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Resource Based View of the Firm

IIMB

PD Jose

7/10/2010

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Competitive Advantage of Firms and Industry Profitability

• Industry conditions that determine industry-wide • A firm in a fiercely competitive industry may

continue to have an edge over its rivals

profitability are distinct from forces that sustain a firm’s competitive advantage

• Firms within an industry with high entry barriers and

higher than competitive profits may all be equally profitable

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

PD Jose 7/10/2010 2

The Fundamental Question

Why are some firms more successful than others?

Industrial Organization Perspective:

Profits = f (industry structure)

Resource-Based View:

Profits = f (firm’s resources & capabilities)

PD Jose

The Resource Based View

RBV argues that…..

the heterogeneous market positions of close competitors arise from each firms unique bundle of resources and capabilities

(Source: Hoopes, Madesn and Walker, 2003)

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The Resource Based View

• •

Resource: an observable - but not necessarily tangible - asset that can be valued and traded (e.g. brand, patent, land or license) Capability: is not observable – and hence necessarily intangible- can not be valued and can change hands only as part of its entire unit (Airline’s yield mgmnt system, WalMart’s cross docking etc)

(Source: Makadok, 2001)

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Resource Based Theory of the Firm

Firm resources Tangible resources

• Land

Intangible resources

Competences • Knowledge (CI, mkt insight) •Capabilities NPD (R&D, Mkt Res) •Attitude

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• Buildings • Materials • Money

Relational resources • Relationships `contracts’ • Reputation `brands’

The Resource Based View

• • •

Valuable: A valuable resource enables a firm to improve its market position relative to competition Rare: To be of value in sustaining competitive advantage, resources must be scarce...