Margaret Peteraf
Kellogg – Tuck at Dartmouth
Strategic Management
Journal (1993)
Cited: 5239 times
(Google Scholar)
The
Cornerstones
of Competitive
Advantage:
a RBV
Presented by: Sandra Corredor
Motivation
 Integration
of the RBV model terminology and
ideas: general model of resources and firm
ability to generate rents and sustainable rents.
 RBV
complements the firm effect analysis (as
opposed to the industry effect)
 Understanding:

What are the origins of heterogeneity

What is the nature of valuable resources and rents

What is the relationship of resources with
competitive advantage and what makes a
competitive advantage sustainable.
1. Resource heterogeneity from which
come Ricardian or monopoly rents.
Value & Rare = heterogeneity
2. Ex post limits to competition are
necessary to sustain the rents.
Inimitable. Non-perfect substitutability.
3. Imperfect Mobility: Perfectly
immobile, or imperfectly mobile due
to firm-specific investments.
4. Ex ante limits to competition
prevent costs from offsetting the rents
TOGETHER THEY ARE SUFFICIENT
CONDITIONS TO C.A.
Four individual-necessary-conditions for
Competitive Advantage
Ricardian Rent


Presence of superior productive factors which are in limited supply.

May be fixed factors which cannot be expanded.

More often, they are quasi-fixed: their supply cannot be expanded
rapidly or without cost.
Characteristics:

Competitive behavior in the product market (firms are price-takers)

Inelastic supply curves: they cannot expand output rapidly,
regardless of how high the price may be. High prices, however, do
induce other less efficient firms to enter the industry.

Entrants will produce so long as P exceeds their marginal cost (MC).

In equilibrium, industry demand and supply are in balance, highcost firms breakeven (P = AC), and low-cost firms earn supra-normal
profits in the form of rents to their scarce resources (P > AC).

Not a market power theory (i.e. no restriction of output, no
uniqueness or rareness on output).
Ricardian Rent



While superior productive factors might be limited in the short run, they
may be renewed and expanded incrementally within the firm that
utilizes them (Wernerfelt, Nelson & Winter).
Utilization of such resources may in fact augment them: i.e. learning.
Superior resources provide basis and direction of growth: path
dependencies.
 Current capabilities may both drive and constrain future learning
and investment activity
Heterogeneity

Heterogeneity = origin or rents

Heterogeneity implies that firms of varying capabilities are able to
compete in the marketplace “and, at least, breakeven”

Sources:

Ricardian rents

Monopoly rents: deliberate restriction of output. Spatial competition
or product differentiation. Imply intra-industry mobility barriers, size
advantages, irreversible commitments or other first mover
advantage. Asymmetries must exist between incumbent and
potential entrants. Homogeneous firms may also earn monopoly
rents (Cournot behavior).
Ex-post limits

Ex-post limits to competition = Durability of heterogeneity

Competition may:


Increase the supply of scarce resources: makes industry supply more elastic.

Undermine a monopolist's (or oligopolists') attempts to restrict output: makes
individual demand curves more elastic.
Imperfect imitability: Rumelt’s isolating mechanisms to isolate groups of
similar firms in heterogeneous industries.

Rights & Quasi-rights to scarce resources: lags, info. asymmetries, frictions.

Producer learning, buyer switching costs, reputation, buyer search costs,
channel crowding, and economies of scale when specialized assets.

Failures of competitive market due to: TC and info. asymmetries (Yao, 1988);
time compression diseconomies, asset mass efficiencies, interconnectedness
of asset stocks, and asset erosion (Dierickx and Cool, 1989)

Imperfect substitutability: Porter’s five forces

Causal ambiguity (Lippman and Rumelt, 1982): Uncertainty regarding the
causes of efficiency differences among firms. Not sufficient condition:
must be coupled with non-recoverable costs.
Ex-post limits

Ex-post limits to competition = Durability of heterogeneity

Competition may:

Increase the supply of scarce resources: makes ind. supply more elastic.

Rights & Quasi-rights to scarce resources: lags, info. asymmetries, frictions.

Producer learning, buyer switching costs, reputation, buyer search costs,
channel crowding, and economies of scale when specialized assets.

Failures of competitive market due to: TC and info. asymmetries (Yao, 88);
time compression diseconomies, asset mass efficiencies, interconnectedness
of asset stocks, and asset erosion (Dierickx and Cool, 89)
“For
the most
part,(orex
post limits
torestrict
competition
 Undermine
a monopolist's
oligopolists')
attempts to
output: makes
individual demand curves more elastic.
imply
heterogeneity, although heterogeneity
 Imperfect imitability: Rumelt’s isolating mechanisms to isolate groups of
does
not
imply
ex
post
limits
to
competition”
similar firms in heterogeneous industries.

Imperfect substitutability: Porter’s five forces

Causal ambiguity (Lippman and Rumelt, 82): Uncertainty regarding the
causes of efficiency differences among firms. Not sufficient condition:
must be coupled with non-recoverable costs.
Imperfect mobility

Imperfect mobility = Sustainability of rents

Opportunity cost of asset use is significantly less than their value to the
present employer.


Pareto rents i.e. Quasi-rents: the excess of an asset's value over its salvage
value or its value in its next best use.
Perfectly immobile: completely bounded to the firm.

Property rights are not well defined or with 'bookkeeping feasibility' problems
(Dierickx and Cool 1989)



Idiosyncratic resources: they have no other use outside the firm
Imperfectly mobile: tradable but more valuable within the firm that
currently employs them.

Switching costs (Montgomery and Wernerfelt 1988): firm specific investments that
cement the trading relationship between a firm and the owners of factors.
Sunk costs.

High transaction costs also lead to imperfect mobility (Williamson 1975; Rumelt 1987)
Co-specialized assets (Teece 1986): must be used in conjunction with one
another or have higher economic value when employed together.
Imperfect mobility

Imperfect mobility = Sustainability of rents requires appropriability

‘Appropriable quasi-rents’ or ‘A-Q rents’: the excess of an asset's value
over its value to the second highest valuing potential user or bidder for
the resource (Klein et al. 78).



NOT a sufficient condition for value.

It is entirely possible for a resource to generate AQ rents in the absence of
either Ricardian or monopoly rents.
Differential value to possible users:

Rare

Inimitable

Other contingencies that are not source of competitive advantage (?)
A-Q rents as competitive advantage: differential value is appropriable
→ a firm can appropriate AQ rents ⇔ AQ rents are also Ricardian or
monopoly rents.

Producer can fully appropriate quasi-rents (Williamson’s V.I.)

Bilateral monopoly: 50-50 rent distribution

The firm and the factor are a team (Teece’s co-especialization)
Imperfect mobility


Imperfect mobility = Sustainability of rents requires appropriability
‘Appropriable quasi-rents’ or ‘A-Q rents’: the excess of an asset's value
over its value to the second highest valuing potential user or bidder for
the resource
(Klein et al. 78).
“Again
heterogeneous
resources need not be
NOT a sufficient condition for value.
imperfectly
mobile. But it is hard to imagine
 It is entirely possible for a resource to generate AQ rents in the absence of
any
mobile
resources which are
eitherimperfectly
Ricardian or monopoly
rents.
not
also
heterogeneous
in nature.”
Differential
value
to possible
users:




Rare

Inimitable

Other contingencies that are not source of competitive advantage
A-Q rents as competitive advantage: differential value is appropriable
→ a firm can appropriate AQ rents ⇔ AQ rents are also Ricardian or
monopoly rents.

Producer can fully appropriate quasi-rents (Williamson’s V.I.)

Bilateral monopoly: 50-50 rent distribution

The firm and the factor are a team (Teece’s co-specialization)
Ex-ante limits

Ex-ante limits to competition = Space for creation of rents

Prior to any firm's establishing a superior resource position, there
must be limited competition for that position. Imperfections in the
strategic factor market.

Barney 86: returns from their strategies but also on the cost of
implementing those strategies.

Profits come from ex ante uncertainty of the ex-post value of a
venture

Uncertainty is solved favorably by luck or foresight.

Ex ante competition to develop strategic factor and/or imperfectly
mobile resources (eg. reputation).

Demand: Value concept in Barney (91)?
Application
The Scope of the Firm
SINGLE BUSINESS STRATEGY




Differentiate between resources
which might support a
competitive advantage from
other less valuable resources.
Sourcing choice: whether to
license a new technology or
whether to develop it internally.
Identify how imitable is firm’s
innovation: develop/buy
appropriability mechanisms.
In sum: how to target, develop &
deploy assets (Amit&Schoemaker 1993)
CORPORATE BUSINESS STRATEGY

Boundaries of the firm

Extent of diversification: excess
capacity in a multiple-use
resource, under a market failure.

Two problematic issues:
1.
How “excess capacity” in resources
may lead to “scarcity rents” for
resource holders?: single product
mkt.
2.
Why firms do not expand more fully in
initial markets before they enter
additional ones?: 'specificity' or
range of application & set of market
opportunities.
Some notes…

Identifies commonalities on RBV.

Main assumptions for this explanation of Ricardian rents: long
run, and no externalities.

What about co-existence of long term vs. short term … what
could be the implications for rents?