The Cornerstones of Competitive Advantage: A Resource-Based View

(Margaret Peteraf, 1993)

Group 1Meredith, Barclay, Woo-je, and Kumar

Motivation and Paper OutlineMotivation and Paper OutlineTo develop a general model of resources and firm performance that integrates the various strands of research and provides a common ground for further work

Two main sections of paper:

1) Discussion of four (cornerstone) conditions that ALL must be met for (sustainable) competitive advantage

2) Applications to business and corporate strategy

Condition #1 : Resource HeterogeneityCondition #1 : Resource Heterogeneity

Assumption of resource-based work: resources and capabilities are heterogeneous across firms (Barney, 1991)

Ricardian Rents (name originates from Ricardo, 1817):

Heterogeneity may reflect superior productive factorsProductive factors often quasi-fixed - cannot be expanded rapidlyThus, inferior resources are brought into production as well (Ricardian argument that can be understood by assuming superior resource firms have lower average costs than other firms) (See Figure 1)

Scarcity rents w/ heterogeneous factors

This model consistent with competitive behavior in product market - Firms are price takers and produce where price equals MC.High returns to low cost firms cannot be attributed to artificial restrictionof output or to market power.Key point: superior resources remain in limited supply - cannot beexpanded freely or imitated by other firms. (See figure 2 to see whathappens when this isn’t the case.)

Rent dissipation from Imitation

Now, only normal economic returns will be earned by efficient producers (now homogeneous).

Note: Monopoly RentsCondition of heterogeneity consistent with models of market power and monopoly rents

Monopoly models - heterogeneity may result from spatial competition, product differentiation, localized monopoly, size advantages

• Firms maximize profits by CONSCIOUSLY restricting their output relative to competitive levels

Apparently homogeneous firms may earn monopoly rents:

• Cournot Behavior • Collusive Behavior• In this case, heterogeneity occurs across incumbent firms and

potential entrants (depends on barriers to entry)

Condition #2: Ex-Post Limits to CompetitionSustained competitive advantage requires that heterogeneity be preserved - must be forces that limit competition for rents (Figure 2 shows how ex-post competition erodes Ricardian rents)

Resource-based work has focused on 2 critical factors that limit ex post competition:

Imperfect imitability

Imperfect substitutability - substitutes reduce economic rents by making the demand curves of monopolists/oligopolists more elastic

More attention has been given to the condition of imperfect imitability.

Imperfect ImitabilityRumelt (1984) - “Isolating mechanisms” - phenomena that protects firm from imitation

Property rights to scarce resourcesQuasi-rights (lags, info asymmetries, and frictions) (Rumelt, 1987)Producer learning, buyer switching costs, reputation, buyer search costs, economies of scale (Rumelt, 1987)Causal ambiguity (Lippman & Rumelt, 1982) - uncertainty regarding causes of efficiencies

Yao (1988) - production economies and sunk costs, transaction costs, and imperfect informationGhemawat (1986) - inimitable positions derive from size advantages, preferred access to resources or customers, restrictions on competitors’ optionsDierickx & Cool (1989) - how imitable an asset is depends on nature and process by which it was accumulated. They suggest the following impede imitation: time compression diseconomies, asset mass efficiencies, interconnectedness of asset stocks, asset erosion, and causal ambiguity

Condition #3: Imperfect MobilityResources are perfectly immobile if they cannot be tradedDierickx & Cool (1989) - one of their examples are resources for which property rights are not well definedWilliamson (1979) - resources that have no other use outside the firmTeece (1986) – co-specialized assets, which have higher economic value when employed togetherWilliamson (1975), Rumelt (1987) - resources may be imperfectly mobile because of very high transactions costsOpportunity cost of imperfectly mobile resource is significantly less than the value to the present employer (firm). Here, Peteraf defines opportunity cost in terms of next best potential user (e.g. firm), rather than next best use.Rents will be shared between factor (input) owners and the firm employing them, thus - bilateral monopoly where rent distribution is indeterminate: Imperfect factor mobility necessary for SCA

Condition #4: Ex Ante Limits to Competition

Prior to any firm’s establishing a superior resource position, there must be limited competition for that position

Performance of firms depends not only on returns from their strategies, but also on cost of implementing those strategies (Barney, 1986)

Without imperfections in strategic factor (input) markets, firms can only hope for normal returns

One example: Walmart’s acquisition of real estate in rural areasAnother example: Price of acquisitionKey here is: Cost

4 Conditions that Must be Met

ApplicationsSingle Business Strategy

Nobel prize winning scientist, although may be a unique resource, is an unlikely source of SCA unless she has firm-specific ties

License new technology or develop internally?• If potential value of technology cannot be well communicated

to others because of the risk of revealing proprietary info, may be best to develop internally

• Might depend on co-specialized assets such as established relationships with vendors who are reluctant to switch suppliers

Consideration of how imitable innovation is:• If innovation is no more than a complex assembly of relatively

available technologies, a firm could consider building other co-specialized resources that are less available

ApplicationsCorporate Strategy

Resource-based model fundamentally concerned with internal accumulation of assets, asset specificity, and less directly with transactions costs - Thus, naturally lends itself too questions of firm boundariesDiversification

Barney (1988) - abnormal returns from diversification depend on how rare and imitable resulting combination of resourcesMontgomery & Hariharan (1991) - shown that firms with broad resource bases tend to pursue diversificationTheory of diversification is resource-based: diversification is the result of excess capacity in which resources have multiple uses and for which there is market failure

ApplicationsParadox of how “excess capacity” in resources may lead to “scarcity rents” for resource holders: Resources are “scarce” relative to total demand for their overall use, despite excess capacity relative to specific markets

Example: Kodak

Montgomery & Wernerfelt (1989) - diversification viewed as matching a firm’s resources to the set of market opportunities

Firms with more specialized resources are more constrained to enter into widely different product markets - and specialized resources relatively scarce, thus higher rentsFirms with more generalizable resources may face a wider opportunity set - yet lower rents

ApplicationsPeteraf suggests that although they do not say so, Montgomery & Wernerfelt’s (1989) model implies an optimal extent of diversification.

ContributionsContributionsPeteraf provides a synthesis of previous work in RBTShows how concepts and ideas in RBT are consistent with a Ricardian view of economic rent and competitive advantageProvides a detailed and tractable discussion of precisely why these four (cornerstone) conditions must be met for SCAResource-based Theory - only theory of corporate scope capable of explaining the range of diversification