7.3.1. What is the connection with the theory of transaction costs?

An analogy with the theory of transaction costs can be drawn if we meditate on the notions of asset and resource. The resource approach is based on the fact that the organization can be studied as a set of resources that vary from firm to firm.

Tangible resources are of different types:

• – physical (machines, settings);
• – human (qualifications, level of staff adaptability);
• – financial (different sources of liquidity).

Resources may also be of an intangible nature and rely on goodwill (existence of intangible assets such as patents, trademarks or brand image and reputation). These resources occupy a special place in the measure that they are difficult to access and imitate. They often constitute strategic resources, because they are truly unique and drive the company’s competitive advantage.

For a firm, the challenge lies in identifying these strategic (or distinctive) resources. [BAR 91] suggested four variables for measuring the strategic character of resources:

• – Evaluability: ability to assess the contribution of the resource to the overall efficiency of the firm;
• – Scarcity: a highly demanded resource with limited availability may eventually become strategic;
• – Inimitability: the more difficult it is to imitate the resource, the more it becomes specific and the more it has a chance of becoming strategic;
• – Substitutability: scarcity and inimitability are not sufficient conditions for a resource to become strategic. It is also necessary for it to not have an immediate and direct substitute.

It is the so-called “distinctive” resources and the core competencies [BAR 91, PRA 90] of a firm that enable it to become stronger in a market, even to grow beyond its competitors and to develop lasting competitive advantage.

This “strategic” dimension, which is linked to the four factors we discussed above, refers to asset specificity as defined by [WIL 89]. This author distinguished between five types of specificities (geographical situation, physical assets, specific human resources, dedicated assets, intangible assets), a list to which he added a measurement difficulty by specifying that the list is not exhaustive. In this way, specific human resources correspond to those in which efficiency and competence depend on an individual and for which the supply is not so elastic, because intangible assets are inherently very specific. We thus encounter the underlying notions of rarity and inimitability.

7.3.2. A possible parallel with agency theory?

The points in common are less obvious with agency theory (see Chapter 4), but they still exist. It is around the notion of information that comparisons can be established, as [CHA 02] explained:

“[In agency theory] there is a real cost in engaging the players (these are known as bonding costs). We reckon that these proposals lead to a business model that aims at reducing agency costs and seeks to improve cooperation by promoting an organizational architecture. But this construction would be very abstract and economy-oriented if it did not introduce another concept, very close to the one we evoked with resource-based theory: the concept of specific knowledge. For Jensen, the superiority of organizations (on the market) lies in that they process information coming from the market and that they are capable of learning, that is to say, of assimilating and capitalizing information. Jensen says that this knowledge is specific, it derives from the experience we have of specific objects (customers, suppliers, organizations, places). Information is also difficult to codify and costly to convey by means of a price. When it is voluminous, it is better to give those who own it the right to make decisions for which it is indispensable. But then there is also the problem of agency costs and the risk of misuse of these decision rights.”

7.4.1. KBV extension

Knowledge-based view (KBV) is an extension of RBV. The firm is considered as a heterogeneous entity [HOS 99]. The KBV esteems that knowledge is a key element for combining distinctive resources as well as the core competencies of organizations. Be careful, however, not to confuse knowledge with information.

Following the distinction made by [NON 95], information refers to a flow of messages. On the contrary, knowledge is created by the aforementioned flow of information and anchored in the beliefs and commitments of its holder. [DAV 98] considered that knowledge exceeds the level of information, because unlike data and information, knowledge incorporates a judgment dimension. There are two types of knowledge: explicit and tacit [NO 00]. Explicit knowledge is tangible and identifiable [STO 01]; it can be expressed in formal and systematic language and shared in the form of data, scientific formulas, specifications and so on [NO 00]. It is relatively easy to process, store and transmit [NON 00, STO 01]. Furthermore, ICTs can facilitate the integration of this type of knowledge into the strategy of the organization [STO 01].

According to KBV, what is crucial for a firm is its ability to create knowledge [GEH 02, GRA 96, NON 95] and provide not only tacit knowledge but also, fundamentally, knowledge that is difficult to imitate [DAR 03, LUN 07]. This will certainly contribute to the development of sustainable competitive advantage.

7.4.2. Competencies

While competencies make it possible to coordinate resources, the concept of competence has been subject to a number of definitions. In general, they refer to the organizational level. If we understand competencies as resources, these are in charge of developing competitive advantage. Sometimes competencies are understood as capabilities or abilities. As such, they constitute the “ability of the firm to multiply its resources by combining them” [PRA 90].

However, above all, it is the so-called fundamental or core competencies that provide firms with the advantage in their market (easy access to and/or broader access to markets) and generate value for customers. They are also identified by their unique character and their being difficult to imitate [REE 90].

The authors behind the notion of core competence, Prahalad and Hamel [PRA 90], considered the company as a tree:

• – the trunk and the main branches being the basic products;
• – the smaller branches would be the functional units; leaves, flowers and fruits, the final products;
• – the core skills refer to the roots, because they nourish the tree and ensure its stability. They enable the firm to keep its existing branches as well as to engender new ones.

At the same time, the competency approach includes different notions of capability.

7.4.3. Dynamic capabilities

The dynamic capabilities approach refers to several theoretical corpuses [BAR 10] and particularly to the evolutionary trend [NEL 82]. By definition, the term “dynamic” expresses evolution, which can be linear or cyclical, or can even radically transform over time. Evolution is also reflected in the conceptual framework of RBV. In fact, there are multiple definitions (Table 7.2) and these vary according to the organizational or managerial orientation that has been chosen.

According to [TEE 97] and [TEE 07], dynamic capabilities can empower firms and help them cope with a changing environment and be more adaptable to specific situations. In fact, the resources and competencies of a firm are frequently challenged in a context of hyper-competition [DAV 94] and high-velocity market [BOU 88] and [EIS 89b], which leads to the development of temporary but unsustainable competitive advantages [MAG 13, CAR 14]. Dynamic capabilities can take the form of routines that lead to the development of new knowledge and solutions that reinforce the competitive position of a firm in the market.

The concept of dynamic capabilities, suggested by [TEE 97], is a theoretical concept that associates resource-based view (which focuses on resources and competencies) with the principles of evolutionary economics. It designates the ability to integrate, build and re-configure resources and skills in a turbulent environment. The underlying hypothesis is that in many industries the environment is evolving so rapidly that the resources and competencies that long constituted the basis of the competitive advantage of some firms are now seriously challenged. In this way, a radical innovation could render the technological competencies of a leader obsolete (e.g. digital photography) or challenge distribution methods whose mastery constituted a key advantage for existing firms (e.g. the distribution of music on the Internet). Consequently, the term points to the flexibility of a firm in the face of such developments. Several authors have tried to give more concrete content to this very theoretical concept. With this intention, [EIS 00] identified three factors underpinning the dynamic capacities of firms:

• – the ability to rapidly develop and introduce new products in the market;
• – the ability to build alliances to access missing resources;
• – the strategic decision-making system must be flexible enough.

7.5.1. First-mover advantage

According to Lieberman and Montgomery [LIE 88], “first-mover advantage” may find its origin in three different sources:

• – Technological leadership: advantage is linked to an experience effect that makes it possible to keep an advantage in terms of cost. In a similar way, technological advantage may temporarily be protected by patents;
• – Preemption of rare assets, for example, input preemption (such as natural resources or other mobile resources), preemption of sites and spaces or preemptive investments in factories or equipment;
• – Development of transfer costs on behalf of the buyer: either because the buyer was obliged to consent to initial transaction costs, because he/she is used to the supplier’s goods or because the supplier creates additional costs. Besides this, the buyer may wish to continue an engagement with the same supplier. Choosing alternative suppliers creates unnecessary uncertainty.

However, these mechanisms may be counterbalanced, as [LIE 88] made clear:

• – followers may benefit from infrastructure, consumer education efforts and R&D efforts encouraged by leaders;
• – after the emergence of a dominant design, competition will be based on prices, giving an advantage to the firms having the most favorable cost structure;
• – if the first entrants are not vigilant enough, a new incomer may alter the conditions of the competitive game through a technological innovation that circumvents existing entry barriers;
• – first movers may delay reacting to the innovation of other firms because they may be blocked by specific assets, they may be reluctant to cannibalize their existing range or their organization has become too rigid.

7.5.2. Lasting competitive advantage versus temporary competitive advantage

While for many decades it was primarily sustainable competitive advantage that was sought by firms and put forward by the various strategic management authors (among which, we can include [POR 86b]), this outlook changed from the end of the 1990s onward. From then on, many authors started questioning the very concept of sustainability. At present, we tend to speak of temporary (or transient) advantage, in line with the works of [DAV 94, FER 01, WIG 05]. This evolution can be appreciated in many sectors [CAR 14].

[MC 13] developed this question in the following terms and provides several examples of firms (including Kodak, Sony, Research in Motion (RIM) and Blockbuster), which have failed to adapt to new market conditions:

“Stability, not change, is the state that is most dangerous in highly dynamic competitive environments […] The end of competitive advantage means that the assumptions that underpin much of what we used to believe about running organizations are deeply flawed” [MC 13].

RBV has also provided theoretical and empirical reflections on the nature of competitive advantage. This was achieved by identifying a possible shift from sustainable competitive advantage to temporary advantage.