Define the four characteristics of resources that lead to sustained competitive advantage as articulated by the resource-based theory of the firm.Understand the difference between resources and capabilities.Be able to explain the difference between tangible and intangible resources.Know the elements of the marketing mix.
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Four Characteristics of Strategic Resources
Southwest Airlines provides an illustration of resource-based theory in action. Resource-based theory contends that the possession of strategic resources provides an organization with a golden opportunity to develop competitive advantages over its rivals (Figure 4.2 “Resource-Based Theory: The Basics”) (Barney, 1991). These competitive advantages in turn can help the organization enjoy strong profits, especially over time.
Figure 4.2 Resource-Based Theory: The Basics
Resource-based theory can be confusing because the term resources is used in many different ways within everyday common language. It is important to distinguish strategic resources from other resources. To most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital resources. When analyzing organizations, however, common resources such as cash and vehicles are not considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an organization’s competitors can readily acquire them. Thus an organization cannot hope to create an enduring competitive advantage around common resources.
A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. Apple has many strategic resources, including their proprietary software and hardware platforms, which have evolved from numerous innovations and improvements over literally decades; the Apple store; many aspects of the overall buying experience including price; and a culture of innovation. It didn’t hurt to have Steve Jobs, a charismatic, innovative thinker, as their CEO for many years. Many computer companies have struggled to make money with razor-thin profit margins. Apple, using a different business model focused on their strategic resources, has succeeded with years of record profits. At one time, based on stocks, Apple was the most valuable company in the world.
Strategic resources that are valuable or rare are valuable simply due to the relatively high cost of acquiring them (e.g., an airplane) or scarcity (e.g., diamonds).
A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well, which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of customer service that the Southwest culture encourages.
Figure 4.3: Westjet 737
Ideally, a firm will have a culture, like Southwest’s or WestJet’s cultures, that embrace the four qualities shown in Figure 4.2 “Resource-Based Theory: The Basics.” If so, these resources can provide not only a competitive advantage but also a sustained competitive advantage—one that will endure over time and help the firm stay successful far into the future. Resources that do not have all four qualities can still be very useful, but they are unlikely to provide long-term advantages. A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the short term, but competitors can overcome such an advantage eventually.
Resource-based theory also stresses the merit of an old saying: The whole is greater than the sum of its parts. Specifically, it is also important to recognize that overall strategic resources are often created by taking several strategies and resources that each could be copied and bundling them together in a way that is difficult to duplicate. For example, WestJet’s culture is complemented by approaches that individually could be copied—the airline’s reliance on one type of plane and its unique system for passenger boarding (in bigger centers, WestJet loads passengers through both front and rear airplane doors, reducing turnaround time)—to create a unique business model whose performance is without peer in the Canadian industry.
On occasion, events in the environment can turn a common resource into a strategic resource. Consider, for example, a very generic commodity: water. Humans simply cannot live without water, so water has inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can substitute for the life-sustaining properties of water. Despite having three of the four properties of strategic resources, water in North America has remained cheap. Yet this may be changing. Major cities in hot climates are confronted by dramatically shrinking water supplies. As water becomes more and more rare, landowners in water-rich areas stand to benefit. Twenty percent of the world’s freshwater lies in the Great Lakes. It is not hard to imagine a day when companies make profits by sending giant trucks filled with water south and west or even by building water pipelines to service arid regions.
Figure 4.4 Resources and Capabilities From Resources to Capabilities
The tangibility of a firm’s resources is an important consideration within resource-based theory. Tangible resources are resources that can be readily seen, touched, and quantified, such as physical assets, property, plant, equipment, and cash. In contrast, intangible resources are resources that are difficult to see, touch, or quantify, such as the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In comparing the two types of resources, intangible resources are more likely to meet the criteria for strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible resources. Executives who wish to achieve long-term competitive advantages should therefore place a premium on trying to nurture and develop their firms’ intangible resources.
Capabilities are what the organization can do based on the resources it possesses, another key concept within resource-based theory. A good and easy-to-remember way to distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities refer to what the organization can do (Figure 4.4 “Resources and Capabilities”). Capabilities tend to arise or expand over time as a firm takes actions that build on its strategic resources. Southwest Airlines and WestJet, for example, have developed the capability of providing excellent customer service by building on their strong organizational cultures. Capabilities are important in part because they are how organizations capture the potential value that resources offer. Customers do not simply send money to an organization because it owns strategic resources. Instead, capabilities are needed to bundle, manage, and otherwise exploit resources in a manner that provides value added to customers and creates advantages over competitors.
Some firms develop a dynamic capability, the unique ability to improve, update, or create new capabilities, especially in reaction to changes in its environment. Said differently, a firm that enjoys a dynamic capability is skilled at continually adjusting its array of capabilities to keep pace with changes in its environment. Google, for example, buys and sells firms to maintain its market leadership over time, and is highly ranked as the most attractive place to work. Apple has an uncanny knack for building new brands and products as the personal technology market evolves. Not surprisingly, both of these firms ranked among the top thirteen among the World’s Most Admired Companies for 2013.
Strategy at the Movies
Pirates of the Caribbean Series
Pirates of the Caribbean is a popular franchise produced by the Walt Disney Company, with four movies on the market and a fifth to be made. Johnny Depp plays the swashbuckling hero who imaginatively gets himself in and out of trouble during the course of the ninety-minute sagas.
Pirates of the Caribbean was actually based on a ride at Disney’s theme parks. Before its release, the movie was advertised on Disney-owned media companies, such as ABC. Johnny Depp, the lead actor, was interviewed on ABC news and The View, an ABC daily daytime talk show (Lee, 2013).
Synergy is an aspect that many companies use to promote their products, often without the public knowing it. Synergy occurs when a conglomerates’ subsidiaries promote a product owned by the company itself. Disney is one of the first to incorporate synergy. Disney’s major theme parks are all used as large-scale advertising tools. The park uses the characters from the movies to promote the parks, and uses the parks to promote the movies.
Disney has been buying other companies, particularly media companies, which has opened the doors to new synergistic opportunities. The popular Pirates of the Caribbean movies have generated spinoff products to become an enormous moneymaker. Licensed products from the movie franchise include collectibles, toys, clothes and accessories, movies, and games. By 2011, the Pirates of the Caribbean franchise had brought in $1.6 billion in global merchandise retail sales (Szalai, 2011).
Disney owns several media subsidiaries, including Pixar, so that synergy enables Disney to dominate the box office. Pixar’s teaming with Disney is a very successful pairing, with over fifteen full feature animated films. The following list shows the top ten grossing movies worldwide as a result of Disney and Pixar’s collaboration (Box Office Mojo, 2014):