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Strategic
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Investment
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Modes of diversification
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Inter-Organizational relationships
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Others : |
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Long-Term
Financial decisions |
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Investment
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THE RESOURCE-BASED
VIEW OF THE FIRM (RBV)
General
managers often ask themselves :
-
What makes
us distinctive or unique?
-
Why do some
and not other customers buy from us ?
-
What are
the Key Success Factors in our business?
Typical
answers might refer to :
The
common theme :
Firm specific resources
and capabilities are crucial in explaining
the firm's performance
Basic principles
of the RBV model
-
Basic
assumptions of RBV :
- Resource and/or capability
heterogeneity : different firms possess
bundles of different resources and
capabilities
- Resource and/or capability
immobility : Some of these resources
and capabilities are inelastic in
supply or costly to copy
- RBV posits
that the sources of value creation are resources
and capabilities
- Value = Consumer surplus
+ Producer profit
- To outperform industry
norm, a company must create more value
than its competitors
Starting
point for a unifying strategic framework
:
THE RBV
of the firm
- The RBV of the firm is grounded
in economics
- RBV sees companies as different
collections of physical and intangible assets
and capabilities, which determine how efficiently,
how effectively a company performs its functional
activities
- Attributes competitive advantage
to ownership of valuable resources and capabilities
that enable a company to perform activities
better or more cheaply than competitors
- Combines internal
analysis with external
analysis
Resources
- Are defined as stocks of
firm-specific assets
- Cannot be easily duplicated
- Cannot
be easily acquired in well-functioning markets
Examples :
Patents
and trademarks
Brand-name
reputation
Installed
base
Organizational
culture
Workers
With specific expertise or knowledge
- Contribute either directly
(e.g., reputation) or indirectly (e.g.,
through serving as the basis of capabilities)
to value creation
- Are converted into final
products or services using bonding mechanisms
such as IT, incentive systems, trust, etc.
- Sometimes non-specific resources
(like buildings, raw materials, unskilled
labor, etc.) are included in the definition
of "resources"
-
Resource
categories :
-
Financial
capital
-
Physical
capital
-
Human
capital
-
Organizational
Capital
Capabilities
- Are defined as cluster
activities that a firm does especially well
in comparison with other firms
o
May reside within business functions (e.g.,
AA yield management)
o May be linked to technologies, product
design (e.g., Honda engines)
o May reside in firm's ability to manage
linkages between elements of value chain,
i.e., coordination skills (e.g., Ford
product development)
o Refer to a firm's capacity to deploy
resources, usually in combination, using
organizational processes to effect desired
ends
- Information-based,
firm-specific processes which are created
over time through complex interactions between
resources
- Key characteristics
:
o Valuable
across multiple products and markets
o Embedded in organizational routines
(well-honed patterns of performing activities)
o Tacit (i.e., difficult to reduce to
algorithms, procedure guides)
Resources
and capabilities are distinct from key success
factors
Key
success factors (KSF)
- Refer to the skills and assets
a firm must have to achieve profitability
in a particular market
- Market-level rather than
individual characteristics
- Necessary, not sufficient
for achieving competitive advantage (e.g.,
KSF in athletic footwear are development
of new designs, management of a network
of suppliers and distributors, creation
of marketing campaigns)
- Predictors of firm profitability
(like resources and capabilities)
Resources
and capabilities
- Are conceptually different
from KSF
- Sometimes overlap with KSF
A FRAMEWORK
FOR ANALYSIS : VRIO
- Resource-based analysis
of the firm determines which resources and
capabilities result in which strengths or
weaknesses
- Strategies are to be implemented
which exploit (or build) strengths and avoid
(or eliminate) weaknesses
- What constitutes a strength
or weakness is partially a function of the
external environment
- Framework for analysis:
VRIO - resources and capabilities
should be
o Valuable
o Rare
o Inimitable
o Organization can
effectively exploit them
VALUE
of resources and capabilities
- A VALUABLE
resource or capability (or a combination
thereof) must
- Contribute to
fulfillment of customer's needs
- At a price the
consumer is willing to pay, which is
determined by
- Thus, value is partially
a function of external environment (product
market, demand forces)
- Changes in consumer
tastes, industry structure, technology,
etc. can result in changed value
- Resources of different
firms can be valuable in different ways
(e.g., Timex versus Rolex)
- Value = Lowered costs
or increased revenues or both
SCARCITY
of resources and capabilities
- Resources and capabilities
must be in short supply
to create competitive advantage (and go
beyond competitive parity)
- What would happen
if this were not the case?
- An analysis of the
firm's resources and capabilities must include
critical assessment whether they are unusual
when compared to those of competitors
- How rare does a resource
have to be in order to have potential for
generating a competitive advantage?
- Example of a rare
resource: Wal-Mart's point-of-purchase inventory
control system
- To be a source of
sustained competitive advantage
the rarity of the resource must persist
over time
INIMITABILITY
of resources dans capabilities
- Requirement for sustained
competitive advantage
- Ease of imitation
depends on
- Sources of cost asymmetries
/ cost disadvantages fall into two categories
:
Impediments
to imitation :
- Legal restrictions on imitation :
- Patents, copyrights, trademarks
- Governmental control over entry
into markets (licensing,
certification, quotas on operating
rights)
- Superior access
to inputs or to customers
- Market size and
scale economies
- Intangible barriers
to imitation
Degrees
of resource and capability imitability
Source:
C. Montgomery, "Resources: The essence
of Corporate Advantage", Harvard
Business School Case N1-792-064.
· Cannot
be imitated : Patents, unique
assets, unique locations
· Difficult to imitate
: Brand loyalty, employee satisfaction,
reputation for fairness
· Can be imitated
(but may not be) Capacity preemption,
economies of scale
· Easy to imitate
: Cash, commodities
ORGANIZING
to exploit competitive potential of resources
and capabilities
The following elements
must be in place in order to effectively exploit
the resource(s) and/or capability(s):
o Structure
o Management and control systems
o Compensation policies
o Business processes
o Complementary resources and capabilities
· Examples
:
o Caterpillar
: Global formal reporting structure, global
inventory systems
o Wal-Mart: Inventory control system
o Xerox: Highly bureaucratic product development
process - failed to exploit enormous opportunities
(e.g., PC, mouse, windows-type software,
laser printer, "paperless office",
ethernet, etc.)
THE
VRIO FRAMEWORK
Is a resource or
a capability or a combination of resources
& capabilities :
Valuable? |
Rare?
|
Costly
to Imitate ? |
Exploitable
by the Organization? |
Competitive
implications |
Economic
performance |
|
No |
- |
- |
No |
Competitive
Disadvantage |
Below
normal |
Weakness |
Yes |
No |
-
|
to |
Competitive
Parity |
Normal |
Strength |
Yes |
Yes |
No |
Temporary
competitive advantage |
Above
normal |
Strength
and distinctive competence |
Yes |
Yes |
Yes |
Yes |
Sustained
competitive advantage |
Above
normal |
Strength
and sustainable distinctive competence |
Source
: Barney, 1997, Tables 5.2 and 5.3, p.163.
Threats to sustainability
Limitations
of the RBV
- Presented as static concept
- however, many firms need to be able to
cope with turbulent environments
- Suggests that managers
may have limited ability to create sustained
competitive advantages (empirical support
by "perpetually failing firms"
- firms that consistently earn normal or
below-normal returns
- Difficult to test
empirically - data problem (at the level
of the unit of analysis, Le., resources
and capabilities)
- What is the appropriate
level of analysis? How deeply does one have
to look?
Principles
of capabilities-based competition
Goal
: Build difficult-to-imitate organizational
capabilities that distinguish a company from
its competitors
Principles
:
o The building
blocks of strategy are business processes
o The transformation of processes into valuable
strategic capabilities is a key to success
o Capabilities are created by making strategic
investments in support infrastructure
o CEO must be responsible, because competing
on capabilities involves cross-functionality
Some lessons
learned from the capabilities perspective
- A capability begins and
ends with the customer (or supplier)
- The longer
and more complex the string of business
processes, the harder it is to transform
into a capability or to duplicate
or imitate
- Outsourcing can be
dangerous
- A strategy for growth
: Transfer essential business processes
to New geographic areas (e.g., Wal-Mart)
or to New businesses (e.g., Honda)
There is a difference
between capabilities and core competencies
Core competencies
- Coordinate diverse production
skills and integrate multiple streams of
technology
- Are communication, involvement,
and a deep commitment to working across
organizational boundaries
- Do not diminish with use,
but are enhanced as they are applied and
shared
- Are the glue that binds
existing businesses
- Are difficult to imitate,
especially if they are a complex harmonization
of individual technologies and production
skills
- Are corporate resources
and may be reallocated by corporate management
Tests to identify core competence
:
Dynamic
capabilities
Definition : Ability
to integrate, build and reconfigure internal
and external processes and competencies to
address a rapidly changing environment; ability
to maintain and adapt the capabilities that
are the basis of competitive advantage
- Hypothesis : Competitive
advantage of a firm lies with its processes
- Roles of organizational
and managerial processes :
- Coordination and
integration
- Learning
- Reconfiguration
- · Bygones are
rarely bygones: History matters
- · Path dependencies
the more important, the greater the returns
to adoption (e.g., through complementary assets,
network externalities)
Implications of dynamic
capabilities and evolutionary perspective
To qualify as the
basis for an attractive strategy, a resource
or capability must pass a number of external
market tests :
The test
of imitability
- Is the resource or capability
hard to copy?
- Inimitability is at the
heart of value creation because it limits
competition
- Inimitability also enhances
the likelihood of achieving a sustainable
competitive advantage
The test
of durability
- How quickly
does a resource or capability depreciate
?
- Crucial for determining
sustainability of rents
- Today, many industries
show a fast depreciation of the value of
resources or capabilities(e.g., technological
know-how)
- Schumpeterian process
of "creative destruction": Huge
pressures on companies in traditional industries
(e.g., steel industry, textile industry),
but also in emerging industries (e.g., computer
business, software applications)
The test
of appropriability
- Who captures the value that
the resource or capability creates?
- Even if you "own"
the resource or capability, profits from
it are often subject to bargaining
- Compare this to game theoretic
concept of value appropriation
The test
of substitutability
- Can a unique resource or
capability be trumped by another resource
or capability ?
- Compare to Porter's
Five Forces framework : Talks
about products, here think in terms of R&C
- RBV pushes critical question
down a level to factors that underpin a
company's competitive ability
The test
of competitive superiority
- Whose
resource or capability is really better?
- Assess your strategic
assets relative to your competitors
- Do not consider analysis
of core competencies just a "feel good"
exercise
- Disaggregate unique
skills in order to truly identify distinctive
resources
Strategic implications
of resource and capabilities-based competition
- Maintain-and build valuable
resources and capabilities
- Continually upgrade
number and quality of resources and capabilities
- Never stop reassessing
the scope of your business
- Rigorously apply market
tests to your strategic assets
Common
mistakes
- Managers tend to overestimate
the transferability of specific assets and
capabilities
- Managers tend to overestimate
their capability to compete in highly profitable
industries
- Managers tend to assume
that leveraging generic resources will be
a major source of competitive advantage
in a new market
Sources :
The essence of Corporate Advantage, C. Montgomery, Harvard Business School, Case N1-792-064.
Gaining and Soustaining Competitive Advantage, Jay. B. Barney, Addison-Wesley, 1997
Competing on Capabilities: The New Rules of Corporate Strategy, G. Stalk, P.Evans, L.E.Shulman ,Harvard Business School, March-April 1992
The Core Competence of the Corporation, C.K Prahalad and G. Hamel, , Harvard Business School, May-June 1990
Dynamic Capabilities and Strategic Management, D.J. Teece, G. Pisano, A. Shuen, , SMJ,1997
Strategic Management, Raphael Amit, Professor at Wharton University of Pennsylvania, US
Contemporary Strategic Analysis, Robert M. Grant, 3th edition, Blackwell, 1998
© ECOFINE - Bernard Jaquier, Professor Emeritus & Dr Honoris Causa, Lausanne, Switzerland, 2020
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