A RESOURCE-BASED APPROACH TO PERFORMANCE AND COMPETITION: An Overview of the Connections between Resources and Competition

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A RESOURCE-BASED APPROACH TO PERFORMANCE AND COMPETITION: An Overview of the Connections between Resources and Competition
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   1 A RESOURCE-BASED APPROACH TO PERFORMANCE AND COMPETITION: An Overview of the Connections between Resources and Competition FLORE BRIDOUX Institut d’Administration et de Gestion, Université catholique de Louvain, Belgium This paper extends the resource-based view of the firm to give an overview of the connections between resources and competition. Specifically, it develops a conceptual framework explaining competitive advantage and performance that incorporate the resource-based view of the firm and Porter’s approach to competitive environment. On the basis of this  framework, it shows how firms compete for resources and may use their resources to compete. Key words: Resources, competition, competitive advantage, performance INTRODUCTION “There has been much debate in the strategy literature as to whether organizational capabilities or market competition are more important in shaping firms’ actions and outcomes but this debate has generated little consensus. We suspect that simply comparing firm-level and industry-level influences will continue to prove fruitless for two reasons. In the first place, both organization and competition are clearly important in shaping strategy and performance. In the second place, we suspect that the inconclusive nature of much of the existing research reflects the fact that organizational capabilities, competition, strategy, and performance are fundamentally endogenous. That is, reciprocal interactions at multiple levels of analysis between the market environment and firm capabilities shape business strategy and performance, while interactions between strategy and performance, in turn, shape both organizational capabilities and competitive environments. […] For a mixture of reasons our understanding of these relationships is still at a very rudimentary stage. In  general, research in the disciplinary traditions that study business organizations has been fundamentally unbalanced: researchers interested in characterizing the environment have typically been content with very simple models of the firm while researchers interested in the internal dynamics of firms have usually been content with very simple models of the environment. […] We believe that the careful study of how capabilities and competition mutually influence each other could be one of the next  great opportunities for the field of strategy research.”  Henderson and Mitchell, introduction to the ‘Summer 1997 Special Issue: Organization and Competitive Interactions’ of the Strategic Management Journal.   The issue of firm performance has been central in strategy research for decades and encompasses most other questions that have been raised in the field, as for instance, why firms differ, how they behave, how they choose strategies and how they are managed (Porter, 1991). In the 1990s, with the rise of the resource-based approach, strategy researchers’ focus regarding the sources of sustainable competitive advantage shifted from industry to firm specific effects (Spanos and Lioukas, 2001). Initiated in the mid-1980s by Wernerfelt (1984), Rumelt (1984) and Barney (1986), the resource-based view (RBV) has since become one of the dominant contemporary approaches to the analysis of sustained competitive advantage. A central premise of the resource-based view is that firms compete on the basis of their resources and capabilities (Peteraf and Bergen, 2003). Most resource-based view researchers choose to “look within the enterprise and down to the factor market conditions that the enterprise must contend with, to search for some possible causes of sustainable competitive advantages” holding constant all external environmental factors (Peteraf and Barney, 2003, p.   2312). This inward-looking approach has proven to be both influential and useful for the analysis of many strategic issues (Foss and Knudsen, 2003), among which the conditions for sustained competitive advantage and diversification. However, “there is also a sense that the ebb and flow of strategy research may have swung excessively to firm-centered analyses and has tended to ignore industry dynamics” (Levinthal and Myatt, 1994, p. 46). So, Amit and Shoemaker (1993, p. 39) think that it is “the applicability of the firm’s bundle of resources and capabilities to a particular industry setting (i.e., the overlap with the set of strategic industry factors) [that] will determine the available rents”. And Porter (1991, p. 108) writes “Resources are not valuable in and of themselves,  but because they allow firms to perform activities that create advantages in particular markets. […] The competitive value of resources can be enhanced or eliminated by changes in technology, competitor behavior, or buyer needs which an inward focus on resources will overlook”. Similarly, Levinthal and Myatt (1994, p. 46) argue that “many organizational capabilities emerge, are refined, or decay as a result of, or an absence of, product market activity”. After excessive swings, first, towards industry structure and, second, towards the firm’s characteristics, I think, in line with Henderson and Mitchell, that the time has come to find a  balanced position integrating the firm in its environment. In consequence, I would like to extend the resource-based perspective to investigate the connections between resources and competition. Mine will neither be the first attempt to extend the resource-based view nor the first attempt to use the resource-based view to analyze competitive behaviors. For instance, Oliver (1997) combines resource-based and institutional factors in her model of sustainable competitive advantage. Extending the resource-based view to analyze competitive behaviors, Tripsas (1997) studies how existing competences shape responses to technological change and Peteraf and Bergen (2003) propose a market-based and resource-based framework to identify direct and indirect competitors. To bring into a theoretical framework the environmental factors relating to competition, I have chosen to extend the resource-based approach with Porter’s (1980) five forces framework and industrial organization economics. This work also integrates some insights from the competitive dynamics literature. Over the forty years of strategy research, a diversity of partly competitive and partly supplementary perspectives has emerged. Researchers in strategy have tended to come from other disciplines (economics, sociology, psychology, etc). So it is not amazing that the field has a penchant for divergent thinking and an eclectic view about theories and disciplines (Schendel, 1991). On the one hand, this diversity is justified by the wide variety of research topics in strategy research (Hoskisson, Hitt, Wan and Yiu, 1999). On the other hand, this diversity undermines the accumulation of theory and knowledge in the strategy field. As we enter the 21 st  century, it seems to many members of the academic community that the time is ripe for integration and synthesis 1 . Conner (1991) and Mahoney and Pandian (1992) conclude that the resource-based view may form the kernel of a unifying paradigm for strategic management research. 2  We hope that extending the resource-based view with 1 Volberda (2004, p. 1) favors synthesis over integration on the ground that “attempts to integration often lead to theoretical frameworks that are relatively disconnected from urgent problems in strategic management”. Volberda (2004) argues that synthesis is less far-reaching than integration because it does not attempt to develop a single  paradigm consisting of universal concepts and laws covering the entire strategic management field. However, our concept of integration does not differ much from Volberda’s notion of synthesis. Indeed, we have never thought that our conceptual framework would cover the entire strategic field and deal with all strategic problems. Instead, we deal with the specific problem of the interactions of competitive behaviors, resources and competitive environment that we approach with three particular literature streams. 2  Foss (1996) opposes the belief that a distinct theory of the multi-person firm can be constructed on the basis of a theory of organizational knowledge or from resource-based insights because it is not possible to tell why there   3contributions from Porter’s (1980) IO-based approach and the competitive dynamics literature will contribute to bridging gaps in the eclectic strategic management theory in order to offer firmer grounds to future research. The first section outlines the resource-based view and Porter’s five forces model stressing the limits of these theories and their complementarities and differences. The next section introduces a conceptual framework that integrates resources and the competitive environment as sources of performance and drivers of strategy. Building on this conceptual framework, the third section presents an analysis of the connections between resources and competition. The paper ends with future research implications. LITERATURE REVIEW Review of the resource-based approach The resource-based view (RBV) emphasizes the firm’s resources as the fundamental determinants of competitive advantage and performance. It adopts two assumptions in analyzing sources of competitive advantage (see for instance Barney, 1991 and Peteraf and Barney, 2003). First, this model assumes that firms within an industry (or within a strategic group) may be heterogeneous with respect to the bundle of resources that they control. Second, it assumes that resource heterogeneity may persist over time because the resources used to implement firms’ strategies are not perfectly mobile across firms (i.e., some of the resources cannot be traded in factor markets and are difficult to accumulate and imitate). Resource heterogeneity (or uniqueness) is considered a necessary condition for a resource  bundle to contribute to a competitive advantage. The argument goes “If all firms in a market have the same stock of resources, no strategy is available to one firm that would not also be available to all other firms in the market” (Cool, Almeida Costa and Dierickx, 2002, p. 57). Like the Chicago School tradition, the RBV is an efficiency-based explanation of  performance differences (Barney, 1991; Conner, 1991; Teece, Pisano and Shuen, 1997; Peteraf and Barney, 2003): “performance differentials are viewed as derived from rent differentials, attributable to resources having intrinsically different levels of efficiency […] in the sense that they enable the firms […] to deliver greater benefits to their customers for a given cost (or can deliver the same benefit levels for a lower cost)” (Peteraf and Barney, 2003, p. 311). The assumed heterogeneity and immobility are not, however, sufficient conditions for sustained competitive advantage. According to Barney (1991), a firm resource must, in addition, be valuable, rare, and imperfectly imitable and substitutable in order to be source of a sustained competitive advantage. In her 1993’s paper, Peteraf presents four conditions underlying sustained competitive advantage: superior resources (heterogeneity within an industry), ex post limit to competition, imperfect resource mobility and ex ante limits to competition. Peteraf and Barney (2003) make clear that Barney’s (1991) and Peteraf’s (1993) frameworks are consistent once some terms are unambiguously defined. The RBV has developed very interesting contributions, among others, with regard to imitation with the concepts of isolating mechanisms (Rumelt, 1984), time compression diseconomies, asset mass efficiencies, and causal ambiguity (Dierickx and Cool, 1989). Recently, much resource-based research has focused on intangible assets, which include information (Sampler, 1998), knowledge (e.g. Spender, 1996), and dynamic capabilities (Teece, Pisano and Shuen, 1997). Scrutiny and assessment have pointed to a number of unresolved problems in the resource- based approach. Some of these problems justify the approach adopted in this paper and indicate ways to integrate the RBV and the firm’s competitive environment. These criticisms relate to the unit of analysis, the circularity or tautological nature of the resource-based should be firms in lieu of notions such as ‘opportunism’ and ‘moral hazard’. He concludes that knowledge-based theories may help shed light on issues relating to the boundaries and internal organization of the firm.   4theory, the exogenous nature of value, the neglect of the environment, the condition of heterogeneity, and the behavioral assumption underlying the condition of non-imitability. Foss (1998) states that the resource-based perspective does not escape the general problem of finding the appropriate unit of analysis. Most contributions within the RBV take the individual resource as the relevant unit of analysis to study competitive advantage. However, Foss (1998) points out that this choice may only be legitimated if the relevant resources are sufficiently well-defined and free-standing. If, in contrast, there are strong relations of complementarity and cospecialization among resources, it is the way resources are clustered and how they interplay and fit into the system that is important to the understanding of competitive advantage. Foss (1998) recognizes that the concepts ‘capabilities’ and ‘competences’ aim perhaps at grabbing this clustering and interplay. The conceptual framework takes this problem into account by relating competitive advantage to strategy rather than to individual resources. Porter (1991) and Priem and Butler (2001 a & b) assert the circularity of the resource-based view. Priem and Butler argue that Barney’s (1991) statement “if a resource is valuable and rare, then it can be source of competitive advantage” is necessarily true if the concepts ‘valuable’ and ‘competitive advantage’ are defined in the same terms. Peteraf and Barney (2003) answer this criticism by proposing a more narrow definition of competitive advantage, no more in terms of profitability advantage but in terms of competitive edge (see below). Priem and Butler (2001 a & b) identify a second important problem, namely the exogenous nature of value in the RBV. In his response to Priem and Butler, Barney (2001) acknowledges that the determination of the value of a firm’s resources is exogenous to the resource-based theory presented in his 1991’s paper. Because of its tautology and its exogenous determination of value, Priem and Butler (2001, a&b) conclude that the resource-based view has contributed very little to the explanation or  prediction of competitive advantage 3  and recommend that scholars address core connections  between resources and the environment because, while resources represent what can be done, the competitive environment represents what must be done to compete effectively in satisfying customer needs. Writing about the neglect of the environment, Foss (1998) says that the RBV needs not restrict its domain of application to the firm because it may in fact add some more fine-grained analysis to the understanding of industry-level competitive dynamics, for instance, by directing attention to the resources that underlie barriers to mobility and entry. Thus, bringing together the firm’s resources and the competitive environment in a single framework could help to understand how resources contribute to performance (Priem and Butler, 2001, a&b) and how resources influence competitive dynamics (Foss, 1998). While Peteraf and Barney (2003) assume heterogeneity and do not inquire into its srcin, some authors argue for the development of an endogenous theory of heterogeneity. So, Mahoney and Pandian (1992, p. 374) propose either to integrate the RBV with the organizational economics and dynamic capabilities approach or to utilize the equilibrium models of industrial organization in order to explain the srcins of heterogeneity. Foss and Knudsen (2003) assert that uncertainty and immobility (i.e., sunk cost commitments) should  be the only conditions to enter the study of sustained competitive advantage as exogenous elements whereas a host of additional conditions are candidates for inclusion as endogenous elements. They include input heterogeneity in this unbounded list of additional conditions that give shape to competitive advantage. Many of Foss and Knudsen’s (2003) additional 3  Note that Priem and Butler (2001) fully acknowledge that the resource-based view has contributed to the explanation and prediction of the sustainability of competitive advantage by identifying the conditions that entail sustainability.   5conditions relate to the competitive environment, thus supporting my claim for the integration of the competitive environment and the RVB in a single framework. Finally, Gimeno (1999, p. 101) states that the resource-based research “has emphasized the lack of ability of imitators or rivals to erode the market position of a firm as a necessary condition for sustainability, implicitly assuming that any rival capable of eroding the position will do so, and cannot be restrained from pursuing that course of action”. Extending my framework to grasp multimarket reality will allow me to consider, in analyzing sustainability,  both the ability and the motivation as drivers of competitive behaviors. Porter’s five forces model In his 1980’s book “Competitive Strategy: Techniques for Analyzing Industries and Competitors”, Porter outlines an analytical framework for understanding the effects of industry structure on the profit potential of firms within an industry. This framework is one of the most influential contributions to the strategic field employing IO economic logic. Porter’s (1980) framework builds on the structure-conduct-performance (SCP) paradigm from industrial organization economics. The essence of this paradigm is that the firm’s  performance in the marketplace depends critically on the characteristics of the industry in which it competes, i.e., the structure (Porter, 1981). In a (limited) move away from the traditional S-C-P paradigm, Porter (1980) acknowledges the role of firms in formulating appropriate competitive strategy to achieve superior economic performance, competitive strategy that may change the industry rules in the firm’s favor (for instance, firm can choose strategies that affect or deter entry into their industries). Nevertheless, in Porter’s (1980) work, the source of profits is not to be found in the firm but rather in the structure of the industry, especially the nature and balance of its competitive forces (Schoemaker, 1990). Porter (1980) proposes an analytical framework to assess the attractiveness of an industry, “the group of firms producing products that are close substitutes for each other” (p. 5). He identifies five basic competitive forces seen as threats to the firm profits: threat of entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among current competitors. The collective impact of these five forces, the underlying structure of an industry, determines the intensity of industry competition and the ability of firms in the industry to make profits. Porter describes competitive strategy as taking defensive and offensive actions to cope successfully with the five competitive forces. The adoption of the SCP paradigm in strategic management and as basis of Porter’s (1980) five forces model has raised two important criticisms. First, the unit of analysis in the SCP- based models being the industry rather than the firm these models cannot explain intra-industry performance differences among firms. However, empirical studies have found significantly higher firm-effects than industry-effects on performance (see, for instance, Schmalensee, 1985, Rumelt, 1991, McGahan and Porter, 1997, Hawawini, Subramanian and Verdin, 2003). A second criticism (linked to the first one) concerns the managerial implications of the SCP logic. According to Porter’s (1980) five forces framework, firms should enter and operate only in attractive industries (i.e., industries with low levels of threat and high levels of opportunity). However, Porter’s framework focuses on what makes some industries or positions within industries more attractive (cross-sectional problem) and not on why some firms are able to get into advantageous positions (longitudinal problem). While the level of threat and opportunity in an industry influences firm performance, the returns from entering and operating in an industry cannot be evaluated independently of the firm’s resources and capabilities. Another criticism to Porter 1980’s work is that it overemphasizes competition to the detriment of cooperation. Indeed, the five forces framework builds on Porter’s conviction that the source of profits is primarily to be found in the nature and balance of competition. In
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