The Resource Based View of the Firm (RBV) - PowerPoint Presentation

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The Resource Based View of the Firm (RBV)

B290Slide3

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 RBVSlide4

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)Slide5

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 steelSlide6

If Industry Mattered Most…Slide7

In fact, Firms Matter Most…Slide8

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., AlcoaSlide9

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

MESSlide10

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. Slide11

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 leaveSlide12

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 advantageSlide13

Hypothetical example:

mobile phone licenses

E[cost] = ?

Frequency band B (4c / call)

Frequency band A (5c / call)

Frequency band C (3c / call)

Three different frequency

bands,

A, B and C

Allocated by the FCC though a lottery…

p=1/3

p=1/3

p=1/3Slide14

Hypothetical example:

mobile phone licenses

E[cost] =

4c / call

Frequency band B (4c / call)

Frequency band A (5c / call)

Frequency band C (3c / call)

p=1/3

p=1/3

p=1/3

Best estimate of likely cost is… Slide15

E[cost]

= 4c

/

min

Imitation allows all firm to

achieve 3c / call

costs

Irrespective of initial estimates firms know that

3c/min is achievable

Hypothetical example:

mobile phone licensesSlide16

E[cost]

= 4c

/

min

Without imitation

, firms retain their initial

costs, good or bad

…

4c / min remains

the expected cost

With 5 firms, prices

would fall below

expected costs, so

n

o 5

th

firm enters

Hypothetical example:

mobile phone licensesSlide17

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 returnsSlide18

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)Slide19

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)Slide20

Barriers to Imitation

Patents, copyrights

Brand

Tacit knowledge

Riding a bicycle

Dispersed knowledge

Formula for Coke

Complex “activity systems”

Complex social system (culture

)Slide21

Three questions

Does the resource create

v

alue?

for our customers

Higher prices

for the firm

Lower costs

Is it

r

are

?

We can only appropriate if we have a unique advantage

Is our advantage

i

nimitable?

i.e., will that unique advantage persist over time?

V.R.I.Slide22

Resources and economic transformation

INTANGIBLE

KNOWLEDGE-BASED

‘TRANSFORMING’

RESOURCES

(CAPABILITIES)

Knowledge,

SOPs and routines,

skills

TANGIBLE

RESOURCES

Physical assets

Finished product

or service

INPUT RESOURCES

Raw materials

Energy, Parts

TECHNOLOGYSlide23

Resources and economic transformation

INTANGIBLE

KNOWLEDGE-BASED

‘TRANSFORMING’

RESOURCES

(CAPABILITIES)

Knowledge,

SOPs and routines,

skills

TANGIBLE

RESOURCES

Physical assets

INPUT RESOURCES

Raw materials

Energy, Parts

COMPETENCE

Finished product

or serviceSlide24

A

Heirarchy

Competence

Distinctive

competence

Core

Competence

Knowledge Resources

or Capabilities

Tangible

ResourcesSlide25

Fruin’s

‘bow tie’ model of core competency

Capabilities

and resources

e.g. Honda

Small internal

combustion engine

Products

Motorcycles

Cars

Lawn mowers

Outboard motors

ATVs

Generators

Core (distinctive)

competencySlide26

“V.R.I.”

V

aluable

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.

R

are

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

I

nimitable

ensures rarity into the future Slide27

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 workSlide28

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’ competencesSlide29