Robust Competitive Advantage

13 August 2008 at 11:54 pm 14 comments

| Peter Klein |

Rich Makadok, during an AoM session on “Real Options and Competitive Advantage,” made an interesting point about the concept of sustained competitive advantage (SCA). The modifier sustained is typically taken to mean “persisting over a long period of time.” As Rich noted, however, the initial formulation of SCA in Barney (1991) doesn’t include a temporal dimension at all. It refers, instead, to imitability: “a firm is said to have a sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy” (Barney, 1991, p. 102). Sustained competitive advantage, in other words, refers to value-creating activities that cannot be imitated. The key is entry barriers, not time.

Rich suggested replacing SCA with some other term, like “hard-to-duplicate competitive advantage,” for greater clarity. Here’s my suggestion: robust competitive advantage. What do you think?

Entry filed under: - Klein -, Strategic Management.

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14 Comments Add your own

  • 1. brayden  |  14 August 2008 at 1:18 am

    I guess I interpret that Barney statement differently than Makadok does. A strategy could be temporally enduring precisely because it is inimitable. If it were easy for others to replicate the strategy, it wouldn’t matter how much value it created initially – over time the strategy would cease to be value creating. So value creating and inimitable translates into sustainable, i.e., enduring.

  • 2. cstevenson  |  14 August 2008 at 7:32 am

    I am hoping “robust” was a joke, as it does not seem to convey any more meaning than “sustained”. Why not just go with “unimitable”? Enduring is also a good suggestion.

  • 3. Warren Miller  |  14 August 2008 at 4:47 pm

    Two observations, Peter:

    1. I believe that the phrase “sustained competitive advantage” is probably the greatest hoax since “one size fits all.” I remember hearing Dick Rumelt speak at a conference a few years ago. He had done some preliminary research into how long “sustained” is. His conclusion: about 10 years.

    That figure has a couple of nice tie-ins. One–and I’m depending on memory here, so I might not get this exactly right–is a great paper by Danny Miller in Management Science in the early ’90s. It was called “Stale in the Saddle.” Among other things, it examined corporate performance in the context of CEO tenure and environmental munificence. It found that, in the main, performance trended down after about Year 6 or 7 and was really in the toilet by Year 10.

    The second tie-in is to the 22nd Amendment of the U.S. Constitution. If one reads its fine print, it is possible for a president to serve for ten years, max; s/he succeeds from the vice presidency w/exactly two years left in the Prez’s term and then gets elected two more times. Jerry Ford couldn’t have been elected in his own right more than once, but LBJ could have. Despite the wrongheadedness of the GOP push for the 22nd Amendment (to eliminate any possibility of an FDR being in office forever), it turns out to have been, I think, a very wise choice. Then again, if Congress EVER does something right, it’s proof positive that even a blind hog can find an acorn every now and then!

    2. I’m not keen on “robust.” Instead, I like what the Atlanta Competitive Advantage Conference used as its theme in, I believe, 2006: “distinctive advantage.” I like the pithiness. It also seems to me the idea here is to remove any notion of time, and I’m for that.

    Thanks for the great topic, Peter.

  • 4. Joe Mahoney  |  14 August 2008 at 11:45 pm

    Jay Barney was an Assistant Professor at UCLA, and was influenced by UCLA Professors’ Lippman and Rumelt and their 1982 Bell Journal of Economics paper on “uncertain imitability,” which provides sustainable competitive advantage in equilibrium. Professor Barney (1991) may be seen as an attempt to articulate the (timeless) equilibirum concept verbally — albeit, with limited success in my view.

    The dynamic capabilites approach of Teece — following Penrose (1959) — is a “real time” based approach to competition. I have always favored the real-time dimensions of strategy. But I also like the many good ideas of RBV. Hence, following Peteraf and Helfat, I have used the concept of “dynamic RBV” although I am fully aware of the elements of incommensurability of the two theories concerning the time dimension.

  • 5. Joe Mahoney  |  14 August 2008 at 11:47 pm

    P.S.: As my comments should indicate, Rich Makadok’s comments — as are usually the case — correct,

  • 6. Niklas Hallberg  |  15 August 2008 at 6:41 am

    Doesn’t the term “equilibrated competitive advantage” say it all?

  • 7. Rich Makadok  |  15 August 2008 at 3:24 pm

    The essence of the Barney (1991) definition of SCA is really “competition-resistant” competitive advantage. Since the word “sustained” does carry implications of a temporal dimension, it’s not quite right.

    “Robust” is certainly better than “sustained,” but it still begs the question, “Robust to what threats?” Indeed, if the answer to that question could be interpreted as “robust to depreciation over time,” then we’re right back to sustained. Likewise, the term “equilibrated” also begs the question, “Equilibrated with respect to what dynamic process?”

    For the sake of greater precision, I would prefer the term “competition-resistant” (or something like it — perhaps “bullet-proof”?) over either sustained or robust.

    Nevertheless, despite our discussions here, I suspect that the term SCA will endure — not only because of its long legacy and high switching costs — but unfortunately, because it allows sneaky authors to perform a neat rhetorical “sleight of hand”: By taking a term that is formally defined as “withstanding competition” and then casually using it in sentences (or, indeed, in empirical measures) where it would seem to mean “withstanding time,” they can stretch the truth a bit (or perhaps a lot).

    Cheers,
    Rich

  • 8. Niklas Hallberg  |  16 August 2008 at 8:37 am

    Naturally,”competition” is the process under investigation. It would seem that “equilibrated competitive advantage” is equivalent to “competition-resistant competitive advantage”. However, is it not unnecessary to state the designated process twice as in “competition-resistant competitive advantage”.

    Another benefit of the term “equilibrated competitive advantage” is that it independently of a temporal dimension explicitly delimits the concept to include only equilibrium outcomes (which is not as clear to a lot of people as you might think).

  • 9. Warren Miller  |  16 August 2008 at 12:15 pm

    I might end up developing a keen empathy for the plight of Gen. Custer with the request I’m about to make, but would someone please give me an argument (or two) against my suggestion of “distinctive advantage”? Thanks in advance.

  • 10. Joe Mahoney  |  16 August 2008 at 10:40 pm

    Hey Warren,

    Let’s chat off-line on this one!

    Take care, my friend

    Joe Mahoney

  • 11. John Mathews  |  17 August 2008 at 1:19 am

    As usual, there are many layers to this debate.

    Rich Makadok’s suggestion referred to the fact that Barney’s original formulation of SCA is not concerned with time, but only with inimitability. This is a correct observation, and is of a piece with the Ricardian School’s propensity to view competitive advantage in terms of market failures, or imperfect competitive equilibrium. Thus resources in the RBV Ricardian view cannot be traded at their value, but lend a firm competitive advantages in terms of their inimitability, rareness etc.

    A quite different approach is concerned with time, and the length of time over which a competitive advantage may be expected to last. This viewpoint has clear Schumpeterian lineage, and is concerned with a new combination being able to generate monopoly profits for a time, until it has been competed away by imitators. This is an approach that is entirely foreign to the Ricardian reasoning of Barney et al, and should properly be labelled Schumpeterian. In their characteristic fashion, the theorists of strategy fudged the issue, and turned a competitive advantage based on inimitability into one based on time. Rich Makadok is absolutely correct to call them to account.

    There is nothing wrong in my view with Warren Miller’s suggestion of ‘distinctive competitive advantage’. That is the feature that I bring out in my own teaching. But the term is not satisfying because it doesn’t clarify the divergence between the two approaches.

    There is a flat earth, equilibrium-based Ricardian view of the role played by resources and the choices made over their aggregation, which looks to the properties of markets as sources of strategic advantage and which is pursued in one school of thought. And there is a disequilibrium, Schumpeterian, Lachmannian and Austrian approach which is concerned with the actions of entrepreneurs in creating their own sources of competitive advantage in conditions not constrained by equilibrium and by ex ante competitive restrictions. This is pursued in another school of thought. It should by now be obvious to everyone that one school generates more useful insights than the other.

  • 12. Nicolai Foss  |  18 August 2008 at 9:43 am

    The notion that sustainability is an equilibrium concept has been made many times before, e.g., by yours truly (e.g., my 2003 SO! paper and earlier papers).

    Denrell et al. (2003) interprets “sustained” to mean “lasting for many periods” but then ask why we should necessarily bother: What is interesting is the net present value of the rent stream, not how many periods you can earn rents. Thus, lots of rents in a single period may be more attractive than a “sustained” series of rents.

  • 13. srp  |  18 August 2008 at 9:05 pm

    Nicolai:

    But competitive advantage and the NPV of the rent stream are not supposed to be the same thing! Thus, sustainability of CA may be important, both in the imitation-resistance and temporal persistence senses, as a predictor of rents.

  • 14. John Mathews  |  19 August 2008 at 11:32 pm

    The notion that sustainability is an equilibrium concept

    Nicolai, surely the issue is that sustainability as such refers to sustainability of rents generated at imperfect equilibrium. This is the only point in economic space where rents can be generated. And it is only through imperfections in markets (for goods: Porter; or for resources: RBV) that the rents arise. Yes, the rents might be bundled into a single period, or spaced over several — who cares? The problem is that from this perspective we are viewing strategizing as responding to market imperfections, not as being created by entrepreneurial moves that create their own opportunities.

    Sustainability of CA is indissolubly linked as a concept to such a rents-earning perspective.

    If we look at the bigger picture, then the sustainability (survival) of the economic system as a whole is the matter of interest. Strategizing is useful because in principle it creates variety — and out of varioety comes adaptability. And how is strategic variety generated? It must come from a variety of entrepreneurial initiatives, responding to differently perceived opportunities. From this perspective, strategizing is about perception, opportunities, and action — all subjectively interpreted — rather than responses to marketimperfections. There is no getting around the fact that entrepreneurial initiative (taken in conditions of disequilibrium) should be the focus of attention (e.g. inititives that create synergies through networks, or complementary activities in value chains), and not rent-generating responses to market imperfections.

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