Competing through operations and supply: the role of classic and extended resource-based advantage[a]
Michael Lewis and Alistair Brandon-Jones[b]
Information, Decisions, and Operations (IDO), School of Management, University of Bath, Bath, BA2 7AY, UK
Nigel Slack
Operations Management Group, Warwick Business School, University of Warwick, Coventry, CV4 7AL, UK
Mickey Howard
eXeter centre for Strategic Processes and Operations (XSPO), University of Exeter Business
School, Exeter EX4 4PU, UK
Competing through operations and supply: the role of classic and extended resource-based advantage
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Abstract
Purpose – The study seeks to analyze the evolution of competitive advantage using both ‘classic’ and ‘extended’ resource-based theory. The aim is to examine the different ways in which ‘classic’ and ‘extended’ resource-based advantage develops and how they might combine to create long-term advantage.
Design/methodology/approach – A single case study method is used to examine the process by which competitive advantage has accumulated over a 50-year period at FSG Inc, a highly successful food service company based on the west coast of the USA with an annual growth rate currently running at 10%.
Findings – Preliminary conclusions suggest support for (1) the sequential, iterative and slow-cycle development model associated with proprietary bounded resources and, (2) the strategic resource-rigidity paradox. The work also highlights preliminary evidence for (3) a more programmatic and faster cycle development process possible with inter-firm resources associated with extended resource based theory (ERBT) and, (4) long-run sustainable advantage requiring synchronization and integration of both bounded and relational resources.
Research limitations/implications – Analysis suggests that competitive advantage may be achieved more slowly when associated with proprietary bounded resources (i.e. ‘classic’ RBT) than when deploying extended resources (i.e. ERBT). Our research also suggests that knowledge-based relationships and opportunistic behavior are not incompatible. As such, it may help address an enduring criticism of RBT that it does not allow for opportunistic action. Further research is necessary to assess the extent to which findings can be generalized beyond the original study context.
Practical implications - It is clear that it is ‘make and buy’ that matters and that correspondingly there is likely significant scope for strategic re-balancing in most firms. The work also suggests some pragmatic lessons for synchronization– developments can be simultaneous or sequential and structural and/or contextual in approach.
Originality/value – This is the first rich empirical study of the way competitive advantage evolves using both RBT and ERBT. The research provides insights into how organisations can combine both classic and extended resource-based advantage in seeking to establish competitive advantage. It illustrates how un-bounded external resources, such as the role of suppliers engaged in new product development, can create an initial advantage for firms who then build on this by investing in bounded resources such as specific skills within their organization.
Keywords – Resource-based theory, Extended resource-based theory, Extended resource-based perspective, Competitive advantage
Paper type – Research paper
Introduction
Resource based theory (RBT), arguing that proprietary resources are as important as industry market factors in determining competitive advantage, has come to occupy a central part of the strategy landscape (cf. Wernerfelt, 1984; Rumelt, 1987; Barney, 1991; Connor, 1991; Mahoney and Pandian, 1992; Peteraf, 1993; Teece and Pisano, 1994; Foss and Knudsen, 1996; Teece et al., 1997). Although ‘classic’ resource-based theory has obvious appeal, terminological ambiguity has limited its impact on practice (Stevenson, 1976; Porter, 1991; Scarborough, 1998) and raised theoretical concerns over the inference that only bounded resources can create competitive advantage (McEvily and Zaheer, 1999; Afuah, 2000; Das and Teng, 2000).
As a result, ‘extended’ resource-based theory (ERBT) has developed, exploring competitive advantage within a broader network context (Matthews 2003a, 2003b; Lavie, 2006; Arya and Lin, 2007). Extended resource based theory assumes that strategic resources lying beyond the boundaries of the firm can be used to generate ‘relational’ (Dyer and Singh, 1998) or ‘collaboration specific quasi-rents’ (Madhok and Tallman, 1998), thereby emphasising their reliance on certain types of inter-firm relationships (Ireland et al., 2002).
This study analyzes the evolution of both ‘classic’ and ‘extended’ resource-based advantage over a 50-year period at Food Services Group Inc (FSG), a highly successful food service company based in the USA. Such case work has limitations but is an explicit response to the call of other RBT researchers (cf. Pandža et al. 2003: 846) for study “that is rich in description and that explains this dynamic phenomenon.” The aim is to explore the way advantage has developed and to address how classic and extended resource-based advantage might combine to create long-term advantage. Our paper is structured as follows. Firstly, there is an examination of the literature relating to classic resource-based theory and extended resource-based theory. Secondly, the methodology for our study is described in detail. Thirdly, we provide information of FSG, including the industry it operates in, its history and product sales over time. Fourthly, analysis of case material and its relationship to antecedent literature is provided. Finally, conclusions are drawn including the implications for theory and practice, research limitations, and opportunities for further research.
Resource-Based Theory
Resource-based theory (RBT) proffers an explanation of how competitive advantage is generated in the face of competitive pressures (Nanda 1996). Recognition that endogenous resources are as important as exogenous market factors is not new, having historical roots in diverse works by, amongst others, Marshall (1925), Schumpeter (1934), Selznick (1957), Penrose (1959), Ansoff (1965), Andrews (1971), Richardson (1972) and, Nelson and Winter (1982). The specific contribution of RBT lies in the fundamental principle that long-term competitive advantage lies primarily in firms creating bundles of strategic resources that competitors find difficult to substitute or imitate without great effort (Rumelt, 1984; Hoopes, 2003). The term strategic resources can include assets, capabilities, organisational processes, firm attributes, information, and knowledge. RBT classifies such resources as those that are:
· Scarce. Strategic resources are by definition rare (Barney, 1986a, 1991). Unequal access to resources leads to their uneven distribution amongst competing firms (Dierickx and Cool, 1989). Scarce resources include bespoke hardware facilities, proprietary software, experienced IT support staff etc.
· Imperfectly mobile. Resources developed in-house, based on experience and tacit knowledge, or interconnected with other resources, are ‘bound’ to the firm and cannot be traded. Any advantage they create can be retained over time by the firm (Mahoney and Pandian, 1992).
· Imperfectly imitable. Whilst short-term advantage may be created by controlling a valuable resource, it is only sustainable if competitors are unable to duplicate the asset perfectly (Barney, 1986b; Peteraf, 1993). Where strategic resources are knowledge-based, imperfect imitability tends to increase because such resources are often idiosyncratic to the firm in which they reside (Mahoney and Pandian, 1992; Peteraf 1993; Miller and Ross 2003).
· Imperfectly substitutable. It is insufficient to have a resource that is scarce, imperfectly mobile and imperfectly inimitable if competitors are able to replace it with an alternative (Conner, 1991). If substitution occurs, prices are driven downwards resulting in zero economic rents for a previously value-creating resource (Barney, 1986a). Learning curve effects, buyer switching costs, and economies of scale all help to prevent both substitution and imitation of strategic resources.
Priem and Butler (2001) argue that the characteristics listed do not create sustainable competitive advantage individually, but only when they are combined. As such, the resource is only as valuable as its weakest element. Resource-based theory has steadily evolved since the early 1990s, from static lists of ingredients for competitive advantage, towards more dynamic explanation of the process by which these elements are utilised (Teece and Pisano, 1994; Newbert, 2007).
Despite its obvious appeal, there are a number of criticisms of classic resource-based theory which have limited its impact on practice (Scarborough, 1998). Firstly, the idea that value creation is based on resources that are valuable is circular and tautological (Priem and Butler, 2001). Secondly, the concept of ‘rare’, important in Barney’s RBV framework, may be redundant. Hoopes et al (2003) argue that resources need not be rare to generate competitive advantage whilst Priem and Butler (2001) suggest that any resource that meets the standards of value, inimitability, and non-substitutability is, by definition, rare. Thirdly, in assuming that endogenous resources drive competitive advantage, resource-based theory tends to ignore exogenous factors that may undermine otherwise advantageous capabilities. Peteraf (1993) notes that firms need to understand what their valuable capabilities are in order to manage them and that external change can nullify competitive advantage or even transform it into a weakness. Finally, a number of authors have concerns that resource-based theory infers that only bounded resources can create competitive advantage (McEvily and Zaheer, 1999; Afuah, 2000; Das and Teng, 2000).
Extended Resource-Based Theory (ERBT)
Although there is no doubt that firms must possess valuable, rare, inimitable, non-substitutable resources and capabilities, it is also understood that this approach is insufficient in light of the ability to alter them (Newbert, 2007), extract rents across alliance networks (Lavie, 2006), and understand collaborative outcomes that realise their full potential (Arya and Lin, 2007). As a result of pragmatic and conceptual criticisms of RBT, interesting research has emerged considering the development of competitive advantage in situations where resources and capabilities are held beyond the boundary of the firm – extended resource-based theory (ERBT) (Lewis, 2000; Dyer and Nobeoka, 2000; Duliba et al., 2001; Carr and Pearson, 2002; Lucas et al., 2002; Matthews, 2003a, 2003b; Lavie, 2006; Arya and Lin, 2007; Squire et al., 2009).
Lewis (2000) illustrates how competitive advantage occurs through the interplay between organisations and their external environment. He notes that provided resources cannot be copied or replaced by competitors, their ownership is not of critical importance – many strategic resources developed in manufacturing processes are in fact ‘owned’ by suppliers. Dyer and Nobeoka (2000) argue that the creation of competitive advantage in Toyota has much more to do with its supplier relationships than the existence of inimitable manufacturing resources. Duliba et al. (2001) illustrate the applicability of ERBT in the airline industry through the extension of reservation systems in travel agencies to create travel-related supermarkets. The heavy investment in these boundary-spanning systems creates an extended resource-based advantage that is difficult to replicate. In his research into the New York Stock Exchange, Lucas et al. (2002) discusses the way new assets, knowledge, and capabilities emerge as a result of interaction between existing actors in the supply chain. Squire et al. (2009) provide empirical support for the logic of ERBT in a study of UK manufacturing firms, with results indicating a strong relationship between suppliers’ capabilities, supply chain collaboration, and buyer performance.
Although ERBT is a relatively recent development, it shares explicit links with supply literature, particularly in relation to research exploring appropriate levels of synergy between supply actors which make reference to issues of buyer-seller relationship evolution, strategic returns from collaboration, and economic value of market power (cf. Croom et al. 2000). ERBT is founded on the assumption that strategic resources beyond the boundaries of the firm can be accessed, especially given the existence of certain types of inter-firm relationships (Hodgson 1998; Ettilie and Sethuraman, 2002; Ireland et al., 2002; Rungtusanatham et al., 2003; Wilk and Fensterseifer, 2003; Napier and Nilsson, 2006). For example, Rungtusanatham et al. (2003) develop a conceptual framework which describes, explains, and predicts the competitive advantage derived from supply chain linkages. The authors argue that ERBT can help justify investment in both up-stream suppliers and down-stream customers within supply chains to create competitive advantage. Based on analysis of the wine industry in Southern Brazil, Wilk and Fensterseifer (2003) argue that competitiveness depends not only on individual resources and capabilities, but also those shared with supply chains or clusters of firms. Napier and Nilsson (2006), in exploring the development of capabilities, note the role of creative entrepreneurs as a key component in building collaboration, exploiting knowledge, and enhancing relationships beyond the boundary of the firm.
ERBT represents an extension of classic RBT because the structure and function of relationships relates to the specificity of the resources to be transferred. As an illustration, analogous research focused on inter-firm knowledge transfer has explored the differential performance implications of strong and weak ties between network nodes (Granovetter, 1973). It is argued that weak ties (i.e. those lacking history, reciprocity, emotional intensity, etc.) are best suited to the transfer of codified technical-type information and are difficult for the transfer of richer knowledge (Szulanski, 1996, 2000). Correspondingly, Dyer and Nobeoka (2000) found that strong ties were central to the development of Toyota’s hugely effective supply network. Interestingly, they analysed the evolution of these relationships and characterised three different stages. Stage 1, where there was virtually no knowledge sharing, stage 2, where Toyota created a supplier association and engaged in a range of supplier development activities, and stage 3, where non-competitive suppliers were encouraged to co-operate.
A central concern for the ERBT perspective is whether knowledge flowing across the firm’s boundary can be held as proprietary knowledge or whether knowledge diffusion makes advantage hard to maintain. Adopting ERBT, Lavie (2006) extends Barney’s (1991) RBV framework, distinguishing between shared and non-shared resources in relation to contribution towards extracting rents from alliance networks. After reassessing the heterogeneity, imperfect mobility, imitability, and substitutability conditions, it is concluded that the nature of relationships may matter more than the nature of resources in networked environments. Lavie incorporates the notion of network resources that play a role not only in the evolution of alliance networks (Gulati, 1999), but also in shaping the competitive advantage of interconnected firms. By incorporating RBT with social network theory, Lavie’s study goes beyond consideration of the intensity of relational ties, defining a set of opportunities and constraints on the focal firm’s rent accumulation behaviour.
Further proponents of ERBT, Arya and Lin (2007), analyse not-for-profit networked organizations to understand the collaborative outcomes as influenced by organizational characteristics, supply partner characteristics and network structures. Again, their study demonstrates the importance of unique resources at individual, dyadic, and full network levels that allow these organisations to develop capabilities and competencies. Arya and Lin claim that by applying RBT beyond the boundary of the firm, the study reveals that organizations can enhance their capabilities by collaborating with others and as a consequence enjoy higher monetary (and non-monetary) benefits compared with less collaborative firms. Such claims may be difficult to substantiate given the embryonic nature of theory development towards value creation in relation to ERBT. The traditional adherence of classic RBT to the notion of ‘competitive advantage’ as prime benefit to the firm, rather than nominal monetary value, gives some indication of the conceptual difficulties in not only the contextual nature of resources, but also how to extend and maintain such value beyond the boundary of the firm.