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Firm Resources and Sustainable Competitive Advantages

For a resource to provide a firm with the potential for a sustainable competitive advantage, it must have four attributes. First, the resource must be valuable in the sense that it exploits opportunities and/or neutralizes threats in the firm’s environment. Second, it must be rare among the firm’s current and potential competitors. Third, the resource must be difficult for competitors to imitate. Fourth, the resource must have no strategically equivalent substitutes.

Is the Resource Valuable? Organizational resources can be a source of competitive advantage only when they are valuable. Resources are valuable when they enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. The SWOT framework suggests that firms improve their performance only when they exploit opportunities or neutralize (or minimize) threats.

Is the Resource Rare? If competitors or potential competitors also possess the same valuable resource, it is not a source of a competitive advantage because all of these firms have the capability to exploit that resource in the same way. Common strategies based on such a resource would give no one firm an advantage. For a resource to provide competitive advantages, it must be uncommon, that is, rare relative to other competitors. This argument can apply to bundles of valuable firm resources that are used to formulate and develop strategies. Some strategies require a mix of multiple types of resources— tangible assets, intangible assets, and organizational capabilities. If a particular bundle of firm resources is not rare, then relatively large numbers of firms will be able to conceive of and implement the strategies in question. Thus, such strategies will not be a source of competitive advantage, even if the resource in question is valuable.

Can the Resource Be Imitated Easily? Inimitability (difficulty in imitating) is a key to value creation because it constrains competition.46 If a resource is inimitable, then any profits generated are more likely to be sustainable.47 Having a resource that competitors can easily copy generates only temporary value.48 This has important implications. Since managers often fail to apply this test, they tend to base long-term strategies on resources that are imitable. IBP (Iowa Beef Processors) became the first meatpacking company in the United States to modernize by building a set of assets (automated plants located in cattle-producing states) and capabilities (low-cost “disassembly” of carcasses) that earned returns on assets of 1.3 percent in the 1970s. By the late 1980s, however, ConAgra and Cargill had imitated these resources, and IBP’s profitability fell by nearly 70 percent, to 0.4 percent.

Physical Uniqueness The first source of inimitability is physical uniqueness, which by definition is inherently difficult to copy. A beautiful resort location, mineral rights, or Pfizer’s
pharmaceutical patents simply cannot be imitated. Many managers believe that several of
their resources may fall into this category, but on close inspection, few do.
Path Dependency A greater number of resources cannot be imitated because of what
economists refer to as path dependency. This simply means that resources are unique and
therefore scarce because of all that has happened along the path followed in their development and/or accumulation. Competitors cannot go out and buy these resources quickly and
easily; they must be built up over time in ways that are difficult to accelerate.

Causal Ambiguity The third source of inimitability is termed causal ambiguity. This means
that would-be competitors may be thwarted because it is impossible to disentangle the
causes (or possible explanations) of either what the valuable resource is or how it can be
re-created. What is the root of 3M’s innovation process? You can study it and draw up a list
of possible factors. But it is a complex, unfolding (or folding) process that is hard to understand and would be hard to imitate.

Social Complexity A firm’s resources may be imperfectly inimitable because they reflect
a high level of social complexity. Such phenomena are typically beyond the ability of firms
to systematically manage or influence. When competitive advantages are based on social
complexity, it is difficult for other firms to imitate them.

Are Substitutes Readily Available? The fourth requirement for a firm resource to be a
source of sustainable competitive advantage is that there must be no strategically equivalent
valuable resources that are themselves not rare or inimitable. Two valuable firm resources
(or two bundles of resources) are strategically equivalent when each one can be exploited
separately to implement the same strategies.
Substitutability may take at least two forms. First, though it may be impossible for a firm
to imitate exactly another firm’s resource, it may be able to substitute a similar resource that
enables it to develop and implement the same strategy. Clearly, a firm seeking to imitate
another firm’s high-quality top management team would be unable to copy the team exactly.
However, it might be able to develop its own unique management team. Though these two
teams would have different ages, functional backgrounds, experience, and so on, they could
be strategically equivalent and thus substitutes for one another.

Second, very different firm resources can become strategic substitutes. For example, Internet booksellers such as compete as substitutes for brick-and-mortar booksellers such as Barnes & Noble. The result is that resources such as premier retail locations become less valuable. In a similar vein, several pharmaceutical firms have seen the value of patent protection erode in the face of new drugs that are based on different production processes and act in different ways, but can be used in similar treatment regimes. The coming years will likely see even more radical change in the pharmaceutical industry as the substitution of genetic therapies eliminates certain uses of chemotherapy.

Four factors help explain the extent to which employees and managers will be able to
obtain a proportionately high level of the profits that they generate:58
• Employee bargaining power. If employees are vital to forming a firm’s unique
capability, they will earn disproportionately high wages. For example, marketing
professionals may have access to valuable information that helps them to understand
the intricacies of customer demands and expectations, or engineers may understand
unique technical aspects of the products or services. Additionally, in some industries
such as consulting, advertising, and tax preparation, clients tend to be very loyal
to individual professionals employed by the firm, instead of to the firm itself. This
enables them to “take the clients with them” if they leave. This enhances their
bargaining power.
• Employee replacement cost. If employees’ skills are idiosyncratic and rare (a source
of resource-based advantages), they should have high bargaining power based on the
high cost required by the firm to replace them. For example, Raymond Ozzie, the
software designer who was critical in the development of Lotus Notes, was able to
dictate the terms under which IBM acquired Lotus.
• Employee exit costs. This factor may tend to reduce an employee’s bargaining power.
An individual may face high personal costs when leaving the organization. Thus,
that individual’s threat of leaving may not be credible. In addition, an employee’s
expertise may be firm-specific and of limited value to other firms.
• Manager bargaining power. Managers’ power is based on how well they create
resource-based advantages. They are generally charged with creating value through
the process of organizing, coordinating, and leveraging employees as well as other
forms of capital such as plant, equipment, and financial capital (addressed further in
Chapter 4). Such activities provide managers with sources of information that may
not be readily available to others.

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