Resources-based theory

Threats to sustainability under all market structure:

    - Regression to the mean: the firm should not be expected to keep performing extremely well or badly, as there are lots of factors which can affect firm performance, cannot be controlled

    ➢ One factor: powerful buyer & supplier -> share profit of a extremely well performed firm with their strong bargaining power, even the firm has inimitable advantages; BUT also return some gains to help the firm with extremely poor performance -> the firm facing strong buyer & supplier has threats on its profit sustainability as it is more unlikely to experience the extreme performance

      Profit persistence evidence: Mueller’s findings

    - Profit persistence: firms having profit that is higher than the average now should remain the performance; firms with lower than average profit now also should keep stable performance with low profit

Mueller’s study of profit persistence

Study results:

    - With the average industry ROA at 6%,   extremely high profit firms with about 12% ROA will experience a profit decrease towards the average level during a period of time, approaching ROA about 8%; while firms with abnormally low profit with about 0% ROA will get an increase in its profit, reaching about 4.9%

    - BUT: the two groups of firms get closer but won’t finally converge to a common mean -> the firms with initially high profit will reach the profitability rate that are still higher than that of the firms with low profit at first

    - Further implication: market forces threat the profit, BUT only to a certain extent -> other forces seems to protect profitable firms

      ➢ the forces protect firm’s competitive advantage and allow its profit persistence -> the sources of the firm’s competitive advantage may be difficult to imitate so that its advantage is sustained for a long time

Sustainable competitive advantage:

  The Resource-based Theory of the firm...