1. The Cornerstones of
Competitive Advantage: A
Resource-Based View
(Margaret Peteraf, 1993)
Group 1
Meredith, Barclay,
Woo-je, and Kumar

2. MMoottiivvaattiioonn aanndd PPaappeerr OOuuttlliinnee
To develop a general model of resources and firm
performance that integrates the various strands of
research and provides a common ground for further
work
Two main sections of paper:
1) Discussion of four (cornerstone) conditions that ALL
must be met for (sustainable) competitive advantage
2) Applications to business and corporate strategy

3. Condition #1 :: RReessoouurrccee HHeetteerrooggeenneeiittyy
Assumption of resource-based work: resources and
capabilities are heterogeneous across firms (Barney, 1991)
Ricardian Rents (name originates from Ricardo, 1817):
Heterogeneity may reflect superior productive factors
Productive factors often quasi-fixed - cannot be expanded rapidly
Thus, inferior resources are brought into production as well
(Ricardian argument that can be understood by assuming superior
resource firms have lower average costs than other firms)
(See Figure 1)

4. Scarcity rents w/ heterogeneous factors
This model consistent with competitive behavior in product market -
Firms are price takers and produce where price equals MC.
High returns to low cost firms cannot be attributed to artificial restriction
of output or to market power.
Key point: superior resources remain in limited supply - cannot be
expanded freely or imitated by other firms. (See figure 2 to see what
happens when this isn’t the case.)

5. Rent dissipation from Imitation
Now, only normal economic returns will be earned by efficient
producers (now homogeneous).

6. Note: Monopoly Rents
Condition of heterogeneity consistent with models of market
power and monopoly rents
Monopoly models - heterogeneity may result from spatial
competition, product differentiation, localized monopoly, size
advantages
• Firms maximize profits by CONSCIOUSLY restricting their output
relative to competitive levels
Apparently homogeneous firms may earn monopoly rents:
• Cournot Behavior
• Collusive Behavior
• In this case, heterogeneity occurs across incumbent firms and
potential entrants (depends on barriers to entry)

7. Condition #2: Ex-Post Limits to Competition
Sustained competitive advantage requires that
heterogeneity be preserved - must be forces that limit
competition for rents (Figure 2 shows how ex-post
competition erodes Ricardian rents)
Resource-based work has focused on 2 critical factors
that limit ex post competition:
Imperfect imitability
Imperfect substitutability - substitutes reduce
economic rents by making the demand curves of
monopolists/oligopolists more elastic
More attention has been given to the condition of
imperfect imitability.

8. Imperfect Imitability
Rumelt (1984) - “Isolating mechanisms” - phenomena that protects firm
from imitation
Property rights to scarce resources
Quasi-rights (lags, info asymmetries, and frictions) (Rumelt, 1987)
Producer learning, buyer switching costs, reputation, buyer search costs,
economies of scale (Rumelt, 1987)
Causal ambiguity (Lippman & Rumelt, 1982) - uncertainty regarding causes of
efficiencies
Yao (1988) - production economies and sunk costs, transaction costs,
and imperfect information
Ghemawat (1986) - inimitable positions derive from size advantages,
preferred access to resources or customers, restrictions on competitors’
options
Dierickx & Cool (1989) - how imitable an asset is depends on nature
and process by which it was accumulated. They suggest the following
impede imitation: time compression diseconomies, asset mass efficiencies,
interconnectedness of asset stocks, asset erosion, and causal ambiguity

9. Condition #3: Imperfect Mobility
Resources are perfectly immobile if they cannot be traded
Dierickx & Cool (1989) - one of their examples are resources for
which property rights are not well defined
Williamson (1979) - resources that have no other use outside the firm
Teece (1986) – co-specialized assets, which have higher economic
value when employed together
Williamson (1975), Rumelt (1987) - resources may be imperfectly
mobile because of very high transactions costs
Opportunity cost of imperfectly mobile resource is significantly less than
the value to the present employer (firm). Here, Peteraf defines opportunity
cost in terms of next best potential user (e.g. firm), rather than next best
use.
Rents will be shared between factor (input) owners and the firm employing
them, thus - bilateral monopoly where rent distribution is indeterminate:
Imperfect factor mobility necessary for SCA

10. Condition #4: Ex Ante Limits to Competition
Prior to any firm’s establishing a superior resource position,
there must be limited competition for that position
Performance of firms depends not only on returns from their
strategies, but also on cost of implementing those strategies
(Barney, 1986)
Without imperfections in strategic factor (input) markets, firms
can only hope for normal returns
One example: Walmart’s acquisition of real estate in rural areas
Another example: Price of acquisition
Key here is: Cost

11. 4 Conditions that Must be Met

12. Applications
Single Business Strategy
Nobel prize winning scientist, although may be a unique resource, is
an unlikely source of SCA unless she has firm-specific ties
License new technology or develop internally?
• If potential value of technology cannot be well communicated to
others because of the risk of revealing proprietary info, may be
best to develop internally
• Might depend on co-specialized assets such as established
relationships with vendors who are reluctant to switch suppliers
Consideration of how imitable innovation is:
• If innovation is no more than a complex assembly of relatively
available technologies, a firm could consider building other co-specialized
resources that are less available

13. Applications
Corporate Strategy
Resource-based model fundamentally concerned with
internal accumulation of assets, asset specificity, and less
directly with transactions costs - Thus, naturally lends
itself too questions of firm boundaries
Diversification
Barney (1988) - abnormal returns from diversification depend on
how rare and imitable resulting combination of resources
Montgomery & Hariharan (1991) - shown that firms with broad
resource bases tend to pursue diversification
Theory of diversification is resource-based: diversification
is the result of excess capacity in which resources have multiple
uses and for which there is market failure

14. Applications
Paradox of how “excess capacity” in resources may lead
to “scarcity rents” for resource holders: Resources are
“scarce” relative to total demand for their overall use,
despite excess capacity relative to specific markets
Example: Kodak
Montgomery & Wernerfelt (1989) - diversification viewed
as matching a firm’s resources to the set of market
opportunities
Firms with more specialized resources are more constrained to
enter into widely different product markets - and specialized
resources relatively scarce, thus higher rents
Firms with more generalizable resources may face a wider
opportunity set - yet lower rents

15. Applications
Peteraf suggests that although they do not say so,
Montgomery & Wernerfelt’s (1989) model implies an
optimal extent of diversification.

16. CCoonnttrriibbuuttiioonnss
Peteraf provides a synthesis of previous work in
RBT
Shows how concepts and ideas in RBT are
consistent with a Ricardian view of economic rent
and competitive advantage
Provides a detailed and tractable discussion of
precisely why these four (cornerstone) conditions
must be met for SCA
Resource-based Theory - only theory of corporate
scope capable of explaining the range of
diversification