MT2: Foundations of Competitive Advantage
*Recommended
~from Y1 notes
L3 Readings- Competitive Advantage: Positioning
*~Porter, 1979- <5 forces> How Competitive Forces Shape Strategy. 5 forces: threat of new entrants
(barriers to entry)/ substitute products, bargaining power of customers (customer size, undifferentiated
product, customer margins)/ suppliers (supplier concentration vs industry, forward integration,
differentiated products), industrial rivalry (equal size/power, lacks differentiation, high exit barriers, high
fixed costs + perishable products, excess capacity). Determine long run industry profitability. Strategies
based on 5 sources: position to defend against it, influence balance of forces, anticipate shifts and react.
Examples: airline industry low profitability, Kodak vs Fujifilm anticipation of substitutes/entrants, Dr
Pepper positioning through differentiation
From Lecture: consider retaliation of entry as well (mutual forbearance, predatory pricing) as a
‘barrier to entry’. Example of predatory pricing of Uber vs Lyft
Bain-Mason IO/ LCAG BP
*Porter, 1981- < Bain/Mason IO SCP application to BP LCAG> industrial organisation (IO) could offer
contributions to strategic management aka business policy (BP) with regards to formulation of
competitive strategy in individual industries at the business unit level. LCAG framework of BP (consistent
strategy in 4 elements including industry). Bain/Mason IO paradigm of structure conduct performance
(SCP) applied to understand nature of competition under LCAG element. IO and BP differed in their
frames of reference (public vs. private), units of analysis (industry vs. firm), views of the decision maker
(max vs min. ROI), and stability of structure (determinism vs changeable)
Traditional Bain/Mason IO Paradigm: industry structure determines conduct of firms, whose
joint conduct determines the collective performance of the firms (SCP)
Caves, 1980- <firm choice affect market structure. IO and BP benefit from each other> IO economists
can learn from and contribute to the fields of business history, business policy, and organisational
behaviour. Learnings: market structures are affected by firm's corporate strategy and organisational
structure choices, not just structure leading to deterministic uniform firm conduct in SCP; competition
and environmental uncertainty influences organisational structure.
Dangers of anti-concentration policy
Demsetz, 1973- <dangers of anti-concentration policy; large size allowed if efficient, reward, no abuse of
power> industry concentration may exist for legitimate reasons: large size is more efficient, uncertainty/
luck/ insight with risk taken (short term monopoly/ outperformance is the reward). Monopoly may be
achieved from competitive behaviour and may be exercised fairly with no creation of artificial entry
barriers. Anti-concentration policy may reduce ease of collusion but penalises innovative success or
shifts output to smaller inefficient firms.
Other positioning
Porter 1996- 3 positioning (in Wk1)
Porter 1985/ Barney 2002- generic strategies (differentiation, cost-leadership, focus)
, However, Hotelling (1929) model that uses the same positioning approach to understand
competitive behaviour suggests firms will end up producing similar goods. There should not be
product differentiation.
Only if there is one dimension, but in reality products are multi-dimensional
Not important
*Porter- whole book
L4 Readings- Competitive Advantage: Strategic Capabilities
RBV
~Barney, 1991- <VRIN> RBV, Resources are key to superior performance, competitive advantage
through applying a bundle of resources, Valuable/ Rare/ Inimitable/ Non-substitutable (VRIN). Non-
substitutable - Resources should not be able to be replaced by any other strategically equivalent
valuable resources. If two resources can be utilized separately to implement the same strategy then
they are strategically equivalent.
~Barney, 1986- <VRI culture> to be source of CA, culture must be valuable, rare, imperfectly imitable
~*Peteraf, 1993- <RBV conditions needed, application of RBV>. 4 conditions needed: resource
heterogeneity, imperfect resource mobility, ex post (imperfect imitability, imperfect substitutability) and
ex ante (limited competition for acquisition of immobile resources, 1st mover adv) limits to competition.
For strategy: diversification supported by resources, resources limit potential markets to pursue,
resources determine profitability, decide whether to license or develop internally. Example: Fujifilm
knowledge of chemicals and antioxidants applied to cosmetics Astalift product. Samsung's OLED displays
to smartphone market
~Prahalad & Hamel, 1990- <Core competencies> success from identifying, cultivating, exploiting core
competencies. Inimitable innate advantages based on tech and production skills (sometimes marketing/
sales). Enter product markets where core competencies can be maximised. GE's power generator and jet
engine business require advanced materials and turbine engineering
Examples of RBV resources- sources of generic strategies
*Barney, 2002- <cost leadership + product differentiation.> sources of cost leadership: size difference
(EoS/DoS), learning curve, differential access to inputs, technological advantages. Last 2 most likely to be
rare and costly to imitate, potential source of sustained competitive advantage. Product differentiation
allows for high price setting. Many different sources, more rare/ less imitable: linking business functions,
timing, location, reputation, service and support. Implements strategies with structure, managerial
controls, compensation.
Think of sources of cost leadership, differentiation as RBV resources
Reasons for presence/ absence of intra-industry variation
*Besanko et al, 2007- <partial convergence of returns, 2 classes of isolating mechanisms> partial but not
full convergence of profits likely due to impediments to perfect competition. RBV. Isolating mechanisms
enable sustained advantage: barriers to imitation (legal restrictions, superior access to scarce input/
customers, EoS and limited market size, intangible barriers like causal ambiguity, historical circumstance,
social complexity), early mover advantages (learning curve, brand, switching costs, network effects).
, Zero ex ante expected economic profits but possible ex post profits- firms find out if they can imitate
successfully only after nonrecoverable entry cost incurred.
Link to persistence
Powell & Arregle, 2007- <axis of errors, 3 error types, 4 org types> intra-industry performance variation
may be due to differences in errors rather than competitive advantages. Ghemawat's (1991) model of
errors: Type I omission (avoid something that should be done), Type II commission (did something that
shouldn’t be done), Type III ignore errors as unavoidable or insignificant. 4 types of organisations:
Advantaged (A), non-advantaged (N), counter-advantaged (C), disadvantaged (D). Conjectures: industry
with no A, many C firms, most common N firms.
Like MT1 Bloom & Reenen 2007
Ryall, 2003- <Sustained outperformance from subjectively rational competitors with suboptimal self-
confirming strategies> subjective rationality when decisions are consistent with available facts and
agent's subjective assessments. Self-confirming equilibrium when subjectively rational actions generate
events consistent with expectations. Suboptimal equilibrium strategies may exist as erroneous beliefs
fail to be contradicted by events. Performance advantage may be sustained when subjectively rational
competitors persistently employ suboptimal self-confirming strategies. Could lead to equilibrium with
stable heterogeneous performance even under competition.
- Link to persistence of performance, intra-industry variance in performance
Coff, 1999- <bargaining power and rent appropriation> rent generated by firm with competitive
advantage may be appropriated by employees/ stakeholders with bargaining power, meaning rent is not
observed in performance (by investors). Bargaining power depends on: capability for unified action, key
information access, high replacement cost, low costs of exit. Sustainability of appropriated advantage:
shareholders lack property rights over human capital that employees own, stakeholders work to
enhance bargaining power and renegotiate rent distribution, competition and corporate control
Lecture: If the firm is profitable because one employee is a star, who gets the rent? The firm
might get more of the profit if the employee is “dependent on the firm”: i.e. less productive
outside the firm
RBV critique/ defence
Priem and Butler, 2001- by definition, a valuable resource is a source of competitive advantage
Powell, 2001- <RBV is analytic, but could be pragmatically useful> Resource-based competitive
advantage has little formal deductive/ inductive inference support, and propositions are analytic
(tautologically true and cannot be empirically refuted). While it may not reflect reality, it could still be
useful in the pragmatist philosopher's eyes as long as it enables intellectual/ practical progress and
generates effective action.
Barney, 2001- <Barney's response to Preim & Butler's RBV critique> critiques on tautology (RBV is
Coasian tautology and can be parameterized to generate testable hypothesis), equifinality (does not
contradict with RBV), product market (RBV not meant to be fully explanatory, meant to be combined
with market models), inapplicability (possible applications to nurture/ maintain resources, attempt to
substitute)
The value of a firm’s resource is exogenously determined and therefore can be parameterised
according to market conditions—one way is to identify the sources of value generation in the
market (e.g. volume derived EOS, learning curve economies etc.), which then allows the value of
a resource to be judged
*Recommended
~from Y1 notes
L3 Readings- Competitive Advantage: Positioning
*~Porter, 1979- <5 forces> How Competitive Forces Shape Strategy. 5 forces: threat of new entrants
(barriers to entry)/ substitute products, bargaining power of customers (customer size, undifferentiated
product, customer margins)/ suppliers (supplier concentration vs industry, forward integration,
differentiated products), industrial rivalry (equal size/power, lacks differentiation, high exit barriers, high
fixed costs + perishable products, excess capacity). Determine long run industry profitability. Strategies
based on 5 sources: position to defend against it, influence balance of forces, anticipate shifts and react.
Examples: airline industry low profitability, Kodak vs Fujifilm anticipation of substitutes/entrants, Dr
Pepper positioning through differentiation
From Lecture: consider retaliation of entry as well (mutual forbearance, predatory pricing) as a
‘barrier to entry’. Example of predatory pricing of Uber vs Lyft
Bain-Mason IO/ LCAG BP
*Porter, 1981- < Bain/Mason IO SCP application to BP LCAG> industrial organisation (IO) could offer
contributions to strategic management aka business policy (BP) with regards to formulation of
competitive strategy in individual industries at the business unit level. LCAG framework of BP (consistent
strategy in 4 elements including industry). Bain/Mason IO paradigm of structure conduct performance
(SCP) applied to understand nature of competition under LCAG element. IO and BP differed in their
frames of reference (public vs. private), units of analysis (industry vs. firm), views of the decision maker
(max vs min. ROI), and stability of structure (determinism vs changeable)
Traditional Bain/Mason IO Paradigm: industry structure determines conduct of firms, whose
joint conduct determines the collective performance of the firms (SCP)
Caves, 1980- <firm choice affect market structure. IO and BP benefit from each other> IO economists
can learn from and contribute to the fields of business history, business policy, and organisational
behaviour. Learnings: market structures are affected by firm's corporate strategy and organisational
structure choices, not just structure leading to deterministic uniform firm conduct in SCP; competition
and environmental uncertainty influences organisational structure.
Dangers of anti-concentration policy
Demsetz, 1973- <dangers of anti-concentration policy; large size allowed if efficient, reward, no abuse of
power> industry concentration may exist for legitimate reasons: large size is more efficient, uncertainty/
luck/ insight with risk taken (short term monopoly/ outperformance is the reward). Monopoly may be
achieved from competitive behaviour and may be exercised fairly with no creation of artificial entry
barriers. Anti-concentration policy may reduce ease of collusion but penalises innovative success or
shifts output to smaller inefficient firms.
Other positioning
Porter 1996- 3 positioning (in Wk1)
Porter 1985/ Barney 2002- generic strategies (differentiation, cost-leadership, focus)
, However, Hotelling (1929) model that uses the same positioning approach to understand
competitive behaviour suggests firms will end up producing similar goods. There should not be
product differentiation.
Only if there is one dimension, but in reality products are multi-dimensional
Not important
*Porter- whole book
L4 Readings- Competitive Advantage: Strategic Capabilities
RBV
~Barney, 1991- <VRIN> RBV, Resources are key to superior performance, competitive advantage
through applying a bundle of resources, Valuable/ Rare/ Inimitable/ Non-substitutable (VRIN). Non-
substitutable - Resources should not be able to be replaced by any other strategically equivalent
valuable resources. If two resources can be utilized separately to implement the same strategy then
they are strategically equivalent.
~Barney, 1986- <VRI culture> to be source of CA, culture must be valuable, rare, imperfectly imitable
~*Peteraf, 1993- <RBV conditions needed, application of RBV>. 4 conditions needed: resource
heterogeneity, imperfect resource mobility, ex post (imperfect imitability, imperfect substitutability) and
ex ante (limited competition for acquisition of immobile resources, 1st mover adv) limits to competition.
For strategy: diversification supported by resources, resources limit potential markets to pursue,
resources determine profitability, decide whether to license or develop internally. Example: Fujifilm
knowledge of chemicals and antioxidants applied to cosmetics Astalift product. Samsung's OLED displays
to smartphone market
~Prahalad & Hamel, 1990- <Core competencies> success from identifying, cultivating, exploiting core
competencies. Inimitable innate advantages based on tech and production skills (sometimes marketing/
sales). Enter product markets where core competencies can be maximised. GE's power generator and jet
engine business require advanced materials and turbine engineering
Examples of RBV resources- sources of generic strategies
*Barney, 2002- <cost leadership + product differentiation.> sources of cost leadership: size difference
(EoS/DoS), learning curve, differential access to inputs, technological advantages. Last 2 most likely to be
rare and costly to imitate, potential source of sustained competitive advantage. Product differentiation
allows for high price setting. Many different sources, more rare/ less imitable: linking business functions,
timing, location, reputation, service and support. Implements strategies with structure, managerial
controls, compensation.
Think of sources of cost leadership, differentiation as RBV resources
Reasons for presence/ absence of intra-industry variation
*Besanko et al, 2007- <partial convergence of returns, 2 classes of isolating mechanisms> partial but not
full convergence of profits likely due to impediments to perfect competition. RBV. Isolating mechanisms
enable sustained advantage: barriers to imitation (legal restrictions, superior access to scarce input/
customers, EoS and limited market size, intangible barriers like causal ambiguity, historical circumstance,
social complexity), early mover advantages (learning curve, brand, switching costs, network effects).
, Zero ex ante expected economic profits but possible ex post profits- firms find out if they can imitate
successfully only after nonrecoverable entry cost incurred.
Link to persistence
Powell & Arregle, 2007- <axis of errors, 3 error types, 4 org types> intra-industry performance variation
may be due to differences in errors rather than competitive advantages. Ghemawat's (1991) model of
errors: Type I omission (avoid something that should be done), Type II commission (did something that
shouldn’t be done), Type III ignore errors as unavoidable or insignificant. 4 types of organisations:
Advantaged (A), non-advantaged (N), counter-advantaged (C), disadvantaged (D). Conjectures: industry
with no A, many C firms, most common N firms.
Like MT1 Bloom & Reenen 2007
Ryall, 2003- <Sustained outperformance from subjectively rational competitors with suboptimal self-
confirming strategies> subjective rationality when decisions are consistent with available facts and
agent's subjective assessments. Self-confirming equilibrium when subjectively rational actions generate
events consistent with expectations. Suboptimal equilibrium strategies may exist as erroneous beliefs
fail to be contradicted by events. Performance advantage may be sustained when subjectively rational
competitors persistently employ suboptimal self-confirming strategies. Could lead to equilibrium with
stable heterogeneous performance even under competition.
- Link to persistence of performance, intra-industry variance in performance
Coff, 1999- <bargaining power and rent appropriation> rent generated by firm with competitive
advantage may be appropriated by employees/ stakeholders with bargaining power, meaning rent is not
observed in performance (by investors). Bargaining power depends on: capability for unified action, key
information access, high replacement cost, low costs of exit. Sustainability of appropriated advantage:
shareholders lack property rights over human capital that employees own, stakeholders work to
enhance bargaining power and renegotiate rent distribution, competition and corporate control
Lecture: If the firm is profitable because one employee is a star, who gets the rent? The firm
might get more of the profit if the employee is “dependent on the firm”: i.e. less productive
outside the firm
RBV critique/ defence
Priem and Butler, 2001- by definition, a valuable resource is a source of competitive advantage
Powell, 2001- <RBV is analytic, but could be pragmatically useful> Resource-based competitive
advantage has little formal deductive/ inductive inference support, and propositions are analytic
(tautologically true and cannot be empirically refuted). While it may not reflect reality, it could still be
useful in the pragmatist philosopher's eyes as long as it enables intellectual/ practical progress and
generates effective action.
Barney, 2001- <Barney's response to Preim & Butler's RBV critique> critiques on tautology (RBV is
Coasian tautology and can be parameterized to generate testable hypothesis), equifinality (does not
contradict with RBV), product market (RBV not meant to be fully explanatory, meant to be combined
with market models), inapplicability (possible applications to nurture/ maintain resources, attempt to
substitute)
The value of a firm’s resource is exogenously determined and therefore can be parameterised
according to market conditions—one way is to identify the sources of value generation in the
market (e.g. volume derived EOS, learning curve economies etc.), which then allows the value of
a resource to be judged
