Competitive Advantage
Industry Analysis
Porter (1985)- A firm achieves a competitive advantage in a given market whenever it
outperforms its competitors- strategy gets to this competitive advantage
Porter (1979)- A strategist should “position his company to best cope with the
environment”, building a defense against competitive forces/finding positions within an
industry where the forces are weakest
Porter (1979) FIVE FORCES MODEL – buyer power, supplier power, Threat of
Substitution, threat of new entrants and competitive rivalry
o Industry level analysis – evaluates industry attractiveness
Managerial Action implied by industry model:
o Profits created at the industry/subsector level rather than the firm level
Focus on industries where the five forces are favorable
o OR change the five forces by investing in barriers to entry, differentiating
product, consolidating competition
o Focus on protecting industry profitability can avoid mutually destructive
competition
Porter (1985)- “stalemates can be quite profitable in attractive industries”
Industry leaders are better off taking actions to improve or protect
industry structure rather than seeking greater competitive advantage for
themselves
Coca-Cola: global leader in the soft-drinks industry, avoids narrow cost-
cutting and competitive pricing strategies to maintain industry
profitability
Industry Model Evaluation:
o Assumes that uncertainty is sufficiently low that you can accurately predict
participants’ behaviour and select strategy accordingly
o Ignores complements and the nonmarket environment
o Industry analysis not sufficient to make strategic decisions
For example, US air travel made zero profits cumulatively (1903-2003)
o Selecting a position may reduce the capacity for adaptation/emergent strategy
, o Model suggests that performance is relative and industry effects affect all firms
symmetrically, therefore cannot explain high/low performance which is visible in
empirical evidence
o Learned, Christensen, Andrews & Guth: Successful firm has to match internal
competences and values with external environment
o JOHNSON, WHITTINGTON & SCHOLES (2011): The relative strengths of the 5
forces change over the life cycle of the industry e.g. Transferwise
Bain/ Mason Industrial organization
Firm’s performance depends on the industry environment in which it competes
Theory assumes all firms in industry are identical, differences other than size are just
noise
o Little room for stable differences in performance within industry
o Not considered as policy practiti oners interest in improving private performance
not social (industry) performance- industry is the unit of analysis
o Static perspective- structure of industry is definitionally stable
Improvements:
o Unit of Analysis: Firms within industries clustered by strategy and their reactions
to disturbances & patterns of rivalry will be determined by group configuration
o Static Tradition- now encompassing dynamic models of industry evolution
Generic Business Strategies Model
Porter (1980)- Generic Business Strategies- Cost
Leadership OR Differentiation (2 strategies can’t be
mixed)
o Know your competence and don’t get stuck
in the middle
o Evaluation: Adherence to the traditional
paradox between ‘low-cost and high-quality’
may result in key opportunities being missed:
Japanese idea that it is possible to reduce
costs by improving quality (lean production)
unleashed a whole new line of development
Porter’s Three “Essential Tests” for Companies Considering Diversification
o The attractiveness test: Is the industry attractive?
o The cost-of-entry test: Will you make profits?
o The better-off test: Will either firm gain?
, Beyond Industry Analysis
Why Industry Analysis cannot explain sustainable competitive advantage
Rumelt (1991): Business-unit effects explain 44-46% of the variation in business-unit
profits- Industry effects only account for 9-16%
Rumelt (1984): “by taking the industry as unit of analysis, industrial organization has
largely ignored the theory and evidence of intra-industry differences among firms.”
o The dispersion in long-term rates of return of firms within industries is five to
eight times as large as the variance in returns across industries.”
GALBREITH & GALVIN (2008): Resources are more important in explaining performance
variation in service firms than manufacturing firms
o Resources were 4.17x more important as industry effects for service firms, and
2.23x more important for other firms
Positioning is not an appropriable asset so unlikely to provide a sustained advantage
o Rapidly-changing technologies, increasing competition and volatility of consumer
preferences make positioning strategies unlikely to provide stability/constancy
Grant (1998)- Market position in technological change is extremely fragile because
innovation reconfigures the value chain
Barney (1991): Data needed for industry-level analysis is in the public domain so
everyone can copy
o BUT information about own resources is private info about its own resources
AMEL & FROEB (1991)- Firm effects are more important than market effects in
determining profitability
CHANG & SIGNH (2000)- Firm effects explain over twice the variation as industry effects
Strategic Capabilities & Core Competencies- The Resource Based View
Many scholars claim it is intangible resources that explain performance heterogeneity
among firms and thus are likely sources of competitive advantage.
Isolating mechanisms exist and are economic forces that limit the extent to which a
competitive advantage can be duplicated or neutralised. This is needed to sustain
resource heterogeneity
o Inimitability may arise breakthrough innovations/real advantages often come
from firms outside an industry which incumbents may not see as competitors e.g.
Starbucks
o Lippman & Rumelt (1982)- causal ambiguity leads to imperfect imitability
Strategic Capabilities and Core Competences: bundle of skills, technologies, people, &
other resources of fundamental customer benefit
o Competitively unique (non-tradable, non-imitable, and non-substitutable)
o Examples: Tacit, behavioural, imperfectly imitable features like open culture,
employee empowerment, and executive commitment
Barney (1991): RBV- resources can yield sustained competitive advantage if Valuable,
Rare, Imperfectly Imitable and Non-Substitutable
o Sustained competitive advantage arises from exploiting internal rather than
external factors
o Internal Factors such as Knowledge- the most valuable resource a firm can have,
hard to imitate and only gained through learning
Industry Analysis
Porter (1985)- A firm achieves a competitive advantage in a given market whenever it
outperforms its competitors- strategy gets to this competitive advantage
Porter (1979)- A strategist should “position his company to best cope with the
environment”, building a defense against competitive forces/finding positions within an
industry where the forces are weakest
Porter (1979) FIVE FORCES MODEL – buyer power, supplier power, Threat of
Substitution, threat of new entrants and competitive rivalry
o Industry level analysis – evaluates industry attractiveness
Managerial Action implied by industry model:
o Profits created at the industry/subsector level rather than the firm level
Focus on industries where the five forces are favorable
o OR change the five forces by investing in barriers to entry, differentiating
product, consolidating competition
o Focus on protecting industry profitability can avoid mutually destructive
competition
Porter (1985)- “stalemates can be quite profitable in attractive industries”
Industry leaders are better off taking actions to improve or protect
industry structure rather than seeking greater competitive advantage for
themselves
Coca-Cola: global leader in the soft-drinks industry, avoids narrow cost-
cutting and competitive pricing strategies to maintain industry
profitability
Industry Model Evaluation:
o Assumes that uncertainty is sufficiently low that you can accurately predict
participants’ behaviour and select strategy accordingly
o Ignores complements and the nonmarket environment
o Industry analysis not sufficient to make strategic decisions
For example, US air travel made zero profits cumulatively (1903-2003)
o Selecting a position may reduce the capacity for adaptation/emergent strategy
, o Model suggests that performance is relative and industry effects affect all firms
symmetrically, therefore cannot explain high/low performance which is visible in
empirical evidence
o Learned, Christensen, Andrews & Guth: Successful firm has to match internal
competences and values with external environment
o JOHNSON, WHITTINGTON & SCHOLES (2011): The relative strengths of the 5
forces change over the life cycle of the industry e.g. Transferwise
Bain/ Mason Industrial organization
Firm’s performance depends on the industry environment in which it competes
Theory assumes all firms in industry are identical, differences other than size are just
noise
o Little room for stable differences in performance within industry
o Not considered as policy practiti oners interest in improving private performance
not social (industry) performance- industry is the unit of analysis
o Static perspective- structure of industry is definitionally stable
Improvements:
o Unit of Analysis: Firms within industries clustered by strategy and their reactions
to disturbances & patterns of rivalry will be determined by group configuration
o Static Tradition- now encompassing dynamic models of industry evolution
Generic Business Strategies Model
Porter (1980)- Generic Business Strategies- Cost
Leadership OR Differentiation (2 strategies can’t be
mixed)
o Know your competence and don’t get stuck
in the middle
o Evaluation: Adherence to the traditional
paradox between ‘low-cost and high-quality’
may result in key opportunities being missed:
Japanese idea that it is possible to reduce
costs by improving quality (lean production)
unleashed a whole new line of development
Porter’s Three “Essential Tests” for Companies Considering Diversification
o The attractiveness test: Is the industry attractive?
o The cost-of-entry test: Will you make profits?
o The better-off test: Will either firm gain?
, Beyond Industry Analysis
Why Industry Analysis cannot explain sustainable competitive advantage
Rumelt (1991): Business-unit effects explain 44-46% of the variation in business-unit
profits- Industry effects only account for 9-16%
Rumelt (1984): “by taking the industry as unit of analysis, industrial organization has
largely ignored the theory and evidence of intra-industry differences among firms.”
o The dispersion in long-term rates of return of firms within industries is five to
eight times as large as the variance in returns across industries.”
GALBREITH & GALVIN (2008): Resources are more important in explaining performance
variation in service firms than manufacturing firms
o Resources were 4.17x more important as industry effects for service firms, and
2.23x more important for other firms
Positioning is not an appropriable asset so unlikely to provide a sustained advantage
o Rapidly-changing technologies, increasing competition and volatility of consumer
preferences make positioning strategies unlikely to provide stability/constancy
Grant (1998)- Market position in technological change is extremely fragile because
innovation reconfigures the value chain
Barney (1991): Data needed for industry-level analysis is in the public domain so
everyone can copy
o BUT information about own resources is private info about its own resources
AMEL & FROEB (1991)- Firm effects are more important than market effects in
determining profitability
CHANG & SIGNH (2000)- Firm effects explain over twice the variation as industry effects
Strategic Capabilities & Core Competencies- The Resource Based View
Many scholars claim it is intangible resources that explain performance heterogeneity
among firms and thus are likely sources of competitive advantage.
Isolating mechanisms exist and are economic forces that limit the extent to which a
competitive advantage can be duplicated or neutralised. This is needed to sustain
resource heterogeneity
o Inimitability may arise breakthrough innovations/real advantages often come
from firms outside an industry which incumbents may not see as competitors e.g.
Starbucks
o Lippman & Rumelt (1982)- causal ambiguity leads to imperfect imitability
Strategic Capabilities and Core Competences: bundle of skills, technologies, people, &
other resources of fundamental customer benefit
o Competitively unique (non-tradable, non-imitable, and non-substitutable)
o Examples: Tacit, behavioural, imperfectly imitable features like open culture,
employee empowerment, and executive commitment
Barney (1991): RBV- resources can yield sustained competitive advantage if Valuable,
Rare, Imperfectly Imitable and Non-Substitutable
o Sustained competitive advantage arises from exploiting internal rather than
external factors
o Internal Factors such as Knowledge- the most valuable resource a firm can have,
hard to imitate and only gained through learning
