Sustainable Competitive Adv - Copy

Sustaining Competitive Advantage

Our Analysis So Far:

Business-level Strategy

Industry AnalysisPorter’s Five Forces

Industry Dynamics

Routines

Capabilities

Value ChainGeneric Strategies

Diff Cost

Broad or Focused


Corporate Level Analysis

Corporate-LevelStrategy

What businesses that we are not in, butshould be in?

What businesses that we are in, butshould not be in?


Sustainable

competitive

advantage:

•When competitive advantage persists despite efforts by competitors or entrants to duplicate or neutralize it


Resource Based View of the firm

Firms are heterogeneous: No two firms are similar

Firms are different because they possess different

resources/capabilities

To have a sustainable competitive advantage a firm

must have some scarce resources/capabilities

If all firms are similar, then one firm can easily imitate another firm• No source of competitive advantage can

be sustainable


Resource Based View of the Firm…..contd.

Resources/capabilities lead to competitive

advantage if and only if these are:

Valuable Rare Inimitable Non-substitutable


Resource Based View of the Firm…..contd.

Valuable

• The resource/capability should be valuable to the firm and to other competitors• Barbie brand

Rare (or scarce)

• Firms should compete for the resource/capability• Superstar

managers of mutual funds

Inimitable

• Competitors should not be able to imitate a resource/capability

Non-substitutable

• Competitors should not be able to find a perfect substitute for this resource/capability


How important are VRIN properties?

V R I NCompetitive

PositionPerformanceImplications

No No No NoCompetitiveDisadvantage

Low Returns

Yes No No Y/NCompetitive

ParityAverageReturns

Yes Yes No Y/NTemporaryAdvantage

Average orSlightly above

Yes Yes Yes YesSustainableAdvantage

Above AverageReturns

Sustaining Competitive AdvantageImperfect Mobility

Imperfect mobility•Resources lose value when moved from one firm to another•Co-specialized resources: resources are more valuable when used together•Delta’s gates and landing slots at Hartsfield airport

•Messi!

Perfect mobility•When knowledge or technique or formula can be written down and copied•American vs. NW in Yield management

Isolating mechanism•creates impediments to mobility of resources

•prevents imitation of resources


Tangible Impediments to Imitation

• Patents• Copyrights• Trademarks

Legal restrictions:

• Access to raw materials• DeBeers; International

Nickel• Access to customers

• Distribution capabilities of RTE breakfast cereal manufacturers

Superior access to inputs or customers


Tangible Impediments to Imitation…..contd.

Market size and scale economies•Prevents others from entering and imitating


Intangible Impediments to Imitation

Causal ambiguity

• Capabilities involve tacit knowledge• Knowledge that

cannot be written down• Swinging a golf

club• Tendulkar or

Sehwag cannot explain their capabilities on a piece of paper

• Sony’s ability to miniaturize product

Historical circumstances

• Southwest flying out of Texas

• Intel and Stanford University• Unique labor

relationship and operational efficiencies• Difficult to

imitate

Social complexity

• Southwest’s culture, Toyota supplier relations

• Trust building


What else makes imitation difficult?

Competitors have made substantial prior strategic commitments (retail locations and lease terms)

Nature of the industry: short product life cycle (Intel)


First mover advantages

Learning curve

Reputation in experience goods- education

Network effects• Network externalities or dynamic increasing returns

to scale• eBay, Windows OS, MS Word/Excel/PowerPoint• Network externalities lead to industry standards• Industry standards may prevent imitation


Network Externalities

Examples of network externalities:• Typewriter• Wrenches, nuts, and bolts• Railway gauges• AC vs. DC power distribution (“to Westinghouse”)• WWW• ATM

Metcalfe’s Law: (Bob Metcalfe: inventor of Ethernet)• If there are n people in the network, then the value of

network to each one of them is n(n-1)• Value to each person in a two person network: 2*(2-

1)=2• Value to each person in a 100 person network:

100(100-1)=9900


Feedback systems

Network externalities: • Positive feedback system • Strong gets stronger and weak gets

weaker, leading to extreme outcomes.• Negative feedback system• Strong gets weaker, and weak gets

stronger, e.g., price competition from a low-cost new entrant

In a positive feedback system, market is tippy, market tips in favor of one competitor, • only one player emerges as a winner.


Winner

Loser

100

50

0

Battle ZoneMarket Share (%)

Time

Evolution of market structure in markets with network externalities


Some features of markets with Network Externalities

• Strategies for markets with network externalities:– Competition is not ‘within’ a market, but ‘for’ the market– Follower can pursue compatibility with the leader

• Will your industry tip? (Shapiro and Varian, Information Rules)– Not every industry tips……..PC/automobiles/……– Two factors: economies of scale and demand for variety

Low Economies of Scale

High Economies of Scale

Low demand for variety

Unlikely High

High demand for variety

Low Depends (HBS)


Summary

Resources lead to competitive advantage if

they meet four criteria

Resources lead to sustainable competitive advantage if they are

imperfectly mobile

Isolating mechanisms prevent perfect mobility

of resources

• Tangible isolating mechanisms• Examples: Patents, copyrights,

access to customers, ……• Intangible isolating mechanisms• Examples: Causal ambiguity,

network effects, …….


Imitation Substitution

Slack Holdup

Added Value

AppropriatedValue

The Four Threats to SustainabilityThe Tetra Threat Framework


•Imitability•Forcing

open your door

•Substitutability •Blowing

up your house

Characteristics affecting Added

Value

•Holdup (threat from ‘friends’ – suppliers, distributors, alliance partners)

•Slack (threat from within)

Characteristics affecting

Appropriated Value


Responses to ImitationBuilding Barriers• Economies of scale and scope• Learning/private information• Contracts and relationships• Network externalities• Threats of retaliation• Time lags• Fit• Upgrading

Added Value

AppropriatedValue

Responses to Substitution• Not responding• Fighting• Switching• Recombining• Straddling/hedging• Harvesting

Responses to Holdup• Contracting• Integrating• Building bargaining

power• Bargaining hard• Reducing asset-

specificity• Building relationships• Developing trust

Responses to Slack• Gathering information• Monitoring behavior• Offering performance

incentives• Shaping norms• Bonding resources• Changing governance• Mobilizing for change

Responding to Threats to Sustainability


Responses to imitability

• Scale and size• Experience/learning (aircraft)• Contracts/relationships (retail)• Reputation (EDLP even if not the case)• Expected retaliation (MS-Netscape v/s MS-Palm)• Response lags (microprocessors) • Upgrading (Windows)• Fit (SW)


Responses to substitutability

• Ignoring (Ernie, Red Bull)• Resist (Kodak)• Switch (BN, Seattle Times)• Hedging (CVC)• Recombining (Blockbuster)


Responses to holdup

• Contracting (competitive renegotiation)• Vertical integration• Improve bargaining power (dual sourcing)• Reduce asset specificity (standardize)• Build mutual dependence (hostage

exchange)• Build trust (Japanese supplier networks)


Responses to slack

• Benchmark (Xerox)• Monitor behavior• Performance incentives (options, EVA)• Shape norms (Walton, Premji)• Bonding mechanisms (buyouts)• Change governance (Satyam!)• Implement change (BP, GE)


Sustainability not forever or

free

Not binary, a matter of degree

Sustainable Competitive Adv - Copy

Documents

resource based

sustaining

sustainable

competitive

level strategy

network externalities

tangible impediments

scale