Question:

The ability of some firms to sustain longer term competitive advantage relates to their capabilities according to the resource based theory of the firm. Summarise this approach to explain why some firms perform better than others in an industry.

Sustainable Competitive Advantage

Within all economies there have always been firms that are destined for success and firms that are doomed to failure... or have there? Is this an inevitable outcome predestined by exterior market forces or are there generalizations we can make about the fundamental nature of business performance that will help allow managers and entrepreneurs to shape their firms to make economic profits even into the long run? It is obvious that some firms
Innovation is the most difficult and unstable of capabilities to capture and hence has the potential to be the most valuable as it is hardest to duplicate. We can see how these core capabilities lead to some firms sustaining longer term competitive advantage in their respective markets. All these capabilities are what differentiate one firm from another it is their distinct elusive quality that brings such high rewards when they are nurtured and used appropriately. We see in practice how a successful firm is one that utilises these capabilities and by doing so creates a competitive advantage in their industry by lowering their marginal cost or allowing them to charge a premium on the product. Determining whether firms capabilities have value depends on a number of criteria. To be valuable, the firm’s capabilities must be sustainable and appropriable. The success of the firm will attract competition and to be valuable in the long run it must be able to remain sustainable under this competitive pressure. This success can itself be a barrier to entry to new firms which contrasts with the “McTaggart, Findlay and Parkin Microeconomics” textbook idea that all firms will return to zero economic profit because new firms will enter the market until it is flooded and the price must drop. The Resource based theory shows that even in the long run firms can make