Week 2 - Foundations of Competitive Advantage

• Johnson, Whittington, and Scholes (2011)

  The Industry Life-Cycle

  1. Development: Low-rivalry, high differentiation, innovation is key
  2. Growth: Low rivalry, high growth and weak buyers, but low barriers to entry. Growth ability is key
  3. Shake-Out: Increasing rivalry, slower growth, some exits. Managerial and financial strength is key
  4. Maturity: Stronger buyers, low growth and homogeneous products. High barriers to entry, market share and costs are key
  5. Decline: Extreme rivalry, price competition. Costs are key
• Johnson, Whittington, and Scholes (2011)

  Production efficiencies

  new developments

  effective management

  brand relationships

  ...are all key to prolonging the industry life-cycle
• Michael Porter (1979); How Competitive Forces Shape Strategy


  5 forces

  • The collective strength of the 5 forces determines the ultimate profit potential of an industry

  Intensity of rivalry:

  • Collusion
  • Price Wars
• Michael Porter (1979); How Competitive Forces Shape Strategy

  • Tactics in industry rivalry:Price competitionProduct informationAdvertising slugfests - competition within adverts
• Levitt (1960)

  • Avoid the myopia of a narrow, product-oriented industry definition
  • Look beyond product when defining a business
• Porter (1985); Competitive Advantage; creating and sustaining superior performance

  Value Chain: The value chain dissects a company’s activities into primary and support activities• Cost vs Differentiation Value System: extends the value chain concept

  • The value system encompasses the value chain of suppliers, distributors, and customers,
• Demsetz (1973); Industry Structure, Market Rivalry, and Public Policy

  • Searching for monopoly is the main role of IO in strategic management
  • Antitrust authorities - mergers
  • Market concentration / firm size does not affect profitability in certain industries
• Besanko (2007); Economics of Strategy


  • Waring (1996); Superior Returns: Mean-reverting
  • Cost drivers explain differences between firms
  • You can prolong advantage by defending the sources of your advantage, and by ensuring you are adaptable to environment changes
  • Supernormal profits WILL be competed away
• Rumelt (1984); Institutional Capital and Competitive Advantage

  3 categories of competitive advantage

  1. Resource-based view
  2. External positioning
  3. Institutional-based view
• Rumelt (1984); Institutional Capital and Competitive Advantage

  Isolating mechanisms: Protect a firm from imitation and protect their rent strings

  Resource uniqueness and causal ambiguity are at the heart of isolating mechanisms

  Barriers to inimitability protect individual firms from competition within a particular strategic group
• Wernerfelt (1984); A Resource-Based View of the Firm

  First introduced the concept of the RBVFirms control: Valuable, Rare, hard-to-imitate resources that are heterogeneous and immobile• Competitive advantage achieved through the acquisition and management of these resources HeterogeneousImmobile
• Barney (1986); Strategic Factor Markets, Expectations, Luck and Business Strategy

  • Imperfect Strategic Factor Markets is necessary: Otherwise, monopoly profits would be bid down to NPV, eliminating any benefits from unique resources
  • Reasons for Inimitability:

  1. Expected Value may differ due to imperfect information between firms
  2. Lack of separation from the firm (e.g., reputation, employees, learning curve)
  3. Uniqueness
  4. Lack of understanding from management
• Barney (1991): Firm resources and sustained competitive advantage;

  • Valuable
  • Rare
  • Inimitable
  • Non-substitutable
• Barney (1996); Gaining and sustaining competitive advantage

  VRIN —> VRIO (organisation positioning).O: Whether a firm’s policies, procedures, and culture are aligned to fully exploit the value of its resources
• Peteraf (1993); The cornerstones of competitive advantage: a RBV

  Four key conditions for competitive advantage and sustained firm performance:

  1. Heterogeneity
  2. Ex-Post limits to competition
  3. Imperfect Mobility
  4. Ex-Ante limits to competition
• Peteraf (1993); The cornerstones of competitive advantage: a RBV

  Ricardian Rents: Superior productive factors that are limited in supply can lead to heterogeneity in industry.

   

  Monopoly Rents: Deliberate restriction of output rather than an inherent scarcity of resource supply
• Priem and Butler (2001); Is the resource based ‘view’ a useful perspective for strategic management research?

  1. Tautological
  2. Equifinality
  3. Underdeveloped product markets
  4. Limited prescriptive implications
• Barney (2001); Is the resource-based ‘view’ a useful perspective for strategic management research? Yes

  1. Does offer testable predictions
  2. Used in context of 1986 paper
  3. Accepts limits of RBV in ex ante determination of VRIN resources
• Kraaijenbrink et al (2010); An Overview of RBV Criticisms

  RBV has no managerial implications given the difficulty of finding resources ex ante. RBV gives little guidance, and that it exaggerates the extent to which managers can truly control resources
• Schmidt (2013); What makes a resource valuable?

  RBV:

  Could be useful ex post, even if not ex ante• Could better inform strategy going forward
• Barney (1986); Organisational Culture

  1. The culture must be valuable; it must enable the firm to do things and behave in ways that lead to high sales, low costs, high margins, or addfinancial value to the firm in other ways
  2. The culture must be rare; attributes and characteristics that are not often found in cultures
  3. The culture must be imperfectly imitable; firms cannot copy
• Russell (1999); When Competitive Advantage Doesn’t Lead to Performance

  Appropriation of Rents:

  The Firm as a Nexus of Contracts: It is normally assumed that the firm owns the strategic resources and can appropriate most of the rent. However, the firm is snot a unitary actor.

  • If resources are controlled by experience of employees / CEOs, then they can appropriate the profit arising from it
• Russell (1999); When Competitive Advantage Doesn’t Lead to Performance

  Stakeholders Bargaining Power

  1. Capability of Unified Action
  2. Access to Information
  3. Replacement Cost to Firm
  4. Cost of exit to the stakeholder
• Thomas Powell (1995); TQM as competitive advantage

  TQM: An integrated management philosophy and set of practices that emphasises continuous improvement, meeting customer’s needs, reducing waste, and employee involvement.• TQM can be a source of competitive advantage
• Thomas Powell (1995); TQM as competitive advantage

  Axis of Errors:Firms compete on 2 axis: The axis of competitive advantage, and the axis of errors

  • Often, that firm heterogeneity is down to errors is overlooked
  • Errors can produce performance variation that is not at all attributed to competitive advantage
• Porter (1989); From Competitive Advantage to Corporate Strategy

  Diversification:

  1. The Attractiveness Test
  2. The Cost of Entry Test
  3. The Better-off Test
• Rumelt (1991); Does Industry Matter?

  No

  • The most important sources of economic rents are business-specific
  • Industry membership is a much less important source
  • Stable industry effects account for only 8% of the variance in business-unit returns
• Industry Life Cycle

  A) Development

  B) Growth

  C) Shake-Out

  D) Maturity

  E) Decline