Sustainable Competitive Adv

Sustaining Competitive Advantage
Our Analysis So Far:

Porters Five Forces
Industry Analysis
Industry Dynamics
Business-level Strategy
Routines Capabilities
Generic Strategies
Value Chain Diff Cost
Broad or Focused
Corporate Level Analysis
What businesses that we are not in, but should be in?
Corporate-Level Strategy
What businesses that we are in, but should 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
If all firms are similar, then one firm can easily imitate another firm
No source of competitive advantage can be sustainable
Firms are different because they possess different resources/capabilities
To have a sustainable competitive advantage a firm must have some scarce resources/capabilities
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 No Yes Yes Yes R No No Yes Yes I No No No Yes N No Y/N Y/N Yes Competitive Position Competitive Disadvantage Performance Implications Low Returns
Competitive Parity
Temporary Advantage Sustainable Advantage
Average Returns
Average or Slightly above Above Average Returns

Imperfect Mobility
Imperfect mobility
Resources lose value when moved from one firm to another Co-specialized resources: resources are more valuable when used together Deltas gates and landing slots at Hartsfield airport Messi!
Isolating mechanism
creates impediments to mobility of resources prevents imitation of resources
Perfect mobility
When knowledge or technique or formula can be written down and copied American vs. NW in Yield management
Tangible Impediments to Imitation

Patents Copyrights Trademarks Access to raw materials DeBeers; International Nickel Access to customers Distribution capabilities of RTE breakfast cereal manufacturers
Legal restrictions:
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 Sonys 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 Southwests 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
Metcalfes 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*(21)=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.
Evolution of market structure in markets with network externalities

Winner 100
Battle Zone Market Share (%) 50
0 Time
Loser

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 Low demand for variety High demand for variety Unlikely Low
High Economies of Scale High 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, .
The Four Threats to Sustainability The Tetra Threat Framework

Imitation Substitution
Added Value
Appropriated Value
Slack
Holdup
Characteristics affecting Added Value
Imitability Forcing open your door Substitutability Blowing up your house
Characteristics Holdup (threat from friends suppliers, distributors, alliance affecting partners) Appropriated Slack (threat from within) Value
Responding to Threats to Sustainability

Responses to Substitution
Not responding Fighting Switching Recombining Straddling/hedging Harvesting
Responses to Imitation Building Barriers

Economies of scale and scope Learning/private information Contracts and relationships Network externalities Threats of retaliation Time lags Fit Upgrading
Added Value
Appropriated Value
Responses to Slack
Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change
Responses to Holdup
Contracting Integrating Building bargaining power Bargaining hard Reducing asset-specificity Building relationships Developing trust
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) Network externalities (Facebook)
Responses to substitutability Ignoring (Ernie, Red Bull) Resist (Kodak) Switch (BN, Seattle Times) Hedging (Corporate Venture Capital, Futurebazaar.com) Recombining (Walmart.com, E-zone)
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

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Sustaining Competitive Advantage

Our Analysis So Far:

Sustaining Competitive Advantage

Corporate Level Analysis

What businesses that we are not in, but should be in?

What businesses that we are in, but should not be in?

Sustaining Competitive Advantage