The Cornerstone

s of Competitive Advantage:

a RBVPresented by: Sandra Corredor

Margaret PeterafKellogg – Tuck at Dartmouth

Strategic Management Journal (1993)

Cited: 5239 times (Google Scholar)

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.

Four individual-necessary-conditions for Competitive Advantage

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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

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, high-cost 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.

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, 88); time compression diseconomies, asset mass efficiencies, interconnectedness of asset stocks, and asset erosion (Dierickx and Cool, 89)

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.

“For the most part, ex post limits to competition imply heterogeneity,

although heterogeneity does not imply ex post limits to competition”

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 = 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).

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-specialization)

c

Imperfect mobility

“Again heterogeneous resources need not be imperfectly mobile. But it is hard

to imagine any imperfectly mobile resources which are not also heterogeneous in nature.”

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

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)

The Scope of the Firm

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.

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?

Some notes…