RBV - Sustainability of Competitive Advantage

Heterogeneity in a firm's resources and capabilities is a necessary but not sufficient condition for any source of competitive advantage to be sustainable (u3s5p53)

The basis of competitive advantage within an industry can change - example is what has happened to film/camera companies such as Kodak and Polaroid. Superior film manufacturing (for example) was no longer a source of competitive advantage when the market went digital. (Or the market for film photography shrank and a new digital market appeared).

Competing flexibly :- responding to the external environment. Organisations need to be able to adapt while remaining stable enough to exploit any changes made (Volberda 1998).

Dynamic capabilities (Teece, Pisano and Shuen, 1997) are "the firm's ability to integrate, build and reconfigure internal and external competencies to address rapiudly changing environments. Dynamic capabilities thus reflect an organisation's ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions".... because:

Firms operate in rapidly changing environments
It is difficult to adapt capabilities or develop new ones when required
Capabilities are not tradable in markets, but must be built within the organisation (due to tacit knowledge etc)
Capabilities take time to build and develop
The process of learning to develop capabilities is path dependent (history matters, bygones are not bygones)

So firms most likely to gain competitive advantage in turbulent environments are those best able to reconfigure and transform themselves, which is a capability in itself.

No s**t sherlock.... :)

Dynamic capabilities are created in the same way as other capabilities. Organisational routines are the main components. So, make or buy your capabilities? After all, we have been building the argument here that capabilities are built not bought. So why are so many people outsourcing?

By outsourcing, it is possible to take advantage of greater expertise and potential scale economies. Companies like Wipro can take advantage of lower overhead costs in places like Bangalore than almost any "western" firm. So the decision to develop capabilities internally should always be subject to economies of scale questions.


Modularity is the principle unlerlying the potential for external capability development. Modularisation of components and services makes it easy for manufacturers to replace or re-use certain components across a wide product range or future products, or use external firms to supply those modularised products or services.

Transaction cost economics is central to the insource/outsource decision. They suggest that the most efficient way to carry out a transaction is whichever way will minimise the costs of that transaction to the organisation. These costs might include the setting up and running of an internal supply contract, internal costs of management of time and resource, costs of operating at less than optimal scale efficiency etc.

The dilemma is that it is often difficult to evaluate today the true cost of a decision to outsource given that we are uncertain of its impact on our future strategic flexibility. See also table u3s5p64