How Sustainable is Your Competitive Advantage?

The focus in this study is on the competitive processes through which resources must be sustained against attempts at imitation and substitution, that is, after the point in time at which resources become commercialized. For a discussion of the complex dynamics of resource creation see Wernerfelt Birger , “A Resource-based View of the Firm,” Strategic Management Journal, 5 (1984): 171–180; Barney Jay B. , “Strategic Factor Markets: Expectations, Luck, and Business Strategy,” Management Science, 32 (1986): 1231–1241; Dierickx Ingemar Cool Karel , “Asset Stock Accumulation and Sustainability of Competitive Advantage,” Management Science, 35 (1989): 1504–1510; Shoemaker Paul J.H. , “Strategy, Complexity, and Economic Rent,” Management Science, 36 (1990): 1178–1192; Barney Jay B. , “Firm Resources and Sustained Competitive Advantage,” Journal of Management, 17 (1991): 99–120; Conner Kathleen R. , “A Historical Comparison of Resource-based Theory and Five Schools of Thought Within Industrial Organization Economics: Do We Have a New Theory of the Firm?” Journal of Management, 17 (1991): 121–154; Peteraf Margaret A. , “The Cornerstones of Competitive Advantage: A Resource-Based View,” Discussion Paper 90-29, J.L. Kellogg Graduate School of Management (1991); and Grant Robert M. , “The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation,” California Management Review, 33 (1991): 114–135.

This study was motivated by a query that different rates of learning might shape competitive forces distinctively; see Spence A.M. , “The Learning Curve and Competition,” The Bell Journal of Economics, 12 (1981): 49–70.

Research on organizational and environmental relationships is the focus of Miller Danny Friesen Peter H. , “Archetypes of Strategy Formulation,” Management Science, 24 (1978): 921–933. Precedents are also found in Miles R.E. Snow C.C. , Organizational Strategy, Structure and Process (New York, NY: McGraw-Hill, 1978) and Miles Raymond E. Snow Charles C. , “Fit, Failure, and the Hall of Fame,” California Management Review, 26 (Spring 1984): 10–28.

Burgelman Robert A. , “Intraorganizational Ecology of Strategy Making and Organizational Adaptation: Theory and Field Research,” Organizational Science, 2 (1991): 239–262; see also Freeman John Boeker Warren , “The Ecological Analysis of Business Strategy,” in Carroll G. Vogel D. , Strategy and Organization: A West Coast Perspective (Marshfield, MA: Pitman, 1984)

Teece David J. , “Contributions and Impediments of Economic Analysis to the Study of Strategic Management,” in Fredrickson J.W. , Perspectives on Strategic Management (New York, NY: Harper Business, a Division of Harper & Row Publishers, 1990).

Itami Hiroyuki , Mobilizing Invisible Assets (Cambridge, MA: Harvard University Press, 1987).

Williams Jeffrey R. , “Strategy and the Search for Rents: The Evolution of Diversity Among Firms,” in Rumelt R. Schendel D. Teece D. , Fundamental Issues in Strategy (Boston, MA: Harvard Press, forthcoming 1992).

Particularly influential in this regard were: Cyert Richard M. March James C. , A Behavioral Theory of the Firm (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1963); and Nelson Richard R. Winter Sidney G. , An Evolutionary Theory of Economic Change (Cambridge, MA: Harvard University Press, 1982).

Rumelt Richard , “Towards a Strategic Theory of the Firm,” in Lamb R. , Competitive Strategic Management (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1984); Rumelt Richard , “Theory, Strategy, and Entrepreneurship,” in Teece D. , ed., The Competitive Challenge (Cambridge, MA: Ballinger, 1987).

Teece David J. , “Profiting from Technological Innovation,” Research Policy, 15, (1986).

Nelson Winter , op. cit., p. 14.

Lippman S.A. Rumelt R.P. , “Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency Under Competition,” Bell Journal of Economics, 13 (1982): 418–438.

The full study of commitment is considerably richer than referenced here, including phenomena Ghemawat explains such as “lock-in,” lock-out,” lags, and inertia. See Ghemawat Pankaj , Commitment: The Dynamic of Strategy (New York, NY: The Free Press, 1991).

For the classic treatment of industry structural analysis see Porter Michael E. , Competitive Strategy (New York: The Free Press, 1980). A compendium of current thinking on the important topic of leadership is: Hambrick D. , ed., “Strategic Leaders and Leadership,” Special Issue of Strategic Management Journal (1989).

In a study of product pricing patterns, Klepper and Graddy show that pricing differences can be explained by product age, as well as by number of entrants, appropriability, and usage and technology diversity. See Klepper Steven Graddy Elizabeth , “The Evolution of New Industries and the Determinants of Market Structure,” RAND Journal of Economics, 21 (1990): 27–44.

Oliver Williamson has emphasized how asset specificity, small numbers bargaining, and imperfect information can dominate the character of organizations and markets. See Williamson Oliver E. , Markets and Hierarchies: Analysis and Antitrust Implications (New York, NY: The Free Press, 1975); and Williamson O.E. , “Transaction Cost Economics,” in Schmalensee R. Willig R.D. , Handbook of Industrial Organization (Amsterdam: North Holland, 1989).

Local monopoly markets share features of locational competitive models (Chamberin, 1933; Hoteling, 1929), where equilibrium is obtained through sequential entry of firms (Prescott & Visscher, 1977), analogous to capturing the most attractive location for a lemonade stand on the beach. See Chamberlin E. , The Theory of Monopolistic Competition (Cambridge, MA: Harvard University Press, 1933); Hoteling H. , “Stability in Competition,” Economic Journal, 29 (1929): 41–57; and Prescott Edward C. Visscher Michael , “Sequential Location among Firms with Foresight,” Bell Journal of Economics, 8 (1977): 378–393. Market imperfections of the type often found in local monopoly markets are discussed in Scitovsky Tibor , “The Benefits of Asymmetric Markets,” Journal of Economic Perspectives, 4 (1990): 135–148.

Consistent with the theory, and subsequent to this period, USAir's profit position deteriorated rapidly when it chose to expand beyond the protection of its Pittsburgh hub. See Bailey Elizabeth E. Williams Jeffrey R. , “Sources of Economic Rent in the Deregulated Airline Industry,” Journal of Law and Economics, 31 (1988): 173–202.

Farquhar Peter H. , “Managing Brand Equity,” Marketing Research (1989), pp. 24–33.

Patterns of “relaxed pricing,” common in local monopoly environments, are discussed in Rotemberg Julio J. Saloner Garth , “The Relative Rigidity of Monopoly Pricing,” American Economic Review, 77 (1987): 917–926.

In the context of resource dependence (Pfeffer and Salancik, 1978), Class 1 organizations may experience a relatively high degree of resource dependence because they are highly dependent upon a specific resource or customer. Casual evidence is provided by the growth constraints associated with local monopoly organizations. As Pfeffer and Salancik point out, such highly resource-dependent organizations, to the degree that they wish to minimize resource constraints (in this case grow) may be particularly motivated to diversify. By extension, Class 3 organizations may be least resource dependent, or at least dependency is unstable, as Schumpeterian organizations are most loosely coupled with idiosyncratic resources, relying instead on the ability to innovate. See: Pfeffer J. Salancik G.R. , The External Control of Organizations: A Resource Dependence Perspective (New York, NY: Harper & Row, 1978); and Williams J. , “The Ecology of Relaxed Imitability,” Carnegie Mellon University Graduate School of Industrial Administration, June 1990.

Carroll Glenn , “The Specialist Strategy,” in Carroll G. Vogel D. , eds., Strategy and Organization: A West Coast Perspective (Marshfield, MA: Pitman, 1984).

This classic form of oligopolistic competition is documented in Porter (1980) op. cit.; Scherer , Industrial Market Structure and Economic Performance (Chicago, IL: Rand McNally, 1980); and Chandler Alfred D. , “The Enduring Logic of Industrial Success,” Harvard Business Review, 68 (1990): 130–140.

Advantages from economies of scale were first assumed to be automatic, but more recent work emphasizes that a continual and complex process of organizational learning must accompany economies of scale. See Hall G. Howell S. , “The Experience Curve from the Economist's Perspective,” Strategic Management Journal (1985), pp. 197–212.; Hayes Robert H. Wheelwright Steven C. Clark Kim B. , Dynamic Manufacturing: Creating the Learning Organization (New York, NY: Free Press, 1988).

Teece David J. , ed., The Competitive Challenge: Strategies for Industrial Innovation and Renewal (Cambridge, MA: Ballinger, 1987).

Organizational transformations associated with speeding up the pace of product development are highlighted in: Bower Joseph L. Hout Thomas M. , “Fast-Cycle Capability for Competitive Power,” Harvard Business Review, 66 (1988): 110–118.

We examine in the context of resource imitation only a small part of the broad Schumpeterian view. See: Schumpeter Joseph A. , The Theory of Economic Development (Cambridge, MA: Harvard University Press, 1934).

For a representative sample of this important new research see Aaker David A. Day George S. , “The Perils of High-Growth Markets,” Strategic Management Journal, 7 (1986): 409–421.; Bourgeois L.J. III Eisenhardt Kathleen M. , “Strategic Decision Processes in High Velocity Environments: Four Cases in the Microcomputer Industry,” Management Science, 34 (1988): 816–85; Stalk George Jr. Hout Thomas M. , Competing Against Time: How Time-Based Competition is Reshaping Global Markets (New York, NY: Free Press, 1990); Eisenhardt Kathleen M. , “Speed and Strategic Choice: How Managers Accelerate Decision Making,” California Management Review, 32 (1990).

In the case of Lotus 1-2-3, lock-in is strengthened through network externalities. Lotus 1-2-3 is hard to dislodge for the same reason that the QWERTY keyboard remains popular; because of the embedded learning associated with the user interface among users. Accordingly, as pointed out to me by Marvin Sirbu, we should see deterioration of the Lotus advantage by organizations that copy the user interface without violating copyrights (Borland) or by organizations that provide file level compatibility while adding sufficient functionality to justify learning in a new context (Excel). Also, as pointed out, in contrast to the general principle that low investment is required in local monopoly environments, in cases where functionality is changing rapidly, such as for spreadsheets, even organizations holding strong monopoly advantages, such as Lotus, may need to invest heavily as insurance against being leapfrogged by competitors.

Efforts by the Japanese (Cusamano's “software factories”) and by others to modularize and standardize software code through object-oriented programming to gain larger markets and reduce production time, would paradoxically, if successful, reduce product sustainability, shorten cycle times, and induce greater (more direct and intense) competition in the software industry.

The unbalanced nature of slow productivity growth in software and rapid productivity growth in electronic hardware is discussed in Baumol William J. Anne Sue Blackman Batey Wolff Edward N. , “Unbalanced Growth Revisited: Asymptotic Stagnancy and New Evidence,” American Economic Review, 75 (1985): 806–817.

Amit Raphael Shoemaker Paul distinguish resources (which reflect a transformation of some input factor to a more desirable output) from capabilities (which represent some firm-specific skill created by complex interactions among the firm's resources). See Amit Raphael Shoemaker Paul J.H. , “Key Success Factors: Their Foundation and Application” Working Paper, University of British Columbia and University of Chicago (1990).

Burgelman , op. cit., p. 248.

The organizational coherence problem seems to be particularly acute for conglomerates, that in the 1980s divested wholesale of unrelated businesses. See: Williams Jeffrey R. Paez Betty Lynn Sanders Leonard , “Conglomerates Revisited,” Strategic Management Journal, 9 (1988): 403–414.

See Teece David J. Pisano Gary Shuen Amy , “Firm Capabilities, Resources, and the Concept of Strategy,” Working Paper (1990). See also Dosi Giovanni Teece David J. Winter Sidney in “Toward a Theory of Corporate Coherence: Preliminary Remarks,” Working Paper, University of California, Berkeley (1990); and Prahalad C.K. Hamel Gary , “The Core Competence of the Corporation,” Harvard Business Review, 90 (1990): 79–93.

Tushman Michael L. Newman William H. Romanelli Elaine , “Convergence and Upheaval: Managing the Unsteady Pace of Organizational Evolution,” California Management Review, 28 (1986): 29–44.

Organizational processes have long been viewed as rate driven in the context of systems dynamics; see Forrester J.W. , Industrial Dynamics (Cambridge, Massachusetts: MIT Press, 1961).