The Resource Based View of the Firm
(RBV)
B290
The object of strategic analysis…
• Explain why a firm or a group of firms is making
above normal returns
– i.e. More than their long run average costs
• Two possible explanations
– It’s something to do with the industry in which they
operate
External analysis - Porter 5 Forces
– It’s something the firm owns or controls
Internal analysis, the RBV
Why some firms make more $ than
others
• If firms are identical and their products are
commodities
– Industry concentration
– Up and down stream bargaining power
– Threat of new entry or substitution
• If products or firms are heterogeneous
– Differences in:
• Cost structure
• Value created (innovation, brand)
• Value appropriated (brand, switching costs)
Two puzzles
• Some industries with no apparent industry
barriers to entry are concentrated and
profitable
• In some fragmented industries some firms
making substantial profits
– e.g., Nucor in steel
If Industry Mattered Most…
a
a
b
b
b
b
c
c
c
c
c
c
In fact, Firms Matter Most…
a
a
b
b
b
b
c
c
c
c
c
c
Why some firms make more $
than others
• Economic assumption
– Imitation should reduce difference in technology
– And thus differences between firms’ returns
• Only if imitation is difficult or impossible, will firms with
favourable initial resource endowments make
consistently higher profits
– E.g., Alcoa
Concentration
• Regulatory barriers to industry entry
• Economies of scale
– Minimum efficient scale
– Total sales / MES = # Firms
– If no MES => monopoly
• Entry deterrence (overcapacity)
• Uncertain imitability
MES
Uncertain imitability
• Two assumptions
– Firms are all different in some way
– Firms cannot figure out exactly what other firms do and
why they are ‘better’ (uncertain imitability)
• Theses two assumptions lead to competitive
industries (i.e. with no entry barriers) in with fewer
firms than one would expect which (some) firms
make money.
Lippman & Rumelt’s model…
• Each period firms consider entering an industry
• Based on their expected costs, the firm considering entry
calculates its expected profit
• If current industry prices are above its estimated long run
costs, it enters.
• If it enters, it finds out what its costs really are
• All firms (new entrant and incumbents) recalculate their
optimal quantity - a new industry price emerges
• Firms whose costs exceed this new price leave
The Resource Based View
• Empirical observation: some firms in ‘competitive industries’ make
above normal returns
– First explanation proposed - uncertain imitability
(Lipmann & Rumelt, 1982)
• Empirical study - firm differences account for much more variation in
performance than industry differences
(Rumelt 1992)
• ‘Market’ for strategic factors –
– efficient market hypothesis (Barney 1986)
– Implications for inimitable resources (Dierickx & Cool, 1989)
• Properties of resources that support profitable value creating activity
- the heart of the RBV
• Something is giving such firms a sustainable competitive advantage
Hypothetical example:
mobile phone licenses
Three different frequency bands, A, B and C
Allocated by the FCC though a lottery…
Frequency band A (5c / call)
p=1/3
p=1/3
E[cost] = ?
Frequency band B (4c / call)
p=1/3
Frequency band C (3c / call)
Hypothetical example:
mobile phone licenses
Best estimate of likely cost is…
Frequency band A (5c / call)
p=1/3
p=1/3
E[cost] = 4c / call
Frequency band B (4c / call)
p=1/3
Frequency band C (3c / call)
Hypothetical example:
mobile phone licenses
Imitation allows all firm to
achieve 3c / call costs
Irrespective of initial
estimates firms know that
3c/min is achievable
E[cost] = 4c / min
Hypothetical example:
mobile phone licenses
Without imitation, firms retain their initial
costs, good or bad…
4c / min remains
the expected cost
E[cost] = 4c / min
With 5 firms, prices
would fall below
expected costs, so
no 5th firm enters
Implications
•
Dynamic rather than static model
– conceptually simple but not easily solvable analytically
•
Limit to firm entry more realistic
– Not an infinite number of firms in the market
•
More uncertainty regarding the resource bundle to be
imitated…
– fewer firms enter
– surviving firms makes higher returns
Market for ‘strategic factors’
•
Imagine there was a market for ‘strategic factors’
the resources that make one firm more profitable than another…
–
–
–
–
•
Firms could buy the resources they needed to be as good as the best in the industry
But how much would they pay?
Up to the present value of the expected value of the benefit the resource conferred
In an industry with several firms, bidding would reduce gains from such a purchase to
zero
SO: if firms do make profits, they cannot have bought the resources on a
‘strategic factor’ market
– Which means rent generating resources have to be created in-house
– (and acquisitions are often unprofitable for the acquiring company)
So, what resources do firms need?
[Resources are the things firms use to create its
products and services]
• Something that makes them distinctive, different,
unique…
• Distinctiveness stems from unique resources…
– Create products of value to customers
– Not available off the shelf
– Are hard to imitate (barriers to imitation - not entry)
Barriers to Imitation
• Patents, copyrights
• Brand
• Tacit knowledge
– Riding a bicycle
• Dispersed knowledge
– Formula for Coke
• Complex “activity systems”
• Complex social system (culture)
Three questions
• Does the resource create value?
– for our customers
• Higher prices
– for the firm
• Lower costs
• Is it rare?
– We can only appropriate if we have a unique
advantage
• Is our advantage inimitable?
– i.e., will that unique advantage persist over time?
»V.R.I.
Resources and economic transformation
INPUT
RESOURCES
Raw materials
Energy, Parts
INTANGIBLE
KNOWLEDGE-BASED
‘TRANSFORMING’
RESOURCES
(CAPABILITIES)
Knowledge,
SOPs and routines,
skills
TECHNOLOGY
TANGIBLE
RESOURCES
Physical assets
Finished
product
or service
Resources and economic transformation
INPUT
RESOURCES
Raw materials
Energy, Parts
COMPETENCE
INTANGIBLE
KNOWLEDGE-BASED
‘TRANSFORMING’
RESOURCES
(CAPABILITIES)
Knowledge,
SOPs and routines,
skills
TANGIBLE
RESOURCES
Physical assets
Finished
product
or service
A Heirarchy
Competence
Tangible
Resources
Distinctive
competence
Core
Competence
Knowledge
Resources
or Capabilities
Fruin’s ‘bow tie’ model of core
competency
Capabilities
and resources
Core (distinctive)
competency
e.g. Honda
Small internal
combustion engine
Products
Motorcycles
Cars
Lawn mowers
Outboard motors
ATVs
Generators
“V.R.I.”
• Valuable
– To customers
• Which means we may be able to raise prices above those of our
less valued competitors.
– To us
• Which means we may be able to maintain lower costs than our
competitors
• Their costs are a floor below which prices will not fall, leaving us
with a profit even when they have none.
• Rare
– If customers have no alternative they will have to pay more than
it costs us to make the product or deliver the service
– We can appropriate some of the value we create
• Inimitable
– ensures rarity into the future
Complex activity systems
• Some firms are made up
of complicated
interlocking systems
• Complicated systems are
hard to copy
• One missing piece and
the entire system will not
work
Summary
• If there is no structural advantage in our
industry, we must look for sources of
competitive advantage inside our firm
• Firm levels factors that deliver competitive
advantage must be
– Valuable (i.e. a competence)
– Rare and non-substitutable (i.e. distinctive)
– Inimitable (and thus persist over time)
• Distinctive competences with multiple uses
are termed ‘core’ competences