40 ENTREPRENEURSHIP
legal staff cannot be the source of an advantage. Common resources such as these may be necessary under certain conditions and may improve chances for survival, but they are not a source of SCA.
Some resources have inelastic supply, which means that even when there is an increase in the demand for the resource, and a corresponding rise in price, the market takes a long time to respond with additional supply. The lag time provides the firm with an advan-
tage that it can exploit until the competition catches up.22
How rare must a resource be to generate a competitive advantage? A unique and valuable resource clearly gives a firm SCA, but does this resource need to be one of a
kind? Probably not. A resource may be considered rare when it is not widely available to all competitors. If supply and demand are in equilibrium, and the price of the resource is generally affordable, the resource will cease to be rare. Examples of resources that may be considered rare are a good location, managers who are also considered good leaders, or the control of natural resources like oil reserves (if you are in the oil business). A spe- cial case of a rare resource that does not provide SCA can be found in a Bertrand mar- ket. A Bertrand market is a duopoly in which both firms have similarly rare resources, giving them the same marginal costs. They will ultimately charge the competitive price based on their marginal costs and neither will therefore have a sustainable competitive
advantage.23
Imperfectly Imitable (Hard-to-Copy) Resources
Firms with rare and valuable resources clearly have advantages over firms lacking such assets. Indeed, such strategic endowments often lead to innovation and market leader-
ship.24However, even rare resources can be obtained at some price. If the price is so
high that the firm makes no profit, there is no SCA because the firm has spent its advan- tage on the resource. Where duplication is not possible at a price low enough to leave profits, the resource is said to be imperfectly imitable or hard to copy . Four factors make it difficult for firms to copy each other’s skills and resources: (1) economic and legal deterrence, (2) unique historical conditions, (3) causal ambiguity, (4) and social complexity.
Economic and Legal Deterrence. Under certain circumstances, it is illegal for one firm to copy the resources of another. These legal protections take forms such as copy- rights, patents, trademarks, service marks, and intentionally proprietary trade secrets. In addition, economic deterrence can prevent copying, as a firm can retaliate in the mar- ketplace as well as in court. For example, the victimized company can cut prices, devel- and their newterzi indicate that this innova-
tive strategic resource arrangement works for them. “The world has changed,” Aydin Olcum, one of the company’s Turkish tailors, observes. “You’re not supposed to live where
you’re born. You’re supposed to live where you can feed your family.”
SOURCE: Adapted from Michael M. Phillips, “Why Turkish Tailors Seem So Well-Suited to Work in Tennessee,” The Wall Street Journal , April 12, 2005: A1, and http://www.johnhdaniel.com.
Resources and Capabilities 41
op other products that compete closely with those of the offender, or attempt to shut the offender out of the market with long-term contracts and tie-ups.
Unique Historical Conditions. The defining moment for many organizations is their
founding. At birth, organizations are imprinted with the vision and purpose of their founders. This emphasis on the founders illustrates the importance of the individual. The initial assets and resources that accompany the organization’s srcin are unique to
that place and time. Firms founded at different times in other places cannot obtain these resources; thus, the resources cannot be duplicated. Examples of unique historical foundings abound, such as starting a company in a great location that was unrecognized by others at the time. Another example might be the creation of a new venture by sci- entists and engineers whose special knowledge is in companies specializing in genetic engineering or software development.
Ambiguous Causes and Effects. Causal ambiguity exists when the relationship be- tween cause and effect is not well understood or is ambiguous.25In business, causal
ambiguity means that there is doubt about what caused what and why things happened. When these factors are imperfectly understood, it is difficult for other firms to duplicate them. Even though the pieces may look the same as in the srcinal, the rules of congru- ence are unknown, so the imitator cannot replicate them. Entrepreneurs themselves often cannot explain their own successes, so how can imitators hope to duplicate their operations? Sam Walton’s break-all-the-rules rule shows that he understood that some things simply could not be predicted by an algorithm.
In the context of competencies and skills, two kinds of causal ambiguity exist. One is linkage ambiguity , which includes how relationships work together. Linkage ambi- guity is related to the complex relationship issue discussed below. For example, compa- nies recognize that training is a good thing, and they spend billions of dollars each year training their employees and managers. However, sometimes much of the training is wasted as people return to their jobs without demonstrating any noticeable change in performance. What is the link between training and performance? Some companies train more successfully than others, but no one really understands why. If we understood, we would make all training the same and it would all be effective. Even copying the way a successful company does its training doesn’t work because the capability of transferring skills also has linkage ambiguity.
The other ambiguity is characteristic ambiguity, which refers to the lack of knowl- edge about which competencies are the actual sources of SCA and how they work. Why do some ventures have high-performing teams while others do not? Why is information technology an advantage in one firm and a continual problem in another? The reason is that IT and teams have characteristic ambiguity, that is, we do not know everything there is to know about either IT or teams.
It may seem odd that a firm with high-performance skills and resources has no bet- ter idea of why things work than the potential imitator. How is this possible? Economic organizations can be very complex. The relationships among product design, develop- ment, manufacturing, and marketing are not subject to complete quantitative analysis. They often depend on the complicated interaction of social, psychological, economic,
42 ENTREPRENEURSHIP
and technical factors. Even when organizations have all available information about their competitors, they often are unable to answer such questions as:
• What makes one firm’s sales force more effective than that of another?
• What makes one firm’s production more efficient than that of another?
• Why are one firm’s designs more appealing to the customer than that of another?
These are but a few of the ambiguous areas. No one can answer these questions. What if there is no causal ambiguity? Consider a firm that understands the cause and effect relationship between its resources and its performance. Can it keep that knowl- edge secret from its competitors? Not in the long run. Competitors have strategies to unearth the information they need, such as hiring workers and managers away from the advantaged organization, and devising schemes to extract the needed information. Competitors may spend time and money, but in the long run, they will know all the firm’s vital secrets, as will the entire industry. The entrepreneur who started with an advantage will not be able to sustain it indefinitely.
Complex Social Relationships. Social complexity is the third reason a firm’s capabili- ties and resources may not be easily duplicated. As long as a firm uses human and orga- nizational resources, social complexity may serve as a barrier to imitation. Why? The interpersonal relationships of managers, customers, and suppliers are complex. Someone, for example, could point out that customers like the firm’s salespeople, but knowing this is the case does not make it possible for competitors to copy the likability of their salespeople. The competitor can hire away the whole sales force, but even this action may not reproduce the srcinal relationship: The sales force may now work under different conditions, with different managers, and for different incentives.
Perhaps the most complex social phenomenon is organizational culture.26 The new
venture’s culture is a complex combination of the founder’s values, habits, and beliefs, and the interaction of these elements with the newly created organization and the mar- ket. The culture might be, among other things, very supportive, highly authoritarian, very aggressive, extremely thrifty, or combinations of all these and more. As organiza-tions grow, subcultures form, adding more complexity. Organizational cultures are dif-
ficult to “know” from the outside; they cannot be directly observed and they resist quan- titative measurement, which makes them almost impossible to copy.
Despite this hard-to-copy element, strong forces are at work that make organizations appear very similar. These forces are described by a framework known as institutional theory.27 At its most basic, institutional theory says that the forces for conformity in
organizational structure, practice, and culture are very strong. These forces are:
• The shaping nature of the business environment
• The accepted wisdom of how to succeed
• The risk aversion that accompanies the prospect of doing something different
• The lack of diversity among the most powerful decision makers
•Organizational practices like benchmarking
Without doubt, these are powerful forces, which is why, when observing large corpora- tions, we frequently find a great deal of conformity. Many new ventures also have look-
Resources and Capabilities 43
alike and me-too aspects, making it nearly impossible to differentiate all aspects of the new venture from aspects of existing firms. Such differentiation is probably undesirable as well, because customers also want the convenience of procuring familiar services and products from the firm. However, for the nascent entrepreneur and new venture cre- ation, which theory, RBV or institutional, is more useful in providing accurate descrip- tion and prediction?
Nonsubstitutable Resources
Nonsubstitutableresources are strategic resources that cannot be replaced by common
resources. For example, let us say there are two firms, A and B. Firm A has a rare and valuable resource, which it uses to implement its strategy. If firm B has common
resources that can be substituted for firm A’s valuable and rare resources, and these com- mon resources do basically the same things, then the rare and valuable resources of firm A do not confer strategic advantage. In fact, if firm B can obtain common resources that
threaten firm A’s competitive advantage, then so can many other firms, thereby ensur- ing that firm A has no advantage.
Very different resources can be substitutes for each other. For example, an expert-sys- tem computer program may substitute for a manager. A charismatic leader may substi- tute for a well-designed, strategic-planning system. A well-designed, programmed-learn- ing module may substitute for an inspirational teacher. Figure 2.1 summarizes the four resource attributes needed for competitive advantage.
RESOURCE TYPES
Our resource-based theory recognizes six types of resources: physical, reputational, orga- nizational, financial, intellectual/human, and technological; they can be called our
PROFITfactors. These resources are broadly drawn and include all “assets, capabilities,
organizational processes, firm attributes, information, and knowledge.”28
Strictly speak- ing, a list like this one (as is true of many lists in this book) should be exhaustive, and the items on it mutually exclusive. Here, the list is exhaustive. But sometimes, the cate- gory types are not mutually exclusive. For example, if the organization has great market- ing, does this characteristic reside in the person who is a great marketer or in the mar- keting department? Sometimes it is tough to tell. From our point of view, it is more important to identify great marketing than to put marketing into the most correct cate- gory.
We explore these six resource types and note the special situations in which they may confer a particular advantage or no advantage at all.
Physical Resources
Physical resources are the tangible property the firm uses in production and adminis- tration. These include the firm’s plant and equipment, its location, and the amenities available at that location. Some firms also have natural resources, such as minerals, en- ergy resources, or land. These natural resources can affect the quality of the firm’s phys- ical inputs and raw materials.
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above. However, because most physical entities can be manufactured and purchased, they are probably not rare or hard to copy. Only in special circumstances, such as a unique historical situation, will physical resources be a source of SCA. For example, one might believe that in Street Story 2.2, Amanda Knauer’s discovery of Argentine leather (a physical resource) is her source of advantage. But read closely. What are the under- lying resources and capabilities of Qara Argentine?
The amenities and infrastructure of a locality or region can also promote entrepre- neurship. Founders frequently locate wherever they happen to be when the entrepre- neurship bug bites, but some areas in the country can give a significant push to entre- preneurial start-ups’ success. These geographic areas form the basis of an entrepreneur-
ial system.29 A recent research study shows how effective such a system can be. The sys-
tem components might include incubator organizations, formal and informal networks, economic and social networks, physical infrastructure such as roads and subsidized industrial space, universities with engineering and entrepreneurship programs and dense high-tech activity. Systems like this exist in legend, such as Silicon Valley and the Massachusetts Route 122 area. Examples of other up-and-coming areas are the Boulder
County, Colorado, area for high tech, and the Indianapolis Life and Health Science Initiative region.
Reputational Resources
Reputational resourcesare the perceptions of the company held by people in the firm’s environment. Reputation can exist at the product level as in brand loyalty, or at the cor-
FIGURE 2.1 Resource Attributes and Competitive Advantage
Not possible through: Similar modes Different modes Substitutable resources Easily possible: Similar modes Different modes Exploits opportunity Neutralizes threats Unique Costly to procure Unique history Causally ambiguous Socially complex Valuable resources Rare resources Imitable resources
Not suited to the environment: common Readily available Inexpensive Ordinary history Causality known Socially simple Creates Competitive Advantage Resource Dimension No Competitive Advantage
SOURCE: Adapted from J. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, 1991:
99–120.
Resources and Capabilities 45
porate level, as in a firm’s global image. Although technological resources may be short- lived because of innovations and inventions, reputational capital may be relatively long-
lived. Many organizations maintain high reputations over long periods of time. Fortune
magazine’s annual survey of corporate reputation indicates that 7 of the top 10 corpo-