4: Resource-Based Theory of the Firm

Question 1

Resource
def
3(+1) properties, defined
+ resource-based view of the firm

Answer 1

= anything that could be thought of as a strength or weakness (asset) of a firm if it is observable and can be valued and traded

§ Resource heterogeneity: A firm is a bundle of productive resources and different firms possess different bundles of resources
§ Resource immobility: Some of the resources are very costly to copy or inelastic in demand
§ Resources are versatile, applicable to a broad range of businesses (production of products for markets) or specialized, applicable to a narrow range of businesses

Question 2

taxonomy of resources in 2(+1) types

Answer 2

\+ Tangible Resources:
Physical attributes, visible, quantified
§  Capital
§  Land
§  Buildings
§  Plant
§  Equipment
§  Supplies

\+ Intangible Resources:
No physical attributes, invisible
§  IP (Patents, Copyright, Trademarks, Trade Secrets)?
§  Culture 
§  Routines 
§  Brand Equity
§  Reputation

(+ Human Resources)
§ Skill, know-how
§ Capacity for communication and collaboration
§ Motivation

Question 3

The 2 Links of resources n capabilities to firm performance

Answer 3

1. resources + capabilities reinforce core competencies, leveraged into firm activities for competitive advantage leading to performance
2. performance yields means to be reinvested into resources n capabilities

Question 4

The 4 effects of resources on economic performance,
explained
2+4+5+3

Answer 4

Competition for resources
- monopoly on a resource reduces profits for users
VS
- existence of substitute resources reduces profits for holder

Resource-position barriers
= where someone already having a resource affects the costs and/or revenues of later acquirers (it is like a private capital good)
§ Joint cost subsidy from resources relations across the firm may be more powerful than product to product (business to business) cash subsidy
§ Because they give more options, the intensity of competition for versatile resources may be higher than for specialized resources, making them unattractive in uncertain settings
§ The optimal growth of a firm involves a balanced exploitation and development of resources
§ An entry barrier without a resource position barrier leaves the firm vulnerable to diversifying entrants, whereas a resource position barrier without an entry barrier leaves the firm unable to exploit the barrier

Resource attractiveness 
= firm has incentive to create situation where own resource position (barriers) directly or indirectly makes it difficult to catch up; 5 examples:
§  Machine capacity
§  Customer loyalty
§  Production experience
§  Technological leads
§  Merger and acquisitions

Mergers, acquisitions, alliances

• can be motivated by access to resources, not only to products and markets
• provide an opportunity to trade otherwise non-marketable resources as well as resource bundles
• should be viewed in the light of their ability to build resource- position barriers and impact on entry barriers

Question 5

The relationship (matrix) between entry and resource-position barriers
assessed on 3(=2) dims

Answer 5

Resource-position barriers/entry barriers

Low/low:
increasing intensity of competition
negative impact on industry economic performance
negative impact on firm economic performance

High/low:
increasing intensity of competition
negative impact on industry economic performance
no impact on firm economic performance

Low/high:
stable intensity of competition
no impact on industry economic performance
negative impact on firm economic performance

High/high:
stable intensity of competition
no impact on industry economic performance
no impact on firm economic performance

Question 6

incumbent’s advantage through resource-position barrier,

specialized VS versatile resources

Answer 6

the incumbent’s (cost) advantage is steeper for specialized resources!

Question 7

Four characteristics of firm resources

relevant for competitive strategy

Answer 7

Rarity = The extent to which a resource is unique to the firm

Value = The extent to which a resource allows a firm to neutralize external threats and exploit business opportunities

Imitability = The extent to which a resource can be imitated by competitors

Potential for substitution = The extent to which the resource can be substituted by other, not rare and/or imitable, resource

Question 8

Four levels of competitive advantage

Answer 8

Competitive disadvantage = The firm is implementing a value-destroying strategy leading to cost-disadvantage or a product that does not satisfy customer needs

Competitive parity = The firm and its competitors are implementing the same value- creating strategies leading to cost-advantage and/or differentiation advantages

Temporary advantage = The firm is alone in implementing a value creating strategy leading to cost-advantages and/or differentiation advantages. Competitors might prepare for imitation.

Sustainable competititve advantage = A firm is alone in implementing a value-creating strategy leading to cost and/or differentiation advantages. Competitors are unable to duplicate the benefits of this strategy

Question 9

Link b/w resource properties n levels of competitive advantage

Answer 9

Is the resource or capability valuable? 
NO --> compet. disadv.
YES
Is the resource or capability rare? 
NO --> compet. parity
YES
Is the firm costly to imitate n organized to capture value, or is the resource without substitutes? 
NO --> temporary compet. adv.
YES
--> sustained compet. adv.

Question 10

Analyzing Resources and Capabilities

in 4 steps

Answer 10

§ Identify the firm`s resources and capabilities
§ Explore linkage between resource and capabilities
§ Appraise the resources and capabilities in terms of strategic importance and relative strength
§ Develop strategy implications

Question 11

Value chain
def + 2 types w +6 examples

Answer 11

Value chain: Internal activities a firm engages in when transforming inputs into outputs.

• Primary activities: Adds value directly by transforming inputs into outputs
  raw materials>Intermediate goods / components>Final assembly n manufacturing>marketing n sales>Customer Service
• Support activities: Add value indirectly.
  General Mgmt, Information Systems, Finance, RnD, Operations Management, HR

Question 12

Strategic activity system 
def + 3 properties

Answer 12

= conceives of firm as a network of activities
§ Socially complex
§ Evolves over time
§ as external environment changes, too

Question 13

Economic effects of imitability

in 3 considerations

Answer 13

§ Valuable and rare resources can only be a source of sustained competitive advantage (above-normal economic performance) if the firms that do not possess these resources face a cost disadvantage in obtaining them compared to the firms that already possess them
§ Such resources are called imperfectly imitable (Lipman n Rumelt, 1984)
§ If direct duplication of a firm’s resources is no more costly than the original development of these resources, then any competitive advantage will be temporary

Question 14

Incentives to imitation

in 4 steps

Answer 14

if superior economic performance

• then try to imitate
• therefore, try to understand factors
• and sources of imperfect imitability, too

Question 15

4 sources of imperfect imitability

explained

Answer 15

§ Unique historical conditions
= low-cost acquisition or development of a firm’s resource depended on a unique historical condition; eg first-mover advantage, but may happen also in later time periods, w path dependencies

§ Causal ambiguity
= the relationship between resources controlled by the firm and its competitive advantage may be unclear, even to own managers! because Resources that generate competitive advantage are taken for granted, or The combinations of resources that generate competitive advantage are difficult to evaluate (thousands of smaller resources taken together generate the competitive advantage)

§ Social complexity
= socially complex phenomena, beyond the ability of firms to systematically manage and influence
Typically:
§ Interpersonal relations among managers
§ A firm‘s culture
§ A firm‘s reputation among suppliers and customers
- exists iff causal ambiguity
- non-valuable socially complex resources can cause sustained compet. disadv.

§ Intellectual property

• IP protected through various mechanisms can be costly to acquire and/or imitate for other firms, OR
• the resources surrounding the implementation, usage, and development of this technology may be socially complex and even causally ambiguous

Question 16

5 Critical points in the resource-based theory of the firm

Answer 16

§ It defines rather than hypothesizes the link between competitive advantage,
economic performance, and resource characteristics
§ It becomes tautological
§ It is difficult to verify empirically (causal ambiguity)
§ For some resources, their value changes rapidly
§ The challenge for strategist is to seek, understand, explain, and develop competitive heterogeneity. Firm resources merely explain one aspect of this challenge

Question 17

Value - price - cost model of competitive heterogeneity:
def.,
3 possibilities
+ 3 impacts of bargaining constraints

Answer 17

= bargaining model of competitive heterogeneity

Firm A enjoys competitive advantage over rivals B and C because it can either

1. Attract buyers due to better surplus offered by its products (V-P)
2. Make a higher profit (P-C)
3. A combination of 1. and 2.

§ When there are industry wide constraints on bargaining price, then the dissimilar
resources of the firms A and B produce the same economic return (P-C)
§ In effect, a resource is valuable only when it increases the difference between a firm’s value and cost (V-C) compared to rivals
§ A valuable resource makes a firm more productive in a competitive context

Question 18

Value innovation:
def in 2 points
+ 3 stages
+ diff. w Porter’s theory

Answer 18

• renders competition irrelevant by offering new and superior buyer value in existing markets or by enabling the creation of new markets through changes in buyer value
• Rather than using conventional perspectives of existing resources, Value innovation involves redefining the basis on which firms compete in an industry

New entrants refresh the industry in its approach to delivering value to its customers.:

1. new entry
2. adaptation by incumbents who can
3. others exit

+ Defending against industry forces does not depend on a firm’s value or cost position per se, as Porter (1980) suggests, but on the difference between the firm’s value offering and its cost (V-C profile)