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Why do some firms persistenly outperform their competitor, despite the efforts of other firms to imitate or neutralize their advantage?

What, in short, makes makes a competitive advantage sustainable, and why?

In industries where firms offer differentiated products, potential In industries where firms offer differentiated products, potential profits can be reduced through entry and imitation by other profits can be reduced through entry and imitation by other companies.companies.

Unlike perfect competition, a monopolistically competitive seller Unlike perfect competition, a monopolistically competitive seller can raise its price without losing all of its customers.can raise its price without losing all of its customers.

If current sellers are making profits, and there is a free entry into If current sellers are making profits, and there is a free entry into the market, new firms will enter.the market, new firms will enter.

By slightly changing themselves from current By slightly changing themselves from current firms, these new firms will find their own niches firms, these new firms will find their own niches and will certainly take some business from and will certainly take some business from current firms.current firms.

Even in oligopolistic or monopolistic markets, where new entry Even in oligopolistic or monopolistic markets, where new entry might be blockaded or deterred, a successful current firm may not might be blockaded or deterred, a successful current firm may not stay that way for long.stay that way for long.

A success factor for current firms could be one that it cannot A success factor for current firms could be one that it cannot control, such as weather or general business conditions.control, such as weather or general business conditions.

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

If there are impediments to the competitive dynamic, then profits If there are impediments to the competitive dynamic, then profits should persist: Firms that earn above-average profits today should persist: Firms that earn above-average profits today should continue to do so in the future; low-profit firms today should continue to do so in the future; low-profit firms today should remain low-profit firms in the future.should remain low-profit firms in the future.

Mueller (economist) suggests that firms with abnormally high Mueller (economist) suggests that firms with abnormally high levels of profitability tend, on average, to decrease in profitability levels of profitability tend, on average, to decrease in profitability over time, while firms with abnormally low levels of profitability over time, while firms with abnormally low levels of profitability tend, on average, to experience increases in profitability over tend, on average, to experience increases in profitability over time.time.

However, the profit rates of these two groups of firms do not However, the profit rates of these two groups of firms do not converge to a common mean. The firm that starts out with high converge to a common mean. The firm that starts out with high profits will converge to rates of profitability that are higher than profits will converge to rates of profitability that are higher than the rates of the firm that starts out with low profits.the rates of the firm that starts out with low profits.

Mueller’s work implies that market forces are a threat to profits, Mueller’s work implies that market forces are a threat to profits, but only up to a point.but only up to a point.

Resources and capabilities alone do not assure that a firm can Resources and capabilities alone do not assure that a firm can sustain its advantage.sustain its advantage.

The resource-based theory of the firm points out that if all firms in The resource-based theory of the firm points out that if all firms in a market have the same stock of resources and capabilities, no a market have the same stock of resources and capabilities, no strategy for value-creation is available to one firm that would not strategy for value-creation is available to one firm that would not also be available to all other firms in the market.also be available to all other firms in the market.

Any other firm could immediately replicate a strategy that Any other firm could immediately replicate a strategy that presents an advantage. To be sustainable, a competitive presents an advantage. To be sustainable, a competitive advantage must thus be underpinned by resources and advantage must thus be underpinned by resources and capabilities that are scarce and imperfectly mobile.capabilities that are scarce and imperfectly mobile.

When value-creating resources are scarce, firms will bid against When value-creating resources are scarce, firms will bid against one another to acquire them. The additional economic profit that one another to acquire them. The additional economic profit that would have resulted from the competitive advantage would then would have resulted from the competitive advantage would then be transferred to the owner of the resources.be transferred to the owner of the resources.

When value-creating resources are scarce, firms will bid against When value-creating resources are scarce, firms will bid against one another to acquire them. The additional economic profit that one another to acquire them. The additional economic profit that would have resulted from the competitive advantage would then would have resulted from the competitive advantage would then be transferred to the owner of the resources.be transferred to the owner of the resources.

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

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

Imperfectly mobile means that the resource cannot “sell itself” to Imperfectly mobile means that the resource cannot “sell itself” to the highest bidder.the highest bidder.

Imperfectly mobile assets are so valuable that firms may compete Imperfectly mobile assets are so valuable that firms may compete away the profits in an attempt to acquire them.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.

Impediments to Imitation: The isolation mechanisms impede Impediments to Imitation: The isolation mechanisms impede existing firms potential entrants from duplicating the resources existing firms potential entrants from duplicating the resources and capabilities that form the basis of the firm’s advantageand capabilities that form the basis of the firm’s advantage

Early-mover advantage: Once a firm acquired a competitive Early-mover advantage: Once a firm acquired a competitive advantage, these isolation mechanisms increase the economic advantage, these isolation mechanisms increase the economic power of that advantage over time.power of that advantage over time.

They are four Impediments to imitation They are four Impediments to imitation ::

Legal restrictionsLegal restrictions

Superior access to inputs or customersSuperior access to inputs or customers

Market size and scale economiesMarket size and scale economies

Intangible barriers to imitating a firm’s distinctive Intangible barriers to imitating a firm’s distinctive capabilities: casual ambiguity,dependence on historical capabilities: casual ambiguity,dependence on historical circumstances, and social complexitycircumstances, and social complexity

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

Patents ,copyrights ,trademarks, and operating rights can be Patents ,copyrights ,trademarks, and operating rights can be sold.sold.

A purchase of a patent or operating right to secure a competitive A purchase of a patent or operating right to secure a competitive advantage is considered a highly mobile resource.advantage is considered a highly mobile resource.

Mobility of a asset also implies that a owner of a patent or Mobility of a asset also implies that a owner of a patent or operating right may be better off selling it to another firm.operating right may be better off selling it to another firm.

A firm that can obtain high-quality or high-productivity inputs, A firm that can obtain high-quality or high-productivity inputs, such as raw materials or information, will be able to sustain cost such as raw materials or information, will be able to sustain cost and quality advantages that its competitors cannot imitate.and quality advantages that its competitors cannot imitate.

A firms can achieve favorable access to inputs by controlling the A firms can achieve favorable access to inputs by controlling the source of supply through ownership or long-term contrast.source of supply through ownership or long-term contrast.

Superior access to inputs allow a firm superior access to Superior access to inputs allow a firm superior access to customers.customers.

A firm that secures access to the best distribution channels or the A firm that secures access to the best distribution channels or the most productive retail locations will hold the advantage most productive retail locations will hold the advantage competing for customers over other firms.competing for customers over other firms.

The control of scare inputs or distribution channels allows a firm The control of scare inputs or distribution channels allows a firm to earn large economic profits . to earn large economic profits .

Imitation may also be deterred when minimum efficient scale is Imitation may also be deterred when minimum efficient scale is large relative to market demand, and a firm has secured a large large relative to market demand, and a firm has secured a large amount of the market.amount of the market.

Economies of scale can limit the number of firms that “fit” in a Economies of scale can limit the number of firms that “fit” in a market and represent a barrier to entry.market and represent a barrier to entry.

Scale economies can also discourage a smaller firm already in Scale economies can also discourage a smaller firm already in the market from seeking to grow larger to imitate the scale based the market from seeking to grow larger to imitate the scale based cost advantage of a firm that has obtained a large market share.cost advantage of a firm that has obtained a large market share.

Scale based barriers to imitation and entry are more powerful in Scale based barriers to imitation and entry are more powerful in markets were specialized products or services are largely markets were specialized products or services are largely demanded enough to support a large firm.demanded enough to support a large firm.

Scale based advantages can only beScale based advantages can only be sustained if demand sustained if demand doesn’t grow to largedoesn’t grow to large..

FFour distinct intangible barriers to imitation our distinct intangible barriers to imitation ::

- Casual ambiguityCasual ambiguity

- Dependence on historical circumstancesDependence on historical circumstances

- Social complexitySocial complexity

Casual Ambiguity refers to situations in which the causes of a Casual Ambiguity refers to situations in which the causes of a firm’s ability to create more value than its competitors are firm’s ability to create more value than its competitors are obscure and only imperfectly understood.obscure and only imperfectly understood.

Casual ambiguity is a consequence of the fact that a firm’s Casual ambiguity is a consequence of the fact that a firm’s distinctive capabilities typically involve tacit knowledge.distinctive capabilities typically involve tacit knowledge.

Tacit capabilities are typically developed through trial and error Tacit capabilities are typically developed through trial and error and refined through practice and experience; rarely are they and refined through practice and experience; rarely are they written down on a manual.written down on a manual.

For this reason,casual ambiguity are a powerful impediment to For this reason,casual ambiguity are a powerful impediment to imitation by other firms, imitation by other firms,

A firms history of strategic action compromise its unique A firms history of strategic action compromise its unique experiences in adapting to the business environment.experiences in adapting to the business environment.

These experiences can make a firm uniquely capable of pursuing These experiences can make a firm uniquely capable of pursuing its own strategy and incapable of imitating the strategies of its own strategy and incapable of imitating the strategies of competitors.competitors.

Historical dependence limits a firms opportunity of growth.Historical dependence limits a firms opportunity of growth.

Historical dependence also implies that a firm’s strategy might Historical dependence also implies that a firm’s strategy might be viable for a limited time be viable for a limited time

A firm’s advantage may be imperfectly imitable because socially A firm’s advantage may be imperfectly imitable because socially complex process underline the advantages.complex process underline the advantages.

Socially complex phenomena include the interpersonal relations Socially complex phenomena include the interpersonal relations between the firm’s managers and those of it’s suppliers and between the firm’s managers and those of it’s suppliers and customers.customers.

Social complexity is distinct from casual ambiguity. Social complexity is distinct from casual ambiguity.

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

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

Developing new technology or products does not always Developing new technology or products does not always guarantee a firms success.guarantee a firms success.

Many lack complementary assets.Many lack complementary assets.

Fail to establish competitive advantage because they bet on the Fail to establish competitive advantage because they bet on the wrong technologies or products.wrong technologies or products.

Luck can play an important role in success.Luck can play an important role in success.