MIDLANDS STATE UNIVERSITY
FACULTY OF SOCIAL SCIENCE
DEPARTMENT OF HUMAN RESOURCES
LEVEL 4.1
NAMES REG NUMBER
CHANTEL MUPEDZISWA R196090E
MODULE CODE: HRM410 LEADERSHIP
Resource-based theory states that the possession of resources is valuable, difficult to imitate,
rare, and cannot be substituted. The resource-based theory suggests that organizations should
look inside the company to find the sources of competitive advantage through the use of their
resources. Competitive advantage is an advantage that a firm has over its competitors that
allows it to generate sales or margins and/or retain more customers than the competition. A
firm's competitive advantage evolves from the resources that the organization has.
In the resource-based theory model, resources are given the major role of assisting companies
in achieving higher organizational performance and competitive advantage. The theory has
been redeveloped and redefined through research and the evidence that supports it. Resource-
based theory prescribes that organizations position themselves strategically based on their
resources and capabilities rather than their products and services. Within resource-based
theory, the key terms include tangible resources, intangible resources, and capabilities.
Let's pretend that you're the owner of a fast food chain called McDreamy's. In your company,
you have tangible resources, intangible resources, and capabilities that all contribute to your
success in the fast food industry.
Resource-Based Theory
4.1 Resource-Based Theory
Learning Objectives
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.
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 4.1 "Resource-
Based Theory: The Basics"). These competitive advantages in turn can help the organization
enjoy strong profits.Barney, J. B. 1991. Firm resources and sustained competitive advantage.
Journal of Management, 17, 99–120; Wernerfelt, B. 1984. A resource-based view of the firm.
Strategic Management Journal, 5, 171–180.
A strategic resource is an asset that is valuable, rare, difficult to imitate, and
nonsubstitutable.Barney, J. B. 1991. Firm resources and sustained competitive advantage.
Journal of Management, 17, 99–120; Chi, T. 1994. Trading in strategic resources: Necessary
conditions, transaction cost problems, and choice of exchange structure. Strategic
Management Journal, 15(4), 271–290. A resource is valuable to the extent that it helps a firm
create strategies that capitalize on opportunities and ward off threats. Southwest Airlines’
culture fits this standard well. Most airlines struggle to be profitable, but Southwest makes
money virtually every year. One key reason is a legendary organizational culture that inspires
employees to do their very best. This culture is also rare in that strikes, layoffs, and poor
morale are common within the airline industry.
Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult
to imitate resources are protected by various legal means, including trademarks, patents, and
copyrights. Other resources are hard to copy because they evolve over time and they reflect
unique aspects of the firm. Southwest’s culture arose from its very humble beginnings. The
airline had so little money that at times it had to temporarily “borrow” luggage carts from
other airlines and put magnets with the Southwest logo on top of the rivals’ logo. Southwest
is a “rags to riches” story that has evolved across several decades. Other airlines could not
replicate Southwest’s culture, regardless of how hard they might try, because of Southwest’s
unusual history.
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.
Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the
years, such as the “Lone Star One” design.
Image courtesy of planephotoman,
http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One.jpg.
Ideally, a firm will have a culture, like Southwesta firm will own resources like Southwest’s
culture#8217;s, that embraces the four qualities shown in Figure 4.1 "Resource-Based
Theory: The Basics". that have all four of these qualities. 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 strategic resources can be
created by taking several strategies and resources that each could be copied and bundling
them together in a way that cannot be copied. For example, Southwest’s culture is
complemented by approaches that individually could be copied—the airline’s emphasis on
direct flights, its reliance on one type of plane, and its unique system for passenger boarding
—to create a unique business model whose performance is without peer in the industry.
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.
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 the United States
has remained cheap. Yet this may be changing. Major cities in hot climates such as Las
Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking water supplies. As
water becomes more and more rare, landowners in Maine stand to benefit. Maine has been
described as “the Saudi Arabia of water” because its borders contain so much drinkable
water. It is not hard to imagine a day when companies in Maine make huge profits by sending
giant trucks filled with water south and west or even by building water pipelines to service
arid regions.
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.
Physical assets such as a firm’s property, plant, and equipment, as well as cash, are
considered to be tangible resources. In contrast, intangible resources are quite difficult to see,
to touch, or to quantify. Intangible resources include, for example, 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 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 4.2 "Resources
and Capabilities"). Capabilities tend to arise over time as a firm takes actions that build on its
strategic resources. Southwest Airlines, for example, has developed the capability of
providing excellent customer service by building on its strong organizational culture.
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, to manage, and otherwise
to exploit resources in a manner that provides value added to customers and creates
advantages over competitors.
Some firms develop a dynamic capability. This means that a firm has a unique capability of
creating new capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at
continually updating its array of capabilities to keep pace with changes in its environment.
General Electric, for example, buys and sells firms to maintain its market leadership over
time, while Coca-Cola has an uncanny knack for building new brands and products as the
soft-drink market evolves. Not surprisingly, both of these firms rank among the top thirteen
among the “World’s Most Admired Companies” for 2011.
Strategy at the Movies
That Thing You Do!
How can the members of an organization reach success “doing that thing they do”?
According to resource-based theory, one possible road to riches is creating—on purpose or by
accident—a unique combination of resources. In the 1996 movie That Thing You Do!,
unwittingly assembling a unique bundle of resources leads a 1960s band called The Wonders
to rise from small-town obscurity to the top of the music charts. One resource is lead singer
Jimmy Mattingly, who possesses immense musical talent. Another is guitarist Lenny Haise,
whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,
Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the
group’s name. When the band’s usual drummer has to miss a gig due to injury, the door is
opened for charismatic drummer Guy Patterson, whose energy proves to be the final piece of
the puzzle for The Wonders.
Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad
called “That Thing You Do!” during a local talent contest. When the talent show audience
goes crazy in response, it marks the beginning of a meteoric rise for both the song and the
band. Before long, The Wonders perform on television and “That Thing You Do!” is a top-
ten hit record. The band’s magic vanishes as quickly as it appeared, however. After their bass
player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva attitude runs amok, the
band is finished and Guy is left to “wonder” what might have been. That Thing You Do!
illustrates that while bundling resources in a unique way can create immense success,
preserving and managing these resources over time can be very difficult.
Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You
Do!
Image courtesy of Daniel Dormann, http://en.wikipedia.org/wiki/File:LivTylerJune08.jpg.
Is Resource-Based Theory Old News?
Resource-based theory has evolved in recent years to provide a way to understand how
strategic resources and capabilities allow firms to enjoy excellent performance. But more
than one wry observer has wondered aloud, “Is resource-based theory just old wine in a new
bottle?” This is a question worth considering because the role of resources in shaping success
and failure has been discussed for many centuries.
Aesop was a Greek storyteller who lived approximately 2,500 years ago. Aesop is known in
particular for having created a series of fables—stories that appear on the surface to be
simply children’s tales but that offer deep lessons for everyone. One of Aesop’s fables
focuses on an ass (donkey) and some grasshoppers. When the ass tries to duplicate the sweet
singing of the grasshoppers by copying their diet, he soon dies of starvation. Attempting to
replicate the grasshoppers’ unique singing capability proved to be a fatal mistake (Figure 4.3
"Aesop’s Fables"). The fable illustrates a central point of resource-based theory: it is an array
of resources and capabilities that fuels enduring success, not any one resource alone.
In a far more recent example, sociologist Philip Selznick developed the concept of distinctive
competence through a series of books in the 1940s and 1950s.Selznick, P. 1957. Leadership
in administration. New York: Harper; Selznick, P. 1952. The organizational weapon. New
York, NY: McGraw-Hill; Selznick, P. 1949. TVA and the grass roots. Berkeley, CA:
University of California Press. A distinctive competence is a set of activities that an
organization performs especially well. Southwest Airlines, for example, appears to have a
distinctive competency in operations, as evidenced by how quickly it moves its flights in and
out of airports. Further, Selznick suggested that possessing a distinctive competency creates a
competitive advantage for a firm. Certainly, there is plenty of overlap between the concept of
distinctive competency, on the one hand, and capabilities, on the other.
Figure 4.3 Aesop’s Fables
Adapted from Chapter 4 of Atlas Black: Managing to Succeed and Short, J. & Ketchen, D.
2005. Using classic literature to teach timeless truths: An illustration using Aesop’s fables to
teach strategic management. Journal of Management Education, 29, 6, 816–832.
So is resource-based theory in fact old wine in a new bottle? Not really. Resource-based
theory builds on past ideas about resources, but it represents a big improvement on past ideas
in at least two ways. First, resource-based theory offers a complete framework for analyzing
organizations, not just snippets of valuable wisdom like Aesop and Selznick provided.
Second, the ideas offered by resource-based theory have been developed and refined through
scores of research studies involving thousands of organizations. In other words, there is solid
evidence backing it up.
The Marketing Mix
Leveraging resources and capabilities to create desirable products and services is important,
but customers must still be convinced to purchase these goods and services. The marketing
mix—also known as the four Ps of marketing—provides important insights into how to make
this happen. A master of the marketing mix was circus impresario P. T. Barnum, who is
famous in part for his claim that “there’s a sucker born every minute.” The real purpose of the
marketing mix is not to trick customers but rather to provide a strong alignment among the
four Ps (product, price, place, and promotion) to offer customers a coherent and persuasive
message (Figure 4.4 "The Marketing Mix").
A firm’s product is what it sells to customers. Southwest Airlines sells, of course, airplane
flights. The airline tries to set its flights apart from those of airlines by making flying fun.
This can include, for example, flight attendants offering preflight instructions as a rap. The
price of a good or service should provide a good match with the value offered. Throughout its
history, Southwest has usually charged lower airfares than its rivals. Place can refer to a
physical purchase point as well as a distribution channel. Southwest has generally operated in
cities that are not served by many airlines and in secondary airports in major cities. This has
allowed the firm to get favorable lease rates at airports and has helped it create customer
loyalty among passengers who are thankful to have access to good air travel.
Finally, promotion consists of the communications used to market a product, including
advertising, public relations, and other forms of direct and indirect selling. Southwest is
known for its clever advertising. In a recent television advertising campaign, for example,
Southwest lampooned the baggage fees charged by most other airlines while highlighting its
more customer-friendly approach to checked luggage. Given the consistent theme of
providing a good value plus an element of fun to passengers that is developed across the
elements of the marketing mix, it is no surprise that Southwest has been so successful within
a very challenging industry.
Few executives in history have had the marketing savvy of P. T. Barnum.
Image courtesy of The Strobridge Litho. Co., Cincinnati & New York,
http://en.wikipedia.org/wiki/File:Barnum_%26_Bailey_clowns_and_geese2.jpg.
Key Takeaway
Resource-based theory suggests that resources that are valuable, rare, difficult to imitate, and
nonsubstitutable best position a firm for long-term success. These strategic resources can
provide the foundation to develop firm capabilities that can lead to superior performance over
time. Capabilities are needed to bundle, to manage, and otherwise to exploit resources in a
manner that provides value added to customers and creates advantages over competitors.
Exercises
Does your favorite restaurant have the four qualities of resources that lead to success as
articulated by resource-based theory?
If you were hired by your college or university to market your athletic department, what
element of the marketing mix would you focus on first and why?
What other classic stories or fables could be applied to discuss the importance of firm
resources and superior performance?
Learning Objectives
Define the four major types of intellectual property.
Be able to provide examples of each intellectual property type.
Understand how intellectual property can be a valuable resource for firms.
Defining Intellectual Property
The inability of competitors to imitate a strategic resource is a key to leveraging the resource
to achieve long–term competitive advantages. Companies are clever, and effective imitation
is often very possible. But resources that involve intellectual property reduce or even
eliminate this risk. As a result, developing intellectual property is important to many
organizations.
Intellectual property refers to creations of the mind, such as inventions, artistic products, and
symbols. The four main types of intellectual property are patents, trademarks, copyrights, and
trade secrets (Figure 4.5 "Types of Intellectual Property"). If a piece of intellectual property is
also valuable, rare, and nonsubstitutable, it constitutes a strategic resource. Even if a piece of
intellectual property does not meet all four criteria for serving as a strategic resource, it can
be bundled with other resources and activities to create a resource.
A variety of formal and informal methods are available to protect a firm’s intellectual
property from imitation by rivals. Some forms of intellectual property are best protected by
legal means, while defending others depends on surrounding them in secrecy. This can be
contrasted with Southwest Airlines’ well-known culture, which rivals are free to attempt to
copy if they wish. Southwest’s culture thus is not intellectual property, although some of its
complements such as Southwest’s logo and unique color schemes are.
Patents
Patents are legal decrees that protect inventions from direct imitation for a limited period of
time (Figure 4.6 "Patents"). Obtaining a patent involves navigating a challenging process. To
earn a patent from the US Patent and Trademark Office, an inventor must demonstrate than
an invention is new, nonobvious, and useful. If the owner of a patent believes that a company
or person has infringed on the patent, the owner can sue for damages. In 2011, for example, a
private company named EBSCO alleged that retailer Bass Pro Shops sold a product that
violated EBSCO’s patent on a deer-hunting stand that helps prevent hunters from falling out
of trees. Rather than endure a costly legal fight, the two sides agreed to settle EBSCO’s
complaint out of court.
Patenting an invention is important because patents can fuel enormous profits. Imagine, for
example, the potential for lost profits if the Slinky had not been patented. Shipyard engineer
Richard James came up with the idea for the Slinky by accident in 1943 while he was trying
to create springs for use in ship instruments. When James accidentally tipped over one of his
springs, he noticed that it moved downhill in a captivating way. James spent his free time
perfecting the Slinky and then applied for a patent in 1946. To date, more than three hundred
million Slinkys have been sold by the company that Richard James and his wife Betty
created.
Patenting inventions such as the Slinky helps ensure that the invention is protected from
imitation.
Image courtesy of Roger McLassus,
http://upload.wikimedia.org/wikipedia/commons/f/f3/2006-02-04_Metal_spiral.jpg.
Trademarks
Trademarks are phrases, pictures, names, or symbols used to identify a particular
organization (Figure 4.7 "Trademarks"). Trademarks are important because they help an
organization stand out and build an identity in the marketplace. Some trademarks are so
iconic that almost all consumers recognize them, including McDonald’s golden arches, the
Nike swoosh, and Apple’s outline of an apple.
Other trademarks help rising companies carve out a unique niche for themselves. For
example, French shoe designer Christian Louboutin has trademarked the signature red sole of
his designer shoes. Because these shoes sell for many hundreds of dollars via upscale retailers
such as Neiman Marcus and Saks Fifth Avenue, competitors would love to copy their look.
Thus legally protecting the distinctive red sole from imitation helps preserve Louboutin’s
profits.
Fashionistas instantly recognize the trademark red sole of Christian Louboutin’s high-end
shoes.
Image courtesy of Arroser,
http://wikimediafoundation.org/wiki/File:Louboutin_altadama140.jpg.
Trademarks are important to colleges and universities. Schools earn tremendous sums of
money through royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods
sporting their names and logos. On any given day, there are probably several students in your
class wearing one or more pieces of clothing featuring your school’s insignia; your school
benefits every time items like this are sold.
Schools’ trademarks are easy to counterfeit, however, and the sales of counterfeit goods take
money away from colleges and universities. Not surprisingly, many schools fight to protect
their trademarks. In October 2009, for example, the University of Oklahoma announced that
it was teaming with law enforcement officials to combat the sale of counterfeit goods around
its campus.Ward, C. 2009, October 8. OU works to prevent trademark infringement. The
Oklahoma Daily. Retrieved from http://www.oudaily.com/news/2009/oct/08/ou-works-
prevent-trademark-infringement This initiative and similar ones at other colleges and
universities are designed to ensure that schools receive their fair share of the sales that their
names and logos generate.
Figure 4.7 Trademarks
Images courtesy of unknown author, http://en.wikipedia.org/wiki/File:Aspirine-1923.jpg
(bottom left); Wilinckx, http://en.wikipedia.org/wiki/File:Trademark-symbool.png (top left);
Hult Ketchen International Group, LLC (top right); Helix84,
http://en.wikipedia.org/wiki/File:Burrbery_check.gif (middle right); Unnamed Publisher
(bottom right).
Copyrights
Copyrights provide exclusive rights to the creators of original artistic works such as books,
movies, songs, and screenplays (Figure 4.8 "Copyrights"). Sometimes copyrights are sold and
licensed. In the late 1960s, Buick thought it had an agreement in place to license the number
one hit “Light My Fire” for a television advertisement from The Doors until the band’s
volatile lead singer Jim Morrison loudly protested what he saw as mistreating a work of art.
Classic rock by The Beatles has been used in television ads in recent years. After the late pop
star Michael Jackson bought the rights to the band’s music catalog, he licensed songs to
Target and other companies. Some devoted music fans consider such ads to be abominations,
perhaps proving the merit of Morrison’s protest decades ago.
He looks calm here, but the licensing of a copyrighted song for a car commercial enraged
rock legend Jim Morrison.
Image courtesy of Polfoto/Jan Persson,
http://upload.wikimedia.org/wikipedia/commons/1/15/The_Doors_in_Copenhagen_1968.jpg.
Over time, piracy has become a huge issue for the owners of copyrighted works. In China,
millions of pirated DVDs are sold each year, and music piracy is estimated to account for at
least 95 percent of music sales. This piracy deprives movie studios, record labels, and artists
of millions of dollars in royalties. In response to the damage piracy has caused, the US
government has pressed its Chinese counterpart and other national governments to better
enforce copyrights.
Trade Secrets
Trade secrets refer to formulas, practices, and designs that are central to a firm’s business and
that remain unknown to competitors (Figure 4.9 "Trade Secrets"). Trade secrets are protected
by laws on theft, but once a secret is revealed, it cannot be a secret any longer. This leads
firms to rely mainly on silence and privacy rather than the legal system to protect trade
secrets.
Some trade secrets have become legendary, perhaps because a mystique arises around the
unknown. One famous example is the blend of eleven herbs and spices used in Kentucky
Fried Chicken’s original recipe chicken. KFC protects this secret by having multiple
suppliers each produce a portion of the herb and spice blend; no one supplier knows the full
recipe. The formulation of Coca-Cola is also shrouded in mystery. In 2006, Pepsi was
approached by shady individuals who were offering a chance to buy a stolen copy of Coca-
Cola’s secret recipe. Pepsi wisely refused. An FBI sting was used to bring the thieves to
justice. The soft-drink industry has other secrets too. Dr Pepper’s recipe remains unknown
outside the company. Although Coke’s formula has been the subject of greater speculation,
Dr Pepper is actually the original secret soft drink; it was created a year before Coca-Cola.
The recipe for Dr Pepper is a secret dating back to the 1880s.
Image courtesy of anyjazz65,
http://www.flickr.com/photos/49024304@N00/4262262427/sizes/l/in/photostream.
Key Takeaway
Intellectual property can serve as a strategic resource for organizations. While some sources
of intellectual property such as patents, trademarks, and copyrights can receive special legal
protection, trade secrets provide competitive advantages by simply staying hidden from
competitors.
Exercises
What designs for your college or university are protected by trademarks?
What type of intellectual property provides the most protection for firms?
Why would a firm protect a resource through trade secret rather than by a formal patent?
