Friday, September 5, 2014

How to tell if your resources give you a sustainable competitive advantage

According to the RBV view of strategy a resource can give you a sustainable competitive advantage only if the above conditions are met.

Some examples from HBS:

Valuable resources can take a variety of forms, including some overlooked by the narrower conceptions of core competence and capabilities. They can be physical, like the wire into your house. Potentially, both the telephone and cable companies are in a very strong position to succeed in the brave new world of interactive multimedia because they own the on-ramp to the information superhighway. Or valuable resources may be intangible, such as brand names or technological know-how. The Walt Disney Company, for example, holds a unique consumer franchise that makes Disney a success in a slew of businesses, from soft toys to theme parks to videos. Similarly, Sharp’s knowledge of flat-panel display technology has enabled it to dominate the $7 billion worldwide liquid crystal display (LCD) business. Or the valuable resource may be an organizational capabilityembedded in a company’s routines, processes, and culture. Take, for example, the skills of the Japanese automobile companies—first in low-cost, lean manufacturing; next in high-quality production; and then in fast product development. These capabilities, built up over time, transform otherwise pedestrian or commodity inputs into superior products and make the companies that have developed them successful in the global market.

4 comments:

  1. Froeb et al. makes a great case for this. Warren Buffet is quoted as saying “Sustainable competitive advantage” to the question of what is the most important factor he uses when evaluating potential companies to purchase. Interestingly enough, I was doing some research on this topic of sustainable competitive advantage and discovered that it may be dead.

    McGrath’s book, The End of Competitive Advantage (2013) makes the case that sustainable competitive advantage is not sustainable – rather it is transient. Given what seems is the faster rate of cycle times of change this point has some weight. McGrath makes the case that given the speed of change that management must consider creating new strategy playbooks that reflect the reality of the pace of change.

    This makes sense from several contexts. First, the speed if change – whether new product or service development to the creation of entirely new competitors – requires a different approach to strategy. Secondly, the concept of sustainability implies to some degree that you can keep an advantage alive – and that creates a lack of inertia as McGrath put’s it. “It (sustainable advantage as a concept) allows people to fall into routines and habits of mind” (n.p.).

    Third, new competitors can emerge from places totally unexpected and unforeseen. Just ask Border’s how it feels never to see or respond to Amazon or the rise of digital computer pads. For some time Borders certainly had an advantage in terms of distribution via its many hundreds of brick and mortar stores located throughout the United States.

    Ask Microsoft how it feels to have to compete head on with the likes of Amazon, Apple and Google in the digital space.

    I think the idea that the speed of change and the ability of competitors to commoditize any sustainable competitive advantage makes any advantage only transient. Companies must move faster and recognize that holding onto their current sustainable competitive advantages is fleeting. Instead, they should be looking at creating the next generation of sustainable advantages.

    Dave

    Reference:

    Denning, S. (2013, June 2). It’s Official! The End Of Competitive Advantage. Forbes. Retrieved from http://www.forbes.com/sites/stevedenning/2013/06/02/its-official-the-end-of-competitive-advantage/

    Froeb, L.M., McCann, B.T., Shor, M., & Ward, M.R. (2014). Managerial Economics: A Problem Solving Approach. Mason, OH: South-Western Cengage Learning.


    ReplyDelete
  2. Sustaining competitive advantage can be elusive. Throughout my career, I have encountered this phenomenon in my own business. Unless you are ahead of the curve, losing your competitive advantage can literally happen overnight. Take the example of the technical recruiting industry. Pre-2000, this industry was explosive. IBM was a client in my firm. We were one of three firms supplying Business Management executives to one of their offices in Cambridge, MA. Making placements of full-time MBA, Ph.D. candidates was relatively simple if we found the right candidate.

    However, almost overnight, IBM outsourced this level of the business and created their Global Contracting Division. This decision was probably in the play at IBM for some time, but when the news hit the consulting firms, we no longer had a permanent placement business. That division of our business was dead. Switching to a contractor based philosophy required capital that was not part of our business plan. We lost our competitive advantage the therefore that business.

    This illustrates why a business can never rest and believe that things will be running smoothly and profitably forever. Businesses must be vigilant to learn what is coming next and plan for the industry to change. We see how quickly industries, funding/lending, supply markets can change quickly. If businesses are not ready to adapt, there is not even competition, let along competitive advantage.

    ReplyDelete
  3. “The resource-based view (RBV) is a model that sees resources as key to superior firm performance. If a resource exhibits VRIO attributes, the resource enables the firm to gain and sustain competitive advantage.” Froeb et al suggest that in the RBV model, resources are given the major role in helping companies to achieve higher organizational performance. There are two types of resources: tangible and intangible. Tangible assets are physical things. Land, buildings, machinery, equipment and capital – all these assets are tangible. Physical resources can easily be bought in the market so they confer little advantage to the companies in the long run because rivals can soon acquire the identical assets. Intangible assets are everything else that has no physical presence but can still be owned by the company. Brand reputation, trademarks, intellectual property are all intangible assets. Unlike physical resources, brand reputation is built over a long time and is something that other companies cannot buy from the market. Intangible resources usually stay within a company and are the main source of sustainable competitive advantage.
    According to Barney, J. B. (1991,) VRIO analysis asks four questions if a resource is: Valuable? Rare? Costly to Imitate? And is a firm organized to capture the value of the resources? A resource or capability that meets all four requirements can bring sustained competitive advantage for the company. The two critical assumptions of RBV are that resources must also be heterogeneous and immobile. Heterogeneous. The first assumption is that skills, capabilities and other resources that organizations possess differ from one company to another. If organizations would have the same amount and mix of resources, they could not employ different strategies to outcompete each other. What one company would do, the other could simply follow and no competitive advantage could be achieved. This is the scenario of perfect competition, yet real world markets are far from perfectly competitive and some companies, which are exposed to the same external and competitive forces (same external conditions), are able to implement different strategies and outperform each other. Therefore, RBV assumes that companies achieve competitive advantage by using their different bundles of resources. The competition between Apple Inc. and Samsung Electronics is a good example of how two companies that operate in the same industry and thus, are exposed to the same external forces, can achieve different organizational performance due to the difference in resources. Apple competes with Samsung in tablets and smartphones markets, where Apple sells its products at much higher prices and, as a result, reaps higher profit margins. Why Samsung does not follow the same strategy? Simply because Samsung does not have the same brand reputation or is capable to design user-friendly products like Apple does. Immobile, is that resources are not mobile and do not move from company to company, at least in short-run. Due to this immobility, companies cannot replicate rivals’ resources and implement the same strategies. Intangible resources, such as brand equity, processes, knowledge or intellectual property are usually immobile.
    Luke, F., McCann, B, Shor, M., & Ward, M. (2014). Managerial Economics; A Problem Solving Approach (3rd ed., p. 87). Mason: South-Western Cengage Learning

    http://www.strategicmanagementinsight.com/tools/vrio.html

    http://www.strategicmanagementinsight.com/topics/resource-based-view.html

    ReplyDelete
  4. Froeb states, “According to the RBV view of strategy, a resource can give you a sustainable competitive advantage only if certain conditions are met. The resource must be valuable, rare, costly to imitate, and the firm must be organized to capture the value of the resource.”

    In an article I recently read for another course I am taking, Grant states, “designing strategy around the most critically important resources and capabilities may imply that the firm limits its strategic scope to those activities where it possesses a clear competitive advantage”. He goes on to say, “most research into the strategic implications of the firm's internal environment has been concerned with issues of strategy implementation and analysis of the organizational processes through which strategies emerge” (Grant, 1991).

    In a separate related article, Porter is referenced in the same manner Froeb mentions him. The accumulation of resources is part of the implementation of the strategy dictated by conditions and constraints in the external environment. In opposition, the resource-based view suggests that firm resources provide the basis for strategy: strategy should allow the firm to best exploit its resources relative to the competitive environment. The resources and the competitive environment condition firms’ strategy. The firm strategy and performance in turn affect the competitive environment and resources, and all these changes generate new information which in turn creates new learning opportunities and may lead to the creation and development of new resources (Bridoux, n.d.).

    In turn, in order to stay ahead of one’s competition, it is important to adopt one of the three basic strategies: cost reduction, product differentiation, or the reduction in the intensity of the competition (Froeb, 2014).

    Bridoux, F. (n.d.) A Resource Based Approach to Performance and Competition: An Overview of the Connections between Resources and Competition. Institut d’Administration et de Gestion, Universit√© catholique de Louvain, Belgium

    Froeb, L. (2014). How to Tell if Your Resources Give You a Sustainable Competitive Advantage. Managerial Economics: Economic Analysis of Business Practice. Retrieved from: https://managerialecon.blogspot.com/search/label/10.%20Strategy-the%20quest%20to%20slow%20profit%20erosion

    Froeb, L.M., McCann, B.T., Shor, M., & Ward, M.R. (2016). Managerial Economics, 4th Edition. Boston, MA: Cengage Learning.

    Grant, R. (1991). The Resource Based Theory of Competitive Advantage: Implications for Strategy Formulation. California Management Review 33(3), 114-135.

    ReplyDelete