MT3: Sustainability of Competitive Advantage and the Value System
*Recommended
~from Y1 notes
L5 Readings- Sustainability of Competitive Advantage
Imitability
*~Dierickx & Cool, 1989- <factors affecting imitability> Imitability is linked to the characteristics of the
asset accumulation process:
Time compression diseconomies: it takes time to build core competencies, cannot replicate in a
short period by throwing money at things
Asset erosion: asset erodes over time, requires constant investment for maintenance
Asset mass efficiencies: Sustainability will be enhanced to the extent that adding increments to
an existing asset stock is facilitated by possessing high levels of that stock. Increasing returns to
scale (eg. R&D and knowledge economies)
Inter-connectedness: network effects are hard to replicate (eg. Apple product ecosystem)
Causal ambiguity: other unknown reasons
Bronnenberg et al. 2009- <empirical early entry advantage in US CPG> Market shares and perceived
quality are higher in cities geographically closer to their origin city where they were likely earlier
entrants. Possible explanations for future research: endogenous sunk costs (ESC) theory (early entrant
invests more aggressively in ads), inertia in brand preferences among consumers.
- Link to time compression diseconomies (takes time to build brand)
- Early mover advantage
Argote & Epple, 1990- <learning curve rates' reasons for variation> variation in learning rates
(productivity gains with experience). Due to: organisational forgetting (employee turnover, employee
forgets, records/ routines lost), knowledge transfer (experience from related products, learning from
other orgs with employee movement, communication, reverse-engineering). EoS may lead to
overestimation of learning rates.
- Learning related to imitability
Substitutability
Christensen, 2003- <new-market disruption and low-end disruption> Innovator's dilemma
Sustaining innovation: incumbents sell improved products at high prices to highest WTP
customers (eg. Each new generation iPhone)
New-market disruption: target customers that do not consume due to lack of WTP or knowhow
to access incumbent solutions
Low-end disruption: target overserved customers with cheap but good enough products
~Christensen 1997 (not in FHS)- <fear of cannibalization; the subsidiary approach; sustaining vs
disruptive innovation>. Innovation-market fit, market vs product led innovation, sustaining (along
performance dimensions customers historically value; radical/incremental; seldom cause failure of
leading firms) vs disruptive (new value prop, fringe markets, cause failure of incumbent) innovation.
Iterative innovation. Quantum & Plus Development Corp's 3.5in hard disk drive vs Micropolis approach.
~Tushman & Anderson 1986 (not in FHS)- <competence enhancing/destroying discontinuities>
competence-enhancing (Edison's kilns in cement, existing firms, decreased turbulence) vs destroying
discontinuities (Diesel vs steam engine, new firms, increased env. turbulence) and their environmental
effects. Product (new class, substitution, improvement) vs process discontinuities.
,~Schumpeter, 1942- <creative destruction> and the need for innovation for firm survival
Gilbert & Newbery, 1982- <pre-emptive patenting to deter entry> monopoly firms may patent new
technology first and have sleeping patents if the cost to pre-empt is less than profits gained by
preventing entry. Patent protection is quite limited (high costs, complementaries encourage cross-
licensing and discourage restrictive enforcement, cheaper ways to deter entry like capacity expansion).
Prohibiting pre-emptive patenting may not increase economic surplus (alternative entry-deterring
behaviour may incur more costs, society gains from development of new tech that is seldom not used)
- Defence against substitutability
Generic strategies- cost and demand leadership
*Barney, 2002 (from MT2)- <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.
~Porter, 1985- <Generic strategies>- cost leadership (Ikea, Walmart, Southwest Airlines, budget airlines,
Primark), differentiation (Dr Pepper), Focus. Cannot be stuck in the middle of cost leadership and
differentiation. Sustainability of competitive advantage: resist erosion by competitor behaviour/
industry evolution
Think of generic strategies as cost advantage (cost leadership) vs demand advantage which
increases price (product differentiation)
~Hendry, 1990- <Problems with Porter's generic strategies>: cost leadership/ differentiation are not
dichotomous (sell differentiated product that is low cost eg. Japanese manufacturers). Exceptions where
differentiation is irrelevant (commodities) and cost is less relevant where there is price-inelastic demand
(professional services, luxury goods)
Generic strategies- incumbency FMA/SMA
~Lieberman & Montgomery, 1988- <1st/2nd mover advantage> 3 sources of first mover advantage
(Technological Leadership, Pre-emption of Assets, Buyer Switching Costs). Second-mover advantage
(free-ride, less uncertainty dominant design). Kodak infringe Polaroid US patents.
~Teece 1986 (Not in FHS)- <factors affecting profitability of innovation>: appropriability (patents, comp.
assets owners win if imitable), complementary assets, preparadigmatic (high/low prototyping costs) vs
paradigmatic stage (access to complementary assets if co-specialised). All 3 linked. De Havilland's Comet
I vs Boeing's 707. RC Cola vs Coca Cola/ Pepsi. Xerox vs Apple. EMI vs GE & Technicare (CAT Scan).
Besanko et al 2007- early mover advantages (learning curve, brand, switching costs, network effects)
Bond & Lean 1977- status quo bias ignoring me-too pharma products
From lecture:
o 1st mover advantage from:
Cost side: experience/ learning leads to cost effectiveness/ tech leadership, EoS,
secure scarce input
Demand side: switching cost, brand/ reputation, status quo bias (customers
won't change if incumbent product works), network effects
o 2nd mover advantage from:
, Learn from incumbent experience.
Not important
*Porter, 1985- Book. HD41 POR 1985 | Competitive advantage: creating and sustaining superior
performance
Grant, 2019- textbook
Ghemawat
Pacheco-de-Almeida & Zemsky, 2007
Brian
Rothaermel, 2001
Lecture 6: Value System and Co-opetition
*Nalebuff & Brandenburger, 1996- <co-opetition, complementors, value net> complementors,
competitors, customers, suppliers. Complementor's product makes customers value your product more
or make it more attractive for supplier to provide you resources. Break away from industry definitions of
competitor. Draw value nets of extended relationships for strategy. Players with multiple roles (bias to
view competitor role only while overlooking complementary opportunities). Win-win and win-lose
elements of relationships.
*Porter, 1998- <3 benefits of clusters; birth, evolution, decline> clusters affect competition by increasing
productivity (better access to employees/ suppliers, access to specialised information,
complementarities, institutions and public goods, better motivation and measurement), driving
innovation which underpins productivity growth (mutual learning), and stimulating formation of new
businesses in the cluster which strengthens it. Birth (historical roots, related clusters, lead innovative
companies), evolution, decline (tech discontinuities, over-consolidation, regulatory inflexibility,
groupthink) of clusters
Complementarities (demand side): Enhanced experience, cluster enhances reputation of the
location/ enables visting many vendors in one trip, attracting buyers. (Porter 1998)
Co-opetition and innovation
Bouncken & Kraus, 2013- <SME coopetition 3 factors, effect on revolutionary vs radical innovation> SME
coopetition affects revolutionary innovation negatively (more novel than radical; since coopetition
occurs in the same industry while revolutionary often requires outside industry resources), and radical
innovation positively. Knowledge sharing decrease innovation (opportunism from unintended
knowledge spill overs); Inlearning increase innovation (attainment and internal use of external
knowledge); tech uncertainty increases innovation (coopetition risk sharing reduce uncertainty and
encourage innovation). Coopetition can improve revolutionary innovation given high inlearning and tech
uncertainty.
Ritala, 2001- <Conditions for coopetition to enhance innovation + performance> generally coopetition
benefits both metrics. Beneficial with: high market uncertainty (risk and cost sharing), high positive
network externalities, low competition intensity (co-opetition is hard with many competitors, easier
with few major players)
Strategic alliance
, Das & Teng, 2000- <RBV and strategic alliance rationale, formation, structure, performance> Rationale
(pool resources for value creation); Formation (imperfect mobility, imitability, and substitutability
accentuates value-creation and facilitates formation); Structural preferences: equity joint ventures
(property-knowledge, acquire knowledge), minority equity alliances (knowledge-property, prevent
knowledge appropriation), bilateral contract-based alliance (knowledge-knowledge, enable learning),
unilateral contract-based (property-property, little engagement needed). Performance (supplementary,
surplus, complementary good; wasteful bad). Axis of resource utilisation and similarity.
Other- cooperation for non-market lobbying
Importance of the non-market environment and shaping it early (Baron 2013)
Exploiting lobbying connections and providing expertise as new regulations form to shape nonmarket
forces favourably (Bertrand et al. 2014)
Not important
Gnyawali & Park, 2011- <Co-opetition 3 drivers, capability, 2 industry effects> Drivers of co-opetition
(Industry/ tech challenges and opportunities, complementary resources/ capabilities, strategies to
pursue opportunities). Co-opetition capability (managing co-opetition to ensure positive outcomes).
Positive effects of co-opetition on industry (collaboration in upstream R&D enable innovation and
standards while competition downstream improves offerings and lowers prices). Co-opetition leads to
co-opetition by other firms and group-to-group competition.
Gnyawali, He, Madhavan- book
Dyer & Singh, 1998
Examples
Imitability
Asset mass efficiencies: success breeds success
o Well known VCs like Sequoia Capital get better deal flow and terms which lead to better
performance. The best startups apply to YC due to its brand
o Access to talent: higher quality workers apply to successful companies who have their
pick for best talent (NVDIA, FANG)
Time compression diseconomies:
o Brand recognition and trust takes time to build- when neobanks (Monzo, Revolut, Wise)
first emerged, they were almost never used as main bank accounts, and consumers still
relied on placing the bulk of their savings in traditional legacy banks as neobanks were
new and trust needs time to build. This is despite the much better user experience
neobanks provided before the legacy banks pursued digitalisation.
o Regulatory approval process has a fixed timeline: pharma, new food products like
alternative proteins: FDA approved Upside Food's lab-grown chicken meat for human
consumption in 2022
Asset erosion:
o Oxford Clubs (high flow through rate- ATIK closing down this summer) vs Jazz Club (low
flow through rate)
Substitutability
Sustaining innovation:
