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Review of Literature

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Chapter 2


The foundations for any research study are to be consolidated with ideas,

thoughts, concepts and methodologies formulated and adopted by various

associated research studies. The constructs and variables are defined as per

the explanations and evidences found in the existing literature and

contemporary studies undertaken.

The present study makes an attempt to understand performance

heterogeneity in the Indian Automotive Companies on the basis of their

resources and competitive advantage. Further the study is undertaking the

Resource Based View of Strategy as platform to develop a model for

performance heterogeneity. Hence the concepts of resource based view,

competitive advantage, performance and the Indian Automotive Companies

are reviewed to build up the base for the present study.

2.1 The Indian Automotive Industry

The Automotive Sector has been a center of attraction for various researches

in the fields of productivity, operational performances, marketing strategies,

consumer behavior, financial performances, segment wise studies, economic

analysis, industry analysis and the strategies adopted. Number studies have

been done depicting the phenomenal growth of Indian Automotive sector in

the post liberalization era. The Indian Automotive Sector has emerged as one

of the most fertile Industry with tremendous potential for Indigenous as well

as Foreign Players. The raising standard of living of the Indian people and

their increased purchasing powers has given a boost to the Automobile

Companies as well the Auto Component sector has also progressed.


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Researchers at industry level have shown about 40% increase in average

productivity in the automobile sector during the decade after the

liberalization took place (Iyer et al 2006, Saranga and Banker 2006).

2.1.1 Automotive Sector in India: Development of Indian Automotive

Industry

2.1.1.1 Overview of Industry

The Indian automobile industry started functioning in 1950s, and has grown

since under a highly regulated and protected economic environment. The

firms were subjected to strict product specific capacity licensing, foreign

collaboration, asset size and scope of industrial operations. As a result very

few firms dominated all the products. With the new industrial policy of 1991

the Indian Government deregulated the entry into automotive sector,

dispensed with the use of licenses to control output levels and significantly

reduced import tariffs on auto components. The changes in the Indian

economic scenario have led to an influx of globally competitive auto

assemblers to the Indian market. Competition among assemblers has become

intense and as a result firms are increasingly being innovative in order to

reduce costs, enhance quality, and improve their performance and

responsiveness to customers’ demand (Iyer, Koudal, Saranga and Seshadri

2006).

The decades of 70s and 80s witnessed high degree of regulations and

protection, and so the reforms in early 1990s led to a boom in the automobile

industry till 1996. The response of industry in terms of capacity expansion

was massive and entry of multinationals led to an acute over capacity. The

competition became intense leading to price wars and aggressive cost cutting

measures (Narayanan and Vashisht 2008). The reforms forced the vehicle

industry into a high degree of unsustainable competition (Piplai 2001).


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2.1.1.2 Evolution of Indian Automotive Industry

Many Researchers in their studies have described the development of Indian

Automotive Industry into three phases.

From 1947 to 1983: India was a closed market economy, and the industry

growth was only limited to domestic supplies. As there were very few

innovations, the technology adopted was inefficient in terms of fuel

consumption and modal development and by that time only 5 firms where

operating (Mani S. 2011)

From 1983 to 1993: The decade witnessed a liberal approach in the Indian

economy as far as the automotive sector is considered. Government of India

entered joint venture with Suzuki motors of Japan and Maruti Udyog in

collaboration with Suzuki started manufacturing. This event was preceded

with Hindustan motors entering a joint venture with Mitsubishi in 1980’s. Till

then the number of firms were six (Mani 2011, Nandy 2011). But till 1990 the

Industry was under “License Raj”.

After 1993: Major changes in the Indian economic scenario. Liberalization of

the economy led to dramatic transformation in the Indian Automotive Sector.

The industry was de licensed. Major Multinational OEMs (Original

equipment manufacturers) started assembling. Valued added tax (VAT)

implemented. Imports were allowed from 2001, and the number players were

greater than 35 (Mani 2011).

2.1.1.3 The Contemporary Scenario

KPMG survey report (2010) has reflected the environmental scenario in which

the Indian Automotive Companies are functioning and the tenets of this

sector which has shown tremendous response to globalization.

Demographically and economically, India’s automotive industry is well-

positioned for predicted increase in India’s working-age population is likely

to help stimulate the burgeoning market for private vehicles. Rising


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prosperity, easier access to finance and increasing affordability is expected to

see four-wheelers gaining volumes, although two wheelers will remain the

primary choice for the majority of purchasers, buoyed by greater appetite

from rural areas, the youth market and women. (The Indian Automotive

Industry: Evolving Dynamics 2010).

As per CII’s Auto Survey 2012, The Indian Automotive Industry is:

Largest three wheeler market in the world

Second largest two wheeler market in the world

Seventh largest passenger car market in Asia and 10th Largest in the

world

Fourth largest tractor market in the world

Fifth largest commercial vehicle market in the world

Fifth largest bus and truck market in the world

The survey also highlights that The Indian Automobile Industry embarked on

a new journey since 1991 with de licensing of the sector and subsequent

opening up for 100 per cent FDI through automatic route. Almost all the

global majors have set up their facilities in India taking the next level of

production of vehicles from 2 million in 1991 to 110+ million in 2011.

As per Ray (2012), The Indian Automotive Industry after de-licensing in July,

1991 has grown at a spectacular rate of 17% on an average for last few years.

The industry has now attained a turnover of Rs. 1, 65,000 crores (34 billion

USD) and an investment of Rs. 50,000 crores. Over of Rs. 35,000 crores of

investment is in pipeline. The industry is providing direct and indirect

employment to 1.31 crore people. It is also making a contribution of 17% to

the kitty of indirect taxes. While the export earnings have been 4.08 billion

USD out which the share of auto components is 1.8 billion USD (Ray2012).

Ray (2012) further urges that the automotive industry is a volume driven

industry and a certain critical mass is a pre-requisite for attracting the much

needed investment in Research and Development and New Product Design


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and Development. RandD investment is needed for innovations which is the

life-line for achieving and retaining the competitiveness in the industry. The

competitiveness depends on the capacity and the speed of innovation and up

gradation. As per Ray (2012) the most important indices for competitiveness

is productivity in both capital and labour.

The Indian Automotive industry can further be understood by the analysis

done by Pandya and Pandya (2013), the authors have dons a fundamental

analysis of the Indian Automobile Industry. The article presents a

segmentation of the Indian Automobile Industry which highlights the two

wheeler segment with 76%, passenger vehicles with 16.25%, commercial

vehicles 4.36% while three wheelers constitute 3.39% of the industry (Pandya

and Pandya 2013).

Also the Indian Automotive Industry is filled with both domestic and

international players making it highly competitive. Almost 8 out of 10 global

companies contribute 25% of the country’s production.

The Automotive Industry in India comprise of the following: (Source:

Indian Automotive Expectation Survey 2011- Mazars)

Table 2.1 Composition of Indian Automotive Industry

Passenger Cars Commercial

Vehicles

Two Wheelers Three Wheelers

Maruti Suzuki

Tata Motors

Hyundai

Mahindra and

Mahindra

Honda

Toyota

Hindustan

Motors

Tata Motors

Ashok Leyland

Swaraj Mazda

Volvo

MAN

AMW

ITEC

Force Motors

Mercedes-Benz

Hero Moto Corp.

TVS

Bajaj Auto

Royal Enfield

Motors

Kinetic Motors

LML India

Suzuki

Yamaha

Bajaj Auto

Piaggio

Mahindra and

Mahindra

TVS Motors

Force Motors

Scooters India

Panchnath Auto

Devendra


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General Motors

Fiat

Ford

Volkswagen

Audi

BMW

Mercedes-Benz

Nissan

Skoda

Volvo

Sonalika (ICML)

Premier Motor

Hyundai

Mahindra

Navistar

Eicher Motors

Mahindra and

Mahindra

Honda

Motorcycles

Automobiles

Some startling facts

about automotive

industry in India - at

a glance:

Second largest two India.

2.1.2 Performance of the Industry

Performance in automotive production has shown promising trends in last

ten years. The production of passenger vehicles has continuously increased

from 2004-05 to 2010-11. Production of automobile has increased by 147%

from 2004-05 to 2010 -11. In commercial vehicles, production has a raising

trend up to 2007-08. In 2008-09, production has declined by 24%. But from

2009-10 onwards production has continuously increased. In three wheelers

category, up to 2007-08, production was showing an upward trend, but in

2008-09 there was slight decline in production. Again from 2009-10 onwards,

production has continuously increased. In two wheelers category, up to 2006-

07 production has increased but in 2007-08 production has declined by 5%.

After 2008-09 it is continuously rising (Pandya and Pandya 2013).

The study also reveal some key statistics about the Indian Automotive

Industry: The overall Indian automobile sector recorded a growth of 14.25 per

cent (16.9 million units in 2011 from 14.8 million units in 2010). Passenger car

sales increased by 4.24 per cent, from 1.867 million units in 2010 to 1.946

million units in 2011, two wheeler sales of 13 million units in 2011 increased

by 16.22 percent and three-wheeler sales of 525,000 units increased by 4.74 per


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cent in 2011. The FDI in automotive sector has increased by 800% within last

five years. Also the increase in infrastructure facilities has led to the growth

the sector. Also heterogeneity in performance has been observed by

analyzing the financial parameters (Pandya and Pandya 2013).

Rao and Sharma (1993), in their study have discussed a framework of

performance of Automobile industry based on market, technology and

financial dimensions. As per Rao and Sharma (1993), Performance can be

considered in terms of market (sales and market share), and financial

(profitability) dimensions. Market performance as measured by absolute

sales volumes or turnover and market shares connotes the ability of the

company to exploit the market opportunity and sustain a presence in the face

of competitive pressures. Market performance reflects the acceptance of the

technological and other attributes of the product by customers. Along with

market performance, financial performance is crucial for the firm in the long

run. The strategy and structure of a firm are both enabling and derived

dimensions of a firm's financial performance (Rao and Sharma 1993). In the

study by Rao and Sharma (1993), 36 measures of profitability in relation to

gross turnover, total capital employed, net worth (share-holders' funds), share

capital, and fixed assets are computed. Out of which two measures were

found to be of greater relevance. The first measure expresses profitability of

operations net of depreciation, interest, and tax as a percentage of gross

turnover while the second measure is expresses profitability of operations

before interest and tax but net of depreciation as a percentage of total capital

employed, comprising both loan and equity funds.

Continuing on the discussion on performance and profitability of Indian

Automobile Companies, the research study by Jamali and Asadi (2012),

investigates the relationship between management efficiency and profitability

for a sample of 13 auto manufacturing companies listed in BSE, located at

Pune, taking into account a period of 5 years. Management efficiency is an

important component of corporate financial management because it directly


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affects the profitability of the firms. Profitability is the ability to make profit

from all the business activities of an organization, company, firm, or an

enterprise. It shows how efficiently the management can make profit by using

all the resources available in the market (Jamali and Asadi 2012). The

profitability ratios show a company’s overall efficiency and performance.

Gross Profit Ratio and Asset Turnover Ratios have been used to determine

profitability and consequently the performance of the firms. Profitability and

management efficiency are usually taken to be positively associated: poor

current profitability may threaten current management efficiency and vice

versa; poor management efficiency may threaten profitability (Eskandari,

2007).

2.1.2.1 Key Players in the Indian Automotive Industry and their

performance.

(Source: www.imaginmor.com/automobileindustryindia.html)

a. Tata Motors

Market Share: Commercial Vehicles 63.94%, Passenger Vehicles 16.45%

Tata Motors Limited is India’s largest automobile company, with

consolidated revenues of USD 14 billion in 2008-09. It is the leader in

commercial vehicles and among the top three in passenger vehicles.

Tata Motors has winning products in the compact, midsize car and utility

vehicle segments. The company is the world's fourth largest truck

manufacturer, and the world's second largest bus manufacturer with over

24,000 employees. Since first rolled out in 1954, Tata Motors as has produced

and sold over 4 million vehicles in India.

Tata Motors is the first company from India's engineering sector to be listed in

the New York Stock Exchange (September 2004), has also emerged as an

international automobile company. Through subsidiaries and associate

companies, Tata Motors has operations in the United Kingdom, South Korea,


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Thailand and Spain. Among them is Jaguar Land Rover, a business

comprising the two British brands which was acquired in 2008. In 2004, it

acquired the Daewoo Commercial Vehicles Company, South Korea's second

largest truck maker. The rechristened Tata Daewoo Commercial Vehicles

Company has launched several new products in the Korean market, while

also exporting these products to several international markets. Today two-

thirds of heavy commercial vehicle exports out of South Korea are from Tata

Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a

reputed Spanish bus and coach manufacturer, and subsequently the

remaining stake in 2009. Hispano's presence is being expanded in other

markets.

In 2006, Tata Motors formed a joint venture with the Brazil-based Marcopolo,

a global leader in body-building for buses and coaches to manufacture fully-

built buses and coaches for India and select international markets. In 2006,

Tata Motors entered into joint venture with Thonburi Automotive Assembly

Plant Company of Thailand to manufacture and market the company's pickup

vehicles in Thailand. The new plant of Tata Motors (Thailand) has begun

production of the Xenon pickup truck, with the Xenon having been launched

in Thailand in 2008. Tata Motors is also expanding its international footprint

by franchises and joint ventures assembly operations in Kenya, Bangladesh,

Ukraine, Russia, Senegal and South Africa.

With over 3,000 engineers and scientists, the company's Engineering Research

Centre, established in 1966, has enabled pioneering technologies and

products. The company today has RandD centers in Pune, Jamshedpur,

Lucknow, Dharwad in India, and in South Korea, Spain, and the UK. It was

Tata Motors, which developed the first indigenously developed Light

Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, the Tata

Indica, India's first fully indigenous passenger car. Within two years of

launch, Tata Indica became India's largest selling car in its segment. In 2005,


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Tata Motors created a new segment by launching the Tata Ace, India's first

indigenously developed mini-truck.

In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, a

development which signifies a first for the global automobile industry. Nano

brings the comfort and safety of a car within the reach of thousands of

families. The standard version has been priced at USD 2,200 or 100,000

(excluding VAT and transportation cost). The Tata Nano has been

subsequently launched as planned, in India by March 2009. Also in 2009 the

company launched a new range of world standard trucks “Prima”.

The Product Mix of the company includes: Passenger cars, Utility Vehicles,

Trucks, Commercial passenger carriers, Defense vehicles. A detailed look at

the performance over a period of 5 years will be helpful in understanding the

heterogeneity in performance for the company.

Table 2.2 Company Performance (TATA)

Indicator

(Million

Rs)

Mar. 2010 Mar. 2011 Mar.2012 Mar. 13 Mar.14

Net Sales 918,934 1,221,279 1,656,545 1,887,927 2,328,337

Total

Revenue

934,800 1,225,574 1,663,163 1,896,083 2,336,623

Gross

Profit

72,356 167,581 217,586 245,960 348,377

Profit

Before Tax

28,088 103,075 143,903 142,500 198,544

Profit After

Tax

25,710 92,736 135,165 98,926 139,910

Net Profit

Margin

2.8 7.6 8.2 5.2 6


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Current

Assets

424,456 420,888 644,615 741,536 958,453

Net fixed

assets

385,063 432,211 562,125 698,629 973,754

Sales to

asset ratio

1.1 1.2 1.2 1.1 1.1

Return on

Assets

5.4 11.5 11.3 7.9 8.5

Return on

Equity

31.3 48.4 40.8 26.3 21.3

Return on

Capital

16.1 41.0 26.0 24.7 21.2

(Source: www.equitymaster.com)

Sales have consistently shown increments, although contrasting results are

seen for on other financial performance parameters like profit before tax,

profit after tax, return on assets, return on equity and return on capital, which

have shown fluctuations indicating heterogeneity in the overall performance

of the company year by year. Year 2010 has not been good for the company.

b. Maruti Suzuki India

Market Share: Passenger Vehicles 46.07%

Maruti Suzuki India Limited, a subsidiary of Suzuki Motor Corporation of

Japan, is India's largest passenger car company, accounting for over 45% of

the domestic car market. The company offers a complete range of cars from

entry level Maruti-800 and Alto, to stylish hatchback Ritz, A star, Swift,

Wagon-R, Estillo and sedans DZire, SX4 and Sports Utility vehicle Grand

Vitara.


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Since inception in 1983, Maruti Suzuki India has produced and sold over 7.5

million vehicles in India and exported over 500,000 units to Europe and other

countries. The company’s revenue for the fiscal 2008-2009 stood over USD 4

billion and Profits after Tax at over USD 243 million.

A detailed look at the performance over a period of 5 years will be helpful in

understanding the heterogeneity in performance for the company.

Table 2.3 Company Performance (Maruti Suzuki)

Indicator

(Rs)

Mar. 2010 Mar. 2011 Mar.2012 Mar.2013 Mar.2014

Net Sales 295,915 371,558 360,899 443,044 444,506

Total

Revenue

306,259 376,703 369,342 451,354 452,811

Gross

Profit

35,910 37,515 25,656 43,275 52,038

Profit

Before Tax

37,466 32,103 21,925 30,701 37,388

Profit After

Tax

26,247 23,824 16,810 24,692 28,529

Net Profit

Margin

8.9 6.4 4.7 9.8 11.6

Current

Assets

39,232 97,464 112,420 111,754 145,536

Net fixed

assets

55,635 65,510 83,577 119,882 136,732

Sales to

asset ratio

1.8 1.9 1.6 1.6 1.4

Return on

Assets

15.8 12.6 7.5 9.7 9.7

Return on 21.5 16.6 10.7 13.0 13.3


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Equity

Return on

Capital

30.2 22.4 14.2 16.7 17.8


In terms of Profit, and Returns on assets, equity and capital the company has

done very well in the year 2010, but the profit margin has decreased again

heterogeneity in overall performance yet having a consistent sales growth is

clearly visible.

c. Hyundai Motor India

Market Share: Passenger Vehicles 14.15%

Hyundai Motor India Limited is a wholly owned subsidiary of world’s fifth

largest automobile company, Hyundai Motor Company, South Korea, and is

the largest passenger car exporter. Hyundai Motor presently markets 49

variants of passenger cars across segments. These includes the Santro in the B

segment, the i10, the premium hatchback i20 in the B+ segment, the Accent

and the Verna in the C segment, the Sonata Transform in the E segment.

Hyundai Motor, continuing its tradition of being the fastest growing

passenger car manufacturer, registered total sales of 559,880 vehicles in the

year 2009, an increase of 14.4% over 2008. In the domestic market it clocked a

growth of 18.1% as compared to 2008 with 289,863 units, while overseas sales

grew by 10.7%, with export of 270,017 units. Hyundai Motor currently exports

cars to more than 110 countries across European Union, Africa, Middle East,

Latin America and Asia. It has been the number one exporter of passenger car

of the country for the sixth year in a row.

In a little over a decade since Hyundai has been present in India, it has

become the leading exporter of passenger cars with a market share of 66% of

the total exports of passenger cars from India, making it a significant


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contributor to the Indian automobile industry. In 2009, in spite of a global

slowdown, Hyundai Motor India’s exports grew by 10.7%. In 2010 Hyundai

plans to add 10 new markets with Australia being the latest entrant to the list.

The first shipment to Australia is of 500 units of the i20 and the total i20

exports to Australia are expected to be in the region of 15,000 per annum.

d. Mahindra and Mahindra

Market Share: Commercial Vehicles 10.01%, Passenger Vehicles 6.50%, Three

Wheelers 1.31%

Mahindra and Mahindra is mainly engaged in the Multi Utility Vehicle and

Three Wheeler segments directly. The company competes in the Light

Commercial Vehicle segment through its joint venture subsidiary Mahindra

Navistar Automotives Limited and in the passenger car segment through

another joint venture subsidiary Mahindra Renault. In the year 2009, on the

domestic sales front, the Company along with its subsidiaries sold a total of

220,213 vehicles (including 44,533 three wheelers, 8,603 Light Commercial

Vehicles through Mahindra Navistar Automotives and 13,423 cars through

Mahindra Renault), recording a growth of 0.6% over the previous year.

The company’s domestic Multi Utility Vehicle sales volumes increased by

3.3%, as against a decline of 7.4% for industry Multi Utility Vehicle sales. A

record number of 153,653 Multi Utility Vehicles were sold in the domestic

market in 2009 compared to 148,761 MUVs in the previous year. Hence,

Mahindra and Mahindra further strengthened its domination of the domestic

Multi Utility Vehicle sub-segment during the year, increasing its market share

to 57.2% over the previous year’s market share of 51.3%.

Mahindra and Mahindra is expanding its footprint in the overseas market. In

2009 the Xylo was launched in South Africa. The company formed a new joint

venture Mahindra Automotive Australia Pty. Limited, to focus on the

Australian Market. (Source: Mahindra and Mahindra Annual Report)


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Table 2.4 Company Performance (Mahindra and Mahindra)

Indicator

(Rs)

Mar. 2010 Mar. 2011 Mar. 2012 Mar.2013 Mar. 2014

Net Sales 315,686 368,638 539,989 687,357 740,009

Total

Revenue

318,288 371,742 597,379 691,246 745,060

Gross

Profit

55,071 62,719 76,398 95,993 101,202

Profit

Before Tax

37,994 44,745 43,775 51,279 55,018

Profit After

Tax

24,785 30,797 31,266 40,992 46,669

Net Profit

Margin

7.9 8.4 5.3 6.0 6.3

Current

Assets

203,162 211,854 289,409 340,201 395,944

Net fixed

assets

105,203 161,161 166,005 179,412 192,280

Sales to

asset ratio

0.9 0.7 0.9 0.9 0.8

Return on

Assets

10 8.4 7.8 8.4 8.6

Return on

Equity

24.3 21.6 18.7 20.5 20

Return on

Capital

21.1 21.0 19.3 20.9 18.7



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Sales for the company have increased over last 5 years but again the trend of

overall performance is highlighting different shades. This company has done

very well in terms of profit but the returns on assets, equity and capital have

shown fluctuations which gives rise to the heterogeneity in performance.

e. Ashok Leyland

Market Share: Commercial Vehicles 16.47%

Against the backdrop of the sharp slump in demand for commercial vehicles,

during 2008-09, Ashok Leyland registered sales of 47,118 medium and heavy

commercial vehicles (MandHCV), 37.5% less than in the previous year. This

includes 16,049 MandHCV buses and 31,069 MandHCV trucks respectively,

8.7% and 46.3% less than in the previous year.

The company lost 1.8% market share in the Indian medium and heavy

commercial vehicle market during the financial year 2008-09, mainly due to

loss of sales in the truck segment. This was because the Eastern Region, where

the Company’s presence had been historically weak, was relatively stable,

whilst the market declined sharply in other regions.

While total industry volume of the medium and heavy duty buses declined

by about 8.7%, the Company’s market share grew marginally and Ashok

Leyland retained its number one position in this segment.

The Company sold 6,812 vehicles in the overseas markets during 2008-09.

This represents a decrease of approximately 6.5% over the previous year.

Total industry volume related to overseas markets to which the Company

exports (such as Sri Lanka, the Middle East) witnessed a reduction of about

25% over the previous year.

To combat the impact of decline in CV sales, the Company focused on non-

cyclical businesses in the portfolio.


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The Company produced in all 54,049 vehicles during the year. To contain

costs and conserve cash, the Company worked only about 50% of the working

days in all its manufacturing units during the second half of the year.

(Source: Ashok Leyland Annual Report)



Table 2.5 Company Performance (Ashok Leyland)

Indicator

(Million

Rs)

Mar. 2010 Mar. 2011 Mar. 2012 Mar.2013 Mar.2014

Net Sales 72,447 111,771 129,043 124,812 114,867

Total

Revenue

72,864 112,216 129,447 125,436 115,792

Gross

Profit

7,420 12,317 12,561 8,765 4,220

Profit

Before Tax

4,985 8,018 6,884 1,812 -8,210

Profit After

Tax

4,236 6,313 5,660 4,337 -1,641

Net Profit

Margin

5.8 5.6 4.4 3.5 -1.4

Current

Assets

41,397 39,838 43,039 42,965 59,892

Net fixed

assets

48,110 49,918 54,617 59,708 70,875

Sales to

asset ratio

0.8 1.1 1.1 1.0 0.7

Return on 5.4 7.7 6.9 6.2 3.7


43

Assets

Return on

Equity

11.6 15.9 13.4 9.7 -4.1

Return on

Capital

10.9 15.7 14.5 11.8 6.0


Net sales for the company have increased over this period but profits have

shown a downward trend, so as the returns on asset, equity and capital. This

is indicating heterogeneity in performance on an annual basis.

f. Hero Moto Corp ( Hero Honda Motors )

Market Share: Two Wheelers 41.35%

Hero Honda or Hero Moto Corp has been the largest two wheeler company in

the world for eight consecutive years. The company crossed the 15 million

unit milestone over a 25 year span. Hero Honda sold more two wheelers than

the second, third and fourth placed two-wheeler companies put together.

As one of the world's technology leaders in the automotive sector, Honda has

been able to consistently provide technical know-how, design specifications

and RandD innovations. This has led to the development of world class, value

- for- money motorcycles and scooters for the Indian market. On its part, the

Hero Group has took the responsibility of creating world-class manufacturing

facilities with robust processes, building the supply chain, setting up an

extensive distribution networks and providing insights into the mind of the

Indian customer. Since both partners continue to focus on their respective

strengths, they have been able to complement each other. In the process, Hero

Honda is recognized today as one of the most successful joint ventures in the

world. It is therefore no surprise that there are more Hero Honda bikes on this

country's roads than the total population of some European countries. But


44

now for last few years both partners have called off their joint venture and

operate independently as two distinct companies.

Hero Honda's bikes are sold and serviced through a network of over 3500

customer touch points, comprising a mix of dealers, service centres and

stockists located across rural and urban India. Hero Honda has built two

world-class manufacturing facilities at Dharuhera and Gurgaon in Haryana,

and Hero Honda was the torchbearer for the two-wheeler industry during

2008-2009. It sold more two-wheelers during the year than the combined

volumes of the second, third and fourth placed competitor. Overall, the

company sold 3.72 million two-wheelers, growth of 12% over previous year.

Motorcycle sales in the domestic market, which account for more than 95 per

cent of Hero Honda's sales, were up by 11%. The company posted sales of

USD 2.4 billion and profits after tax of USD 256.40 million during the year

2008-2009. During the year under review, your Company exported 81,194

two-wheelers, a decline of 10%. Its third and most sophisticated

manufacturing plant at Haridwar has just completed a full year of operations.

During the year, the company also turned in a rollicking performance with its

scooter portfolio, with a 49% growth in domestic sales to 156,210 units. This

performance allowed Hero Honda to increase its share in the domestic scooter

market by more than three percentage points. Hero Honda's performance in

the two-wheeler industry was the only standout performance during the year

amongst the large players. Without Hero Honda's numbers, the two wheeler

industry growth would have been marginal.

(Source: Hero Honda Motors Annual Report 2008-2009)




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Table 2.6 Company Performance (Hero Moto Corp aka Hero Honda)

Indicator

(Rs)

Mar. 2010 Mar. 2011 Mar.2012 Mar.2013 Mar. 2014

Net Sales 157,582 193,979 235,790 237,681 252,755

Total

Revenue

161,215 196,875 239,436 241,665 257,197

Gross

Profit

26,709 26,126 36,187 32,845 35,391

Profit

Before Tax

28,406 24,846 28,647 25,292 28,641

Profit After

Tax

22,319 19,279 23,781 21,182 21,027

Net Profit

Margin

14.2 9.9 10.1 8.9 8.3

Current

Assets

28,826 14,508 20,743 50,776 55,583

Net fixed

assets

17,069 41,302 38,244 31,331 31,020

Sales to

asset ratio

1.9 1.8 2.4 2.5 2.5

Return on

Assets

26.2 18.1 24.3 22.1 20.9

Return on

Equity

64.4 65.2 55.4 42.3 37.4

Return on

Capital

81.0 81.9 67.3 50.8 51.1


The company has shown excellent performance as far as sales and revenues

are concerned, but as evident from the financial data contrasting results are


46

seen in profits and various returns (assets, equity and capital). Thus again

heterogeneity in overall performance is visible.

g. Bajaj Auto

Market Share: Two Wheelers 26.70%, Three Wheelers 58.60%

Bajaj Auto is ranked as the world's fourth largest two and three wheeler

manufacturer and the Bajaj brand is well-known across several countries in

Latin America, Africa, Middle East, South and South East Asia. Despite falling

demand in the motorcycle segment, the company has succeeded in

maintaining an operating EBITDA (earnings before interest, taxes,

depreciation and amortisation) margin of 13.6% of net sales and other

operating income. From 1.66 million motorcycles in 2007-2008, the company’s

domestic sales fell by 23% to 1.28 million units in 2008-2009.

Bajaj Auto is the country’s largest exporter of two- and three-wheelers.

During 2008-2009, Bajaj Auto’s international sales achieved an all-time high of

772,519 units of two and three wheelers, representing a growth of 25% over

the previous year. The growth was driven by the export of two-wheelers,

which increased by 31% over 2007-2008 to achieve sales of 633,463 units in

2008-2009. The company expanded its footprint in Africa and Middle East,

where the region’s share rose from 30% of the export business in 2007-2008 to

43% in 2008-2009. The total value of exports was USD 528 million,

representing a growth of 29%.

The company’s domestic sales of three wheelers in 2008-209 were 12% lower

compared to the previous year, and stood at 135,473 units. Exports of three

wheelers grew at 2% to 139,056 units. (Source: Bajaj Auto Annual Report)

(Source: www.imaginmor.com/automobileindustryindia.html)




47

Table 2.7 Company Performance (Bajaj Auto)

Indicator

(Rs)

Mar. 2010 Mar. 2011 Mar. 2012 Mar.2013 Mar.2014

Net Sales 115,431 164,291 195,947 200,420 201,583

Total

Revenue

120,941 170.081 202,031 208,391 208,401

Gross

Profit

20,535 31,816 37,651 37,301 41,552

Profit

Before Tax

24,603 36,343 42,021 43,610 46,549

Profit After

Tax

15,946 34,549 30,454 31,327 33,803

Net Profit

Margin

13.8 21.0 15.5 15.6 16.8

Current

Assets

16,113 30,632 51,854 61,816 56,244

Net fixed

assets

15,249 15,565 15,271 21,007 21,505

Sales to

asset ratio

1.7 1.8 1.8 1.6 1.3

Return on

Assets

23.2 37.8 27.6 24.8 22.1

Return on

Equity

58.7 71.9 50.1 38.8 33.2

Return on

Capital

79.9 90.3 66.2 53.5 46.7



48

The company has performed well in sales and revenue but again overall

performance in terms of profits and returns has varied over a period of time

which indicates heterogeneity in performance.

2.1.2.2 Performance Heterogeneity

These detailed reviews on the performance of various players in the Indian

automobile players are clearly indicating that over the last decade as the

Automotive companies on one hand have been successful in increasing their

sales and revenues which indicate a very good market growth but if we look

at individual performances of different players on various financial

parameters then differences are clearly observed.

Companies in Automotive sector have expanded in their business, in

manufacturing and sales as well as the assets have also grown. But

profitability and various returns computed on assets, equity and capital have

fluctuated during last five years. These fluctuations highlight that

performance is not only about getting incremental sales and revenue but also

how profitability and various returns are being achieved. Analyses of these

parameters suggest heterogeneity in performance. It also visible that in

similar types of segments say, commercial vehicles, passenger’ vehicles or two

wheelers, the various parameters like net profit margins, profit before and

after tax, returns on assets, returns on equity and on capital have also suggest

that only having larger market shares alone cannot make the companies to

perform consistently well over a period of time. There have been instances

when a company having a lesser share in market was actually doing well in

terms of profits and other returns.

The body of literature reviewed has shown the dimensions of performance,

and other determinants of competitiveness of the companies in this sector but

not much has been discussed about the reasons of such heterogeneity. Most of

the reviews in Automobile sector have discussed about the success factors

and growing economics of the country but any substantial answer on the


49

question of contrasting or heterogeneous performance are not given.

Performance heterogeneity for Indian Automotive Companies is needed to be

explained on the basis strategy adopted by the companies over a period of

time.

The next section talks about performance heterogeneity in the present

scenario with a focus more on non financial parameters.

2.1.2.3 Performance heterogeneity: The Contemporary Competitive

Scenario

While reviewing the performance of Indian automotive companies and to

further elaborate on the key construct of difference in performance or

performance heterogeneity analysis of contemporary scenario becomes highly

significant. The last one year period till February 2015 the Indian automotive

sector again has shown promising trends as suggested by their sales figures.

Other than Mahindra and Mahindra, Maruti Suzuki, Hyundai Motor India,

Honda Cars India and Tata Motors all posted decent to good growth year on

year (India Sales Analysis AutoCar Pro 2015). Till January 2015 a sales growth

was observed in Indian passenger car segment of about 3.14 %.In comparison,

two-wheeler manufacturers are feeling the pressure of slowing motorcycle

sales, particularly in the rural market, and leading players have reported YoY

declines in their bike numbers. Scooter sales though continue to perform with

aplomb, giving a helping hand to overall numbers. Importantly, commercial

vehicle sales numbers for February continued to be in positive territory. The

medium and heavy commercial vehicle (MandHCV) segment that has seen an

uptick continues with double-digit growth and the LCV sector, which has

been subdued, seems to be gaining momentum as well (India Sales Analysis

AutoCar Pro 2015).

The current performance status of the following companies especially in

terms of their sales and market performance are helpful in understanding the

heterogeneity concept more comprehensively:


50

Maruti Suzuki India, the country’s largest carmaker, has recorded an 8.2

percent growth in its February 2015 sales to 107,892 units (February2014:

99,758). The Alto and Wagon R sold 39,988 units, up 7.1 percent from 37,342

units in the year-earlier period. The Swift, Dzire, Ritz and Celerio together

sold 42,778 units, up from 45,721 units, a dip of 6.4 percent. The Ciaz

premium saloon sold 5,410 units in the month, taking its aggregate sales since

its launch to just over 28,000 units.

Of Maruti’s UVs, combined sales of the Gypsy and Ertiga comprised 5,863

units, up 12 percent over year-earlier month figures. The Omni and Eeco vans

sold 11,301 units, 13.8 percent over 9,932 units in February 2014. (INDIA

SALES ANALYSIS: FEBRUARY 2015)

On the export front, Maruti Suzuki India sold a total of 10,659 units, up 14

percent year on year (February 2014: 9,346). The carmaker’s total sales for

February comprising domestic and exports totaled 118,551 units, up 8.7

percent (February 2014: 109,104).

Meanwhile, Maruti is planning to set up a new network of dealerships in

India to sell its premium models. The company plans to rope in both existing

and new dealerships for this. Over a year, it plans to open 30 to 55 new

dealerships.

Hyundai Motor India has reported domestic sales of 37,305 units in February

2015, an impressive 9.7 percent growth over sales a year ago. The new Elite

i20, once again, topped Hyundai's sales chart at 10,264 units. The Elite i20’s

sales have crossed 64,000 units in the eight months since its launch. The

company plans to launch another i20 variant, the i20 Active later on. Domestic

and export sales combined, Hyundai Motor India sold 47,612 last month

compared to 46,505 units in February 2014. Exports however took a beating,

falling 17.5 percent to 10,307 units.

Mahindra and Mahindra announced its total auto sales numbers which

stood at 38,033 units during February 2015 as against 42,166 units in February

2014, a fall of nine percent. The passenger vehicles segment (which includes


51

UVs and the Verito) sold 18,103 units in February 2015 as against 19,308 units

in February 2014, down 6.24 percent.

Tata Motors has reported strong growth in its passenger car sales. The

company’s passenger vehicle division recorded sales of 13,767 units, up 22

percent compared to 11,325 units sold in February 2014. According to a

company statement, the trend of growth in passenger vehicles continues with

strong sales of the Zest sedan and a good market response to the Bolt

hatchback. While sales of passenger cars in February 2015 were, at 11,805

units, higher by 31 percent over February 2014, UV sales declined by 15

percent at 1,962 units in February 2015. Cumulative passenger vehicle sales

for Tata over the 11-month period for the ongoing fiscal are 119,041 units,

down by 5 percent over sales in 2013-14.

Honda Cars India has recorded a 16 percent increase in sales with a February

2015 tally of 16,902 units as against 14,543 units sold in February 2014. The

popular Amaze sedan was the top-seller with 7,163 units followed by the City

which sold 6,505 units. The Mobilio MPV sold 1,697 units, the Brio 1,397 units

and the CR-V 140 units; it’s highest in a year. Since its launch in March 2013,

the Amaze has totted up sales of 138,533 units. The Brio though is seeing a

downturn. For the current fiscal (April 2014-February 2015), the small

hatchback has sold 13,344 units, down 26 percent from a year earlier when

sales were 18,044 units. For Honda, 2014-2015 is turning out to be a good year.

The carmaker has registered an overall growth of 44 percent during April

2014-February 2015 with 166,366 units sold as against 115,913 units during the

corresponding period in FY 2013 -14.

These figures are given a clear indication that how the performances have

varied with regard to their sales and market shares and the operational efforts

they put in. (INDIA SALES ANALYSIS: FEBRUARY 2015)

Evidences from the two wheeler segment further contribute in understanding

the concept of performance and its heterogeneity in the contemporary scene.

In a corporate announcement made on Bombay Stock Exchange’s (BSE)

website, India’s largest motorcycle manufacturer, Hero MotoCorp has


52

communicated that its monthly sales for February 2015 stands at 484,769 units

as against 504,181 units sold in February 2014. The company has registered a

fall of 3.85 percent YoY for this month.

However, it is known that in the near future, Hero MotoCorp is gearing up to

launch its new scooters, starting from its 110cc Honda Activa competitor,

Hero Dash, which was earlier unveiled at the Auto Expo in Greater Noida last

year. To prepare itself on the front of the production capacity of scooters, the

listed company is in the process of ramping up its capacity from 75,000-80,000

units per month to 100,000-150,000 units per month. According to sources,

this process is estimated to end by mid-2015. Hero, which has lined up a

couple of new two-wheeler launches for 2015, has been boosting its RandD

strengths over time. The company is known to have filed over 15 patents and

also has registered 77 designs in FY2013-14. These developments included the

idle start-stop switch (on the Splendor iSmart model), side-stand indicator,

integrated braking system (brake actuator primarily for scooters), fuel lid, gas

liquid separation apparatus, vehicle operation status monitoring system and

several other features. Furthermore, the company is also known to have

carried operations in the areas of new model technology absorption,

indigenization of the CKD parts, multi-source approval, meeting legislative

norms, and gearing up for future automobile regulations in India during that

financial year. (INDIA SALES ANALYSIS: FEBRUARY 2015)

This year till date has witnessed the highest domestic market share of 29

percent for Honda Motorcycle and Scooter India (HMSI). The company sold

a total of 361,493 units during the month, marking a growth of 10.05 percent

(including exports as well). HMSI’s February 2014 sales stood at 328,468 units.

However, on the motorcycle sales front, even HMSI witnessed a marginal dip

of 2.25 percent during the said month, when it sold 139,334 units (February

2014 bike sales: 142,549 units). Meanwhile, covering up for that was the

scooter vertical for the largest scooter maker in India. HMSI sold a total of

208,811 scooters during Feb 2015, marking a rise in its sales by 22.13 percent

(February 2014 scooter sales: 170,971 units).


53

Bajaj Auto sold 216,077 units (including exports) during February 2015. The

company, which marked a decline in its monthly motorcycle sales of 20.94

percent, had sold 273,323 units in February 14. In order to make up for the

declining sales, Bajaj Auto is gearing up with several new launches for the

remaining part of the calendar year, which will also include a number of

refreshes and technology upgrades in the Pulsar line-up.

TVS Motor Company, on the other hand, continues to climb with respect to

its YoY monthly sales numbers. The company has recorded a growth of 11.47

percent by selling 164,508 units in the domestic market (February 2014:

147,580 units). The company continues to see a rise in its scooter sales, which

are driving overall growth. TVS’ scooter sales grew by 35.15 percent in

February 2015, when it sold 56,750 units (February 2014: 41,990 units). The

motorcycle sales for February 2015 stood at 74,292 units, up by 18.37 percent

(February 2014: 62,762 units).

Meanwhile, Mahindra Two Wheelers has sold a total of 8,591 units during

February 2015, down a considerable 53 percent (February 2014:17,848). Of

this, the company’s domestic sales stood at 8,289 units during the month,

while exports stood at 302 units. (INDIA SALES ANALYSIS: FEBRUARY

2015) Very interestingly these reports on the performance of two wheeler

companies clearly indicate how the competitive scenario has changed in last

one year. Some major players have been outperformed. The product wise

description revel further heterogeneity and compelled the need to find

reasons for such happenings.

The discussion on contemporary performance will be incomplete without the

heavy and medium commercial vehicle segment.

The medium and heavy commercial vehicle (MandHCV) segment that has

seen an uptick continues with double-digit growth and the LCV sector, which

has been subdued, seems to be gaining momentum as well.

Tata Motors’ overall domestic CV sales increased 11 percent. The company

sold 26,547 units (February 2014:23,990). The MandHCV segment continued

to perform well for the company with a 34 percent growth, selling 12,190


54

units in February 2015 (February 2014: 9,109). Its LCVs continue to decline

albeit the fall is narrowing down to single digits at just 4 percent. In terms of

numbers, Tata Motors sold 14,357 LCVs last month (February 2014: 14,881).

Ashok Leyland’s overall sales grew 36 percent with the company selling 10,

762 units. (February- 2014-7,915 units) The MandHCV segment registered a 48

percent growth selling 8,230 units (February 2014:5,576 units). The LCVs

increased by 8 percent with 2,532 units (February 2014:2,339 units)

VE Commercial Vehicles registered nine percent growth in the month. In the

local market in the 5-tonne and above category, it sold 2,774 units (February

2014: 2, 531 units). Mahindra Trucks and Buses recorded a 21 percent increase

with sales of company sold 731 units. (February 2014:605 units).

(Source: India Sales Analysis Auto Car Pro 2015).

These product and company wise reviews throw light on the market

performance aspects. The figures and reports have highlighted on the inter -

firm performance differences. The major players in the Indian automotive

sector are exhibiting performance heterogeneity both product wise as well as

in terms on their market and financial performance. Thus In order to

understand performance and its heterogeneity the concept of competitive

advantage and its relation to performance is needed to be understood. There

are various factors which generate competitive advantage and ultimately

yield performance, thus these factors can explain how and why heterogeneity

arises in performance.

One such a stream in study of Competitive advantage and performance is the

Resource Based View of Firms which talks about the relationships between

various resources and capabilities of a company generating competitive

advantage and resulting in performance.

So there is a need to understand the concepts of competitive advantage,

resources, capabilities and the Resource Based View of Strategy.


55

Competitive Advantage and performance of firms are fundamental concepts

laying the foundations of any research in strategic management. The next

section reviews this concept to build up the base for the present study.

2.2 The Resource Based of View (RBV)

The field of Strategy Research has been for long focusing on the concept of

Competitive Advantage as intent for Strategy. Eminent researchers and

authors in the strategy domain have placed numerous discussions and

arguments in attempt to understand and build up theories explaining

competitive advantage and its sustainability. Many approaches have taken

shape in these ventures and a number of theories have been proposed and

researched. These approaches have been developed and talked about in a

number seminal literary works by authors in the field of Strategy,

Management and Economics. One such approach has been the Resources

Based View (RBV). As a theory RBV articulates the relationships between

resources, capabilities and competitive advantage of a firm. RBV attempts to

explain competitive advantage and its sustainability on the basis of

competences and capabilities developed by the firms with the availability and

deployment of resources they possess. Hence the evolution and development

of the RBV as a strategic tool is needed to be addressed so as to understand

the role played by key resources and capabilities for attaining sustained

competitive advantage, a prime avenue for research in strategy (Saxena and

Joshi 2011).

2.2.1 RBV: Evolution of Theory

The Resource based theories have evolved from the core of economics. The

theorists in this regard have urged that all profits are known as economic

rents can be attributed to the ownership of scarce resources. These resources

have been scarcity based called as Ricardian Rents or entrepreneurial known

as Schumpeterian rents. Ricardian Rents are long lived while Schumpeterian

is not. Müller-Lietzkow (2002) has argued in his paper that the resource-based


56

view theory is based on the assumption that a competitive advantage is the

result of optimal resource allocation and combination in imperfect markets.

Resources comprise of tangible and intangible assets, skills, and

organizational capabilities. But as a theory RBV origins go far back and in this

regard Barney and Arikan (2001) have suggested four sources where RBV

cultivated. These sources are referring as The Traditional study of Distinctive

competencies, Ricardian Economics, Penrosian economics and the study of

Anti- Trust implications of economics.

Talking of Distinctive Competences , authors like Herbinik and Snow (1982)

and Hit and Ireland (1985, 1986) preceded by Leonard et.al (1969) have

defined Distinctive Competences as those attributes that enable a firm to

pursue a strategy more effectively and efficiently than other firms. These

competences can become exclusive attributes for the firm possessing them,

and these competencies are understood by the resources they need.

The origins of RBV further find roots in Ricardian economics. Ricardo (1817)

has emphasized on the gifts of nature which are original, un-augmentable,

and indestructible. The concept of Economic Rent thus takes shape; an

economic rent is defined as a payment to owner of a factor of production in

excess of the minimum required to induce that factor into employment as

(Hirshleifer 1980). These factors of production are considered to be perfectly

inelastic as their quantity of supply is fixed and they do not respond to price

changes. Thus it is possible for a firm to own higher quality factors of

production and yield economic rents.

Further going ahead in our discussion for the origins of RBV, one more

economic approach has reinforced the development of RBV as a theory; this is

the Penrose contribution to the field of economics and management. Edith

Penrose (1959) had an objective to understand the process of a firm’s growth

and the limits of growth. Penrose had an assumption that firms can be

appropriately modeled as if they were relatively simple production functions.

According to Penrose a manager has a task to exploit the bundle of


57

productive resources controlled by the firm through the use of administrative

framework created in the firm, so as to generate advantage.

And finally as a field of study, the social policy implications of economic

theories has been an interest area for many researchers. Social Policy is

guided in the area of Anti Trust Regulations. The approach to social welfare

and anti- trust has developed into “structure- conduct- performance” (SCP)

paradigm (Bain, 1956). The SCP paradigm suggest that the structure of a

firm’s industry defines the range of activities that a firm can engage in – so

called “conduct”- and in turn, the performance of the firm. Thus these sources

for the origin of RBV have been attempting to elaborate discussions on

competitive advantage yielding performance.

Taking a deeper look into the development of RBV as a theory, Briger

Wernerfelt (1984) had a seminal work done in exploring the usefulness of

analyzing firm from the resource side rather than the product side. Wernerfelt

has developed some simple economic tools for analyzing a firm’s resource

position and to look at some strategic options suggested in this analysis. He

further defines firm’s resources as those tangible and intangible assets which

are tied semi permanently to the firms. Talking on same lines Robert M Grant

(1991) have similar views. According to Grant the resources and capabilities

of a firm are central considerations in strategy formulation; resources are also

termed as primary sources for profitability of firms. Grant has view that the

resource based approach to strategy formulation is based on the

comprehension of the relationships between resources, capabilities,

competitive advantage and profitability and to understand how the

competitive advantage can be sustained over time. Grant further argues to

identify the resource gaps and develop a resource base for the firm. Grant also

focuses on filling of resource gaps by exploiting resources to extend positions

of competitive advantage and broaden the firm’s strategic opportunities.

Sustaining the advantageous situations requires constant development of

resource bases.


58

2.2.2 RBV (The VRIN concept) and types of resources

Talking of strategy; as field of research, there has been always a quest for

understanding competitive advantage and its sustainability. In order to

understand the sources of competitive advantage, Jay Barney (1991) examines

the linkage between firm resources and sustained competitive advantage.

Barney assumes that strategic resources are heterogeneously distributed

across firms and these differences are stable over a period of time. This paper

has produced discussions on four empirical indicators of the potential of firm

resources to generate sustained competitive advantage. These indicators are

value, rareness, imitability and substitutability. Barney (1991) defines firm

resources as all assets, capabilities, organizational processes, firm attribute,

knowledge, information and so on, controlled by a firm enabling it to

conceive and implement strategies that can improve efficiency and

effectiveness. Firm resources are classified as Physical Capital Resources,

Human Capital Resources and Organizational Capital Resources. But not all

the three capital resources are strategically relevant. There are certain

attributes of resources that enable firms to conceive and implement strategies

that improve effectiveness and efficiency. Barney further defines competitive

advantage and sustained competitive advantage in terms of the inability of

current and potential competitors to duplicate strategy implemented by the

firm. Barney (1991) has attempted to build up a theoretical model to

understand sustained competitive advantage with an assumption that firm

resources may be heterogeneous and immobile. To have a potential of

sustained competitive advantage a resource should be Valuable to exploit

opportunities or neutralize threats in an environment, it should be Rare in the

current and potential competition, the resource should be imperfectly imitable

and there should not be any strategically equivalent substitutes for these

resources. The firm resource model of sustained competitive advantage has

been examined for its implications in other business applications also. Also it

is essential to understand the economics of resource based view of

competitive advantage and its sustainability.


59

The economics of resource based view has been explained by Margret A

Peteraf (1993). Her work is an attempt to develop a model of resources and

firm performance. The model takes into consideration four conditions which

should be satisfied so as to sustain competitive advantage. These conditions

are defined as: Resource Heterogeneity which will generate monopoly rents

or Ricardian rents; Ex Post Limits to Competition which are essential for

sustaining these rents; Imperfect resource Mobility for ensuring that theses

rents are bounded with the firm and shared by it; Ex Ante Limits to

Competition preventing cost from offsetting the rents. Peteraf further argues

that firms having heterogeneity in resources and capabilities compete in the

market and at least break even. Firms with marginal resources only breakeven

but firms with superior resources earn rents. The firms earning such rents will

be efficient and they will sustain their competitive advantage if such superior

resources are not expanding freely or imitated by other firms. For the

sustenance of competitive advantage it is necessary to preserve the

heterogeneity. This can be done by ex post limits to competition. The

Resource based theories have emphasized on two critical factors to limit ex

post competition; imperfect inimitability and imperfect substitutability of

resources. Further Peteraf talks about Imperfect mobility of resources. If

resources are perfectly immobile they are not tradable. But imperfect mobility

of resources means the resources are tradable but are more valuable for the

firm which is currently holding them. Such resources are more firm specific in

nature. And finally Peteraf addresses ex ante limits to competition which

means that before a firm establishes a superior resource position, there must

be limited competition for that position. These four conditions have been

termed as cornerstones of competitive advantage by Peteraf (1993). And the

framework developed by Peteraf reinforces the four attributes of resources as

a source of sustained competitive advantage defined by Barney (1991).

Barney (1986a) has introduced the concept of strategic factor market in one of

his works. A strategic factor market is a market where firms acquire or


60

develop the resources needed for implementing product market strategies. He

argues that if the strategic factor markets are perfectly competitive, the

acquisition of resources in those markets will anticipate the performance of

those resources while implementing product market strategies. Further he

emphasizes that if strategic factor markets are perfectly competitive and if

firms are successful in implementing strategies creating imperfect competitive

product markets, such strategies are not a source of economic rents. Barney

(1986a) suggests that the sources of economic rents will be those resources

which are in control of the firm rather than those which will be acquired from

external sources. These due to the fact that resources already under the

control of firms were acquired in previous strategic factor market where the

price was a function of the expected value of these resources in that market.

But if the firm finds new ways for utilizing the resources for implementing

product market strategies, then such new resource would not have been

anticipated in the original factor market and can become a source of economic

rent.

These reviews have been addressing the development of resource based

concepts and views for firms and their strategy. It is evident that concepts of

economics, management and strategy go hand in hand when talking about

the Resource Based Theories.

Further talking of fundamentals of RBV, David N. Ford (1998) has proposed

the Operationalization of RBV, which talks about formalizing the theoretical

concepts into applicable models to facilitate strategy formulation and decision

making process. Again the quest is to understand the sources of sustained

competitive advantage. The operationalization of RBV leads to resource based

strategy implementation. Ford (1998) has operationalized RBV in five steps

with three levels of analysis; the firm’s environment, the firm and the

resources. The five step methodology for operationalization comprise of:

Listing the Valuable Resources; sketching the resource charts; draw key


61

resource maps; identify resource strategic plans and managerial policies; and

develop system models. But this operationalization faces challenges in

quantifying intangible resources. Operationalization helps in explaining how

RBV theory can be developed and implemented rather than what RBV theory

should consists of. According to Ford (1998) system dynamics plays an

important role in operationailzation process.

Adriana Mohd. Rizal (2011) has proposed the construction of resource base.

Most of the existing literature has focused the kinds of resources needed for

competitive advantage. Rizal has discussed about most of the literature on

RBV. She further talks about the construction of resource base. The

construction of resource base is defined as a series of resource development

activities whereby initial resources are strategically constructed and unique

capabilities are developed to gain competitive advantage and long term

profitability. Rizal concludes that theories that address construction of

resource base are needed to determine the origins of firm heterogeneity, in an

attempt to understand how initial resources are constructed and managed

into unique and valuable resources gaining competitive advantage.

These discussions and arguments are being placed as an opening note for

understanding the resource based theories in pursuit of explaining

competitive advantage. Further reviews in this regard attempt to explain

competitive advantage being sourced from resource based theories.

2.2.3 RBV: Explanation for Performance and Competitive Advantage

As a theory RBV has made explanations in establishing relationships between

resources, capabilities and competitive advantage. RBV has taken a firm as a

strategic business unit (SBU) to explain a firm’s competitiveness and

advantages it gains. These thoughts can be elaborated in order to understand

performance heterogeneity which is the soul of the present study.

The dominant paradigm in strategic management until the 1990’s was that

business management was determined by the appeal of the sectors in which


62

company was competing and by competitive position of the company in those

sectors (Rumelt, 1991; McGahan and Porter, 1999, 2002; Wiggins and Ruefli,

2002). But in recent years the analysis of firm’s competitive advantage from an

intra organizational perspective according to its own capabilities has made

the targeting of business strategies easier (Priem and Butler, 2001; Ray et al,

2004). From an RBV perspective the firm is regarded as a unit; a single,

organized group of heterogeneous assets created, developed, renewed,

evolved, and improved with passage of time. The performance variations

between firms can be explained by the heterogeneity in assets (Lopez, 2005).

RBV gives special attention to study the factors that cause these differences to

persists (Grant 1991; Mahoney and Pandiyan, 1992; Amit and Schoemaker,

1993; Barney, 2001). But it does not analyze their causes or the process which

determines these factors; increasingly an essential aspect of analysis in

dynamic environment. The diverse nature of resources is an essential element

in the development of economic activity and also plays a key role in the

evolution of technology and organizational structures. The logical response to

this question pertains in a new kind of organizational capability; the capacity

for self renewal of resources, routines, capabilities and core competencies

(Collis, 1994). This has paved the way for a new asset or highest order,

naturally dynamic process; the capacity to learn within the organizations

(individual learning) and about the organizations themselves (organizational

learning) (Teece et al. 1997; Zollo and Winter, 2002).

In this way, dynamic capabilities are formed as a subgroup of the firm’s

capabilities, allowing creation of new products and processes, permitting the

company to respond to changing external conditions which can be

advantageous, yielding high performance. Performance heterogeneity thus

becomes the key issue to be addressed. Resources based models have been

utilized by strategy thinkers in these regards. Views and thoughts have been

established to address performance and its heterogeneity.


63

RBV has emerged as a model of business unit performance, tracing back to

the economic theory of firm growth (Penrose, 1959) arguing that firms who

possess competencies and capabilities to best exploit those competencies

would be rewarded with highest levels of growth and profitability. Day (1990,

1994) has argued that a strategic business unit (SBU) can gain competitive

advantages by developing the capabilities by which it can exploit its

competencies. However this acceptance has been controversial (Priem and

Butler, 2001). But the RBV has been described as a dominant model to explain

differences among firms (Hoopes et al, 2003). An SBU’s capabilities are

deeply rooted in routines and practices so are generally hard for competitors

to imitate and, as a result, the SBU developing appropriate capabilities can

establish sustainable competitive advantage and maximizes its growth and

performance (Dierckx and Cool, 1989; Hoopes et al, 2003). The relationship

between resources and capabilities is the basis of RBV (DeSarbo, Benedetto

and Song, 2007).

According to Helfat and Peteraf (2003), heterogeneity of capabilities and

resources in a population of firms is one of the cornerstones of RBV (Peteraf

1993; Hoopes et al, 2003). RBV has explained competitive heterogeneity as an

enduring and systematic performance difference among close rivals (Hoopes

et al 2003; Peteraf and Bergen, 2003). Even the closest of rivals possess unique

bundle of resources and capabilities (Barney, 1986; Wernerfelt, 1984; Peteraf,

1993). But sustained competitive advantage is gained by some of the resources

and capabilities, having differential effects on actual performance.

To be a source of advantage, a resource or a capability must be valuable (it

can enable the SBU to improve its relative market position), rare (in short

supply, or rare in terms of resource functionality), and isolated from imitation

or substitution (immobile or costly to replicate) (Peteraf, 1993; Peteraf and

Bergen, 2003; Hoopes et al, 2003). Since, SBU will differ in terms of their

possession of resources and capabilities that lead to sustainable advantage, as

well as their differential utilization and effectiveness, their long term


64

performance will differ as well. These interrelationships between firm

capabilities, environmental factors, and strategic types have been investigated

(DeSabro et al, 2006; Song et al, 2007).

According to RBV to gain full advantage of resources, an SBU must possess

capabilities, defined as bundles of skills and knowledge, so that the SBU can

deploy its competences and coordinate its activities in such a way as to create

sustainable competitive advantage (Lippman and Rumelt, 1982, 1984; Barney,

1986; Day, 1990). According to Makadok (2001), a resource is an observable

asset that can be valued and traded. A capability is not observable, cannot be

valued, and changes hands as only part of entire unit. Capabilities may be

valuable in and of themselves, while others may be valuable mostly due to

their ability to increase the value of other SBU resources (Tripsas 1997,

Hoopes et al, 2003).

As these capabilities are difficult for competitors to imitate, they lead to long –

term competitive advantage and performance (Dierckx and Cool, 1989;

Hoopes et al, 2003; Peteraf and Bergen, 2003; Lippman and Rumelt, 2003).

SBUs with similar competencies then may not perform equally due to

differences in their capabilities (Hitt and Ireland, 1986; Day and Wenslay,

1988; Peteraf, 1993; Amit and Schoemakar, 1993; Peteraf and Bergen, 2003;

Hansen et al, 2004). Since capabilities are difficult to imitate or substitute, it

also follows that the SBU that most successfully cultivates these capabilities

outperforms its competitors in the long run (Hitt and Ireland, 1986; Hunt and

Morgan, 1995; Peteraf and Bergan, 2003; Hansen et al, 2004).

Thus the RBV literature focuses on competitive advantage rooted in

developing key resources and capabilities that are different.

2.2.4 RBV: VRIO Framework

The organizational existence has been explained on the basis of internal assets

that are valuable, rare, and inimitable having an organizational focus (VRIO)

(Barney, 1991, 1998, 2002; Ray, Barney, Muhanna, 2004; Duncan, Ginter and


65

Swayne 1998; Charkraborty, 1997). Organizational focus refers to integrated

and aligned managerial practices, routines and processes. It also refers to the

managerial leadership and decisions that support key assets in terms of their

development and sustenance. An organizations formal processes and

production functions are the backbones which support the strategic assets;

organizations protect their assets through business practices (Jugdev, 2005).

The focus of present study is on understanding the relationship between

resources, capabilities, competitive advantage and performance. The RBV

literature is enriched with a number contributions which have thrown light

the empirical relationships between resources, capabilities, competitive

advantage and performance, their review can generate insights for building a

conceptual framework for our study. The analyses done in these literary

works have led to various outcomes depicting the relationships between firm

resources, competitive advantage and performance.

2.2.5 Relationship between Resources, Competitive Advantage and

Performance

The relationship under debate is studied by DeSarbo, Beneditto and Song

(2007). Their paper seeks to explore the relationships between

resources/capabilities and performance by explicitly modeling the

heterogeneity of such relations across firms in various different industries in

exploring the interrelationships between capabilities and performance. The

authors have taken a sample of 216 US firms and they have developed a latent

structure regression model to provide a discrete representation of

heterogeneity in terms of different cluster or groups of firms. In order to

understand the relationships the firms are considered as Strategic Business

Units (SBU). The analysis finds that the derived four group latent structure

regression solution statistically dominates the one aggregate sample

regression function. The authors talk about five capabilities which were

explicitly measured on an 11 point scale and validated in previous studies.

These are: Market Linking Capabilities, Technological Capabilities, Marketing


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Capabilities, Information Technology Capabilities and Management

Capabilities. Model proposed is able to discern the sources of managerial

heterogeneity among the firms in the sample. And three different possible

sources of managerial heterogeneity have been identified. The authors have

found that the four derived groups differed in terms of their profitability

performance; consequently capabilities were closely related to performance.

Yet significant differences across the firms in terms of their actual capabilities

were not found (DeSabro, Beneditto and Song 2007).

DeSarbo et al (2006) in another study have also devised a constrained finite-

mixture structural-equation methodology and empirically derived a four

group, “mixed-type” strategic typology. This methodology allowed them to

capture the nature of heterogeneity among the firm capability and

performance variables due to the estimation of a series of nested models.

DeSarbo et al (2005) identified association between capabilities, strategies,

performance and strategy types. The study of 2006 extends the prior findings

by suggesting that strategic decision making by SBUs is context dependent:

different capabilities lead to improved profit performance for different

strategic types. This is in line with the expectations of the RBV. Thus, for

different strategic types, different capabilities will be tied to performance.

Empirical researches have been done on RBV in order to investigate the

relationships between resource/capabilities and competitive advantage.

Arguments have been placed for determining the resources which can lead to

competitive advantage.

One such study has been put by Jeremy Galbreath and Peter Galvin (2004).

They have proposed a fine grained test of RBV, to determine the resources

which matter to the firm. Conceptually Authors talk about two fundamental

categories of resources: Tangible and Intangible. Tangible resources are those

which have recorded accounting values in the Balance sheet, such as physical

or financial assets, while intangible are those which are non physical or non


67

financial in nature, these are capabilities. Authors argue that as a rare

exception only intangible resources are examined in RBV research as

intangibles are viewed as only sources of competitive advantage by some

authors. According to Galbreath many scholars claim that intangible

resources can explain performance heterogeneity among firms. But this

argument only holds true if the effects of intangible resources are analyzed

after simultaneously accounting the effects of tangible resources. It has been

attempted empirically. A sample of 1000 manufacturing firms and 1000

service firms were taken from Australia. Resources and Performance were

measured as constructs while the age of the firm was chosen as control

variable along with Porter’s five force industry structure. A Psychometric

evaluation of the constructs was done and various relationships between

resources and firm performance were done using multiple hierarchical

regression analysis. The Galbreath and Galvin (2004) study concluded that

some intangible resources do account for significant effects on performance

after accounting for the tangible resources and hence these intangibles are

valuable, rare, inimitable and no substitutable (VRIN), but not in all expected

prediction. Galbreath and Galvin(2004) argues that strength of some

resources are dependent on interactions or combination with other resources

so no single resource can became important for firm performance.

On similar thoughts Gautam Ray, Jay Barney and Waleed Muhanna (2004)

have presented a seminal work for choosing the Dependent variable in the

Empirical Test of RBV. Authors talk about Capabilities, Business Processes

and Competitive Advantage. The authors argue that in some situations

adopting the effectiveness of business processes as a dependent variable may

be more appropriate than adopting overall firm performance. For testing this

idea the determinants of effectiveness of customer service business process in

a sample of North American Insurance Companies were examined. The

Authors define Business Processes as actions that firms engage in

accomplishing some business purpose or objective. The authors then explain

the effect of multiple business processes on the firm performance; adopting


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the effectiveness of business processes as dependent variable is due to the fact

that a firm may excel in some business processes, can be average in others and

below average in still others. A firm’s overall performance depends on the net

effect of these business processes on a fir’s position in the market. Various

business processes can have varying effects on overall firm performance.

Aggregating the outcomes of numerous processes makes it very difficult to

examine whether a particular set of resources and capabilities can generate

competitive advantage. Another reason explained by the authors for adopting

effectiveness of business processes as dependent variable in resource based

research is that it is possible for stakeholders of the firm’s to appropriate the

economic profits that can be generated by business processes, before they are

reflected in overall profitability. This would be helpful for researchers to

examine how wealth of the stakeholders get affected by competitive

advantage. This information can be used to determine the size of economic

profit generated by firms. However it is difficult to measure (Coff 1999). The

authors further explain the reason for considering effectiveness of business

processes as dependent variable because business processes are the ways by

which a firm’s resources and capabilities are realized as competitive potential.

Resources can only be the source of competitive advantage if they are

exploited through business processes.

Taking in to consideration all these perspectives Ray, Barney and Muhanna

(2004) empirically analyzed the performance of the customer service process

in the life and insurance segments of insurance industry in North America.

Combined samples of 800 companies were taken and data were obtained

from 104 firms. Four resources and capabilities were suggested from previous

researches which influence the performance of customer service performance;

they are Service Climate, Managerial Information Technology Knowledge,

Technology Resources and Investments. The hypotheses based on these

attributes were tested using Structured Equation Modeling; models were

estimated for five measures of competitive service performance

independently. Another model was estimated that examines the


69

relationships between four independent variable and firm performance

measured in terms of returns on assets (Ray, Barney and Muhanna 2004).

Reviews till now have indicated that the existing literature on RBV has more

focused on conceptual issues trying to build up theories for creation and

sustainability of competitive advantage with the utilization of resources and

generation of capabilities. The relationships studied are also more

theoretically supported rather than empirical investigations of the constructs

like resources, capabilities, competencies, competitive advantage and firm

performance.

2.2.6Applications of Resource Based Theory

The RBV as a theory has been operationally defined and tested by applying

the theory to the major US film studios from 1936 to 1965. This work has been

done by Danny Miller and Jamal Shamsie (1996). They have proposed

Resource based view of the firm in Two Environments. The two environments

are time based as one is an era from 1936 to 1950 which was a stable,

predictable environment and the financial performance of these studios was

stable as there were property based resources in the form of long term

contracts with the stars and theaters. While the era from 1951 to 1965 had a

changing and unpredictable environment where the financial performance

was boosted due to Knowledge based resources in the form of production and

coordinative talents and budgets. The nature of resources has been discussed

and the conceptual framework defines Property based and Knowledge based

resources. The study of Miller and Shamsi (1996) shows that both property

based and knowledge based resources that are hard to buy or imitate

contribute to performance, return on sales, operating profits and market

share. But the environmental context is most important in conditioning these

relationships. The authors conclude that whether or not an asset can he

considered a resource will depend as much on the context enveloping an

organization as on the properties of the asset itself.


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In the pursuit of reviewing the applications of RBV, John Mills, Ken Platts and

Michael Bourne (2003) have presented a work on applying resource based

theory to determine Methods, outcomes and utility for managers. The paper

has described research on resources that underlie a manufacturing company’s

service competence in its most established product group. The authors have

referred to the extensive literature on RBV critically and have developed and

tested improvement in the identification and assessment of resources based

on existing theory. Resource identification can be done using Top Down or

Bottom-Up approaches. But the bottom-up approach leads to more reliable

data for the managers. The authors talk about various resource identification

methods used by various researchers. Similarly resource evaluation is done

with the help of VRIN characteristics; also sustainability and versatility have

been used as facet for resource evaluation. A historical representation of the

firm’s activities in its service provision over more than 10 years have been

used to assess the value and sustainability of the resources identified. The

methods for resource analysis have been discussed from three perspectives,

appropriateness, resource data generated and apparent utility for managers.

Continuing our review journey on application of RBV, Gerhard Kristandl and

Nick Bontis (2007) have used the resource based view of firm to construct

definition for Intangibles derived from RBV. Intangibles are defined as a

subset of corporate resources. The paper has tested various definitions of

intangibles against the RBV framework. The authors claim that RBV and

Intangibles can be positioned in natural hierarchy since the Intangibles

connect to company’s strategy and both contribute to sustained corporate

performance and competitive advantage. This done with interactions of

assets and capabilities, and the capabilities transform the assets into outputs

of increased value. According to RBV the resources having VRIN

characteristics are intangibles. The paper finds that most of the definitions of

intangibles in the existing literatures synchronize with RBV and thus a

common definition for intangibles can be proposed.


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As an application of the Resource based view of strategy, Stuart Orr (2007)

proposes the RBV application to the Agricultural Industry. The study is done

on Australian Floral Industry. Research was conducted to produce

generalisable data and constructs for RBV. Orr (2007) has view that despite

the RBV's successful application to research in a number of discipline areas

and the formalization of its relationship with Competitive Advantage (CA),

the empirical support for the benefit of the RBV and development of research

constructs has been inadequate. The industry under study is well bounded

with several strongly differentiating resources and operates in a global market

environment, which is necessary for research objectives. The research

determined that organizations in the Australian floral industry possessed

important resources which were categorized as geography, skills, technology,

RandD, supply chains and production cost controls. These resulted in four

production outputs that created competitive advantage - product quality,

production capacity, production reliability and customer convenience. The

research also identified interrelatedness between production outputs, but not

resources. It was also identified that one resource could contribute to a

number of competitive advantage creating production outputs.

The Resource based perspectives have also been instrumental in resourcing

Corporate Environmental Strategies. Frances Bowen and Sanjay Sharma

(2005) have presented this idea in the work. The authors refereeing to

literature have argued that corporate environmental strategies involve

mobilization of unique bundles of resources and capabilities (Hart 1995;

Sharma and Vrendenburg 1998), such as employees, environmental

championing skills, corporate strategic planning process, stakeholder

management, continuous innovation and search for talent and technology.

The authors also talk about behavioral perspectives facilitating corporate

environmental strategies by a search using generic, slack resources dependent

on managerial discretions and interpretations of environmental issues

(Sharma, 2000; Sharma, Pablo, and Vrendenburg, 1999). The paper draws out


72

from both the perspectives that the type of resource most useful for

developing and implementing a corporate environmental strategy is likely to

be dependent upon the characteristics of that strategy. A categorization of

resources is done on the basis of their degree of complexity, tacitness and

specificity. The RBV is expanded by explicitly recognizing the potential utility

of available slack, downplayed in the view’s focus on specific, competitively

valuable resources. The behavioral aspect is explained by the commitment of

strategic resources, capability bundles, dynamic capabilities or some non -

competitively valuable resource, rather than their availability. The authors

conclude that a firm’s feasible corporate environmental strategy choices are at

least partly determined by their resource endowments.

The Resource based view also finds significant applications in Operations

Strategy research. Stephane Gagnon (1999) in a work has argued that the

operations strategy research should integrate theories from resource based

view. The author in this paper has done some extensive literature review and

has identified some key issues that may become the basis of a New Resource –

Based Operations Strategy. The RBV will help the operations to reach up to

the leadership of strategy, ensuring that firm’s resources, capabilities and

competencies are effectively used as competitive weapon. The author has a

view that the RBV offers a number of lessons in the management of

capabilities under hyper competitive conditions, providing rules to develop,

protect and leverage resources in a dynamic manner. And the resource based

view may help the operations strategy to better integrate the sources of

strategic advantage within a coherent portfolio of optional capabilities, this

will be helpful in overcoming the failures in the implementation of world

class practices. Gagnon (1999) concludes that as a new paradigm operation

strategy emerges tracing back to operational roots of management

fundamentals, a new integrated research agenda could emerge between areas

of operation strategy and resource based strategy. The resource-based view

may help refocus operations strategy making as a truly creative and future


73

oriented activity, geared toward integrating and building new strategic

advantages through learning and operational regeneration (Tranfield and

Smith, 1998).

The RBV as theory has contributed to a number of applications and consistent

a subject of research. The theory is well grounded in industrial economics and

has been developed by multiple contributions by management authors. But

this body of knowledge has also found a lot of confusions, ambiguity,

conceptual and empirical difficulties. In this regard John Fahy (2000) in his

work talks a capability driven perspective of RBV and addresses some

stumbling blocks on the road to understand sustainable competitive

advantage.

The paper provides an integrated view of the RBV in an effort to eliminate

ambiguities caused by weak taxonomies and the inconsistent and conflicting

use of terminology. The paper is an attempt to provide insights into RBV and

its contribution to the nature of competitive advantage (Fahy, 2000). The

author argues that the desired outcome of managerial efforts within the firm

is sustainable competitive advantage (SCA). The achievement of SCA leads a

firm to gain above average returns or economic rents. According to RBV key

resources having characteristics of value, barriers to duplication and

appropriability should be possessed by the firm. Fahy (2000) argues that

essential elements of RBV comprise of: sustainable competitive advantage and

superior performance; the characteristics and types of advantage generating

resources; and strategic choices made by management. Fahy (2000) further

explains that the persistence of resource heterogeneity is central for attaining

sustained superior returns; the process is not automatic and requires the

moderating interventions of managerial choices in the identification,

development, protection and subsequent deployment of resources in product

markets. From the resource based perspective, firms exist because of the

opportunities to benefit from efficiencies created by asset interdependencies


74

within the firm. Fahy (2000) concludes by discussing a number research

avenues opening up in RBV by referring to the literature.

These reviews have presented RBV as an effective tool for comprehending the

prime constructs in strategy research; the competitive advantage. These

literary works have taken evidences and illustrations from different

organizations who been striving hard for high degree of performance and

sustaining the advantages they are gaining. Yet the literature is focused on

explaining the various relationships qualitatively and resulting into theory

developments. The expressions of the relationships between resources,

capabilities, competitive advantage and performance have got a

comparatively lesser quantitative treatments. Measurements of performance

along with the measures of competitive advantage and its persistence with a

view of resources and capabilities require more work to be done. Thus a

number of research avenues are opened and the literary works discussed

have threads and strings open to weave further researches.

In this regard Dovev Lavie (2006) has presented an extension of resource

based view to study the competitive advantage of interconnected firms.

Model distinguishes shared resources from non shared resources; identifies

new types of rent; and illustrates how firm-, relation-, and partner-specific

factors determine the contribution of network resources to the rents extracted

from alliance networks. After reassessing the heterogeneity, imperfect

mobility, imitability, and substitutability conditions, Lavie (2006) urges that

the nature of relationships may matter more than the nature of resources in

networked environments. The model proposed by Lavie (2006) overcomes the

limitation of traditional RBV, focusing on resources that are owned or

controlled by single firm. The model incorporates network resources that play

a role in evolution of alliance networks and shaping the competitive

advantage of interconnected firms.


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As per Black and Boal (1994) the resource-based view (RBV) of the firm holds

that certain assets with certain characteristics will lead to sustainable

competitive advantage. All the traits are required to be present to result in

sustainable competitive advantage. Such a trait approach overlooks the

dynamics of the creation of firm resources especially the strategically

important factors as identified by the resource based view theory. According

to Black and Boal (1994) resources are made up of factor networks which have

specific inter factor and inter-resource relationships that result in the

characteristic traits being evidenced. These strategic resource factor

relationships include network type, available substitutes and cogency

relationships (compensatory, enhancing and suppressing). Specific

configurations that lead to high or very high support of sustainable

competitive advantage are proposed. Twenty-two specific paths to

sustainable competitive advantage for a factor, contingent on resource factor

traits and relationship configurations, are proposed.

These reviews exhibiting the extensive application of RBV concept in strategy

research is instrumental in placing the RBV theory to understand the

performance heterogeneity issues in Indian automotive companies and the

concept of competitive advantage. Thus RBV is a suitable approach for the

present study done in Indian conditions and business scenario, as the various

applications discussed have exhibited the role of RBV in explaining

performance in changing environments from a stable and predictable to

unstable one(Jamal and Shamsi 1996); RBV playing role in determining the

methods, outcomes and utility for managers along with approaches to

identify resources as per VRIN characteristics(Mills, Platts and Bourn 2003);

the significance of intangibles in connection with company strategy, corporate

performance and competitive advantage (Kristandl and Bontis 2007); the

formalization of RBV with competitive advantage in an industry operating

global market environments possessing important resources (Orr 2007); or the

resource based view being instrumental in resourcing corporate

environmental strategies involving mobilization of unique bundles of


76

resources and capabilities and behavioral perspectives (Bowen and Sharma

2005); or the significant applications of RBV in formulating operations

strategy, resources and capabilities effectively being used as competitive

weapon, the resource based perspective being helpful in making the

operations strategy more creative and future oriented, building new

advantages (Gagnon 1998, Tranfield and Smith 1999).

Such variety of applicability and explanations for competitive advantage, its

sustenance and performance of firms addressed by RBV distinguish it from

other strategy research approaches and hence resource based view is treated

as central consideration and approach, and is adopted for the present study.

2.2.7 RBV: Critical Appraisals

In this comprehensive review we come across an interesting critical appraisal

of RBV done by Lockett, Thompson and Morgenstern 2009, they examine the

RBV in terms of theory, method, empirical evidence and practical insights. As

per Lockett et al 2009, The RBV has developed as a series of related

propositions that seek to explain the relationship between a firm’s resource

endowment and its performance and growth. However, it has not generated

clear unambiguous hypotheses in the manner of more narrowly conceived

theories of firm behaviour or even transaction cost economics (TCE), an

approach with which the RBV is frequently compared. The paper discusses

the practical difficulties arising in the RBV methodologies. The first issue is of

tautology (Prime and Butler 2001). According to Prime and Butler 2001, only

valuable and rare resources are the source of competitive advantage, where

rarity and value in turn depend upon the use to which such resources may be

put. More generally, they argue that the problem of tautology lies in the

relationship between the general and the specific in the RBV. Competitive

advantage is considered to be rooted in firm-specific circumstances that are

themselves, at least in part, imperfectly observable.

Secondly, for any empirical assessment of RBV, its predictions require the

identification and measurement of relevant resources. But this is not easy as


77

the resources of central concern are often those associated with organizational

learning etc. and are commonly unobservable (Ambrosini and Bowman 2001;

Godfrey and Hill 1995; Rouse and Daellenbach 1999).

Third, firm heterogeneity creates problems for researchers who are interested

in generating a homogeneous sample of firms for testing specific RBV

hypotheses.

Fourth, identifying and explaining causal relationships in large firms is

problematic. The sheer complexity of large organizations makes it very

difficult to isolate the performance effects of specific resources.

Fifth, not merely is agreement on a working definition of ‘competitive

advantage’ itself controversial (Foss and Knudsen 2003; Powell 2001), but

such a concept is directly unobservable so that empirical tests normally

involve seeking to explain inter-firm differences in performance (Peteraf and

Barney 2003) with respect to observable differences in the firms’ identifiable

resource endowments.

Sixth, the logic of the RBV does not predict a universal relationship between

firm performance and any particular resource. On the contrary, the value of a

resource to the firm will depend upon the specifics of its use, including the

deployment of co specialized assets. Therefore, even at the industry level,

there may be no discernible relationship between firm performance and the

possession of resource X (Lockett, Thompson and Morgenstern 2009). Lockett

et al 2009 have further urged that much of the empirical work this field still

tends to use single equation, cross sectional design, raising problem of

causality.

This review strongly reinforces the need to for the present study and the

analysis carried out as the model developed and tested will be able to put

reasonable explanations on these issues.

Continuing with discussion on Empirical Research in RBV Stuart Orr 2011 has

also made a critical appraisal on RBV theory. Orr (2011) has taken a

substantial literature support and has emphasized the problems faced while


78

working with RBV. As per Orr 2011, Selection of the correct empirical

research methodology to enable the identification of specific resources

meeting Barney's criteria and separation of the contributions of these

resources to CA, has proven to be one of the difficulties associated with

empirical research into the RBV (Lockett et al 2009). Orr 2009 further

elaborates from the literature that the theory does not adequately consider

how organizations establish the resources to create CA (Mathews 2002). Such

resources must also be very difficult to attain in the first place (Miller 2003)

and may be explained by linkage, resource leverage and learning (Mathews

2002).

The literature also suggest that Industries need to be very homogenous to

enable fair comparisons to be made across organizations, and resources can

be difficult to identify as many are intangible (Fahy 2000, Lopez 2001, Riahi-

Belkaoui 2003, Arend 2006). The very best resources will be hardest to identify

(Fahy 2000). The literature suggests that such resources need to be identified

using qualitative methods (Rouse – Dallenbach 1999).

Further critics to RBV is also found in literature as the VRIN and VIRO

framework by Barney (1991 and1996) do not provide a strong measure of the

potential for performance, as even resources which are relatively weak still

correlate with sustained superior performance (Arend and Lavesque 2010).

This may be partially due to limited attention being given to date to the

selection of the correct output variables. Further development of the

constructs representing the impact of CA is required for investigation of the

RBV (Orr 2011).

Thus in a way the review also provide insights to the problems encountered

by researchers while dealing with RBV theory. This opens up the avenues to

test the theories on empirical grounds thus making the concept very potent

for significant research contributions.


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2.2.8 Summarizing RBV Literature

The literature on RBV has emphasized on developing key resources and

capabilities that are different. The VRIO framework is defined in reference to

organizational processes and production functions. But having a

comprehensive look to the studies carried on from last three decades, it is

observed that the arguments posed are in reference to developed economies.

The concepts of RBV have been dealing with organizations in general pertain

to any sort of industry. These studies have a base of business firms of diverse

nature. The research locations have been the countries which are industrially

developed and highly automated. These concepts are still to be applied on

developing economies like India. The literature provides comprehensive

theory building of fundamental concepts of competitive advantage, core

competences, distinctive capabilities, resources of heterogeneous natures,

economic rents, sustained competitive advantages and so on. These

fundamental concepts have been worked upon by various researchers in a

generalized sense and any evidences or illustrations which been talked are

not from developing economies especially India. The literature has talked of

various characteristic applications of RBV in understanding the creation and

sustenance of competitive advantage ultimately leading to firm performance.

The performance heterogeneity has been addressed in these literary analyses,

yet a substantial work can be done regarding the relationship between

resources, capabilities, competitive advantage and performance to explain the

heterogeneity. The heterogeneity in resources have led to competitive

advantage, characteristics of resources and development of capabilities have

resulted in the persistence of this advantage and thus all the papers talking in

this regard have contributed in building up the theories. These theories are

now to be utilized to develop and establish relationship between resources,

competitive advantage and performance in a context specific and industry

specific scenario. The body of literature till now will be the ingredient in

shaping up the design for the present research study. Also the literature will


80

guide the difficulties faced and gaps emerged in research studies of such

nature.

While reviewing the RBV literature Competitive Advantage as a concept has

been comprehensively used in the discussion to understand performance

heterogeneity, hence as a construct Competitive Advantage is to be

understood in detail.

2.3 Competitive Advantage

The concept of Competitive Advantage has been extensively treated in

Strategic Management literature. Fundamentally Competitive Advantage is

elusive, and researchers are still involved in deriving a clear definition. Many

researchers have a consensus that a firm has competitive advantage over

other firms in the same business as it offers something valuable to the

customers which cannot be given by the competitor firms (Fahy and Smithee

1999). Jay Barney (1991) has urged that competitive advantage can be gained

if the firm’s current strategy creates value and is not being implemented by

any competitor at present or in future. Day and Wensley (1988) have focused

on two categorical sources involved in creating competitive advantage:

superior skills and superior resources (Hoffmann 2000).

2.3.1 Generation of Competitive Advantage

Porter (1980, 1985) developed the concepts of cost leadership and

differentiation relative to competitors as two important sources of competitive

advantage. A firm can use aggressive pricing and high sales volumes in a low

cost position, whereas differentiated product creates brand loyalty and

positive reputation, facilitating premium pricing, thus can generate

competitive advantage.

Competitive advantage can also be secured by making an early entry and on a

large scale rather than an incremental scale (Ghemawat 1986, Lieberman and

Montgomery 1988). Any firm making an early move or large scale move can

preempt competitors by setting new standards or gaining access to critical


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raw materials, locations, production capacity, or customers. Preemptive

commitments enable firms to gain a strong focus and dominate a particular

niche, either through lower costs, differentiated products or both (Ghemawat

1986; Porter 1980).

Hemal and Prahalad (1989, 1994) emphasized on profitability in the present

and growth in medium terms and also on future position and source of

competitive advantage. Thus a lot of thoughts have been proposed in order to

conceptualize competitive advantage.

Competitive Advantage leads to performance provided a firm sustains its

competitive advantage. A firm can attain sustained competitive advantage

when it implements a strategy which creates value and also no other

competitor is implementing such strategy, neither the benefits of such a

strategy are duplicated, Barney (1991). He suggests that not all firm resources

hold the potential of sustainable competitive advantage; instead there are four

attributes to it: rareness, value, inability to imitate and inability to be

substituted.

Hunt and Morgan (1995) have a proposition of categorizing potential

resources as financial, physical, legal, human, organizational, informational

and relational. In this regard Prahalad and Hamel (1990) suggest that firms

combine their resources and skills into core competencies, loosely defined as

that which a firm does distinctively well in relations to competitors. Therefore

firms may succeed to establish a sustained competitive advantage by

combining skills and resources in unique and enduring ways.

Strategic Management researchers have also understood that competitive

advantage and its sustainability depends on the match between distinctive

internal capabilities and changing external conditions or the organizational

capabilities and environment (Andrews 1971; Chandlar 1962; Hofer and

Schandel 1978; Penrose 1959).


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2.3.2 Sources of Sustained Competitive Advantage

Hao Ma (1999) has urged that competitive advantage arises from the

differential among firms along any dimension of firm attributes and

characteristics that allow one firm to better create customer value than do

others. Generic sources of competitive advantage include ownership of assets

or position, access to distribution and supply, proficiency – knowledge and

competence and capability in business operations. To achieve and sustain

competitive advantage a firm needs to exploit these sources creatively and

proactively; with preemption of rival’s efforts and to pursue any combination

of proactive and preemptive efforts (Hao Ma 1999).

The fundamental basis of long-run success of a firm is the achievement and

maintenance of a sustainable competitive advantage. A competitive

advantage can result either from implementing a value-creating strategy not

simultaneously being employed by current or prospective competitors or

through superior execution of the same strategy as competitors (Bharadwaj,

Varadarajan, and Fahy 1993).

Strategic Management literature has been enriched with a number of

contributions by eminent authors addressing competitive advantage and its

sustainability.

Alderson (1965) has talked about three bases for differential advantage:

technological, legal and geographical. There are four strategies for achieving

advantage: segmentation, selective appeals, transvection, and differentiation.

Coyne (1986) proposed that in order to possess a sustainable competitive

advantage, consumers must perceive some difference between a firm’s

product offerings and the competitors’ offerings. This difference must be due

to some resource capability that the firm possesses and competitors do not

possess. Also, this difference must be some product/delivery attribute that is

a positive key buying criterion for the market (Coyne 1986). The key is being

able to predict the actions of others in the industry over time; by matching the


83

firm’s resources to the gaps and voids that exist in the industry, a CA can be

created. This advantage is sustained if competitors either cannot or will not

take action to close the gap (Coyne 1986).

As per Hamel and Prahalad (1990) a sustainable competitive advantage

results from core competencies; firms should consolidate resources and skills

into competencies that allow them to adapt quickly to changing

opportunities.

Day and Nedungadi (1994) have a view that a firm’s use of strategy and

reaction to the environment depends on its orientation towards customers or

competitors; competitive advantage is based on this orientation.

In order to understand achievement of sustained competitive advantage

Shrivastava, Shervani and Fahey (1998) have classified market based assets

into two primary types: relational and intellectual. Intangible assets may be

leveraged to achieve sustainable competitive advantage if they can add

unique value for customers (Shrivastava, Shervani and Fahey 1998).

Relational market-based assets are those that reflect bonds between a firm and

its customers and/or channel members. While an intellectual market-based

asset would be the detailed knowledge that firm employees possess

concerning their customers’ needs, tastes, and preferences. Both types are

intangible and employ an outward focus on firm customers and channel

members (Shrivastava, Shervani and Fahey 1998).

Firms may succeed in establishing Sustainable Competitive Advantage by

combining skills and resources in unique and enduring ways. By combining

resources in this manner, firms can focus on collectively learning how to

coordinate all employees’ efforts in order to facilitate growth of specific core

competencies (Hoffmann 2000).

Hoffmann (2000) also defines Sustainable Competitive Advantage as the

prolonged benefit of implementing some unique value-creating strategy not


84

simultaneously being implemented by any current or potential competitors

along with the inability to duplicate the benefits of this strategy.

This definition has been coined while comprehending the various literary

contributions in work.

The literature also talks about inter organizational competitive advantage.

Dyer and Singh (1998) have urged that an increasingly important unit of

analysis for understanding competitive advantage is the relationship between

firms and identify four potential sources of inter organizational competitive

advantage: (1) relation-specific assets, (2) knowledge-sharing routines, (3)

complementary resources/capabilities, and (4) effective governance. Dyer

and Singh (1998) have emphasized that a pair or network of firms can develop

relationships that result in sustained competitive advantage. Competition

between single firms, while per-haps still the rule, is becoming less universal,

as pairs and networks of allied firms have be-gun to compete against each

other.

It is evident from the above discussions that understanding the sources for

sustained competitive advantage for firm has been a major area in strategic

management (Porter 1985, Rumalt 1984). J. Barney (1991) summarizes on the

framework developed in the decades of 60’s and 70’s and suggests that firms

obtain sustained competitive advantage by implementing strategies which

exploit their internal strengths, by responding to the external opportunities,

while neutralizing external threats and avoiding internal weaknesses. Most of

the researches on sources of sustained competitive advantage have focused on

isolating a firm’s opportunities and threats (Porter 1980, 1985), describing its

strength and weaknesses (Hofer and Schendel 1978; Penrose 1958;

Stinchcombe 1965), or analyzing how these are matched to choose strategies

(Barney 1991).

Barney (1991) further throws light on the research carried by Porter and his

colleagues as an attempt to describe the environmental conditions that favor


85

high levels of firm performance. Porte’s (1980) five force model describes the

attributes of industry attractiveness and suggests that opportunities will be

greater and threats are less in such industries.

As discussed earlier Barney (1991) has defined competitive advantage and

sustained competitive advantage. As per Barney (1991) a firm will have

competitive advantage when it is implementing a value creating strategy not

simultaneously being implemented by any current or potential competitors;

further a firm will have sustained competitive advantage when it implements

a value creating strategy not simultaneously being implemented by current or

potential competitor and the other firms are unable to duplicate the benefits

of this strategy. Barney (1991) further has an argument that these definitions

do not focus on a firm’s competitive position. Also a firm’s competition is

assumed to include not only current competitors but also potential

competitors that may enter on any future date. Barney (1991) urges that the

definition of sustained competitive advantage does not depend on the period

of calendar time during which a firm enjoys a competitive advantage. Some

authors like (Jacobsen 1988, Porter 1985) have suggested that a competitive

advantage that lasts for a longer duration of calendar time can be termed as

sustained competitive advantage.

Adding to the ongoing discussion on competitive advantage and its

sustainability Roy Lubit (2001) explores how companies can best grow their

knowledge resources to create not simply competitive advantage but

sustained competitive advantage. According to Lubit (2001) there are two

paths by which companies can use knowledge to create sustained competitive

advantage. First, the companies can act to internally spread knowledge that

other companies will find almost impossible to copy, it is tacit knowledge.

Secondly companies can create superior knowledge management capabilities

and foster ongoing innovation (Lubit 2001).

It is evident from the above discussions that Competitive Advantage and its

sustainability has been prime research avenue in Strategic management


86

research. Authors have dealt with a number of approaches to address

competitive advantage and in this pursuit a variety of sources for sustained

competitive advantage have been suggested. There have been differences in

opinions and thoughts as evident from the works of Porter, Barney and other

eminent authors who have consistently provided inputs for the development

of new constructs which can explain competitive advantage and its

sustainability either in regard to the external environment of the firm or its

internal strength and weaknesses. Competitive Advantage as a construct has

been explained on the basis of value creating strategies, core competencies,

dynamic capabilities, knowledge based capabilities and resources, firm

resources, cost leadership, differentiated products and so on.

As per the need of the present study the relationship of competitive

advantage with resources is to be established in order to understand

performance of the firm. Thus in depths review of the literature for strategy,

resources and relationships with competitive advantage and its sustainability

is essential. These reviews will generate the insights to the building blocks

and foundations of relationships to be talked in this study.

To sum up the discussions till now on the reviewed literature, understanding

is built up on the concept of competitive advantage by various strategic

thinkers who have defined the same on the basis of strategies generating

values, superior skills and superior resources which are valuable, rareness,

inimitability and inability to be substituted. The resources and skills combine

into core competences and thus sustained competitive advantage can be

attained. Cost leadership and differentiation have been developed as sources

of competitive advantage. It has been understood that competitive advantage

depends on the match of internal capabilities and external circumstances. The

theory of RBV has been developed in order to understand competitive

advantage ultimately leading to firm performance. Many discussions have

been raised to answer the fundamental question of strategy research:

outperformance of other firms by some in the same business. And thus many


87

arguments have been raised in this regard. The performance variations have

explained in terms of resource heterogeneity. Utilization of RBV concept has

been done to understand relationships between resource, capabilities and

performance. Also resources and capabilities have been explained in terms of

SBUs and the difference in performance of these SBUs.

2.4 Conclusion and Research Gaps

The Indian literature on Automotive Industry has dealt comprehensively in

studying the nature of the sector, the growth aspects in pre and post

liberalization era, competitiveness in terms of native and foreign enterprises,

technological advancements, the utilization of various productivity measures,

economic reforms and so on; but any conceptual work regarding the

competitive advantage gained by firms in India with view of resources and

capabilities are not visible. The common approaches to strategy and its types

are evident in these works. Most of the studies on Indian scenario are based

on general observations, surveys and trends prevalent in the pre and post

liberalization era. But again nothing substantial is available with regards to

the study of competitive advantage yielding performance. The present study

focuses on the question of outperformance of firms by others in the same

business in terms of resource and capability utilizations. But most of the

literature available is not describing this basic theme of this study. There is

need to conceptually design a theory which explains the dynamics of

relationships between resources, capabilities and competitive advantage so

that heterogeneity in performance for the Indian Automotive companies can

be explained. There is need for analyzing the relationship between

competitive advantage and performance illustrated in a segment which has

seen drastic changes, which can be cultivated into a model depicting the

relations between resources, capabilities, competitive advantage ultimately

yielding performance with a resource based view of strategy, which is the

central theme of the present research study.


88

The Review up till now has giving a plateform on which the design of the

present research is taking shape. The constructs which are being used and

elaborated to develop desired relationship between resources, capabilities,

competitive advantage and performance have been defined and debated.

Evidence and illustrations from the literature are useful in setting up the need

and pattern of the present study. Empirical investigation is need of the hour

for the desired relationship in the context of Indian Automotive Companies.

A model to represent these relationships is will be taking shape with the

progress of empirical analyses of the data collected in regards of identifying

the resources, capabilities, and competitive advantage for the Indian

Automotive sector.

The body knowledge which is taking shape with the progress of the present

study is an attempt to generate insights to strategy research with a deeper

view to the resource based approach developing up in a theory on Indian

context, which portrays an industrial landscape which is consistently and

rapidly advancing and the study is based on a sector which is booming

consistently.

The study aims to make Resource based approach a more comprehensive in

the Indian strategy research and for practitioners a more useful tool to

identify, analyze and utilize resources and build up capabilities creating a

difference to have competitive advantage that can be reflected in final

performance. And hence Resource based theories due to their focus and

orientations become an appropriate approach for this study.

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