Sustaining Competitive Advantage

Venus Abliter
Angelito Santamina Jr
Market Structure & Threats to Sustainability

Perfect Competition
Opportunities for earning profit
based on favourable market
conditions will quickly evaporate as
new entrants flow into the market,
increase the supply of output, and
drive price down to the point where
economic profits are zero.
Market Structure & Threats to Sustainability
Monopolistic Competitive Markets

$￪ • In monopolistic competition, firms sell

horizontally differentiated products to
consumers who differ in their tastes.

• Each seller faces a downward sloping

demand curve due to product
differentiation

• Sellers get to set the price above marginal

cost but there is no guarantee of
economic profits.
Market Structure & Threats to Sustainability
Monopolistic Competitive Markets
• Entrants can slightly differentiate their
products from the incumbents’ and
create their own niche.

• Free entry will cut into the market

share of the incumbents and make the
economic profit become zero.

• Profitability cannot be sustained unless

entry is deterred
Market Structure & Threats to Sustainability
Oligopolistic and Monopolistic Markets

• Even when incumbents can deter entry

economic profits may not be
sustainable.

• Sometimes good performance may be

simply due to luck.

• Over time profits regress to the mean.

Effect of Competitive Forces on Profitability

• Entry, imitation, and price

competition will force economic
profits to eventually go to zero.

• Competitive forces will make return

on assets (ROA) to equal the cost
of capital

• Regardless of where a given firm is

today, with time, its profits will
converge to competitive levels.
Evidence on the Persistency of Profitability
Persistence of Profitability in Mueller’s Sample
Sustaining Competitive Advantage
Competitive advantage is sustainable if it persists despite
competitors’ efforts to duplicate or neutralize it.

Sustainability can occur in 2 ways:

1. Resource Based Theory

2. Isolating mechanisms
Sustaining Competitive Advantage
Resource Based Theory

Resource based theory of the firm explains sustained competitive

advantage in terms of heterogeneity in resources and capabilities.

Resources and capabilities must be:

1. Scarce
2. Imperfectly mobile
3. Unavailable in the open market
Sustaining Competitive Advantage
Isolating Mechanisms

Isolating mechanisms limit the rivals from eroding a firm’s

competitive advantage.

Two types of isolating

mechanisms
1. Impediments to imitation
2. Early mover advantage
Sustaining Competitive Advantage
Isolating Mechanisms Impediments to Imitation

These mechanisms impede the potential entrants from duplicating

the resources and capabilities of the incumbent firm.

Four impediments to imitation:

1. Legal restrictions
2. Superior access to inputs or
customers
3. Market size & scale economies
4. Intangible barriers
Sustaining Competitive Advantage
Isolating Mechanisms Impediments to Imitation
Intangible Barriers
Barriers to imitation will be intangible if the firm’s
advantage lies in distinctive organizational
capabilities.

Three intangible barriers:

• Causal ambiguity
• Historical circumstances
• Social complexity
Sustaining Competitive Advantage
Isolating Mechanisms Impediments to Imitation
Intangible Barriers
• Causal ambiguity
A firm’s superior ability to create value may
be obscure and imperfectly understood,
even by those in the firm

Causal ambiguity may become a source of

diseconomies of scale because the firm
may be unable to replicate its success from
one plant to the next
Sustaining Competitive Advantage
Isolating Mechanisms Impediments to Imitation
Intangible Barriers
• Historical circumstances
Distinctive capabilities may be bound up with
the history of the firm

Dependence of the capabilities on historical

circumstances may limit the firm’s growth
potential

Historical dependence may also mean that the

strategies may be viable only for a limited time
Sustaining Competitive Advantage
Isolating Mechanisms Impediments to Imitation
Intangible Barriers
• Social complexity
Competitive advantage may be hard to replicate
of rooted in socially complex processes

Such processes include interpersonal

interactions among managers, suppliers, and
customers

Complex social interactions are not easily

imitated even when understood
Sustaining Competitive Advantage
Isolating Mechanisms Early-Mover Advantage

Four different isolating mechanisms fall under the category of

early mover advantage

1. Learning curve
2. Reputation and buyer
uncertainty
3. Switching costs
4. Network effects
Networks and Standards
Networks and Standards
Networks and Standards

Should a firm
compete
“for the market”
or
“in the market”?
 Networks and Standards

What does it
take to topple
the existing
standard?
Early-Mover Disadvantages

Early movers may lack the

complementary assets to make their
products succeed

Early movers can lock themselves into

inferior technologies and rivals can
learn from these mistakes
 IMPERFECT
IMITABILITY AND
INDUSTRY
EQUILIBRIUM
Ex- Post
- It is useful for prediction of future
trend, price.
- It helps in predicting returns from
a security based on actual returns
from it over years.
- companies can use Ex-Post data
to predict future earnings of the
company.
Ex- Ante
- Predicting future helps investor to
take right decision to maximize
returns from investment.
- Also, Ex-Ante predictions help
companies to attract investors &
raise capital.
- It help company to effectively plan
for inflation, deflation, or serious
situation like a recession.
 This occurs when innovation
Creating deconstructs long-standing
Advantage and arrangements and frees
Creative resources to be deployed
Destruction elsewhere.

Henry Ford’s assembly line

 Disruptive
Technologies
 Innovator’s Dilemma
Clay Christensen identified a special class of products that offer
much higher B–C than their predecessors, but do so not through
incremental improvements but with entirely new technologies that
drastically lower C.

Are large firms doomed to be less innovative than smaller rivals?

 Economists call this type of competition
patent racing.

For example, a large pharmaceutical

The Productivity company could maintain a biostatistics
Effect department that services all of its research
activities. But these scope economies can be
defeated by the sheer statistical power of the
innovative process. In this example,
innovation is a winner-take-all activity
rewarded by a patent.
 The sunk cost effect arises because a firm
that has already committed to a particular
technology has invested in resources and
organizational capabilities that are likely
The Sunk Cost to be specific to that technology and are
Effect thus less valuable if the firm switches to
another technology.
 Arrow considered the incentives for adopting a
process innovation that would lower the average
variable costs of production.
The innovation is drastic: once it is adopted,
producers using the older technology will not be
viable competitors.
The Replacement Arrow compared two different scenarios: (1) the
Effect opportunity to develop the innovation is available to
a firm that currently monopolizes the market using
the old technology, and (2) the opportunity to
develop the innovation is available to a potential
entrant who, if it adopts the innovation, will become
the monopolist.
 If an incumbent monopolist anticipates that
potential entrants may also have an
opportunity to develop the innovation, then
the efficiency effect comes into play.
The Efficiency The efficiency effect makes an incumbent
Effect monopolist’s incentive to innovate stronger
than that of a potential entrant.
 Disruption
versus the
Resource-Based
Theory of the
Firm
 A patent race is a competition
between two or more inventors
(usually firms) to discover an
INNOVATION AND
invention first in order to
THE MARKET FOR
IDEAS obtain patent protection for the
invention and exclude
competitors.
 § Dynamic Capabilities - The ability of
a firm to maintain and adapt the
capabilities that are the basis of its
competitive advantage.
EVOLUTIONARY
ECONOMICS § Path Dependent - the search for new
AND DYNAMIC sources of competitive advantage is it
CAPABILITIES depends on the path the firm has taken
in the past to get where it is now.
 §1. Factor conditions
Porter identifies four attributes in a
§2.firm’s
Demand homeconditions
market (which he
collectively refers to as
§3. Related supplier or support the
THE “diamond”) that promote or impede
ENVIRONMENT industries
a firm’s ability to achieve
§4.competitive advantage in
Strategy, structure, andglobal
markets:
rivalry
 Factor conditions describe a nation’s
position with regard to factors of
production (e.g., human resources,
infrastructure) that are necessary to
Factor compete in a particular industry.
Conditions
 These conditions include the size,
growth, and character of home
demand for the firm’s product.
Demand Sophisticated home customers or
Conditions unique local conditions stimulate
firms to enhance the quality of their
products and to innovate.
 Companies with skillful home-based
Related Supplier suppliers can be early beneficiaries of
or Support newly generated production know-how
Industries and may be able to shape innovation in
supplying firms.
 This is the context for competition in
the firm’s home market it includes
local management practices,
organizational structure, corporate
Strategy,
Structure, and governance, and the nature of local
Rivalry capital markets.
local rivalry affects the rate of
innovation in a market far more than
foreign rivalry does.
THANK YOU !!