resource based model

1-4 The Resource-Based Model

of Above-Average Returns

The resource-based model of above-average returns assumes that each organization is a collection

of unique resources and capabilities. The uniqueness of resources and capabilities is the basis of a

firm’s strategy and its ability to earn above-average returns.)# Resources are inputs into a firm’s pro-

duction process, such as capital equipment, the skills of individual employees, patents, finances, and

talented managers. Firms use three categories to classify their resources: physical, human, and orga-

nizational capital. Described fully in Chapter ', resources are either tangible or intangible in nature.

Individual resources alone may not yield a competitive advantage; resources have a greater

likelihood of being a source of competitive advantage when integrated to form a capability.

A capability is the capacity for a set of resources to perform a task or an activity in an integrative

manner.87 Core competencies are capabilities that serve as a source of competitive advantage for a

firm over its rivals.88 Core competencies are often visible in the form of organizational functions.

For example, Apple’s R&D function is one of its core competencies, as is its ability to produce

innovative new products that create value for customers. Amazon’s distribution function is a core

competence while information technology is a core competence for Walmart.

According to the resource-based model, differences in firms’ performances across time are due

primarily to their unique resources and capabilities rather than the industry’s structural charac-

teristics. Through continued use, capabilities become stronger and more difficult for competitors

to understand and imitate. As a source of competitive advantage, a capability must not be easily

imitated but also not too complex to understand and manage.89 The resource-based model of

above-average returns is found in Figure 1.3. This model suggests that the strategy the firm chooses

should allow it to use its competitive advantages in an attractive industry (firms use the I/O model

to identify an attractive industry).

Not all of a firm’s resources and capabilities have the potential to be the foundation for a com-

petitive advantage. This potential is realized when resources and capabilities are valuable, rare,

costly to imitate, and non-substitutable.90 Resources and capabilities are valuable when they allow

a firm to take advantage of opportunities or neutralize threats in its external environment. They

are rare when possessed by few, if any, current and potential competitors. Resources are costly to

imitate when other firms either cannot obtain them or are at a cost disadvantage in obtaining them

compared with a firm that already possesses them. They are non-substitutable when they have no

practical equivalents.

Over time, competitors find ways to imitate value-creating resources or to create new resources that

yield a different type of value for customers. Therefore, it is difficult to achieve and sustain a competi-

tive advantage based on resources alone. Firms integrate individual resources to develop configurations

of resources with the potential to build capabilities. Capabilities developed in this manner have a stron-

ger likelihood of becoming a core competence and of leading to a source of competitive advantage.91

Learning Objective

1-4 Use the resource-

based model to explain

how firms can earn

above-average returns.

Resources are inputs into

a firm’s production process,

such as capital equipment,

the skills of individual

employees, patents, finances,

and talented managers.

A capability is the capacity

for a set of resources to

perform a task or an activity in

an integrative manner.

Core competencies are

capabilities that serve as

a source of competitive

advantage for a firm over its

rivals.

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Chapter 1: Strategic Management and Strategic Competitiveness 15

While the I/O model focuses on industry, which is external to the organization, and the

resource-based model focuses on internal resources and capabilities, a third model of above-aver-

age returns focuses simultaneously on internal stakeholders (employees) and external stakeholders

(customers, suppliers, communities, shareholders), and in particular on the relationships of a firm

with these stakeholders. Since all firm resources come from stakeholders, it makes sense that the

nature of relationships with those stakeholders will make a big difference in terms of a firm’s ability

to create and sustain competitive advantages leading to above-average returns. In fact, one of the

leading scholars on the resource-based model, Jay Barney, said that if there were no other stake-

holders besides shareholders providing resources to the firm that have the potential to earn profits,

there would be no profits.92