CANS 406 Lecture Notes - Lecture 6: Edith Penrose, Ronald Coase, Competitive Advantage
22 May 2018
School
Department
Course
Professor
Internal environment
Jan 23rd 2018
By studying external environment, firms identify what they might choose to do
Why is internal analysis important?
• "It is not possible to evaluate attractiveness of an industry independent of the resources a
firm brings to that industry" - Barney
• Antecedents:
o Capabilities: "services of the firm" in Edith Penrose (1959), Theory of the Growth of the
Firm
• Firm as bundle of physical and human resources which managers can assemble
into productive services to take advantage of external opportunities
o Value chain: Ronald Coase (1937), "The nature of the firm"
• What determines the size and scope of the firm?
▪ Internalization theory
• Key definitions
o Resource: tangible and intangible assets a firm uses to choose and implement its
strategies
o Capabilities: resources firms use to organize and exploit other resources
Resource-based theory (Barney)
• Key definitions
o Strategy: firm's theory of how it is going to gain and sustain competitive advantage
o Competitive advantage: when a firm creates more economic value than its competitors
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• Using core competencies to exploit opportunities in the external environment
can be a source of competitive advantage
o Sustained competitive advantage: competitive advantage that lasts a long time
• Key assumptions
o Resource heterogeneity: competing firms may control different resources and
capabilities
o Resource diffusion: these differences may last long periods of time
• Comparison between Porter five-forces and Barney resource-based view
o
5-forces (external)
Resource-based view (internal)
Unit of analysis
Industry
Resource
Within industry/group
Firms homogeneous
Firms may be heterogeneous
Industry structure
Oligopoly or monopoly
Globally competitive
Primary strategic
implications
Barriers to entry and
collusion
Create value by meeting
customer needs
• Components of internal analysis
Competitive advantage through core competencies
• Firms achieve strategic competitiveness and earn above-average returns when their core
competencies are effectively
o Acquired
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o Bundled
o Leveraged
• The ultimate goal of such strategic is for the firms to achieve a sustainable competitive
advantage
o Will enable them to earn above-average returns
• To achieve strategic competitiveness and earn above-average returns
o Firms must leverage their core competencies to exploit opportunities in the external
environment
Creating Competitive Advantage
• Core competencies, in combination with product-market positions, are firm's most
important sources of competitive advantage
• Core competencies of a firm, in addition to analysis of its general, industry and competitor
environments, should drive its selection of strategies
• Core competences could arise from
o Collective learning or expertise within the business
o Ability to integrate skills and technologies
o Ability to deliver superior products and services
o Ways a business is differentiated to be competitive
Competitive advantages may not persist
• Competitive advantage does not always last
o Value-creating strategies may be successfully imitated or duplicated by competitors
• Sustainability of a competitive advantage is a function of
o Rate of core competence obsolescence because of environmental changes
o Availability of substitutes for core competence
o Imitability of the core competence
Leveraging resources: foundation of competitive advantage
• Resources:
o Source of firm's capabilities
o Broad in scope
• Firm's assets, including people and value of its brand name, that represent
inputs into firm's production process
o Cover spectrum of individual, social and organizational phenomena
o Alone, do not yield a competitive advantage
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