Thus far, it has been suggested that in order to understand sources of sustained competitive advantage, it is necessary to build a theoretical model that begins with the assumption that firm resources may be heterogeneous and immobile. Of course, not all firm resources hold the potential of sustained competitive advantages. To have this potential, a firm resource must have four attributes: (a) it must be valuable, in the sense that it exploits opportunities and/or neutralizes threats in a firm’s environment, (b) it must be rare among a firm’s current and potential competition, (c) it must be imperfectly imitable, and (d) it must be able to be exploited by a firm’s organizational processes. These attributes of firm resources can be thought of as indicators of how heterogeneous and immobile a firm’s resources are, and thus how useful these resources are for generating sus- tained competitive advantages. Each of these attributes of a firm’s resources is discussed in more detail below.
1. VALUABLE RESOURCES
Firm resources can only be a source of competitive advantage or sus- tained competitive advantage when they are valuable. As suggested earlier, resources are valuable when they enable a firm to conceive or implement strategies that improve its efficiency and effectiveness. The traditional ‘strengths–weaknesses–opportunities–threats’ model of firm performance suggests that firms are able to improve their performance only when their strategies exploit opportunities or neutralize threats. Firm attributes may have the other characteristics that could qualify them as sources of competitive advantage (e.g. rarity, inimitability, and organizational abilities/processes), but these attributes only become valuable resources when they exploit opportunities or neutralize threats in a firm’s environ- ment.
This analysis perfectly correlates with the definition of competitive advantage presented in Chapter 1. A valuable resource enables a firm to increase the economic value it creates by increasing the willingness of customers to pay, decreasing its costs, or both.
That firm attributes must be valuable in order to be considered as pos- sible sources of sustained competitive advantage points to an important complementarity between environmental models of competitive advan- tage and the resource-based model. These environmental models help isolate those firm attributes that exploit opportunities and/or neutralize threats. The resource-based model then suggests what additional char- acteristics these resources must possess if they are to generate sustained competitive advantage. Note, this means that the value of a firm’s resources needs to be evaluated within the context of the firm’s strategy and the specific market environment.
2. RARE RESOURCES
Valuable firm resources possessed by large numbers of competing or poten- tially competing firms cannot be sources of either a competitive advan- tage or a sustained competitive advantage. A firm enjoys a competitive advantage when it creates more economic value than the marginal firm in an industry. If a particular valuable firm resource is possessed by large numbers of firms, then each of these firms has the capability of exploiting that resource in the same way, thereby implementing a common strategy that gives no one firm a competitive advantage.
The same analysis applies to bundles of valuable firm resources used to conceive and implement strategies. Some strategies require a particular mix of physical, financial, human, and organizational capital resources for implementation. One firm resource required in the implementation of almost all strategies is managerial talent (Hambrick 1987). If this particular bundle of firm resources is not rare, then large numbers of firms will be able to conceive and implement the strategies in question, and these strategies will not be a source of competitive advantage, even though the resources in question may be valuable.
To observe that competitive advantages (sustained or otherwise) only accrue to firms that have valuable and rare resources is not to dismiss common (i.e. not rare) firm resources as unimportant. Instead, these valuable but common firm resources can help ensure a firm’s survival when they are exploited to create competitive parity in an industry (Barney 1989). Under conditions of competitive parity, though no one firm obtains a competitive advantage, firms do increase their probability of economic survival (Porter 1980; McKelvey 1982).
How rare a valuable firm resource must be in order to have the potential for generating a competitive advantage is a difficult question. It is not difficult to see that if a firm’s valuable resources are absolutely unique among a set of competing and potentially competing firms, those resources will generate at least a competitive advantage and may have the poten- tial of generating a sustained competitive advantage. However, it may be possible for a small number of firms in an industry to possess a particular valuable resource and still generate a competitive advantage. In general, as long as the number of firms that possess a particular valuable resource (or a bundle of valuable resources) is less than the number of firms needed to generate perfect competition dynamics in an industry, that resource has the potential of generating a competitive advantage.
3. IMPERFECTLY IMITABLE RESOURCES
It is not difficult to see that valuable and rare organizational resources may be a source of competitive advantage. Indeed, firms with such resources will often be strategic innovators, for they will be able to conceive and engage in strategies that other firms could either not conceive, or not implement, or both, because these other firms lacked the relevant firm resources. The observation that valuable and rare organizational resources can be a source of competitive advantage is another way of describing first- mover advantages accruing to firms with resource advantages.
However, valuable and rare organizational resources can only be sources of sustained competitive advantage if firms that do not possess these resources cannot obtain them by direct duplication or substitution. In language developed in Lippman and Rumelt (1982) and Barney (1986a, 1986b), these firm resources are imperfectly imitable. Why might a com- peting firm face a cost disadvantage in imitating a firm’s resources?
Firm resources can be imperfectly imitable (or costly to imitate) for one or a combination of three reasons: (a) the ability of a firm to obtain a resource is dependent on unique historical conditions, (b) the link between the resources possessed by a firm and a firm’s sustained competitive advan- tage is causally ambiguous, or (c) the resource generating a firm’s advantage is socially complex (Dierickx and Cool 1989). Each of these sources of the imperfect imitability of firm resources is examined below.
Unique historical conditions
Another assumption of most environmental models of firm competitive advantage, besides resource homogeneity and mobility, is that the perfor- mance of firms can be understood independent of the particular history and other idiosyncratic attributes of firms (Scherer 1980; Porter 1981). These researchers seldom argue that firms do not vary in terms of their unique histories, but rather that these unique histories are not relevant to understanding a firm’s performance (Porter 1980).
The resource-based theory of competitive advantage developed here relaxes this assumption. Indeed, this approach asserts that not only are firms intrinsically historical and social entities, but that their ability to acquire and exploit some resources depends on their place in time and space. Once this particular unique time in history passes, firms that do not have space- and time-dependent resources cannot obtain them and thus these resources are imperfectly imitable.
Resource-based theorists are not alone in recognizing the importance of history as a determinant of firm performance and competitive advan- tage. Traditional strategy researchers (e.g. Ansoff 1965; Stinchcombe 1965; Learned et al. 1969) often cited the unique historical circumstances of a firm’s founding, or the unique circumstances under which a new man- agement team takes over a firm, as important determinants of a firm’s long-term performance. In addition, several economists (e.g. David 1985; Arthur, Ermoliev, and Kaniovsky 1987) have developed models of firm performance that rely heavily on unique historical events as determi- nants of subsequent actions. Employing path-dependent models of eco- nomic performance (Arthur 1983, 1984a, 1984b; Arthur, Ermoliev, and Kaniovski 1994), these authors suggest that the performance of a firm does not depend simply on the industry structure within which a firm finds itself at a particular point in time, but also on the path a firm followed through history to arrive where it is. If a firm obtains valuable and rare resources because of its unique path through history, it will be able to exploit those resources in implementing value-creating strategies that can- not be duplicated by other firms, for firms without that particular path through history cannot obtain the resources necessary to implement the strategy.
The acquisition of all the types of firm resources examined in this chapter can depend on the unique historical position of a firm. A firm that locates its facilities on what turns out to be a much more valuable location than was anticipated when the location was chosen possesses an imperfectly imitable physical capital resource (Ricardo 1966). A firm with scientists who are uniquely positioned to create or exploit a significant scientific breakthrough may obtain an imperfectly imitable resource from the history-dependent nature of the scientist’s individual human capi- tal (Winter 1987; Burgelman and Maidique 1988). Finally, a firm with a unique and valuable organizational culture that emerged in the early stages of a firm’s history may have an imperfectly imitable advantage over firms founded in another historical period, where different (and perhaps less valuable) organizational values and beliefs come to dominate (Zucker 1977; Barney 1986b).
The literature in strategic management is infused with examples of firms whose unique historical position endowed them with resources that are not controlled by competing firms and that cannot be imitated (e.g. Caterpillar—Rukstad and Horn 1989; Lucent Technologies—Kupfer 1997). These examples are the case analyses that have dominated teaching and research for so long in the field of strategic management (Learned et al. 1969; Miles and Cameron 1982). In addition, the impact of history on firm performance has been studied systematically (Collins and Porras 1997). There are at least two ways that unique historical conditions can give a firm a sustained competitive advantage. First, it may be that a particular firm is the first in an industry to recognize and exploit an opportunity, and being first gives the firm a first-mover advantage. Second, when events early in the evolution of a process have significant effects on subsequent events, path dependence allows a firm to gain a competitive advantage in the current period based on the acquisition and development of resources in earlier periods.
Causal ambiguity
Unlike the relationship between a firm’s unique history and the imitability of its resources, the relationship between the causal ambiguity of a firm’s resources and imperfect imitability has received systematic attention in the strategic management and related literatures (Alchian 1950; Mancke 1974; Lippman and Rumelt 1982; Rumelt 1984; Barney 1986b; Reed and DeFillippi 1990). In this context, causal ambiguity exists when the link between the resources controlled by a firm and a firm’s sustained competi- tive advantage is not understood or understood only very imperfectly.
When the link between a firm’s resources and its sustained competitive advantage is poorly understood, it is difficult for firms that are attempting to duplicate a successful firm’s strategies through imitation of its resources to know which resources it should imitate. Imitating firms may be able to describe some of the resources controlled by a successful firm. However, under conditions of causal ambiguity, it is not clear that the resources that can be described are the same resources that generate a sustained competi- tive advantage, or whether that advantage reflects some other nondescribed firm resource. As suggested by Demsetz (1973), sometimes it is difficult to understand why one firm consistently outperforms other firms. Causal ambiguity is at the heart of this difficulty. In the face of such causal ambi- guity, imitating firms cannot know the actions they should take in order to duplicate the strategies of firms with a sustained competitive advantage.
To be a source of sustained competitive advantage, both the firms that possess resources that generate a competitive advantage and the firms that do not possess these resources but seek to imitate them, must be faced with the same level of causal ambiguity (Lippman and Rumelt 1982). If firms that control these resources have a better understanding of their impact on competitive advantage than firms without these resources, then firms without these resources can engage in activities to reduce their knowledge disadvantage. They can do this, for example, by hiring away well-placed knowledgeable managers in a firm with a competitive advantage or by engaging in a careful systematic study of the other firm’s success. Although acquiring this knowledge may take some time and effort, once knowledge of the link between a firm’s resources and its ability to implement certain strategies is diffused throughout competing firms, causal ambiguity no longer exists and thus cannot be a source of imperfect imitability. In other words, if a firm with a competitive advantage understands the link between the resources it controls and its advantages, then other firms can also learn about that link, acquire the necessary resources (assuming they are not imperfectly imitable for other reasons), and implement the relevant strate- gies. In such a setting, a firm’s competitive advantages are not sustained because they can be duplicated.
On the other hand, when a firm with a competitive advantage does not understand the source of its competitive advantage any better than firms without this advantage, that competitive advantage may be sustained because it is not subject to imitation (Lippman and Rumelt 1982). Ironi- cally, in order for causal ambiguity to be a source of sustained competitive advantage, all competing firms must have an imperfect understanding of the link between the resources controlled by a firm and a firm’s competitive advantages. If one competing firm understands this link and no others do, in the long run this information will be diffused through all competi- tors, thus eliminating causal ambiguity and imperfect imitability based on causal ambiguity.
At first, it may seem unlikely that a firm with a sustained competitive advantage will not fully understand the source of that advantage. However, given the very complex relationship between firm resources and competi- tive advantage, such an incomplete understanding is not implausible. The resources controlled by a firm are very complex and interdependent. Often, they are implicit, taken for granted by managers, rather than being subject to explicit analysis (Polanyi 1962; Nelson and Winter 1982; Winter 1988). Numerous resources, taken by themselves or in combination with other resources, may yield sustained competitive advantage. Although managers may have numerous hypotheses about which resources generate their firm’s advantages, it is rarely possible to rigorously test these hypotheses. As long as numerous plausible explanations of the sources of sustained competitive advantage exist within a firm, the link between the resources controlled by a firm and sustained competitive advantage remains some- what ambiguous, and thus which of a firm’s resources to imitate remains uncertain.
Three situations in which managers may not fully understand their sources of competitive advantage include: (a) when the resources and capabilities are taken-for-granted organizational characteristics or invisible assets (Itami 1987) such as teamwork among top mangers, organizational culture, relationships with suppliers and customers; (b) when managers are unable to evaluate which of their resources and capabilities, alone or in combination, actually create the competitive advantage; and (c) when the resources and capabilities are complex networks of relationships between individuals, groups, and technology, identified by Dierickx and Cool (1989) as interconnectedness of asset stocks and asset mass efficien- cies. Whenever the sources of competitive advantage are widely diffused across people, locations, and processes in a firm, those sources of compet- itive advantage will be difficult to identify and costly to imitate.
Social complexity
A third reason that a firm’s resources may be imperfectly imitable is that they may be very complex social phenomena, beyond the ability of firms to systematically manage and influence. When competitive advantages are based in such complex social phenomena, the ability of other firms to imitate these resources is significantly constrained.
A wide variety of firm resources may be socially complex. Examples include the interpersonal relations among managers in a firm (Hambrick 1987), a firm’s culture (Barney 1986b), a firm’s reputation among sup- pliers (Porter 1980), and customers (Klein, Crawford, and Alchian 1978; Klein and Lefler 1981). Note that in most of these cases it is possible to specify how these socially complex resources add value to a firm. Thus, there is little or no causal ambiguity surrounding the link between these firm resources and competitive advantage. However, understanding that, say, an organizational culture with certain attributes or quality relations among managers can improve a firm’s efficiency and effectiveness does not necessarily imply that firms without these attributes can engage in systematic efforts to create them (Barney 1986b; Dierickx and Cool 1989). Such social engineering may be, for the time being at least, beyond the capabilities of most firms (Porras and Berg 1978b; Barney 1986b). To the extent that socially complex firm resources are not subject to such direct management, these resources are imperfectly imitable.
Note that complex physical technology is not included in this category of sources of imperfectly imitable resources. In general, physical technology, whether it takes the form of machine tools or robots in factories (Hayes and Wheelwright 1984) or complex information management systems (Howell and Fleishman 1982), is by itself typically imitable. If one firm can purchase these physical tools of production and thereby implement some strategies, then other firms should also be able to purchase these physical tools, and thus such tools should not be a source of sustained competitive advantage.
On the other hand, the exploitation of physical technology in a firm often involves the use of socially complex firm resources. Several firms may all possess the same physical technology, but only one of these firms may possess the social relations, culture, traditions, etc. to fully exploit this tech- nology in implementing strategies (Wilkins 1989). If these complex social resources are not subject to imitation (and assuming they are valuable and rare and no substitutes exist), these firms may obtain a sustained compet- itive advantage from exploiting their physical technology more completely than other firms, even though competing firms do not vary in terms of the physical technology they possess. These issues are examined further in Chapter 7.
Substitutability
History, causal ambiguity, and social complexity can all increase the cost of another firm duplicating the resources of a particular firm. However, if substitutes for these resources exist, and if these substitutes are themselves not costly to duplicate, then firms without these resources can imitate their effects by substituting resources they can duplicate at low cost. Two valu- able firm resources (or two bundles of firm resources) are substitutes when they are strategically equivalent, that is, when they each can be exploited separately to implement the same strategies.
Suppose that one of these valuable firm resources is rare and imperfectly imitable, but the other is not. Firms with this first resource will be able to conceive and implement certain strategies. If there were no strategically equivalent firm resources, these strategies would generate a sustained com- petitive advantage (because the resources used to conceive and implement them are valuable, rare, and imperfectly imitable). However, that there are strategically equivalent resources suggests that other current or potentially competing firms can implement the same strategies, but in a different way, using different resources. If these alternative resources are either not rare or imitable, then numerous firms will be able to conceive and implement the strategies in question and those strategies will not generate a sustained competitive advantage. This will be the case even though one approach to implementing these strategies exploits valuable, rare, and imperfectly imitable firm resources.
Substitutability can take at least two forms. First, though it may not be possible for a firm to imitate another firm’s resources exactly, it may be able to substitute a similar resource that enables it to conceive and implement the same strategies. For example, a firm seeking to duplicate the competitive advantages of another firm by imitating that other firm’s high-quality top management team will often be unable to copy that team exactly (Hambrick 1987). However, it may be possible for this firm to develop its own unique top management team. Although these two teams will be different (different people, different operating practices, a different history, etc.), they may likely be strategically equivalent and thus be substi- tutes for one another. If different top management teams are strategically equivalent and if these substitute teams are common or highly imitable, then a high-quality top management team is not a source of sustained competitive advantage even though a particular management team of a particular firm is valuable, rare, and imperfectly imitable.
Second, very different firm resources can also be strategic substitutes. For example, managers in one firm may have a very clear vision of the future of their company because of a charismatic leader in their firm (Zucker 1977). Managers in competing firms may also have a very clear vision of the future of their companies, but this common vision may reflect these firms’ systematic, companywide strategic planning process (Pearce, Freeman, and Robinson 1987). From the point of view of managers having a clear vision of the future of their company, the firm resource of a charismatic leader and the firm resource of a formal planning system may be strategically equiv- alent and thus substitutes for one another. If large numbers of competing firms have a formal planning system that generates this common vision (or if such a formal planning is highly imitable), then firms with such a vision derived from a charismatic leader will not have a sustained competitive advantage even though the firm resource of a charismatic leader is probably rare and imperfectly imitable.
Of course, the strategic substitutability of firm resources is always a matter of degree. It is the case, however, that substitute firm resources need not have exactly the same implications for an organization in order for those resources to be equivalent from the point of view of the strategies that firms can conceive and implement. If enough firms have these valuable substitute resources (i.e. they are not rare), or if enough firms can acquire them (i.e. they are imitable), then none of these firms (including firms whose resources are being substituted for) can expect to obtain a sustained competitive advantage.
4. ORGANIZATION
Valuable, rare, and imitable resources can only be a source of sustained competitive advantage if the firm is organized to exploit the potential offered by these resources. Organizational processes provide the fourth condition necessary for realization of sustainable competitive advantage. Numerous components of a firm’s organization influence its ability to exploit the full competitive potential of its resources and capabilities, including its formal reporting structure, its explicit management control systems, and its compensation policies. These components are often called complementary resources and capabilities as they have limited ability to generate competitive advantage in isolation. However, in combination with other resources and capabilities they can enable a firm to realize its full potential for competitive advantage.
For example, much of Caterpillar’s sustained competitive advantage in the heavy-construction industry can be traced to its becoming the primary supplier of this equipment to the Allied forces in World War II. However, if Caterpillar’s management had not taken advantage of this opportunity by implementing a global formal reporting structure, global inventory and other control systems, and compensation policies that created incentives for employees to work around the world, then Caterpillar’s potential for competitive advantage would not have been fully realized. By themselves, these attributes of Caterpillar’s organization could not be a source of competitive advantage—that is, adopting a global organizational form was relevant for Caterpillar only because it was pursuing a global opportunity. However, this organization was essential for Caterpillar to realize its full competitive advantage potential.
In a similar way, much of Wal-Mart’s continuing competitive advantage in the discount retailing industry can be attributed to its early entry into rural markets in the southern United States. However, to fully exploit this geographic advantage, Wal-Mart needed to implement appropriate report- ing structures, control systems, and compensation policies. One compo- nent of Wal-Mart’s organization—its point-of-purchase inventory control system—is being imitated by K-Mart, and thus, by itself, is not likely to be a source of sustained competitive advantage. However, this inventory control system has enabled Wal-Mart to take full advantage of its rural locations by decreasing the probability of stock outs in those locations.
Having an appropriate organization in place has enabled Caterpillar and Wal-Mart to realize the full competitive advantage potential of their resources and capabilities. Having an inappropriate organization in place prevented Xerox from taking full advantage of some of its most critical valuable, rare, and costly to imitate resources and capabilities.
Through the 1960s and early 1970s, Xerox invested in a series of very innovative technology development research efforts. Xerox managed this research effort by creating a stand-alone research center in Palo Alto (Palo Alto Research Center—PARC) and assembling a large group of highly creative and innovative scientists and engineers to work there. Left to their own devices, these scientists and engineers at Xerox PARC developed an amazing array of technological innovations—the personal computer, the ‘mouse’, Windows-type software, the laser printer, the ‘paperless office’, Ethernet, and so forth. In retrospect, it is clear that the market potential of these technologies was enormous. Moreover, because they were developed at Xerox PARC, they were rare. Xerox may have been able to gain some important first-mover advantages if the organization had been able to translate these technologies into products, thereby increasing the cost to other firms of imitating these technologies.
Xerox possessed very valuable, rare, and costly to imitate resources and capabilities in the technologies developed at Xerox PARC, but did not have the organization in place to take advantage of these resources. No structure existed whereby Xerox PARC innovations could become known to managers at Xerox. Indeed most Xerox managers—even many senior managers—were unaware of these technological developments through the mid-1970s. Once they did become aware of them, very few of the technolo- gies survived Xerox’s highly bureaucratic product development process, a process where product development projects were divided into hundreds of minute tasks and progress in each task was reviewed by dozens of large committees. Even innovations that survived the product development process were not exploited by Xerox managers because management com- pensation at Xerox depended exclusively on maximizing current revenue. Short-term profitability was relatively less important in compensation cal- culations and the development of markets for future sales and profitability was essentially irrelevant. Xerox’s formal reporting structure, its explicit management control systems, and its compensation policies were all incon- sistent with exploiting the valuable, rare, and costly to imitate resources developed at Xerox PARC. Not surprisingly, Xerox failed to exploit any of the potential sources of sustained competitive advantage.
Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.