quality, insight into customerneeds, exploitation of emerging markets and new ideas and innovations. Barney (1995) refersto the resources and capabilities which are physical, financial, human and organizatorial, andthe 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 thedifferences between firms in terms of their resources and capabilities. Grant (1996) is mainlyconcerned with internal, specialist knowledge as a resource. 2
  3. 3. Each view is mainly concerned with internal performance drivers and hardly considersexternal circumstances, except to say that strategy cannot be static because the environment isconstantly changing.The business processes at a firm are a very important aspect of its unique capabilities. Eachauthor somehow argues that competitive advantages can only be enhanced when a corporatestrategy 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, viewingthe 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 knowledgeitself. Grant emphasizes that production – the creation of value through transforming inputinto output – requires a wide array of knowledge, usually through combining the specializedknowledge of a number of individuals. Grant discusses the scope of integration and explainsthe wider the span of the knowledge being integrated within a capability, the greater thedifficulty faced by competitors in replicating that capability. Therefore, he suggests buildingentry barriers by large scale knowledge integrations to gain competitive advantage againstnew entrants. Stalk, Evans and Schulman (1992) also argue that the essence of strategy is notin products and markets but in business processes and therefore firms should invest increating a cross-functional infrastructure. Three of Barney‟s (1995) most important questionsabout resources and capabilities involve the key business processes. Rareness means ofinformation and knowledge at the firm‟s disposal. Imitability refers to the ability of the firm‟sresources to be duplicated or substituted and there are three aspects. Firstly, he shows that afirm‟s history can make it difficult to emulate because knowledge and resources may havebeen built up over time and this can be costly to compete with. Next is the importance ofsmall decisions and namely the cumulative effect of multiple small decisions. It can be easyfor one firm to “copy” another‟s “Big Decisions” as these are announced publicly, but small 3
  4. 4. decisions determine the culture within the company and cannot be seen (and copied) bycompetitors. The final issue which determines imitability is what Barney calls “TheImportance 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 andmanagement. This alone cannot make a firm competitive but it can help to support the otheraspects. Peteraf (1993) is the only one who does not refer to the business processesthemselves.The role of employees is one important aspect of some resource-based views of competitivestrategy. According to Grant (1996), knowledge is found in individual employees, makingeach 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 andSchulman (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 ofthe 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 advantagedepends 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 corecompetencies. How to transform from a portfolio of SBUs to a portfolio of core competenciesis a matter of what they refer to as strategic architecture and will be different for everyorganization. Barney (1995) recognizes the importance of a fitting organization in order to becompetitive (the Question of Organization), but does not elaborate on what the organizationshould look like. Stalk, Evans and Schulman (1992) are more detailed in their description of 4
  5. 5. what they call a capabilities-based competitor and provide four steps how companies cantransform themselves into such an organization. Grant (1996) indicates that the essence oforganizational capability is the integration of individuals‟ specialized knowledge. This makesit difficult to yield a description of what a firm looks like and where its boundaries are. Hencehe quotes Demsetz who refers to firm-like organizations.Both Grant (1996) andPeteraf (1992) agree that imperfect mobility of resources, especiallyknowledge, is an important asset and should be retained internally as much as possible.Butlater on in both papers, they differentiate from the idea where, for Grant,knowledge can beexternal unless it is not directly involved in a firm‟score products or services, becauseotherwise, the firm will be more dependenton external resources, or worse, it will not be itselfanymore. Peteraf (1993) discusses the idea more on the economic aspects and explains thatinternalresources are good to keep because their transaction costs are lower.However,according to Peteraf, as her approach is based on the economics, if the transactioncosts of external resources are lower, those can easily replace theinternals.For Barney (1995), history is very important. He shows that in some cases a firms historycan still be relevant today and form part of its competitive advantage even now, creating anentry barrier for potential competitors, however in other cases, new firms can overtake thetraditional leader. Peteraf (1993) mentions Diederick and Cools 1989 paper and concludesthat in the case of intangible and inimitable assets such as knowledge, "history matters". Incontrast, Stark, Evans and Schulman (1992) and Prahalad and Hamel (1990) show that firmscan completely turn things around so that those who were traditionally the best performerscan lose out to new competitors. Grant (1990) seems to agree with both views, because forhim the key is both extending existing capabilities to incorporate new knowledge and viceversa (p.382) especially as markets and external circumstances are constantly changing, 5
  6. 6. sometimes radically. We can surmise, then, that if a firm can leverage its history to itsadvantage 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 forcesmodel (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 alsothe structure and strengths of the firm itself. Conner‟s (1991) resource-based theory alsoposited that firms are a unique blend of resources and their performance depends on theiruniqueness. Unlike Bain Type IO, which defends efficiency that is mainly stemmed frommonopolistic power, the heterogeneity condition of the resource based view discussed byPeteraf (1993), claims that without restricting the output level and producing higher amountsit 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 afirm‟s performance which consists of imperfect imitability and imperfect substitutability.Imperfect imitability is also discussed by Porter (1979); one of his five factors of competitionis “substitutes”, utilized to explain the better performance of companies whose products arehard to copy.As refered to in Conner (1991), in terms of similarities, Bain defines entry barriers whichseparate firms from potential entrants and in Peteraf‟s article (1993), Caves&Porter derive thenotion of “mobility barriers” which separate groups of similar firms from potential entrantsand Rumelt discusses isolating mechanisms to protect firms. Additionally, Ghemawatdiscusses size advantages in the context of creating inimitable positions in the market byproviding access to more efficient resources and more customers, similar to the Bain Type IO 6
  7. 7. approach. Grant‟s (1996) view of knowledge and the way it can be used as an entry barrierextends 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 mobileresources. According to Peteraf, imperfect mobile resources are available within the firm andcreate rent; similarly Coarse argues that asset specification is a prerequisite for a firm togenerate opportunistic potential. Additionally, it may be also argued that imperfect mobileresources somehow resemble Schumpeter‟s (in Conner 1991) suggested requirement ofinnovation to maintain market dominance.Lastly while discussing ex ante limits to competition it is noted that efficiency is a result ofhaving efficient inputs for production and effective implementation of the strategies in linewith Chicago School‟s argument of deriving efficiency from efficient production anddistribution.This paper aims to provide an overview of sources of performance, as suggested by variousauthors, and the similarities and differences between their views. This is a complex task so wehave included as appendix 1 a comparison matrix which summarizes some key aspects. Wehave also tried to link (parts of) these theories to the positioning views. 7
  8. 8. ReferencesBarney, Jay (1995), „Looking Inside for Competitive Advantage‟, Academy of ManagementExecutive, 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 ofManagement Executive, 16(2): 58-60.Brandenburger, Adam M. and Barry J. Nalebuff (1995), The Right Game: Use Game Theoryto Shape Strategy, Harvard Business Review (July-August): 57-71.Conner, Kathleen R. (1991), „A Historical Comparison of Resource-based Theory and FiveSchools 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-basedView‟, Strategic Management Journal, 14: 179-191.Porter, Michael E. (1979), How Competitive Forces Shape Strategy, Harvard BusinessReview, (March-April): 137-145.Prahalad, C.K. and Gary Hamel (1990), „The Core Competence of the Corporation‟, HarvardBusiness 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. 8
  9. 9. Appendix 1 Comparison MatrixKey aspects Prahalad & Hamel Grant Stalk et al. Peteraf BarneyPerformance 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 internalRole 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 SBUs are competition in Transcending companies that are viewed as a traditional SBUs portfolio of SBUsRole of outside competition Competition is Ex post and ex ante extremely dynamic competitionBusiness 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 9