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Article Excerpt
1. Introduction
At the core of the field of business strategy is the notion of sustainable competitive advantage (Porter 1985). The leading approach to sustainability among strategy researchers is to identify hard-to-imitate resources that underlie a firm's competitive advantage (Dierickx and Cool 1989, Barney 1991). Examples of resource-based advantages include a firm that has lower costs than competitors due to a proprietary production process or a firm that generates superior willingness-to-pay due to an advanced product design. Competitive advantage is sustainable to the extent that it persists over time, with the strategy literature particularly concerned with the threat of competitors neutralizing an advantage through imitation of the underlying resources.
1.1. Crisis in the RBV
Although the resource-based view (RBV) retains a central position in strategy research, there is concern that it is no longer serving as an effective engine for moving the field forward. The core assertion of the RBV is that superior performance can be reduced to the possession of valuable, rare, and hard-to-imitate resources. This approach to strategy was originally developed using verbal arguments grounded in economic reasoning (see Peteraf 1993 for a synthesis). A prominent attack on the received theory is Priem and Butler (2001) who argue that the link between valuable, rare, and inimitable resources and superior performance is tautological. Another of their critiques is that there is insufficient attention to how resources actually create value in competitive product markets. Other critiques are possible as well. The core propositions of the RBV are very broad but they lack depth and specificity, especially in terms of the strategy dynamics which they consider. (1) In particular, RBV analyses focus on barriers to imitation, taking as given initial resource heterogeneity (Rumelt 1984, Peteraf 1993). Hence, the dynamic linkages between imitation processes and initial resource development tend not to be studied.
Despite increasing concerns with the theoretical foundations of the RBV, no other perspective has effectively challenged its centrality to the field. Resources as a level of analysis distinct from firms and industries is proving to have great staying power. Researchers in strategy continue to use the RBV extensively to frame and motivate their empirical work. We support the continued use of a resource level of analysis for the study of sustainable competitive advantage. Our objective is to deepen the theoretical foundations of the RBV in ways that address recent criticisms. Specifically, we study a dynamic model of resource development by firms competing in a market and then use it to elucidate and extend the received verbal theory.
While they differ in their assessment of the RBV, there is considerable agreement between Priem and Butler (2001) and Barney (2001) on promising avenues for further developing resource-based theory. For example, they both call for an integrated analysis of the internal resources of firms and the external competitive environment. Such an integration of internal and external elements is the hallmark of early conceptualizations of strategy dating back to the original SWOT (strengths, weaknesses, opportunities, and threats) framework (Ansoff 1965). At the end of their article, Priem and Butler (2001, p. 26) state "efforts by RBV scholars to formalize the RBV ... and to incorporate the temporal component will each likely payoff in increased contributions." We simultaneously pursue all three of these avenues: the integration of resources and product market competition, the use of formal modeling, and the development of an explicit temporal component to the analysis.
1.2. The Phenomenon and Our Model
For many resources, the time required for resource development is extensive (Ghemawat 1991). The team working on the development of Intel's 386 microprocessor took 48 months (Casadesus-Masanell et al. 2005). There is extensive data on time-to-build for new plants (Koeva 2000, Pacheco-de-Almeida et al. 2007), which can be as low as 13 months for simple commodity products such as rubber and more than double for more technologically advanced products such as transport equipment. The launching of a new line of commercial airplanes often takes at least five years (Esty and Ghemawat 2002). Several influential management books emphasize the timing dimension of strategy including the work of Fine (1998) on industry clockspeed and before that the work of Stalk (1988) on time-based competition. Clark (1989) estimates that each day of delay in introducing a new model represents a $1 million loss in profits for a $10,000 car. Timing matters.
Our formal model starts with the foregone revenues from delays in deploying a resource in the product market. We combine this with a micromodel of the resource development process with the following key features. Firms develop resources via discrete development projects that vary in their complexity, which can be thought of as the number and interconnectedness of the steps required for resource development (Simon 1996, Anderson et al. 1999). The central assumption is that firms exert effort over time toward resource development, with effort at a point in time subject to diminishing returns. Finally, spillovers from firms that have already developed the resource (Mansfield et al. 1981) can reduce project complexity to the extent that imitators have sufficient absorptive capacity (Cohen and Levinthal 1989).
A fundamental property of our resource development process is time compression diseconomies (Scherer 1967, Dierickx and Cool 1989) such that the faster a firm seeks to develop a resource, the greater the development costs. (2) Hence, when firms choose the timing of resource development, they face a trade-off between the foregone earnings from delayed deployment of the resource to the product market and the increased costs from time compression diseconomies. In making this trade-off, we assume that firms maximize the present value of the revenues from deploying the resource in the market net of the development costs. (3)
We focus on a duopoly setting where there is a leader and a follower. In the base model, the leader already has the resource and the follower can seek to imitate the leader's resource, mirroring the standard RBV approach to sustainability which starts with firm heterogeneity. In an important extension, we add initial resource development by the leader. A second extension allows the leader to license some of its knowledge about resource development to the follower.
Our model seeks to bridge the gap between the two main pillars of competitive strategy research: the RBV and industrial organization (IO). First, we integrate resource-level and market-level analysis. Second, while the RBV seeks to identify resources that are intrinsically inimitable, we consider whether resources are economically inimitable, which parallels the concern in IO with the economic incentive to imitate a competitor's product market position (Cool et al. 2002). In many ways, our model of resource development is close to the IO literature on the adoption of new technologies (Reinganum 1981; see Hoppe 2002 for a survey). (4)
1.3. Questions and Contributions
We address several fundamental questions in competitive strategy. What determines the sustainability of competitive advantages based on internally developed resources? Within our model, we can derive a precise characterization of sustainability. What is the relationship between competitive advantage and relative performance? These are distinct constructs in our model and a priori a competitive advantage need not result in superior performance. We consider actions that firms can take to manage the knowledge flows between them, which leads to two additional questions. Under what conditions should a leader license its knowledge about the resource development process to an imitating firm? What is the optimal level of absorptive capacity for the imitating firm?
Our paper is part of an emerging literature that is developing formal theoretical foundations for strategy. The closest prior contributions are Makadok and Barney (2001) and Makadok (2001), who also develop formal foundations to the RBV. While their work seeks to formalize the concept of strategic factor markets from Barney (1986), our focus is on internally developed resources as emphasized by Dierickx and Cool (1989). Another formal study that takes a resource level of analysis is Adner and Zemsky (2006), which considers how resource rents erode over time due to exogenous forces operating in a firm's environment. (5) Our theory is more dynamic than prior foundational work in strategy. (6) By working with a continuous time model, we are able to consider time as an explicit part of the firm's competitive strategy. By sequencing the resource development activities of the leader and follower, we incorporate the effect of the follower's optimal timing on the leader's resource strategy. The central contribution of this paper is that it offers the first formal treatment of resource development and sustainable competitive advantage.
In terms of sustainability, we first consider whether or not the leader's resource is economically inimitable. This occurs when the fixed cost of developing the resource exceeds the benefits of possessing it. We characterize a dynamic version of this basic mechanism where both the level of the fixed costs and the present value of the benefits are endogenously determined by the follower's choice of development time. For resources that are imitated, sustainability depends on how long the follower takes to develop the resource. We derive an explicit expression for the optimal development time of the follower. We show that sustainability is increasing in both the complexity of resource development and the cost of capital and decreasing in the level of absorbed spillovers. Interestingly, the extent of diminishing returns has a nonmonotonic effect on sustainability in our model.
Rumelt (2003) points out that competitive advantage is not consistently defined in the strategy literature and he suggests that settling on a definition may be sufficiently difficult that the field should consider dropping this currently ubiquitous term! Our theory offers one approach to making precise the notion of competitive advantage. We say that a firm has a competitive advantage over another firm when resource asymmetries at a point in time give it superior cash flows. Competitive advantage, as a concept that applies at a point in time, can then be distinguished from intertemporal performance measures based on net present value (NPV) calculations. The cost of developing the underlying resources, which are incurred prior to the increase in revenues from the competitive advantage, must be factored into performance comparisons. Our approach is consistent with Postrel (2006), who argues that competitive advantage should not be synonymous with superior performance. We develop these ideas in an extension where we allow for the initial resource development by the leader. While the leader necessarily has higher performance for inimitable resources, we show that for imitable resources the follower has superior performance for a sufficiently high level of information flows from the leader to the follower.
Absorptive capacity and spillovers affect the information flows between firms and are generally taken to be good for imitators and bad for innovators. Maintaining secrecy about resource development can constitute an important barrier to imitation (Cohen et al. 2000). One implication is that followers should try to increase their absorptive capacity by collocating with industry leaders and by hiring their employees, for example. We evaluate this received wisdom in the context of our model. We assume that information flows reduce the complexity of the follower's resource development. We confirm that information flows...
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