Resources and Dynamic Capabilities: The Foundations of Competitive Advantage
Mary B. Teagarden and Andreas Schotter
The basic logic behind business strategy is the development of a competitive advantage in order to generate profits. Strategists focus on both the formulation of strategy and the implementation of strategy. Both of these activities depend on the fit between the competitive environment a company faces and the resources at its disposal plus the way the organization configures these resources. Apple, Dell, and Lenovo compete in the same industry—information and communications technology—yet, each creates value for customers and competitive advantage for themselves in different ways. Apple differentiates by focusing on creating seamless integration of its computers and products in a service-rich customer experience. Lenovo focuses on providing standardized computers, and provides customer support through a network of retail outlets. Dell takes yet another approach; they provide mass customized computers built using a large, but not infinite menu of options that can be configured to meet a wide range of customer needs that they support with virtual online or call center service. These three competitors make products that address similar customer needs but address these needs with wide variations in how they make their computers and how they serve their customers.
Organizations exist because they are a more efficient mode for executing certain transactions than individuals; hence they lead to greater profit-making opportunities for groups than individuals would if they had to interact independently in a market. In his classic essay titled "An Inquiry into the Nature and Causes of the Wealth of Nations" written in 1776, Adam Smith uses the example of the division of labor in a pin factory to demonstrate this concept.1 Smith argues that one worker producing pins might be able to produce 20 pins a day. On the other hand, were the work organized with pin-making tasks broken down into coordinated steps, 10 specialized workers focusing on one or two steps each could produce over 4,800 pins—40 times the number of pins any individual could produce according to Smith's estimates.
The economic logic behind Smith's assertion is that the "within firm" combination of different specializations leads to lower transaction costs. Lower transaction costs in turn, lead to more efficient market interactions that allow more resources to be available for allocation to the development and production of better or more products and services. From this rather abstract perspective firms can be regarded as bundles of resources that in combination create a specific competitive position for a firm in its respective market. In our earlier example, Apple, Lenovo, and Dell each configure different bundles of resources that result in different competitive positions in their markets. The important strategic questions for executives then become:
1. Why do customers buy our products or services?
2. How are we different from our competitors?
3. How can we bundle our resources in order to gain a market advantage?
4. What are the key success factors that drive our competitiveness?
This line of strategic thinking is based on what strategy scholars call the resource -based view" of the firm, a strategic management perspective popularized by Jay Barney,2 although its roots go back to Wernerfelt.3 The resource-based view of the firm emphasizes the internal strengths of an organization for building a competitive advantage.4 It is different from the traditional industrial organizational economics perspective5 that postulates that a firm's profit-maximizing abilities are largely determined by forces defined by the respective industry in which the firm exists. The resource-based view suggests that competitive advantage can be achieved when a firm holds valuable resources that are (1) rare, (2) difficult to imitate, (3) not substitutable, and (4) organized in ways that allow them to be exploited. These key characteristics are commonly expressed in an acronym, VRINO, based on the initials of the key characteristics: valuable, rare, inimitable, not substitutable, and organized to be exploited.
Barney defined resources in a fairly general way and included all fixed assets, capabilities, organizational processes, firm attributes, information, and other knowledge.6 Barney's model initially contained only valuable, rare, and inimitable resources' characteristics. It was later that other scholars added the not substitutable and organized to be exploited dimensions.7 VRINO resources can be many different tangible and intangible assets, including technology, machinery, talent, location, natural resources, know-how in general and in specific in the form of patents, brands, and much more. In the automotive industry, for example, engine technology, design know-how, and market access based on a strong dealership network can all be VRINO resources depending on the individual market characteristics. As illustrated in our earlier computer company example, in a given industry competitive advantage can be achieved in many different ways and there is not necessarily one "best" set of resources or one preferable combination of resources that leads to competitive advantage.
A form of chicken-and-egg debate persists in strategic management: The resource-based view popularized by Barney's VRINO framework represents one perspective and industrial organization economics popularized by Michael Porter's "five forces model"8—which suggests that the way firms generate profits is mostly determined by the external environment and the individual relative resource position a company enjoys rather than their specific unique resource position—represents the other perspective.9 A successful firm, according to the five forces model, is one that is able to execute the dominant strategic paradigm of its industry better than its competition. We will explain the different elements of the resource-based view and the VRINO framework in more detail later.
In this chapter, we will also discuss dynamic capabilities, which is an extension of the resource-based view.10 The dynamic capabilities perspective adds resource integration, resource building, and reconfiguration to the framework. Here, dynamic represents the viewpoint that the external environment constantly changes and organizations need to address the change by developing specific but flexible resource management capabilities. The elementary idea behind dynamic capabilities is that a firm should use competencies for developing short-term competitive positions, which should then be developed into more sustainable, long-term competitive advantages.