Post on 13-Jan-2016
transcript
The Resource Based View of the Firm
B189Simon Rodan, PhD
Recap
• Three ‘levers’ involved in generating
economic profit:
– Creating value
– Appropriating value (raising prices)
– Managing (reducing) costs
• Profit (producer surplus) = (price –
cost)*quantity
The RBV
• RBV helps us answer the question:“What kind of resources does a firm need to create and appropriate value over time?”
• It is a theory of sustainable competitive advantage
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
Normal returns
• Revenue = long run average costs• Assumes resources are optimally
deployed (no opportunity costs)• Normal returns =>economic profit is
zero• Above normal returns = economic
profit• Accounting profit may be larger than
economic profit since it ignores opportunity cost of misused resources
Why are firms making profits?
• Two possible explanations
– It’s something to do with the industry
in which they operate
External analysis – Porter’s 5 Forces
– It’s something the firm has
Internal analysis, the RBV
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: what accounts for variation in performance, firms or industries?(Rumelt, 1992)
• ‘Market’ for strategic factors:– Efficient Market Hypothesis (Barney, 1986)
– Implications for inimitable resources (Dierickx & Cool, 1989)
• What gives a firm a sustainable competitive advantage?– Properties of resources that support profitable value creating
activity
Classic microeconomic assumptions
• Firms in competitive markets are identical– Either at inception– Or adopt and acquire identical
production technologies
• All firms sell the same number of units, at the same price and make the same profit
A Puzzle…
• In some highly competitive industries some firms are making above normal returns
• Some industries are concentrated despite having no obvious barriers to entry
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 are all that are
needed to explain:
– Concentrated industries with no obvious entry
barriers
– Many (if not all) of those firms make above normal
returns.
Lippmann and Rumelt’s Model
• Each period firms consider entering the industry
• Based on their expected costs, the entering firm
calculates its expected profit
• If current industry prices are above its estimated
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
Hypothetical example: mobile phones
E[cost] = ? Frequency band B (4c / min)
Frequency band A (5c / min)
Frequency band C (3c / min)
Three different frequency bands, A, B and CAllocated by the FCC through a lottery…
p=1/3
p=1/3
p=1/3
Hypothetical example: mobile phones
E[cost] = 4c / min Frequency band B (4c / min)
Frequency band A (5c / min)
Frequency band C (3c / min)
Best estimate of likely cost is…
p=1/3
p=1/3
p=1/3
Hypothetical example: mobile phones
E[cost] = 4c / cal
Imitation allows all firm to achieve 3c / call costs
If firms can imitate their more efficient competitors…
Hypothetical example: mobile phones
E[cost] = 4c / call
Any 5c firms are forced out when price falls below 5c
Without imitation, firms retain their initial costs, good or bad…
4c firms are forced out and entry ceases
Profitability (ROS): Rumelt v.s. Cournot
0 %
1 0 %
2 0 %
3 0 %
4 0 %
5 0 %
6 0 %
7 0 %
8 0 %
9 0 %
1 0 0 %
Rumelt Cournot
Time
Implications of the model
• Barriers to entry are not needed to explain industry concentration
• Above normal returns can come from both firm heterogeneity and industry concentration
• The focus is on firms and the factors that lead to uncertain imitability
Rumelt’s 1992 study
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Firm Profit
Rumelt’s 1992 study
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Firm Profit
If industry was all that mattered…
Indy A Indy B Indy C
Rumelt’s 1992 study
Firm Profit
Rumelt found that within industry variance about twicethat found between industries…
Indy A Indy B Indy C
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Conclusion
• Most (~60%) of the variation in firm performance is a function of the firm rather the industry in which the firm operates
• Implications– Internal resource focus– Horizontal integration and market
power
So, what resources do firms need?
• If higher than normal profits are possible in industries without barriers to entry, what should firms in competitive industries look for?
• Something that make them distinctive, different, unique
• Distinctiveness that stems from resources…– That help create something of value to customers
– Not available off the shelf (no market for strategic factors)
– That are hard to imitate• E.g. based on tacit knowledge, hard to transfer skills
• Time compression diseconomies
• a complex (social) system
Resource “properties”
• Resources that deliver competitive
advantage must be:
– Valuable
– Rare and non-substitutable
– Inimitable
Barriers to imitation
• Property rights– Patents, copyrights
• Tacit knowledge – Riding a bicycle
• Dispersed knowledge– Formula for Coke
• Time• Complex social system (culture)• Complex “activity systems”
Three questions
• Do we create value? – for our customers – for ourselves
• Is it rare – We can only appropriate if we
have a distinctive advantage• Is our advantage inimitable
– Is is sustainable»V.R.I.
Resources and economic transformation
TANGIBLE RESOURCESPhysical assets
Finished product
or service
INPUT RESOURCESRaw materialsEnergy, Parts
INTANGIBLE KNOWLEDGE-BASED
‘TRANSFORMING’ RESOURCES
(CAPABILITIES)Knowledge,
SOPs and routines, skills
Resources and economic transformation
INTANGIBLE KNOWLEDGE-BASED
‘TRANSFORMING’ RESOURCES
(CAPABILITIES)Knowledge,
SOPs and routines, skills
TANGIBLE RESOURCESPhysical assets
Finished product
or service
INPUT RESOURCESRaw materialsEnergy, Parts
COMPETENCE
Terminology
• Capabilities
(knowledge resources)– know-how, skills,
routines, SOP’s• Competencies
– particular configuration of capabilities and input resources that successfully transform the inputs into more valuable outputs.
• Distinctive competencies– a unique competence,
i.e one other firms don’t have
• Core competencies– a distinctive
competence that has multiple applications
Competence
Distinctive competence
Core Competenc
e
Knowledge Resourcesor Capabilities
Tangible Resources
Fruin’s ‘bow tie’ model of core competency
Capabilities and resources
e.g. HondaSmall internal
combustion engine
Products
Motorcycles
Cars
Lawn mowers
Outboard motors
ATVs
Generators
Core (distinctive) competency
“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
Resource “properties”
• Valuable
– a competence
– May not be distinctive
– May be temporary
• Rare (and non-substitutable)
– A distinctive competence
– May be temporary
• Inimitable
– Sustainable competitive advantage
“V.R.I.N.” – raising prices
• Valuable
• Rare
• Inimitable
Value
Price
P C
Competitors
… to customers
“V.R.I.N.” - reducing costs
• Valuable
• Rare
• InimitableCost
Cost
… to you
P C
Competitors
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