Lecture: Sustainability of a competitive advantage
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Transcript Lecture: Sustainability of a competitive advantage
STR 421
Economics of
Competitive Strategy
Michael Raith
Spring 2007
Today’s class
2. Value creation and competitive advantage
2.1 Value creation and positioning
2.2 Sustainability of a competitive
advantage
Sustainability of competitive
advantage
Efficient markets principle: if you have a competitive
advantage, others will try to imitate what you’re doing
What will prevent them?
Sources of sustainability
a.k.a. “Isolating mechanisms”, “Sources of market
power”
All of these are also barriers to entry
1. Impediments to imitation
= Reasons why others cannot imitate you
= Loosely speaking, returns from unique resources and skills
2. First (or early)-mover advantages
= Reasons why it would be uneconomical for others to imitate you
= Loosely speaking, returns from market power
Distinction not clear-cut: how much does it cost to
replicate an incumbent’s advantage?
1. Impediments to imitation: (a)-(f)
(a) Regulatory restrictions
–
–
Broadcasting rights, taxis, import tariffs and quotas
Not just given situation: companies spend $$$ to influence regulation
(b) Patents = legally protected monopoly rights, exist to encourage
innovation
–
Example: Patent protection important in pharmaceuticals, weaker in
medical devices. Depends on
Ability to innovate around existing patents
Speed of innovation: new devices quickly become obsolete
(c) Secrecy about production process
–
Often chosen when obtaining patent protection is difficult and product
is difficult to reverse-engineer
(d) Superior access to inputs or
customers
Inputs:
– De Beers until 1990
– Alcoa’s backward integration into bauxite in early 20th century
Customers: e.g. through exclusive-dealing contracts
What about talented employees (=inputs)?
– Can be hired away if worth as much or more elsewhere
– Cannot if they stand to lose human capital specific to the firm
(or to a set of other employees, “cospecialized assets”)
“Unique resources” must be scarce and immobile
(e) Unique capabilities
Examples:
–
–
–
–
Honda in engines
3M in adhesives and thin-film coating
Bombardier in trains
Canon: integration of microelectronics, fine optics and precision
engineering
= Capabilities that
– are result of organizational learning over time, corporate
culture, organizational structure
– do not depend on individuals
(f) Strategic fit
Examples: Southwest Airlines, Ikea, Dell; we’ll see
others
Good internal fit can be
1. Source of competitive advantage
2. Reason for its sustainability
Hard for others to get all components of the system right at
the same time.
But successful imitation may only be question of time
– E.g. pressure on airlines like Southwest, JetBlue
2. First-mover advantages:
basic logic
Suppose A has discovered a market opportunity and is making a
profit
B considers imitating A. Assume B can do so without any
technological disadvantage (no impediments to imitation)
What would happen? Upon entry, B might find itself
– Sharing a limited market with A
– Engaged in a price war with A
– Without customers because for some reason customers stick with A
As long as A is committed to staying, A can make profit if alone, but
B as second mover cannot, and hence should stay out
A then has a first-mover advantage
(a) Scale economies relative to
size of market (segment)
Basic logic:
– A and B can share market if market > 2 MES
– But if market smaller, competition will lead to losses
– If A is more likely to stay because of sunk costs, B should not
enter in the first place
Examples:
– Wal-Mart in small towns
– Coors in West in 70s, A/B & Miller in East in 80s
Closely related: Geographic or positional preemption in
markets with differentiated goods
– CC&S in its niche of the market
(b) Reputation
Established reputation for quality raises buyers’ WTP
– What matters is perceived quality
Competitors w/o reputation can only sell at lower price
Reputation must often be maintained through
advertising or R&D
Endogenous sunk-cost markets
– E.g. Coke, Intel, Apple
Special case: brand image
Perceived quality often more matter of brand image
than based on tangible things
Companies spend $$$ to advertise brands
Importance of advertising depends on who
makes/influences purchase decision
– Beer: consumers
– Cans: companies
– PCs: resellers, Consumer Reports, corporate/educational etc.
(c) Network effects
Direct network effects: value to buyers increases with # of users
– Fax machines, Word, eBay
Indirect network effects: link through a complementary product
– The more people use PCs & Windows,
the more software for PCs is developed
the greater the value of PCs to buyers
– Another example: DVDs/players and Blockbuster
If a firm owns technology that customers are locked into, it has
market power because rivals’ products will be less valuable to
customers.
– PC industry is competitive, but Microsoft is monopolist
Ask: how strong are network effects?
(d) Switching costs
A firm has market power if its customers incur some cost if they
switch to a different product
– Synergies with other products in same family, e.g. Microsoft Office
– Familiarity with existing product, e.g. WordPerfect
– eBay, NetFlix
– Yahoo vs. Google: lock in users through personalized searches?
Creating switching costs is powerful way to build customer loyalty
and market power
– But rational customers must be willing to be locked in!
Ask: How difficult is it really for customers to switch?
– E.g. cell phones: regulation that allows customers to transfer home
phone number to cell phone
(e) Learning effects
(“experience curve”)
lower AC as a result of higher cumulative output
First-mover advantage through experience
– E.g. aircraft
Strategic consequences
–
–
Being first important if you know there will be learning effects
BCG in 70s: invest in early stages of product life cycle to secure
learning economies. Problems:
1. Existence of learning effects often known only afterwards
2. You may be investing in losing products
Internal fit matters: union contracts at Lockheed diminished
learning effects in producing the L-1011 TriStar (BDSS Ch. 2)
Sustaining a competitive
advantage is hard
Don’t assume any of these barriers exist for a
particular firm; ask to what extent they may exist:
1. Having certain resources and capabilities does not mean
they’re unique
Imputed “unique capabilities” often used as shortcut to
explain a firm’s success without careful analysis
Firms often fool themselves by claiming to have certain
unique capabilities
2. Moving first does not by itself confer a first-mover advantage
“Sustainability” is not yes-no matter, often only matter
of time