Sustaining Competitive Advantage

Chapter 12

By Bryan Richards Armando Gonzalez Brian Ellingworth

Threats to Sustainability in Competitive and Monopolistically Competitive Markets

In industries where firms offer differentiated products, potential profits can be reduced through entry and imitation by other companies. Unlike perfect competition, a monopolistically competitive seller can raise its price without losing all of its customers.

Threats Cont.
If current sellers are making profits, and there is a free entry into the market, new firms will enter. By slightly changing themselves from current firms, these new firms will find their own niches and will certainly take some business from current firms.

Threats to Sustainability Under All Market Structures

Even in oligopolistic or monopolistic markets, where new entry might be blockaded or deterred, a successful current firm may not stay that way for long. A success factor for current firms could be one that it cannot control, such as weather or general business conditions.

Threats Cont.


Ex. Colorado blizzard delayed Coors sales to the West Coast, but boosted Budweiser and Miller Sales temporarily on the West Coast.

If one firm is having good luck and another firm is having bad luck, it is unlikely that both firms will continue on to persist that same way. The possibility of regression toward the mean means that one should not expect those firms to repeat extreme performances, whether good or bad, for long.

Evidence: The Persistence of Profitability

If there are impediments to the competitive dynamic, then profits should persist: Firms that earn above-average profits today should abovecontinue to do so in the future; low-profit firms lowtoday should remain low-profit firms in the future. lowMueller (economist) suggests that firms with abnormally high levels of profitability tend, on average, to decrease in profitability over time, while firms with abnormally low levels of profitability tend, on average, to experience increases in profitability over time.

Cont.
However, the profit rates of these two groups of firms do not converge to a common mean. The firm that starts out with high profits will converge to rates of profitability that are higher than the rates of the firm that starts out with low profits. Muellers work implies that market forces are a threat to profits, but only up to a point.

The Resource-Based Theory of Resourcethe Firm

Resources and capabilities alone do not assure that a firm can sustain its advantage. The resource-based theory of the firm resourcepoints out that if all firms in a market have the same stock of resources and capabilities, no strategy for value-creation valueis available to one firm that would not also be available to all other firms in the market.

Cont.
Any other firm could immediately replicate a strategy that presents an advantage. To be sustainable, a competitive advantage must thus be underpinned by resources and capabilities that are scarce and imperfectly mobile. When value-creating resources are scarce, firms valuewill bid against one another to acquire them. The additional economic profit that would have resulted from the competitive advantage would then be transferred to the owner of the resources.

Cont.


Ex. When key resources are talented employees, the extra-value created would be extracaptured by the talented employees as higher salaries, rather than by the firm as higher profit.

A firm that possesses a scarce resource can sustain its advantage if that resource is imperfectly mobile.

Imperfectly mobile means that the resource cannot sell itself to the highest bidder. Imperfectly mobile assets are so valuable that firms may compete away the profits in an attempt to acquire them.


Ex. Where the key resource is a potentially valuable location that can support only one retail outlet. Retailers can bid away the rents by offering to pay extravagant prices for the land.

Two Distinct groups of Isolating Mechanism

Impediments to Imitation: The isolation mechanisms impede existing firms potential entrants from duplicating the resources and capabilities that form the basis of the firms advantage EarlyEarly-mover advantage: Once a firm acquired a competitive advantage, these isolation mechanisms increase the economic power of that advantage over time.

Impediments to Imitation
They are four Impediments to imitation Legal restrictions Superior access to inputs or customers Market size and scale economies Intangible barriers to imitating a firms distinctive capabilities: casual ambiguity,dependence on historical circumstances, and social complexity Strategic fit

Legal Restrictions
Legal restrictions, such as patents, copyrights,and trademarks, as well as government control over entry into markets, through licensing, certificate,or quotas on operating rights, can be powerful impediments to imitation. Patents ,copyrights ,trademarks, and operating rights can be sold.

Legal restrictions continued

A purchase of a patent or operating right to secure a competitive advantage is considered a highly mobile resource. Mobility of a asset also implies that a owner of a patent or operating right may be better off selling it to another firm.

Superior Access to Inputs or Customers

A firm that can obtain high-quality or high-productivity highhighinputs, such as raw materials or information, will be able to sustain cost and quality advantages that its competitors cannot imitate. A firms can achieve favorable access to inputs by controlling the source of supply through ownership or longlong-term contrast. Superior access to inputs allow a firm superior access to customers.

Superior Access to Inputs or Customers Cont.

A firm that secures access to the best distribution channels or the most productive retail locations will hold the advantage competing for customers over other firms. The control of scare inputs or distribution channels allows a firm to earn large economic profits .

Market Size and Scale Economies

Imitation may also be deterred when minimum efficient scale is large relative to market demand, and a firm has secured a large amount of the market. Economies of scale can limit the number of firms that fit in a market and represent a barrier to entry. Scale economies can also discourage a smaller firm already in the market from seeking to grow larger to imitate the scale based cost advantage of a firm that has obtained a large market share.

Market Size and Scale Economies Cont.

Scale based barriers to imitation and entry are more powerful in markets were specialized products or services are largely demanded enough to support a large firm. Scale based advantages can only be sustained if demand doesnt grow to large

Intangible Barriers to Imitation

There are four distinct intangible barriers to imitation . Casual ambiguity Dependence on historical circumstances Social complexity

Casual Ambiguity
Casual Ambiguity refers to situations in which the causes of a firms ability to create more value than its competitors are obscure and only imperfectly understood. Casual ambiguity is a consequence of the fact that a firms distinctive capabilities typically involve tacit knowledge. Tacit capabilities are typically developed through trial and error and refined through practice and experience; rarely are they written down on a manual. For this reason,casual ambiguity are a powerful impediment to imitation by other firms,

Dependence on Historical Circumstances

Am firms history of strategic action compromise its unique experiences in adapting to the business environment. These experiences can make a firm uniquely capable of pursuing its own strategy and incapable of imitating the strategies of competitors. Historical dependence limits a firms opportunity of growth. Historical dependence also implies that a firms strategy might be viable for a limited time

Social Complexity
A firms advantage may be imperfectly imitable because socially complex process underline the advantages. Socially complex phenomena include the interpersonal relations between the firms managers and those of its suppliers and customers. Social complexity is distinct from casual ambiguity.

Strategic Fit
Strategic fit exists when a firms activities from a coherent, mutually-reinforcing mutuallywhole. Strategic fit can also create power barrier to imitation.

EarlyEarly-Mover Advantages
Learning Curve Network Externalities Reputation and Buyer Uncertainty Buyer Switching Costs

Learning Curve
Experienced firms will have a better advantage by jumping in first. Firms with greater experience are able to increase volume and enhance their cost advantage over other firms

Network Externalities
When additional consumers join the network of users, they create a positive external benefit for consumers who are already part of the network Ebay Microsoft programs

Reputation and Buyer Uncertainty

Goods with customer experience and reputation will be desired over unknown products. Early mover will be able to obtain this advantage much easier than later movers.

Buyer Switching Costs

Buyers incur substantial costs when switching to another supplier. Lost knowledge to product line. Early mover has advantage here due to customer knowledge of product

Use in Competition for Market Share

Early mover is able to capture a large share of a growing market Competition between early mover advantage can be intense.

Early Mover Disadvantages

Developing new technology or products does not always guarantee a firms success. Many lack complementary assets. Fail to establish competitive advantage because they bet on the wrong technologies or products. Luck can play an important role in success.

Questions?