The document summarizes key differences between the Industrial Organization (IO) view and Resource-Based View (RBV) of firms. The IO view focuses on external industry conditions and assumes firms have identical resources, while the RBV focuses on internal characteristics and assumes resources are heterogeneous.

1. Resource-Based View

2. IO vs. RBV
Industrial Organization (IO) Resource Based View (RBV)
Some Authors: Porter, Rumelt Barney, Wernerfelt
Focus External—describes environmental Internal—describes firm’s internal
conditions favoring high levels of firm characteristics and performance
performance
Assumptions: 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.

3. 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

4. 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…

5. 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

6. 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.

7. 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.

8. 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

9. Where are we?
 We are discussing sustainable competitive
advantage, and have defined Competencies:
 AssetsCapabilitiesCompetenciesCompetitive 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.

10. 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

11. Sustainable Competitive Advantage
1. 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

12. Sustainable Competitive Advantage
2. 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?

13. Sustainable Competitive Advantage
3. 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.

14. Sustainable Competitive Advantage
4. 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

15. Sustainable Competitive Advantage
5. 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

16. 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.

17. Economic Performance
Exploited by
Costly to
the Competitive Economic
Valuable Imitate?
Rare? Organization? Implications Performance
?
Competitive
No -- -- -- Below Normal
Disadvantage
Competitive
Yes No -- -- Normal
Parity
Temporary
Yes Yes No -- Competitive Above Normal
Advantage
Sustained
Yes Yes Yes Yes Competitive Above Normal
Advantage