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1、Economics of StrategySlide show prepared by Richard Ponarul California State University, ChicoChapter 12Sustaining Competitive AdvantageBesanko, Dranove, Shanley and Schaefer, 4thEditionSustaining Competitive Advantage?In a perfectly competitive market, price competition will ensure that competitive
2、 advantage will not be sustained?Even without perfect competition, sustaining competitive advantage is not easy?Rivals can imitate a successful firms products or neutralize the firms advantage through new technologies, products and business practicesSustaining Competitive Advantage?Some firms have b
3、een successful in sustaining their competitive advantage (Coca-Cola, Dell Computers)?Others have allowed their competitive edge to erode under pressure from their competitors (Dominicks Pizza, Silicon Graphics)Perfect Competition and Competitive Advantage?In a perfectly competitive industry where fi
4、rms are price takers, competitive advantage does not exist?Even when the product is not homogenous (and varies on a cost-quality continuum), dynamics of perfect competition can workThe Perfectly Competitive DynamicThe Perfectly Competitive Dynamic?The efficient frontier is the theoretical boundary t
5、hat no firm can cross?Free entry and costless imitation will force all the firms to move to the tangency point and the economic profit will be zeroSustainability with Monopolistic Competition?In monopolistic competition, firms sell horizontally differentiated products to consumers who differ in thei
6、r tastes?Each seller faces a downward sloping demand curve due to product differentiation and sets the price above marginal costSustainability with Monopolistic Competition?Entrants can slightly differentiate their products from the incumbents and create their own niche?Free entry will cut into the
7、market share of the incumbents and make the economic profit become zero (while price marginal cost)?Profitability cannot be sustained unless entry is deterredThreats to Sustainability Regardless of Market Structure?Even when incumbents can deter entry, powerful suppliers/buyers can threaten profitab
8、ility regardless of market structure?Sometimes good performance may be simply due to luck and over time profits regress to the meanEffect of Competitive Forces on Profitability?Entry, imitation and price competition will force economic profits to eventually go to zero?Competitive forces will make re
9、turn on assets (ROA) to equal the cost of capital?Regardless of where a given firm is today, with passage of time its profits will converge to competitive levelsEvidence on the Persistence of Profitability?Dennis Muellers study of profit persistence reports the followingFirms with abnormally high RO
10、A will experience a decline over timeFirms with abnormally low ROA will experience an improvement over timeHigh ROA firms and low ROA firms do not converge to a common mean Evidence on the Persistence of Profitability?Muellers results indicate that there are some forces that push markets towards the
11、 competitive rate of return and other forces that impede that dynamic?The net result is a persistent ROA gap between firms that start out as high ROA firms and firms that start out as low ROA firms Competitive Advantage of Firms and Industry Profitability?Industry conditions that determine industry-
12、 wide profitability are distinct from forces that sustain a firms competitive advantage?A firm in a fiercely competitive industry may continue to have an edge over its rivals?Firms within an industry with high entry barriers and higher than competitive profits may all be equally profitableSustaining
13、 Competitive Advantage?Competitive advantage is sustainable if it persists despite competitors efforts to duplicate it or neutralize it?Sustainability can occur in two waysFirms may differ with respect to resources and capabilities and the differences persist Isolating mechanisms (analogous to barri
14、ers to entry) may work to protect the competitive advantage of firmsResource Based Theory of the Firm?Resource based theory of the firm explains sustained competitive advantage in terms of heterogeneity in resources and capabilities?Scarce resources and capabilities that are critical for value creat
15、ion can be imperfectly mobile and cannot be acquired in the open marketResource Based Theory of the Firm?Resources may be non-tradable (Example: Customer loyalty built through a frequent flyer program)?Resources may be relationship specific (Example: Landing slots in an airlines hub)Isolating Mechan
16、isms?Isolating mechanisms are to firms what entry barriers are to industries?Two distinct types of isolating mechanisms can be observedImpediments to imitationEarly mover advantageImpediments to Imitation?These mechanisms impede the potential entrants from duplicating the resources and capabilities of the incumbent firm?Five important types of impediments existLegal restrictionsSuperior access to
