Debate 1: Firm-Specific versus Industry-Specific Determinants of Performance At the heart of the resource-based view is the proposition that firm performance is most fundamentally determined by firm-specific resources and capabilities, whereas the industry-based view argues that firm performance is ultimately a function of industry- specific attributes. The industry-based view points out persistently different average profit rates of different industries, such as pharmaceutical versus grocery industries. The resource-based view, on the other hand, has documented persistently different performance levels among firms, such as ASML (see Strategy in Action 3.1) and CIMC (see Strategy in Action 3.2) versus rivals within the same industry. Findings are mixed. Some studies find industry-specific effects to be more significant, and other studies are supportive of the resource-based viewfirm-specific capabilities are stronger determinants of firm performance than industry-specific effects.* While the debate goes on, it is important to caution against an interest in declaring one side to be winning.* There are two reasons for such cautionmethodological and practical. First, while industry-based studies have used more observable proxies, such as entry barriers and concentration ratios, resource-based studies have to confront the challenge of how to measure unobservable firm-specific capabilities, such as organizational learning, knowledge management, and managerial talents. While resource-based scholars have created many innovative measures to get at these capabilities, these measures at best are observable consequences of unobservable resources and can be subject to methodological criticisms.* Critics contend that the resource-based view follows the logic that show me a success story and I will show you a core competence [resource] (or show me a failure and I will show you a missing competence).* Resource-based theorists readily admit that the source of sustainable competitive advantage is likely to be found in different places at different points in time in different industries.* While such reasoning can insightfully explain what happened in the past, it is difficult to predict what will happen in the future. For instance, are we going to do better than rivals if we match, say, their equipment? Second and perhaps more important, there is a good practical reason to believe that it is the combination of both industry-specific and firm-specific attributes that collectively drive firm performance. They have in fact been argued to be the two sides of the same coin of strategic analysis from the very beginning of the development of the resource- based view.* It seems to make better sense when viewing both perspectives as complementary to each other.

Answer each question with a minimum of 3 sentences.

1) What is the debate and what do you think? 2) Why is it important to understand the profitability by industry and/or by firm? 3) Why is it important to understand resources and capabilities?