Academic journal article Journal of Competitiveness Studies

Sustained Competitive Advantage: A Resource-Based Framework

Academic journal article Journal of Competitiveness Studies

Sustained Competitive Advantage: A Resource-Based Framework

Article excerpt

INTRODUCTION

The dominant paradigm in business strategy for the last fifteen years or so has been based on externally oriented product market/industry analyses. These show the characteristics of product market advantages and how such advantages are produced in an industry. This is exemplified in the framework for industry analysis provided by Porter (1980) and numerous other strategy texts. In turn, the approach finds its theoretical underpinnings in the economics of industrial organization, the work of economists such as Bain (1968), Scherer (1980) and Caves (1980). The insights of consulting firms accruing from their practices have also been instrumental to this approach, as for example with the constructs of the Boston Consulting Group (BCG): to wit their formulations regarding the experience curve in product markets, their product-portfolio matrix to evaluate performance in these markets, and other related concepts (Boston Consulting Group, 1972). Henderson (1979) also provides an exegesis of some of the ideas developed at BCG. Under this paradigm basic strategic choices are predicated on an external, industry approach which uses industry analysis as the starting point of strategy: the level of competition within the industry under observation, the barriers to entry and exit, and the relationship of suppliers and customers to this same industry. Strategy is first based on identifying whether an industry or product market is attractive or not, and then whether and how a company is or could be a viable player within those external constraints. This analysis is also further nested within a broader social environment of demographic trends, national and international economic conditions, and cultural developments.

The paradigm's application is expected to provide all the answers to the questions regarding lasting sources of competitive advantage. A little reflection should convince most people that it cannot be freighted with such a burden.

First of all, by itself this externally based orientation is not a very useful instrument for idenifying the true sources of lasting competitive advantage. Any advantage identified by this analysis would be of short duration as it could be copied and so competed away, absent market failure, in a perfectly competitive market. In fact a good case can be made for concluding that the better this framework is at what it does, the less potent will it be at identifying sources of lasting advantages that are not as readily apparent. The externally based approach to strategy is then a good ex post description of external market conditions but not particularly sensitive to the sources of sustained advantage within those conditions. The value of the external approach lies in its ability to delineate the shape of the success floor: with it one is able to identify the conditions for survival, i.e., for normal returns. It is not very sensitive to the sources of above-average or above-normal profits, absent market failure.

Second, the evidence from various industries is quite clear on one point. Successful firms enjoying sustained above-average returns exist in many industries without the traditional signs (as with monopoly conditions) of market failure in those industries. For example, Mancke (1974) shows that some of the traditional conclusions of industry-based analysis, namely that scale economies and monopoly power explain profitability differences, may be mistaken. Given the institutional goal of perfectly competitive market economics on which this exterral approach is based, one would imagine that over time every industry would show little variation in the profitability between firms -- after all the less successful ones only have to copy the more successful firms. However, while the discrepancies in profitability can be reduced over time, they can continue to exist (Jacobsen, 1988), persisting even in commodity and commodity-like industries. Some of the explanation for intra-industry profitability differences may come from strategic groups internal to industries. …

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