Resource-based Strategy

This strategy approach focuses on the rents accruing to a firm that owns scarce resources rather than the economic profits from product market positioning. In this view, the competitive advantages lie upstream of product markets, and rest on the firm’s idiosyncratic and difficult-to-imitate resources. Research has shown that intra-industry differences in profits are greater, in general, than inter-industry differences in profits. This suggests that firm-specific factors might have more bearing on profits than previously thought, and also that industry conditions, competitive maneuvers and external effects might be relatively unimportant.

Comparing this approach with Porter’s Five Forces, an entry decision for a firm looks approximately as follows (Teece, 1997):

1. Pick an industry based on its structural attractiveness,
2. Choose an entry strategy based on a hypothesis of rival strategies (rational hopefully)
3. Acquire the needed assets to compete in the market

From the resource-based perspective, firms are different with respect to their capabilities, resources and endowments. Plus, the assets are sticky to the firm, in the short run the likelihood of the firm losing the added value of the differentiating capabilities is low. This also applies to a lack of assets for the firm, if that happens to be the case. They are stuck with what they have in the short run. This is necessarily true because acquiring new resources is a costly and complicated process for a firm. Further, most assets are not easily exchanged for better ones. Examples abound, but knowledge or ‘know-how’ is the most common! Also important is the firm’s ability to monetize the newly acquired asset to become profitable quickly and show high ROI.

1. An entry decision in the resources perspective looks like the following:
2. Identify the firm’s unique resources
3. Decide in which markets those resources can earn the highest returns, and
4. Decide whether the returns or rents from the assets are most efficiently utilized by integrating into related markets, selling the relevant intermediate output to related firms, or selling the assets themselves to a firm in related businesses.

In this view, managing the scarce, not easy to imitate firm-specific resources such as human capital, patents, processes and internal controls and such, clearly becomes the most crucial and fundamental strategic issue. Skill acquisition, talent management, knowledge management and learning are the strategic drivers for the firm.

Dynamic Capabilities

IBM, Texas Instruments, Philips and other well-known firms have followed a resource-based strategy of collecting technology assets, guarded by an aggressive intellectual property stance. However, this strategy alone is not enough to support a significant and sustainable competitive advantage against a changing technology landscape, extremely low barriers to entry and never-before-seen levels of market fragmentation. New competitors in the technology space pop up every single day in the market!

The winners in the global marketplace were those that could demonstrate timely responsiveness and product innovation along with the management capability to efficiently deploy resources, internal competencies and external partnerships to ensure success. Simply building an inventory of technology assets was not enough!

The abilities of a firm to achieve new flavors of competitive advantage are collectively referred to by Teece, Pisano and Sheun as “dynamic capabilities”. The term dynamic refers to the capacity to renew competences so as to achieve congruence with the changing business environment. This approach considers that capabilities cannot be bought in most cases, but must be built, and that strategy involves choosing  and committing to long-term trajectories for building competencies.

Porter’s Focus strategy, as applied to the dynamic capabilities, needs to be defined in terms of distinctive competences NOT products. Products are considered manifestation of competences. The capabilities approach places emphasis on the internal processes that a firm utilizes, how these are deployed and how these will be enhanced into future capabilities.

In comparison with Shapiro’s game theoretic strategy formulation, the capabilities approach has the benefit of indicating that competitive advantage is not just a function of how one plays the game; it is also a function of the assets available to the players, and how these assets can be deployed, and in what configurations in a changing market.