“Sustaining Competitive Advantage In Spite of Imitation” .“Sustaining Competitive Advantage

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Transcript of “Sustaining Competitive Advantage In Spite of Imitation” .“Sustaining Competitive Advantage

  • Sadiq Gillani Pembroke College

    MPhil Management Studies

    Sustaining Competitive

    Advantage In Spite of Imitation

    11th June 2001 Supervisor: Dr. J. Prabhu

  • 1

    ABSTRACT:

    It has been argued that if an action or innovation can be imitated then it can provide no

    competitive advantage for the first mover to take that action. This is because the respondent can

    copy that action (for example a product innovation) and thus both firms end up worse off than

    before. This argument was refuted. The link between radicality of an action, response time and

    competitive advantage was also investigated. In addition, it was analysed whether imitation can be

    good whether there can be win-win situations. All of this work was combined into an overall

    model, linking radicality and the degree of win-win. Finally, moves that firms can make to increase

    their competitive advantage, in spite of imitation, were examined. These hypotheses were tested by

    analysing how British Airways and Virgin Atlantic have competed in the UK airline industry over

    the last 17 years. Very interesting conclusions were drawn - that imitation can in fact be healthy. It

    was found that the more radical an innovation, the more time it takes for imitation to occur and

    the greater the win-win for both firms, in the long-run.

    ACKNOWLEDGMENT:

    The author would like to sincerely thank Dr. Jaideep Prabhu for his invaluable guidance and

    support in writing this thesis and in focussing the area of research.

    This thesis is substantially my own work and confirms to the Judge Institute guidelines on plagiarism. Where

    reference has been made to other research this is acknowledged in the text and bibliography.

  • 2

    CONTENTS

    1.0 INTRODUCTION 3 1.1 Foundations..... 4

    1.2 Importance Of Imitation. ... 5

    1.3 Aim Of The Paper.. 5

    2.0 REVIEW OF EXISTING WORK 6 2.1 Differentiation 6

    2.2 Imitation 6

    2.3 Action And Responses 7

    2.4 Does Imitation Negate Competitive Advantage? 8

    2.41 First-Mover Advantages.. 10

    2.42 Imitation Of Tactical Actions Price Cuts.. 12

    2.5 Uniqueness...... 13

    2.6 Win-win Situations. 15

    2.7 Overall Model. 17

    2.8 Increasing A Competitive Advantage.. 18

    2.81 Supporting Innovations With Complementary Assets 18

    2.82 Using Isolating Mechanisms 19

    3.0 THE DATA AND METHOD 23

    3.1 What Data Was Used.. 23

    3.2 How Data Was Collected.... 24

    4.0 HISTORY OF THE AIRLINES 25

    4.1 British Airways. 25

    4.2 Virgin Atlantic. 27

    4.3 Competition Between The Two Airlines.. 29

    5.0 TESTING THE HYPOTHESES... 32

    5.1 Effect Of Imitation On Competitive Advantage.. 32

    5.2 Uniqueness And Imitation... 36

    5.3 Win-win Situations.. 38

    5.4 Overall Model.. 41

    5.5 Increasing Competitive Advantage... 43

    5.51 Using Complementary Assets. .. 43

    5.52 Using Isolating Mechanisms... . 44

    6.0 CONCLUSIONS . 48

    7.0 LIMITATIONS AND FUTURE RESEARCH 49

    BIBLIOGRAPHY. 50

  • 3

    1.0 INTRODUCTION

    No two species can coexist that make their living in the identical way

    (Gauses Principle of Competitive Exclusion, 1934)

    Gause put two very small animals of the same genus into a bottle with an adequate supply of food.

    If the animals were of different species, they could survive and live together. If they were of the

    same species, they could not (Henderson, 1989). When one firm imitates another in some area, it

    becomes more similar to that firm and thus threatens the survival of one of them. If one firm

    introduces a cunning new product or launches a new advertising campaign, the competitive

    advantage of such moves is directly dependent on whether competitors imitate these actions. This

    is basic game theory. It has therefore been argued (Kay 1993, Moore and Urbany 1994) that

    imitation negates competitive advantage. It is the purpose of this paper to examine and challenge

    this argument and clarify when and why imitation affects the sustainability of competitive

    advantage. It will be argued that the more radical an innovation is, the greater the competitive

    advantage for the innovator will be, due to a longer response time from competitors. In addition,

    it will be examined whether imitation can lead to a win-win situation for both the innovator and

    imitator.

  • 4

    1.1 FOUNDATIONS

    Competitive advantage can be defined as: when two or more firms compete within the same

    market, one firm possesses a competitive advantage over its rivals when it earns a persistently

    higher rate of profit (Grant, 1998). It is important to note that each firm can have a competitive

    advantage in different areas. Examples of competitive advantages are British Airways in resources,

    size and landing slots and Virgin in brand, creative capabilities, and management skills.

    This paper will focus on duopolies and oligopolies, since this reflects the structure of many

    industries. Duopoly represents a simple case that makes it easier to provide analysis. The UK

    (transatlantic) airline industry has been chosen for this reason as a primary source of data. Over

    the last 17 years since British Airways (BA) and Virgin Atlantic have been competing, the success

    of one on transatlantic routes (for example, London to New York) depends on the actions of the

    other. In fact, the competition between these two firms has been direct and severe over this time

    period. This provides useful data on which to assess the impact of imitation and competitive

    advantage. In fact, almost every action by one leads to a response by the other and their

    interaction is quite remarkable a reflection of the strength of the competition between the two.

    In this paper, the action of one firm will be compared to the response of the other and the

    resulting impact on performance of both of them investigated. The actions that will be looked at

    include price changes, new product launches/improvements (e.g. new sleeper seats) and loyalty

    card schemes. All of these actions can be seen as innovations and the terms actions and

    innovations will be used interchangeably. Thus an innovation is more than simply developing a

    new product it can be any action that changes the marketing mix or marketing strategy of a firm

    in order to secure a competitive advantage. Any response has to involve a counteraction, in which

    it seeks to copy or counteract the original move.

  • 5

    1.2 IMPORTANCE OF IMITATION

    The speed with which competitive advantage is undermined depends on the ability of competitors to

    challenge either by imitation or innovation (Grant, 1998)

    Competitive advantage is of great importance to businesses they live and die by it. Porter (1990)

    shows how this even applies to nations. A firm without a competitive advantage is like being

    surrounded by a pack of lions without any means of defence soon competitors will ensure the

    death of the firm. However, even if a firm has a competitive advantage, it must sustain it. This can

    be done by innovating (in the broadest sense described above) in the marketing strategy. There are

    many sources of competitive advantage. Kay (1993) outlines four sources: product innovation,

    reputation, architecture (relationships) and strategic assets. This paper will focus on product

    innovations and other strategic actions. The effect of imitation of these actions by competitors will

    be very important. Smith, Grimm, and Gannon (1992) state that, firms are not interdependent in

    the marketplace, but are affected by the actions of one another and prone to react. Given this

    interdependence, the effectiveness of a firms strategy cannot be assessed without an evaluation of

    the reactions of rivals

    1.3 AIM OF THE PAPER

    As the quote above shows, the success of any action will depend on whether competitors copy

    that action. Thus, the imitation of competitors is a very important area of study, which has been

    under-researched. This is especially true of less tangible areas of the marketing mix. While a lot of

    research (using game theory) has been done on the effect of matching a price change, there is little

    work on the effect of less objective dimensions, say BA introducing a sleeper seat after Virgin

    introduces them. This paper aims to fill this gap by focusing on the degree of radicality of an

    action and the impact of imitation of that action on the performance of both firms.

  • 6

    2.0 REVIEW OF EXISTING WORK

    2.1 Differentiation:

    Competition existed long before strategy. It began with life itself(Henderson, 1989)

    Henderson (1989) provides a useful discussion of how firms compete. He draws on Gauses

    Principle (mentioned above) that competitors which make their living in the same way cannot

    coexist. Each must be different enough to have a unique advantage. The continued existence of a

    number of competitors is proof that their advantages over each other are mutually exclusive. They

    may look alike, but they are different species. Every airline must differentiate itself in important

    ways, to gain a different segment of the market. They must sell to different customers or offer

    different values, services or products (Henderson, 1989). In fact, image alone can be a source of

    differentiation. Since there are many sources o