Sustainability of Competitive Advantage
Reasons for Sustainable Competitive Advantage
First Mover Advantage
Pre-emption of assets/resources – can monopolise ownership of them
o Can purchase assets at a lower price than will prevail later e.g. Tesla, Apple
Spatial Pre-emption – Environmental carrying capacity
o First-mover can choose most attractive nïche and deter others e.g. Walmart
o Pioneers can reinforce their early lead by filling product differentiation niches
Buyer-Switching Costs – latecomers must invest to attract customers away from the 1 st
o If the product is satisfactory, further search costs are not justified i.e. people
satisfice
o Customers may be in existing contracts with the first-mover- Status quo bias
o Bronnenberg, Dhar & Dubé (2009)- There is a strong positive correlation
between a brand’s share and the order of entry. Early entrants tend to be
perceived as higher-quality brands
o Schmalensee (1982): uncertainty about the quality of new brands can give
established or pioneering brands an advantage in differentiated markets
Markides & Geroski (2004): The firms which develops the dominant design often
achieves substantial and long-lasting first-mover benefits
Dierickx & Cool (1989)- Its competitive position and hence its potential profitability is
determined by the level of its stocks.
o Sustainability of a firm’s asset position hinges on how easily assets can be
substituted or imitated.
LIEBERMAN & MONTOGMERY (1998)- If network externalities exist in an industry, the
pioneer’s product is more likely to be established as the industry standard
o Retailers less willing to stock newer/unknown brands if the first is doing well
Evaluation: according to RBV, 1st-moving cannot be a basis for sustained advantage as
time is not a rare or imperfectly imitable resource
Past Experience
Firm success as a function of past success. It affects access to talent, opportunity,
capital, and quality.
Arthur (1989)- Modern, complex technologies often display increasing returns to
adoption in that the more they are adopted, the more experience is gained with them,
and the more they are improved.
Barney (1986): Resources are accumulated rather than acquired in “strategic factor
markets”
Pavitt (1990): Technological innovation activities are cumulative.
o Technological knowledge is specific, involving development and testing of
prototypes and pilot plants.
o Although firms can buy-in technology and skills from the outside, what they have
been able to do in the past strongly conditions what they can hope to do in the
future.
, The ability to learn from expertise—whether internally (learning by doing) or from
suppliers, customers, and competitors (learning by using, learning by failing, reverse
engineering)—is of major importance in the management of innovation.
o Teece (1989)- Sustainable advantage arises from non-tradeable intangibles such
as knowledge and competence
Imitability is linked to characteristics of asset accumulation process:
o TIME COMPRESSION DISECONOMIES: decreasing returns to fixed factor time-
Source of first-mover advantage
The most valuable advantages are accumulated over time through
investment in e.g. R&D and Marketing and capital investment cannot
always act as a shortcut
Maintaining a given rate of R&D spending over an interval produces a
larger increment to the stock of R&D than twice this rate over half the
time
ASSET MASS EFFICIENCIES: higher initial asset stock facilitate further asset accumulation
o Hard to imitate an advantage if success requires initial success
Consumer attitudes towards brands/pioneers depends on the cultural context
o Alpert et al. (1986) 50% of products in Japanese supermarkets were pioneering
brands; compared to 14% of products in US supermarket
Patents
Efficacy of legal mechanisms of protection (patents, copyrights, trade secrets)
o It costs $1bn to get FDA approval for a new drug
o Patent infringement if costly/difficult to prove
e.g. Dyson almost went bankrupt when fighting a lawsuit for years which
accused Hoover who had copied his patent-protected vacuum
designs/technologies
Strengthening of Intellectual Property Regimes
o Knowledge assets are often inherently difficult to copy
o Knowledge assets enjoy protection against theft under the Intellectual property
laws
o Intellectual property systems have been strengthened since the 1980s
PATENT TROLLS – people/companies accumulate/buy large quantities of various patents
and store them so that they can sue innovators for actually creating an invention
The threat of a lawsuit from innovating is a huge deterrent- patent thickets can block
entry
Success in patent races- A head-start in R&D deters rivals entering the patent race
A firm with monopoly power has incentive to maintain its monopoly power by patenting
new technologies before potential competitors.
o Lead to patents that are neither used nor licensed to others—“sleeping patents”.
Complementary Assets
Teece (1986)- When imitation is easy, the profits from innovation may accrue to the
owners of certain complementary assets, rather than to the developers of the
intellectual property
, Complementary assets matter because knowledge assets are typically an intermediate
good and need to be packaged into products or services to yield value.
o Teece- The design for a new automobile is of little value without access to
manufacturing and distribution facilities on competitive terms
o Example: RC Cola was the first firm to sell cola in a can
Teece (1986)- Imitators can often outperform innovators if they are better positioned
with respect to critical complementary assets
o So, public policy aimed at promoting innovation must focus not only on R&D, but
also on complementary assets, as well as the underlying infrastructure
The ownership of complementary assets helps establish who wins and who loses from
innovation
o If technology requires cospecialised assets or has a weak appropriability regime,
it will not drive the growth of new business
Teece (1998)- The winners are the entrepreneurs with the cognitive and managerial
skills to discern the shape of the play, and then act upon it
Extends to Dynamic Capabilities- ability to sense and seize new opportunities, and to
reconfigure and protect knowledge assets, competencies, and complementary assets
and technologies to achieve sustainable competitive advantage.
Shapiro & Varian (1999): These assets are also essential in Standards Wars
Reasons for Sustainable Competitive Advantage
First Mover Advantage
Pre-emption of assets/resources – can monopolise ownership of them
o Can purchase assets at a lower price than will prevail later e.g. Tesla, Apple
Spatial Pre-emption – Environmental carrying capacity
o First-mover can choose most attractive nïche and deter others e.g. Walmart
o Pioneers can reinforce their early lead by filling product differentiation niches
Buyer-Switching Costs – latecomers must invest to attract customers away from the 1 st
o If the product is satisfactory, further search costs are not justified i.e. people
satisfice
o Customers may be in existing contracts with the first-mover- Status quo bias
o Bronnenberg, Dhar & Dubé (2009)- There is a strong positive correlation
between a brand’s share and the order of entry. Early entrants tend to be
perceived as higher-quality brands
o Schmalensee (1982): uncertainty about the quality of new brands can give
established or pioneering brands an advantage in differentiated markets
Markides & Geroski (2004): The firms which develops the dominant design often
achieves substantial and long-lasting first-mover benefits
Dierickx & Cool (1989)- Its competitive position and hence its potential profitability is
determined by the level of its stocks.
o Sustainability of a firm’s asset position hinges on how easily assets can be
substituted or imitated.
LIEBERMAN & MONTOGMERY (1998)- If network externalities exist in an industry, the
pioneer’s product is more likely to be established as the industry standard
o Retailers less willing to stock newer/unknown brands if the first is doing well
Evaluation: according to RBV, 1st-moving cannot be a basis for sustained advantage as
time is not a rare or imperfectly imitable resource
Past Experience
Firm success as a function of past success. It affects access to talent, opportunity,
capital, and quality.
Arthur (1989)- Modern, complex technologies often display increasing returns to
adoption in that the more they are adopted, the more experience is gained with them,
and the more they are improved.
Barney (1986): Resources are accumulated rather than acquired in “strategic factor
markets”
Pavitt (1990): Technological innovation activities are cumulative.
o Technological knowledge is specific, involving development and testing of
prototypes and pilot plants.
o Although firms can buy-in technology and skills from the outside, what they have
been able to do in the past strongly conditions what they can hope to do in the
future.
, The ability to learn from expertise—whether internally (learning by doing) or from
suppliers, customers, and competitors (learning by using, learning by failing, reverse
engineering)—is of major importance in the management of innovation.
o Teece (1989)- Sustainable advantage arises from non-tradeable intangibles such
as knowledge and competence
Imitability is linked to characteristics of asset accumulation process:
o TIME COMPRESSION DISECONOMIES: decreasing returns to fixed factor time-
Source of first-mover advantage
The most valuable advantages are accumulated over time through
investment in e.g. R&D and Marketing and capital investment cannot
always act as a shortcut
Maintaining a given rate of R&D spending over an interval produces a
larger increment to the stock of R&D than twice this rate over half the
time
ASSET MASS EFFICIENCIES: higher initial asset stock facilitate further asset accumulation
o Hard to imitate an advantage if success requires initial success
Consumer attitudes towards brands/pioneers depends on the cultural context
o Alpert et al. (1986) 50% of products in Japanese supermarkets were pioneering
brands; compared to 14% of products in US supermarket
Patents
Efficacy of legal mechanisms of protection (patents, copyrights, trade secrets)
o It costs $1bn to get FDA approval for a new drug
o Patent infringement if costly/difficult to prove
e.g. Dyson almost went bankrupt when fighting a lawsuit for years which
accused Hoover who had copied his patent-protected vacuum
designs/technologies
Strengthening of Intellectual Property Regimes
o Knowledge assets are often inherently difficult to copy
o Knowledge assets enjoy protection against theft under the Intellectual property
laws
o Intellectual property systems have been strengthened since the 1980s
PATENT TROLLS – people/companies accumulate/buy large quantities of various patents
and store them so that they can sue innovators for actually creating an invention
The threat of a lawsuit from innovating is a huge deterrent- patent thickets can block
entry
Success in patent races- A head-start in R&D deters rivals entering the patent race
A firm with monopoly power has incentive to maintain its monopoly power by patenting
new technologies before potential competitors.
o Lead to patents that are neither used nor licensed to others—“sleeping patents”.
Complementary Assets
Teece (1986)- When imitation is easy, the profits from innovation may accrue to the
owners of certain complementary assets, rather than to the developers of the
intellectual property
, Complementary assets matter because knowledge assets are typically an intermediate
good and need to be packaged into products or services to yield value.
o Teece- The design for a new automobile is of little value without access to
manufacturing and distribution facilities on competitive terms
o Example: RC Cola was the first firm to sell cola in a can
Teece (1986)- Imitators can often outperform innovators if they are better positioned
with respect to critical complementary assets
o So, public policy aimed at promoting innovation must focus not only on R&D, but
also on complementary assets, as well as the underlying infrastructure
The ownership of complementary assets helps establish who wins and who loses from
innovation
o If technology requires cospecialised assets or has a weak appropriability regime,
it will not drive the growth of new business
Teece (1998)- The winners are the entrepreneurs with the cognitive and managerial
skills to discern the shape of the play, and then act upon it
Extends to Dynamic Capabilities- ability to sense and seize new opportunities, and to
reconfigure and protect knowledge assets, competencies, and complementary assets
and technologies to achieve sustainable competitive advantage.
Shapiro & Varian (1999): These assets are also essential in Standards Wars
