Resource Based View

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Alternative Model of Superior Returns
Industrial Organization Model
1
Resource-Based Model
2
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I/O Model of Superior Returns
The Industrial Organization Model suggests that
above-average returns for any firm are largely
determined by characteristics outside the firm.
The I/O model largely focuses on industry
structure or attractiveness of the external
environment rather than internal characteristics
of the firm.
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I/O Assumptions

• Environment determines strategy
• Firms possess similar resources and thus pursue
  similar strategies.
• Resources are mobile
• Decision-makers rational act in the best
  interests of the firm.

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I/O Model of Superior Returns
Action required
External Environment
Study the external environment, especially the
industry environment.
General Environment
Industry Environment
Competitive Environment
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I/O Model of Superior Returns
Action required
Locate an industry with high potential for
above-average returns.
An Attractive Industry
An industry whose structural characteristics
suggest above-average returns are possible
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I/O Model of Superior Returns
Action required
Identify strategy called for by the industry to
earn above-average returns.
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I/O Model of Superior Returns
Action required
Develop or acquire assets and skills needed to
implement the strategy.
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I/O Model of Superior Returns
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I/O Model of Superior Returns
Action required
Maintain selected strategy in order to outperform
industry rivals.
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Resource Based View

• Introduction
• Assumptions
• Firms are unique bundles of resources
• Resources are relatively immobile

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RBV Concepts

• Resource
• Stocks
• Flows
• Capability
• Capacity
• Durability
• Specificity

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Value Chain Analysis
helps to identify which resources and
capabilities can add value
Firm Infrastructure
Human Resource Management
Support Activities
MARGIN
Technological Development
Procurement
Service
Inbound Logistics
Outbound Logistics
Marketing Sales
MARGIN
Operations
Primary Activities
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The Value Chain System
A Companys Own Value Chain
Upstream Value Chains
Downstream Value Chains
Internally Performed Activities, Costs, Margins
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The Value Chain System

• Cost competitiveness -- comparing costs along the
  industrys value chain
• Suppliers value chains are relevant because
• Costs, quality, and performance of inputs
  influence a firms own costs and product
  performance
• Forward channel allies value chains are relevant
  because
• Forward channel allies costs and margins are
  part of price paid by ultimate end-user
• Activities performed affect end-user satisfaction

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Example Key Value Chain Activities
SOFT DRINK INDUSTRY

• Processing of basic ingredients
• Syrup manufacture
• Bottling and can filling
• Wholesale distribution
• Retailing

Kroger
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Competencies, Core Competencies, and
Distinctive Competencies

• Competencies Internal capabilities that a
  company performs better than other capabilities.
• Core competencies Competencies that are
  central, not peripheral, to a companys strategy
  and operations.
• Distinctive competencies Competencies that are
  sources of sustainable competitive advantage.

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Strategic Assets Distinctive Competencies

• Characteristics
• In Demand (valuable)
• Scarce (rare)
• Difficult costly
• to imitate
• Appropriability
• Nonsubstitutable

• Sources of Economic Rents
• Ricardian Rents
• Schumpeterian Rents

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RC Characteristics and Implications
Resource R Capability C AIR Average
Industry Returns Assumption Rents are
appropriated by the firm.
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Examples Distinctive Competencies

• Sharp Corporation
• Competencies in flat-panel display technology
• Toyota, Honda, Nissan
• Low-cost, high-quality manufacturing capabilities
  and short design-to-market cycles
• Intel
• Capability to design and manufacture ever
  more powerful microprocessors for
  PCs

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Practical Implications I

• Inventory Analysis of Resources Capabilities
• I.D. strategic assets distinctive competencies
• Invest in / Upgrade SA DC
• ex ante identification
• entrenchment vs. flexibility
• ways to upgrade
• Rebundle / Reconfigure
• Leverage SA DC

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Practical Implications II

• Assessing the Firms Relative Strengths
• Strategic Cost Analysis
• Managing the Value Chain System

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Assessing a Companys Competitive Strength
versus Key Rivals

• 1. List industry key success factors and other
  relevant measures of competitive strength
• 2. Rate firm and key rivals on each factor using
  rating scale of 1 - 10 (1 weak 10 strong)
• 3. Decide whether to use a weighted or
  unweighted rating system
• 4. Sum individual ratings to get overall measure
  of competitive strength for each rival
• 5. Determine whether the firm enjoys a
  competitive advantage or suffers from competitive
  disadvantage

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An Unweighted Competitive Strength Assessment
KSF/Strength Measure
ABC Co.
Rival 1
Rival 2
Rival 3
Rival 4
Quality/product performance
8
5
10
1
6
Reputation/image
8
7
10
1
6
Manufacturing capability
2
10
4
5
1
Technological skills
10
1
7
3
8
Dealer network/distribution
9
4
10
5
1
New product innovation
9
4
10
5
1
Financial resources
5
10
7
3
1
Relative cost position
5
10
3
1
4
Customer service capability
5
7
10
1
4
Overall strength rating
61
58
71
25
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Rating Scale 1 Very weak 10 Very strong
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A Weighted Competitive Strength Assessment
KSF/Strength Measure
Rival 1
Rival 2
ABC Co.
Rival 3
Rival 4
Weight
Quality/product performance
5/0.50
10/1.00
8/0.80
1/0.10
6/0.60
0.10
Reputation/image
7/0.70
10/1.00
8/0.80
1/0.10
6/0.60
0.10
Manufacturing capability
10/1.00
4/0.40
2/0.20
5/0.50
1/0.10
0.10
Technological skills
1/0.05
7/0.35
10/0.50
3/0.15
8/0.40
0.05
Dealer network/distribution
4/0.20
10/0.50
9/0.45
5/0.25
1/0.05
0.05
New product innovation
4/0.20
10/0.50
9/0.45
5/0.25
1/0.05
0.05
Financial resources
10/1.00
7/0.70
5/0.50
3/0.30
1/0.10
0.10
Relative cost position
10/3.50
3/1.05
5/1.75
1/0.35
4/1.40
0.35
Customer service capability
7/1.05
10/1.50
5/0.75
1/0.15
4/1.60
0.15
Rating Scale 1 Very weak 10 Very strong
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Why Do a Competitive Strength Assessment ?

• Reveals firms competitive position
• Pinpoints the companys competitive strengths and
  weaknesses
• Identifies competitive advantage, parity, or
  disadvantage
• Identifies possible offensive attacks
• Identifies possible defensive actions

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Strategic Cost Analysis

• Analyze firms costs relative to rivals
• Compare firms costs activity by activity against
  costs of key rivals
• From raw materials purchase to
• Price paid by ultimate customer
• Pinpoints which internal activities
  are sources of cost advantage
  or disadvantage

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Activity-Based Costing A Key Tool in Strategic
Cost Analysis

• Compare companys costs with those of rivals
  activity-by-activity--from one end of the value
  chain to the other
• This requires accounting data that measures the
  cost of each value chain activity
• Activity-based accounting systems provide a way
  of measuring costs for each relevant value chain
  activity

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Traditional Cost Accounting vs.
Activity-Based Costing
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Benchmarking the Costs ofKey Value Chain
Activities

• Cross-company comparisons of how well activities
  are performed
• Purchase of materials
• Payment of suppliers
• Management of inventories
• Training of employees
• Processing of payrolls
• Getting new products to market
• Performance of quality control
• Filling and shipping of customer orders

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Determining Cost Competitiveness

• Cost competitiveness comes from managing the
  value chain system better than competitors
• Three areas contribute to cost differences
• 1. Suppliers activities
• 2. The companys own internal activities
• 3. Forward channel activities

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Correcting Supplier-Related Cost
Disadvantages Options

• Negotiate more favorable prices with suppliers
• Work with suppliers to help them achieve lower
  costs
• Integrate backward
• Use lower-priced substitute inputs
• Do a better job of managing linkages between
  suppliers value chains and firms own chain
• Make up difference by initiating cost savings in
  other areas of value chain

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Correcting Forward Channel Cost
Disadvantages Options

• Push for more favorable terms with distributors
  and other forward channel allies
• Work closely with forward channel allies and
  customers to identify win-win opportunities to
  reduce costs
• Change to a more economical distribution strategy
• Make up difference by initiating cost savings
  earlier in value chain

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Correcting Internal Cost Disadvantages Options

• Reengineer high-cost activities or business
  processes
• Eliminate some cost-producing activities
  altogether by revamping value chain system
• Relocate high-cost activities to lower-cost
  geographic areas
• See if high-cost activities can be performed
  cheaper by outside vendors/suppliers
• Invest in cost-saving technology
• Simplify product design
• Make up difference by achieving savings in
  backward or forward portions of value chain system