The Cornerstones of Competitive Advantage A ResourceBased View

The Cornerstones of Competitive Advantage: A Resource-Based View Peteraf, Margaret A. (1993) Strategic Management Journal, Vol. 14, 179 -191 Prepared By Yuanyuan Sun Sep. 23, 2009

Main Theme The purpose of this paper is to develop a general model of resources and firm performance which at once integrates the various strands of research and provides a common ground from which further work can proceed.

Main Theme Basic Principle of Resource-Based View Firms are fundamentally heterogeneous, in terms of their resources and internal capabilities. Notable Works in this Area: Penrose (1959) Lippman and Rumelt (1982) Teece (1980, 1982) Rumelt (1984, 1987) Barney (1986, 1991) Castanias and Helfat (1991) Mahoney and Pandian (1992) Nelson and Winter (1982) Wernerfelt (1984) Dierickx and Cool (1989) Conner (1991)

Main Theme Distinctions and Commonalities: General agreement to the basic insights of the model; But small disagreement over minor points, such as subtle variations in terminology.

A Model of Competitive Advantage Four conditions necessary for competitive advantage Heterogeneity Ex post limits to competition Imperfect mobility Ex ante limits to competition

A Model of Competitive Advantage Heterogeneity A basic assumption of resource-based work is that the resource bundles and capabilities underlying production are heterogeneous across firms (Barney, 1991). Heterogeneity is the source of Ricardian rents and monopoly rents.

A Model of Competitive Advantage Ricardian Rents Source of heterogeneity: Superior resources remain limited in supply. - Fixed productive factors cannot be expanded - Quasi-fixed productive factors cannot be expanded rapidly. Ex. collective learning, knowledge based competencies Firms with superior resources have lower average costs than other firms.

A Model of Competitive Advantage Ricardian Rents

A Model of Competitive Advantage Ricardian Rents

A Model of Competitive Advantage Monopoly Rents Monopoly profits result from a deliberate restriction of output rather than an inherent scarcity of resource supply. Source of heterogeneity: spatial competition; product differentiation; intra-industry mobility barriers; size advantages; first mover advantages. Firms in favorable positions face downward sloping demand curves.

A Model of Competitive Advantage Ex post limits to competition For Rents to be SUSTAINED Two critical factors limiting ex post competition: - Imperfect imitability - Imperfect substitutability

A Model of Competitive Advantage Ex post limits to competition Imperfect imitability Rumelt (1984): “isolating mechanisms”. Lippman and Rumelt (1982): causal ambiguity Rumelt (1987): producer learning, buyer switching costs, reputation, buyer search costs, channel crowding, economies of scale. Rumelt (1984): Mobility barriers (entry barriers)

A Model of Competitive Advantage Ex post limits to competition Imperfect imitability Yao (1988): production economies, sunk costs, transaction costs, imperfect information. Ghemawat (1986): size advantage, preferred access to resources / customers, restrictions on competitors’ options. Dierickx and Cool (1989): time compression diseconomies, asset mass efficiencies, interconnectedness of asset stocks, asset erosion, causal ambiguity.

A Model of Competitive Advantage Ex post limits to competition Imperfect substitutability Substitutes reduce rents by making the demand curves of monopolists or oligopolists more elastic.

A Model of Competitive Advantage Imperfect mobility Perfectly immobile: resources cannot be traded. Imperfectly mobile: Resources which are tradable but more valuable within the firms that currently employ them than they would be in other employ. - Montgomery and Wernerfelt (1988): switching costs; sunk cost - Cospecialized assets: transaction specific, firm specific.

Applications Peteraf suggests that although they do not say so, Montgomery & Wernerfelt’s (1989) model implies an optimal extent of diversification.

A Model of Competitive Advantage Imperfect mobility “Opportunity cost” A-Q rents: appropriable quasi-rents – the excess of an asset’s value over its value to the second highest valuing potential user or bidder for the resource. Key features of imperfect factor mobility: Imperfectly mobile resources will remain available to the firm; The economic rents will be shared by the firm.

A Model of Competitive Advantage Ex ante limits to competition Prior to any firm’s establishing a superior resource position, there must be limited competition for that position. Barney (1986): the economic performance of firms depends not only on the returns from their strategies but also on the cost of implementing those strategies. Rumelt (1987): Unless there is a difference between the ex post value of a venture and the ex ante cost of acquiring the necessary resources, the entrepreneurial rents are zero. Apply to tradable, immobile and imperfectly mobile resources.

A Model of Competitive Advantage

Applications of the Resource-Based Model Major contribution: it explains long-lived differences in firm profitability that cannot be attributed to differences in industry conditions. Single business strategy Corporate strategy

Applications of the Resource-Based Model Single business strategy RBV facilitates the differentiation between resources which might support a competitive advantage from other less valuable resources (Barney, 1991). RBV helps to decide whether to license a new technology or whether to develop it internally. RBV helps to identify how imitable the innovation and thus enhance decision-making. Guidelines for identifying critical resources: causal ambiguity; time-path dependent or socially complex resources.

Applications of the Resource-Based Model Corporate strategy Boundaries of the firm Diversification is the result of excess capacity in resource which have multiple uses and for which there is market failure. E. g. , Montgomery and Hariharan (1991): firms with broad resource bases tend to pursue diversification. Two problematic issues: 1. How “excess capacity” in resources may lead to “scarcity rents” for resource holders? 2. Why firms do not expand more fully in initial markets before they enter additional ones.

Comments Nice literature review; good attempt to identify common grounds and facilitate communication. One Question: P 190: “It is the only theory of corporate scope which is capable of explaining the range of diversification, in all its richness, from related constrained to the conglomerate form. ” Coase (1937): P 402