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Average Economic Profits of
U.S. Industry Groups, 1978-1996
ROE-Ke Spread
20% Toiletries/Cosmetics
Pharmaceuticals
Soft Drink
15%
Tobacco
Food Processing
10% Household Products
Electrical Equipment
Financial Services
5% Specialty Chemicals
Newspaper Integrated Petroleum Electric Utility - East
Bank Retail Store
Telecom
0%
Tire & Rubber
Electric Utility - Central
(5%) Medical Services
Machinery
Auto & Truck
Computer & Peripheral
(10%) Paper & Forest
Air Transport
Average Invested Equity ($B) Steel
(15%)
0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300
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Average Economic Profits in
the Drug Industry, 1978 -1996
ROE-Ke Spread
60%
SmithKline
American Schering Plough
40%
Home Amgen Watson Rhone-Poulenc
Glaxo Products Mylan Labs
Merck Bristol
Myers Warner Lambert Perrigo
20% Pharmacia & Upjohn
Eli Lilly Pfizer Forest Labs
Alza
0%
ICN
Scherer
Ivax
(20%) Genetech
Biogen
Roberts
Genzyme
(40%) Dura
Chiron
Cephalon
(60%) Gensia
Cygnus
Immunex
Average Invested Equity ($B)
(80%)
$0 $5 $10 $15 $20 $25 $30
Average Economic Profits in
the Steel Industry, 1978 -1996
ROE-Ke Spread
40% Great Northern Iron
30%
20%
Worthington Inds
Nucor
Steel Technologies
10%
Oregon Mills
Commercial Metals
0%
Carpenter British Steel PLC
Birmingham Cleveland-Cliffs
Quanex
(10%) Lukens USX-US Steel
ACME Metals
Ampco
Inland Steel
(20%)
Armco
Average Invested Equity ($B) WHX Bethlehem
(30%)
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15
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• Industry based view
•Situation:
ØConsider the intense competitive conditions in
the airline industry.
ØThe industry-based view suggests that all firms
“stuck” in this industry are likely to suffer.
There must be resources and capabilities specific
to successful firms like Southwest and Ryanair
that are not shared by their unsuccessful
competitors in the same industry.
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What is important?
• Industry
• Firm characteristics
Competing on Resources
• Focus of the industry-based view:
– How “average” firms within an industry
compete.
• Focus of the resource-based view:
– How individual firms differ from each other
within an industry and can outperform the
industry average consistently and significantly.
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Resources and Capabilities
• The Resource-based View
– A firm consists of a bundle of productive
resources and capabilities.
• Resources
– The tangible and intangible assets a firm uses to choose and
implement its strategies.
• Capabilities
– The skills a firm can use to bring its resources to bear.
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate
individual firm resources to achieve a desired
objective.
Capabilities become important when they are
combined in unique combinations which
create core competencies which have strategic
value and can lead to competitive advantage.
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The VRIO Framework: Value
• The Question of Value
– Only value-adding resources can lead to competitive
advantage, whereas non-value-adding capabilities may
lead to competitive disadvantage.
– If firms do not shed non-value-adding resources and
capabilities, they are likely to suffer below-average
performance or become extinct.
• Overall, the search for valuable resources and
capabilities is an ever present challenge for
virtually all firms.
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The VRIO Framework: Rarity
• The Question of Rarity
– Valuable common resources and capabilities can lead to
competitive parity but no advantage (e.g., airline
aircraft).
– Valuable rare resources and capabilities can provide, at
best, temporary competitive advantage
• Once competitors develop equal abilities, then no
unique and distinctive capability remains on which
to build a competitive advantage.
The VRIO Framework:
Imitability
• The Question of Imitability
– Valuable and rare resources and capabilities are a source
of competitive advantage only if competitors have a
difficult time imitating them.
• Imitation of tangible resources (such as plants, software, or
trucking fleet) is easy.
• Imitation of intangible resources (knowledge, managerial talents,
and organizational culture) is much more difficult.
• Some resources are impossible to imitate
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The VRIO Framework:
Imitability (cont’d)
• Why is imitation so difficult?
– Physical uniqueness
– Time compression diseconomies: Inability to
acquire in a short period of time rivals’
resources and capabilities over a long history
– Path dependencies: History matters
– Causal ambiguity: What really causes the
success of certain firms? Nobody really knows!
The VRIO Framework:
Organization
• The Question of Organization
– How is a firm organized to develop and leverage
the full potential of its resources and
capabilities?
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The VRIO Framework:
Features of a Resource or
Capability
Test for Value of resources
• Must create something of value to the customer
• Inimitability
- Time dependent
- Causal ambiguity
Durablility
Appropriability
Substitutability
Superiority
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Core Capability
• Does the capability make a Superior
/disproportionate contribution to customer
value.
• Does it provide a potential basis for entering
new markets.
Pitfalls in Leveraging on
Resources
• Transferability of assets or capabilities
• Inability to identify the resource / capability
contributing to success.
• Managers overconfidence in their ability
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External Environment
What the Firm Might Do
Sustainable
Competitive
Advantage
Internal Environment
What the Firm Can Do
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