1. What is competitive advantage?

Competitive advantage is an ambiguous concept. CA can be acquired through

resources, positions, and other strategies that will result in either a supra normal return,
an above average return, an economic profit or other means of business outcomes.
Rumelt discussed a few definitions, suggested by other researchers in the strategic
field, in his paper which where the following:
1. Value is created when the revenue exceeds the costs of sold goods
2. CA is sustained above normal returns
3. When actions of the firm generate greater than expected value from the resources
4. Earning superior financial returns above industry average for the long term
5. When a firm earns more economic profit on average than others
6. Measured in terms of shareholder returns.

 - Is an ambiguous concept
 - It should be disentangled from performance
 - It should be clear over whom a firm has an advantage
 - It has something to do with value creation (but also with value appropriation)
 - It has something to do with creating value in excess of costs (but which costs?)
 - Can only occur in environments that deviate from perfect competition

How can the neoclassical theory of perfect competition inform theories of competitive
advantage? The neoclassical theory of perfect competition makes assumptions under which
firms in an industry end up in an equilibrium in which they earn zero economic profit.

1. Large numbers assumption (large number of buyers and sellers, firm is a price taker)
2. Homogeneity assumption (no differentiation, demand is homogeneous; standardised
products)
3. Mobility assumption (resources are perfectly mobile; free entry and exit of firms)
4. Rationality assumption (buyers and suppliers have complete information; everyone
maximises value and

utility)

5. Transaction cost assumption (no cost of transactions)

Competitive advantage is not clearly defined, because it is used in different ways. Therefore, it
is an ambiguous concept (Rumelt, 2003). Ultimately it has to do with (1) advantage over
competitors and (2) differences in performance. How these advantages and differences are
defined differs. Rumelt also adds that it has something to do with creating value.

In conclusion there is no definition available for competitive advantage. However,

research suggest that is has something to do with value creation.

2. What is the role of the concept of ‘strategic groups’ in the explanation of

performance differences among firms in Porter’s early work (Porter, 1979,
1981 – see also, Ghemawat, 1999)?
As Porter (1979) mentions in its paper ‘The Structure within Industries and
Companies' Performance’, industries exist of different strategic groups who directly
influence each other Looking at the aviation industry, it could be said it also consist
out of different strategic groups, namely the luxury carriers and the low-fare carriers.
 The luxury carriers offer a more expensive seat with high quality service included,
while low-fare carriers focus more on cheaper seats and additional services that can be
bought separately. According to Porter a strategic group responds in the same way to
disturbances in their industry. The concept of strategic groups is that firms within
industries can be clustered according of their strategies and that their reactions to
disturbances and the pattern of rivalry will be determined by the configuration of
groups. There can be more than two groups in an industry, and they are identified by
the type customers of customers they serve and their way of conducting business
(luxury vs low fare).

9. Strategic groups
- Groups of firms within industries that follow similar strategies in terms of key
decision variables (e.g. advertising, cost structure, R&D etc.)
- Structure within an industry will determine profitability of individual firms
- Industry rivalry depend on number and sizedistribution of groups, the strategic
distance between groups, and the market interdependence among groups.

3. How does the ‘High Church’ of the resource-based view explain differences in
performance among firms?
Barney (1986) discusses that a source of differences in performance amongst firms is
based on firms creating or exploiting competitive imperfections in strategic factor
markets. Barney adds context to this in his 1991 paper about VRIN resources. Here he
explains that companies need to have valuable, rare, inimitable and non-substitutional
resources which would lead to a sustained competitive advantage if a firm meets all
the criteria. If only the first three are met temporary competitive advantage is attained.
Peteraf 1993 complements barney in that she describes heterogeneity as a means to
achieve superior performance together with imperfect mobility, ex-ante and ex-post
limits to competition.

The high church of the resource-based school thus considers firm and resource
heterogeneity as a source of differences in performance amongst firms. Based on the
views of the authors discussed in their papers it is concluded that costly to copy
resources provide a competitive advantage which results in a competitive (sustained)
advantage. Though, it should be noted that it is the exploitation of such an asymmetry
that leads to a difference in performance amongst firms, not the asymmetry itself.

4. What are the similarities and differences between the explanation of

performance differences in the ‘added-value view’ of strategy
(Brandenburger & Stuart, 1996 and Brandenburger, 2002 – also see Gans &
Ryall, 2017), on the one hand, and the explanations in Porter’s early work
and the High Church of the RBV, on the other hand?

The added value view developed by Brandenburger and Stuart is very much based on
economic thinking. Many parallels with neoclassical model of perfect competition > similar
rationality assumptions / equilibrium view of competition / unitary agent view of the firm.
What different is about the added value view > it is based on cooperative game theory logic.
Brandenburger and Stuart give very precise definitions of value creation and appropriation in
their developed framework.

 - These definitions clarify and improve theories of Porter and the RBV
 - The added value view can be seen as offering an integration of Porter-type I/O and

the HIGH CHURCH of the RBV

value creation vs value appropriation

5. What are the main similarities of, and differences between, the explanations
of performance differences among firms in the ‘High Church’ and ‘Low
Church’ of the RBV?
The differences between the high church and the low church best explained as: The
High church looks at explanations in relation to the market, factor markets, and how
those were attained, while the low church tries to identify the capabilities of the
company that are built from inside the firm. Both principles however try to relate their
concepts to competitive advantage.
The low church expands on the high church by opening the black box of the firm,
including dynamics, and tries to go beyond the view of the firm as a unitary agent.

The similarities are in that both churches relate to heterogeneity and imperfect
mobility in order to create value.

These views are opening up the black box of the firm. Prior to these views, theories explained that a
firm obtained resources from factor markets, transformed these into products, and finds positions in
product markets. Obtaining costly to copy resources from factor markets or favorable positions in
product markets may lead to competitive advantage. But exactly how these inputs are turned into
outputs by a firm remained unidentified. These views try to look inside the black box to determine how
firms do this, and if any competitive advantage may be obtained from this.

The ‘Low church’ of the resource based view (deviates more from the underlying neoclassical
economics) Also, these theories break the limitation of a static equilibrium and add a dynamic view of
the firm:

The capabilities view: The essence of organizational capabilities is the integration of tacit knowledge to
perform a productive task. The integration entails that these capabilities are imperfectly mobile, and
tacit knowledge is limitedly transferable. The tacit also entails that these capabilities are inimitable by
other parties.


The knowledge-based view: This entails that knowledge is a firms’ most valuable resource, and since
knowledge is limitedly transferable (only explicit knowledge is transferable, but tacit is often the most
valuable), this may lead to CA. Knowledge may be embedded in organizational routines, which also
difficult to imitate.


The dynamic capabilities view: This theory entails that firms develop capabilities to create, modify, or
adopt processes as time passes. Hence, the term dynamic capabilities. Organizational learning is a
prime example of a dynamic capability.

You can say that these views take the high church of the RBV, and go a little more in depth of how
these resources can be obtained/acquired. These theories open up the black box and move the firm
from a static perspective to a dynamic view. They elaborate that superior resources cannot be bought,
but need to be developed by the firm over time. They move away from the fact that ‘having these
resources’ lead to CA, towards that it is ‘what a firm does’ with these resources that leads to CA. Both
these views and the High church of the RBV do, however, stress the importance of inimitability, non-
substitutability and imperfect mobility of resources in obtaining CA.

Addition, dynamic capabilities may lead to costly to copy resources, while knowledge and capabilities
mostly entail process efficiencies that transform resources into output.

6. Compare the Austrian view on strategy to the views of (1) Porter and (2) the
resource-based view. What does the Austrian view on strategy add to these
more traditional views?

The Austrian view on strategy sees the business environment as a continual process of
strategic windows. In other words, they believe that the industry is in constantly in
disequilibrium and industry fits of the requirements of the markets and the competencies of a
firm are temporarily optimal. There is a constant disequilibrium. The Austrians claim that the
entrepreneur must exploit these existing opportunities in the disequilibrium.

Porter’s early view is concerned with the industrial organization and positioning in an
industry. He talks about barriers to competition, positioning and generic strategies. He builds
on the static neoclassical view as his work suggests that by deviating from perfect competition
creates a favorable market position which leads to competitive advantage. He assumes stable
industries over time thus equilibrium. Here the Austrian view adds a more dynamic view that
there is no equilibrium only disequilibrium and that environments change constantly.

The RBV is also a static view of strategy in that they explain CA by the resources and
capabilities of firms which should be imperfectly mobile, inimitable and heterogeneous
amongst others. Mainly the high church of the RBV has a static view of strategy. The low
church tries to include some dynamics by including the concepts of building capabilities and
organizational learning opposed to factor markets. These capabilities are more dynamic in
that they can be adjusted to the change in the industry. The Austrian view adds here that not
only having these capabilities is enough, they also need to be used to exploit opportunities in
the market.
The main points where Austrian view adds to porter and the RBV is the dynamic nature and
the view that markets are in constant disequilibrium where firms need to exploit the chances
that exist in these markets.

The Austrian view on strategy is built on completely different assumptions than Porter’s view or the RBV. While Porter/RBV
provides us with a relatively static approach for analysis, where markets are in equilibrium, Austrians deny the equilibrium and
say that business environments is always chaotic and in disequilibria.
Different, as Barney distinguished sustainable competitive advantage from temporary competitive advantage, while Austrian
view does not make such a distinction as they say advantage/profits erodes over time as more and more knowledge is produced.
The Austrians tend to explain value creation by innovation within firms, while Porter/RBV does not talk about value creation
and treat firms as ‘black boxes’.

However, Austrians agree with the notions of RBV about heterogeneity of firms and superior recourses. According to the
Austrian school new combinations of recourses lead to pure profits.

7. What does the theory of increasing returns add to the explanations of

performance differences in Porter’s work and in the resource-based view?

Firstly, there is a difference in Porter’s Early View (PEV) and Porter’s Later View (PLV). In
short, PEV explains performance differences by looking at the industry structure and the
strategic positions within the industry. A favourable position can be obtained by pursuing a
differentiation strategy or a low-cost leadership. A competitive advantage could be obtained,
which was sustainable to the degree that there are barriers-to-competition. In reaction to this
view of Porter, Barney came with the resource-based view because he stated that resources
could lead to a competitive advantage. A resource has to be Valuable, Rare, inimitable and
non-substitutable. Peteraf (1993) added some more criteria, namely heterogeneity, ex ante
limits to competition, ex post limits to competition and imperfect mobility. This advantage is
sustainable to the degree that there are barriers-to-imitation. Both these views are static ones
and look at the situation at one point in time. CA is explored in terms of characteristics of the
competitive situation at this given time at which a firm occupies a favourable competitive
position. A question arises, namely: How did they occupy this position in the first place?

PLV was more dynamic, the focus on looking inside the firm and analyse the reasons why
firms achieve those favourable positions and therefore designed the value-chain. The question
then became why are some firms better at some positions and he developed the Diamond,
which looks at the attributes of the approximate environment and at the initial conditions a
firm rises in. He also emphasises the effects of decisions and choices made by managers and
how they can influence the firm and its performance outcomes.

Increasing returns is a concept in line with the dynamic thinking. It can be defined as
mechanism of positive feedback that reinforce the lead of whoever gets ahead in the
competitive process. There are six mechanisms, of which there are three on de supply and
three on the demand side, respectively being: economies of scale, experience economies,
information economies and network externalities, bandwagon effect, technological
complementarities. CA is explained by increasing returns in terms of characteristics of a
competitive process. In doing so, it calls attention to the role of initial conditions, the sequence
of events during the process and the role of small, random, events that may give a firm an
early lead that becomes self-reinforcing. By explaining the dynamic process by which
barriers-to-competition emerge over time, it explains the independent variable of the
positioning and RBV theories. In other words, it explains where barriers-to- competition
(barriers-to-imitation) come from, which they use to explain CA.
 Both Porter’s view and RBV have been unable to answer where the barriers to competition
leading to competitive advantage come from. This is mostly because the views use static
analysis in their essence. In contrast, theory of increasing return is build on a dynamic
evolutionary approach, which offers new explanatory logics as compared to PEV and the
classic RBV

8. Each of the three articles for this meeting have something to say (either
explicitly or implicitly) about managerial cognition: how managers think
about the strategies of their firms and the possible biases that they may have
in doing so when faced with technological change. What are the main lessons
that you can draw from the articles to help managers think of strategy in
relation to technological change in a better way?

Technological change can often disrupt an industry and result in failure of incumbent firms. It is
therefore important that managers are prepared and understand the dynamic environment and take
into account the uncertainties and risks that technological change brings.

In this meeting we discussed the concept of pattern recognition as well as pattern management. As
technological industries are fast changing and dynamic industries it faces high risks and uncertainties.
One way of coping with this problem is by looking at the past and trying to learn from it. Managers can
try to learn from past cases and see how competition has evolved. If managers are able to recognizing
and understand the patterns in technological changes, they will be able to prepare for possible pitfalls.
Studies on different patterns in technology industries suggest that the competitive landscape and the
value of individual resources change in predictable ways as a technology develops. The concept of
pattern recognition and pattern management is based on that everything we know about the world is
based on past information. If we can identify underlying patterns across different cases, we might be
able to prepare for them in the future. There are typical patterns discussed in the literature of how
technologies evolve over time.
However, everything that we know and the way we perceive the world is different for every individual.
This is where the concept of cognition comes in. Managers are boundedly rational, which means that
they rely on simplified representations of the world in order to process information. These imperfect
representations form the basis for the development of the mental models and strategic beliefs that
drive managerial decisions. It highly influences the manner in which managers frame problems and
thus how they search for solutions.
Cognitive representations are typically based on historical experience. Firm founders play a significant
role in establishing beliefs. The history of a company influences the development of beliefs, therefore
in rapidly changing environments top managers often have difficulty adapting their mental models,
resulting in poor organizational performance. These top managers have developed a certain set of
mental models and beliefs over time, also referred to as the “dominant logic”, which is influenced by
experience; it is therefore hard to adapt to it in rapidly changing environments.
This is to say that managerial cognition highly influences the development of new capabilities. There is
interplay of managerial cognition and capability development. Search processes in a new learning
environment are deeply interconnected to the way managers model the new problem space and
develop strategic prescriptions premised on this view of the world. Evidence points to the deep
interrelationships between a manager’s understanding of the world and the accumulation of
organizational competencies. If you want to understand how capabilities evolve, you cannot neglect
the role of managerial cognitive representations.

9. How does a stakeholder view of the firm change how we should think about
competitive advantage?
Some research suggest that competitive advantage is the value that is appropriated to the
shareholders. However Coff and Stoelhorst take on a stakeholder view instead. The
stakeholder view suggests that human resources are the VRIN resources involved in creating
value. These humans are bound to the firm in terms of legal contracts. In other words one
could say that the whole firm is built of a nexus of contracts as the firm does not appropriate
value but the people do. If the employees appropriate rent it will not be a supranormal return
and thus not be rewarded to the shareholders. How much the shareholders claim depends on
how strong the bargaining positions of all the stakeholders are. In the end the main difference
is that before it was the firm which created value and was appropriated by the shareholders.
With the stakeholder view this shifted to the value being created by the people as a nexus of
contracts, taking some of that value. So to measure true competitive advantage it is necessary
to include all the value created, even the one less visible.

9. What is a business model?

A business model is not clearly defined (Stoelhorst, 2001). Scholars have used the term business model to explain different
things, such as e-business, value creation, or how innovation works (Zott, Amit, Massa, 2011).

According to Casedus-Masanell (2010), a business model is the logic of the firm, how it operates and how it creates value for its
stakeholders. It is a plan implemented by a company to remain in business in the long run, generate revenue by covering its
costs and make a profit from operations. An organization’s business model is an objective entity: choices are made in every
organization, like policies, type of assets, and the governance of policies and assets. Every choice has consequences. The choices
and consequences together make up the organization’s business model. What makes a business model different from a strategy
is that a strategy is a plan of action in terms of what business to use; strategy is about designing a business model. Also,
strategies are not always fully observable to the outside world; only the realized strategy is observable. Every organization has a
business model, because every organization makes choices that have certain consequences. However, not every organization has
a strategy, since it may not have a certain plan of action in terms of how to reconfigure the business model in accordance with
changes in the environment. A business model is a reflection of the realized strategy (Casadeus-Masanell & Ricart, 2010).

Stoelhorst (2001) also sees the business strategy as more fundamental, and says that every organization has a business model. A
good business model can provide CA. However, this is not necessarily the case as business models can be easily copied. Business
models are more about how a firm makes money, while strategy is about how a firm is able to do better than its competitors.
When analyzing a business model three questions are central:

3) How do you generate revenues as a firm?

These three questions show similarities with the thinking of Brandenburger & Stuart (1996): the first question is about value -
the willingness-to-pay of customers, the second question about the price in the resource market or opportunity costs, and the
last question is about the price in the product market. A successful business model should balance these three questions or
balance between value, cost and revenues. A minor change in one aspect can influence the business model as a whole
(Stoelhorst, 2001). If for example the costs are rising faster than your revenues, the firm should reconsider its business model.