and development expertise, customer service, and high-quality manufacturing. Skills, by contrast, are more specific relating to narrowly defined activities such as ...
resource-based view John McGee
THE RESOURCE-BASED VIEW IN THEORY Economists see the firm as a bundle of productive resources where resources are defined as inputs into the firm’s operations so as to produce goods and services. In this view, resources are generic and specific categories are not suggested. However, typical examples include patents, capital equipment, and skilled and unskilled human resources. Strategists go further and distinguish capabilities from resources. A capability is the ability to perform a task or activity that involves complex patterns of coordination and cooperation between people and other resources. Capabilities would include research and development expertise, customer service, and high-quality manufacturing. Skills, by contrast, are more specific relating to narrowly defined activities such as typing, machine maintenance, and book-keeping. Strategists are interested in those resources and capabilities that can earn rents (a surplus of revenue over cost). These collectively are known as strategic assets or core competences and are a subset of, but distinct from, those other resources and capabilities that do not distinctively support the competitive advantage. The strategic task for the firm is to sustain these rent streams over time by creating and protecting the competitive advantage and the strategic assets that together underpin them. The inherent value of the strategic assets for the firm depends on the ways in which the firm combines, coordinates, and deploys these assets in concert the with other firm-specific and more generic resources and capabilities. The internal economy of the firm can be seen as sets of discrete activities (e.g., a product line), each of which leads to market positions and each of which is supported by asset of resources and capabilities. Similar activities (e.g., the Ford Mondeo and Ford Focus product lines) share some common strategic assets and some common generic assets. This sharing can lead to economies of scale (if different components share the same production line), to economies of scope (where products might go through
common distribution channels), and experience effects. Complementary activities require dissimilar sets of strategic assets, which would then require degrees of coordination (e.g., marketing activities and production activities). The skills of coordination and internal cooperation are, in fact, high-level capabilities with considerable strategic significance. In the real world of uncertainty and imperfect information, the firm may have (and usually does have) considerable problems in knowing which particular configurations of its strategic assets will maximize profits. Managers do not have perfect knowledge of future states of the world, of alternative actions that could be taken, nor of the payoffs from adopting various alternatives. Moreover, the way a manager chooses to allocate resources will be a function of past personal experience, the firm’s experience, values, biases, and personality. Accordingly, even if two managers were given identical bundles of resources, they would use them in different ways. The result is that a firm’s set of resources and capabilities will diverge from those of its competitors over time. Managers in competing firms in the same markets do not face the same sets of choices – rather they have different menus with different choices. The future, as firms see it, is to a greater or lesser degree uncertain and unknowable and their capacities for addressing the unknowable are diverse. Furthermore, no amount of information gathering can resolve this fundamental uncertainty of what the future will hold. Thus, strategy making is a long way from the simplistic assumptions of the economic model. Strategies tend to be unique and idiosyncratic, and simplistic theories for success are usually “magic theories,” that is, theories that explain everything but predict nothing. Nor are there simple rules for riches, that is, there are no automatic rules that provide benefits in the long run. This means that strategic management is not captured in the form of a strategic theory of the firm in a way that enables equations to be identified, data collected, analyzed, and simple rules be inferred. Strategic management is much more eclectic and diverse. Contexts external and internal to the firm are highly idiosyncratic. This places a premium on the ability to diagnose
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper. Copyright © 2014 John Wiley & Sons, Ltd.
2 resource-based view Capabilities Investment programs
Core competences
Positional advantage
Superior value to customers
Resources
Financial capacity
Stakeholder value
Superior returns
Figure 1 Competitive advantage and core competence.
situations and formulate options. The specific routes to high performance are many and varied and not readily susceptible to simple generalizations. This goes some way to explaining why the resource-based view (RBV) is widely seen as lacking specificity and definable concepts, and having no traceable connection to real performance improvements.
THE LANGUAGE OF THE RBV: WHAT IS CORE COMPETENCE? We introduce the RBV with Figure 1. The top line of the diagram shows how the firm’s investment programs are directed toward the creation and development of resources and capabilities, and that these underpin the positional advantage from which superior value can be delivered to customers. The bottom line shows the value and financial consequences in terms of the capacity of the firm to finance its investment programs. The RBV focuses on the resources and capabilities of the firm, asserting that it is the distinctiveness of these that enables sustainable positional advantages to be constructed. The added element in this diagram is the presence of core competences as representing those resources and capabilities that are distinctive to the firm. As a result, competitive advantage is seen as the joint product of core competences and positional advantage. What many writers observe is that imperfections in the resource and capability markets are more in number and larger in size than those in product markets. This places the burden on firms to pay attention to the underpinnings of competitive advantage
in resource and capability terms. What many writers have also observed is that markets are changeable and even volatile, whereas it is quite difficult to get firms to change their internal cultures and processes quickly enough to keep pace with market changes. Here we follow Grant’s (1991, 2011) lead in using “resources” to describe inputs that can, in general, be purchased on open markets and customized for use by the purchasers. Thus, production capacity might be generally available but will be configured for specific use by each purchaser. The activities of individual purchasers may lead to imperfections in supply markets. For example, a company may seek to monopolize certain raw materials through acquisition or maybe through offering longterm supply contracts. However, on their own, few resources are immediately productive. By contrast, the “capabilities” described here are firm specific. They are developed internally against the specific needs and ambitions of each company. They often depend on tacit knowledge, are path dependent in that they emerge and develop over time, and are not in the form of assets that can be traded. These resources and capabilities have individual characteristics, but a large part of their value-in-use to a firm is related to their configuration and their coordination. Table 1 compares typical resources and typical capabilities. The distinctiveness of the firm’s specific set of resources and capabilities is a function of which resources to acquire and what capabilities to develop (the configuration issue), the way in which each of these is developed (the firm-specificity issue), and the way in which
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Table 1 Resources and capabilities. Resources
Capabilities
Distribution coverage Financial capacity Shared expertise with related businesses Low-cost manufacturing and distribution systems Production capacity Ownership of raw material sources Long-term supply contracts
Specialized knowledge Customer service orientation Design expertise Application experience Trade relationships Ability to utilize relevant technologies Systems design capability Fast, flexible response capability
they are internally managed to create positional advantage (the coordination issue).
PRAHALAD AND HAMEL ON CORE COMPETENCE The language of assets, resources, and capabilities can be confusing. The Grant (2011) distinction between resources and capabilities is an easy distinction as any to maintain. However, it is laborious to keep referring to strategic resources and capabilities as those that systematically and uniquely underpin the competitive advantage relative to those other resources and capabilities that do not. Thus, it is attractive to refer to these as CORE COMPETENCES, the language popularized by Prahalad and Hamel (1990) in the Harvard Business Review. They provide an unusual metaphor: The diversified corporation is a large tree. The trunk and the major limbs are core products, the smaller branches are business units; the leaves, flowers, and fruit are end products. The root system that provides nourishment, sustenance, and stability is the core competence. You can miss the strength of competitors by looking only at their end products, in the same way you miss the strength of a tree if you look only at its leaves … Core competences are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.
BCG AND CAPABILITIES-BASED COMPETITION Prahalad and Hamel’s approach is to define core competence as the combination of
individual technologies and production skills that underlie a company’s product lines. Sony’s core competence in miniaturization allows it to make everything from the Sony Walkman to video cameras and digital cameras. Honda’s core competence in engines and powertrains allows it compete from lawnmowers to racing cars. However, this latter example shows a difficulty in their approach in that Honda’s dealer network would be invisible – because of the focus on competences that lead directly to products. A development of their idea is contained in a Boston Consulting Group paper in 1992 on “capabilities-based” competition. This contained four basic principles: 1.
The building blocks of strategy are not products and markets but business processes. 2. Competitive success depends on transforming these key processes into strategic capabilities that consistently provide superior value to the customer. 3. Companies create these capabilities by making strategic investments in a support infrastructure that links together and transcends traditional strategic business units. 4. Because capabilities necessarily cross functions, the champion of a capabilities-based strategy is the chief executive officer. This approach has the real merit of focusing on business processes as the integrative glue that binds together the various lower level ingredients and on the investments that are required to make this effective. Unfortunately,
4 resource-based view Table 2 Strategic resources and capabilities. Speed:
The ability to respond quickly to customer or market demands and to incorporate new ideas and technologies quickly into products
Consistency:
The ability to produce a product that unfailingly satisfies customers’ expectations
Acuity:
The ability to see the competitive environment clearly and thus, to anticipate and respond to customers’ evolving needs and wants
Agility:
The ability to adapt simultaneously to many different business environments
Innovativeness:
The ability to generate new ideas and to combine existing elements to create new sources of value
Source: Stalk, Evans, and Shulman (1992).
the continued use of capabilities makes for some confusion. The essence of the idea here is that these business processes should connect to real customer needs. Things are only strategic when they begin and end with the customer because that is where value is sensed and created. Table 2 summarizes the five dimensions on which a company’s strategic resources and capabilities should aim to outperform the competition. Boston Consulting Group presents this discussion in the language of strategic capabilities in an attempt to avoid an overuse of competences, which is a feature of the Prahalad and Hamel approach.
AMIT AND SCHOEMAKER ON STRATEGIC ASSETS A similar approach can be seen in another classic paper from the same era. Amit and Schoemaker (1993) build on the resource and capability language to create “strategic assets.” By resources they mean stocks of available factors of production that are owned and controlled by the firm. Capabilities refer to the firm’s capacity to deploy resources, usually in combination, using organizational processes to affect a desired end. They are information-based, tangible, and intangible processes that are firm specific and are developed over time through complex interactions with each other and with the firm’s resources. Unlike resources, capabilities are based on developing, sharing, and exchanging information through the firm’s human capital – as information-based assets they are often called invisible assets. The authors describe “strategic assets” as
the set of difficult to trade and imitate, scarce, appropriable and specialised resources and capabilities that (underpin) the firm’s competitive advantage.
In practice, it is difficult to draw clear distinctions between the core competences of Prahalad and Hamel, the capabilities-based competition of Boston Consulting Group, and the strategic assets of Amit and Schoemaker. They all convey the sense of firm-specific assets that are typically process and information based and intangible in character. There are other assets and activities in the value chain, notable, complementary assets that when linked to strategic assets (core competences) are necessary for the existence of a competitive advantage. Thus, a research-based pharmaceuticals company such as Merck or SmithKlineGlaxo would identify research expertise as a core competence but management of government regulations as a complementary asset, essential but not unique. Many other assets and activities in the firm can be classified as “make-or-buy,” that is, the firm makes a financial calculation as to make or buy. Figure 2 distinguishes “strategic assets” from “complementary” assets and “make-or-buy” assets. Strategic assets are those that are truly distinctive and unique to the firm and provide the underpinning of positional advantage in product markets. Complementary assets are those assets that are jointly required with the strategic assets to produce and deliver the product or service. Thus, product development might be a strategic asset, but production capacity is required for product trials and for product adaptations, even
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assets = resources = capabilities Strategic (‘‘distinctive’’) assets
Complementary assets
Make-or-buy assets
Figure 2 The asset triangle.
though that capacity is not unique to the firm. These assets are sometimes called co-specialized assets, in that they are complementary to the specialized assets and (lightly) customized to interface with them. Make-or-buy assets are those that you choose to include in the assets portfolio solely on the basis of financial calculations. For example, the decision to own or lease company cars might be made solely on financial criteria, because there are no strategic implications. In principle, if there are no strategic implications (which means that there is no need to customize the assets for specific purposes), then there will, in general, be a free outside market. This, in turn, generally means that the market is able to supply more cheaply than is possible internally. You can see from this that the pressure to outsource can be very high and depends critically on the characteristics of supply markets. The language of core competences is abstract and difficult to put into practice. This reflects the idiosyncratic and unique nature of the strategic problems faced by individual firms.
However, it also reflects the need to have a clear concept on which to base strategic thinking. The two building blocks of strategy identified so far are competitive advantage and core competence. They are both intellectual constructs. Each relies on situational characteristics for their application in practice. Each provides a way of thinking so that strategists can develop a “theory in use” that applies to their own situation. Hamel (1994) has attempted to codify the idea of core competence further. He offers the following essential characteristics of a core competence: 1.
A competence is a bundle of constituent skills and technologies rather than a discrete skill or technology and, a core competence is the integration of a variety of individual skills. 2. A core competence is not an asset in the accounting sense of the word. A factory, a distribution channel, or a brand cannot be a core competence but an aptitude to manage that factory, that channel, or that brand may constitute a core competence.
6 resource-based view 3.
A core competence must make a disproportionate contribution to customer-perceived value. The distinction between core and noncore competence thus rests on a distinction between the relative impacts on customer value. 4. A core competence must also be competitively unique. This means either that (i) a competence is held uniquely by one firm in the competitive set or that (ii) a competence that is ubiquitous across an industry must be held at a superior level in the firm (e.g., powertrains are ubiquitous in the automobile industry, but one could argue that Honda has unique strength in this area and thus it is a core competence for Honda). 5. From the corporate (multibusiness) perspective, a core competence should provide an entrée into new markets. A particular competence may be core from the perspective of an individual business, but from a corporate perspective it will not be core if there is no way of imagining an array of new product-markets issuing from it. The language of core competence has become widespread. Core competence and competitive advantage together have become the central conceptual terms in the analysis of competitive strategy. We define core competence quite simply as the underlying capability that is the distinguishing characteristic of the organization.
• • • •
It is the way we do things. It is how we organize the way we do things. It is how we systematically communicate this knowledge and build on it. It is understanding the difference and building bridges between tangible and intangible assets, tacit and explicit knowledge, individual and team knowledge, and skill. More formally, we define core competences as the set of firm-specific skills and cognitive processes directed towards the attainment of competitive advantage. (McGee and Segal-Horn, 1997)
Core competence is a fundamental concept in our understanding of what strategy making is. It is only through core competence that the firm attains competitive advantage and is, therefore, the mainspring of sustainable distinctiveness. However, it is also the lens through which the world is seen and interpreted. Different firms (and people) see different things in their environments and this is a function of the inheritance and their experience. In the same way, firms (and people) differ in the way in which they see themselves and, therefore, in their understanding of what they might achieve. In this way, we can see core competences as the link between managerial cognition and the economics of the firm (Figure 3). The key tasks of strategy analyst are interpreting the external environment, understanding the dynamics of markets and of competition, and understanding the internal dynamics of one’s own organization. Core competences provide the links to these economic assessments through a clarity of perception about the shared values and beliefs in the firm (often explicit in the mission statement), through tacit knowledge and understandings (that are possibly unique to the firm), and through flexible routines and recipes that enable nonstandard challenges to be comprehended.
WHAT DETERMINES THE VALUE OF A CORE COMPETENCE? Figure 4 summarizes the conditions that determine the value of a core competence (strategic asset). The basic foundations of value are imitability, durability, substitutability, and appropriability. The ability of competitors to imitate your assets is in part to do with physical uniqueness. More subtle issues around inimitability are as follows: •
•
•
path dependency – cumulative learning and experience over time, which is difficult to replicate over short periods; causal ambiguity – not really knowing what it is, that is the important element in a complex asset; first mover advantage – the preemption of a market by being the first to create scale-efficient assets.
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Interpreting the external environment
Flexible recipes and routines
Core competences
Shared values Tacit knowledge and beliefs and understandings Understanding internal dynamics
Understanding competitive dynamics
Figure 3 Core competences as the link between managerial cognition and the economics of the firm.
Inimitability Physical uniqueness Path dependency Causal ambiguity First mover advantage
Durability Technical life Economic life Time compression
Value of a strategic asset
Substitutability Can a unique resource be trumped by a different resource?
Competitive superiority
Appropriability Who captures the value that the resource creates? Labor and other factor market structures Figure 4 Value of a core competence. Source: Peteraf (1993).
Substitutability is often unknown in that new technologies can emerge that very quickly outdate older solutions. For example, the battle between satellite and cable television systems is still raging – substitutability is high but
it is not clear which standard will prevail. Appropriability is an important but subtle issue. A central question about a strategic asset is: Who can capture the value that is created? Is it the firm? Could it be the skilled technicians?
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