1. Sustaining Competitive Advantage
Class 8

2. The issue
Competitive Advantage that has taken years to build up can be erode by imitators who * Copy the formula for success. * Do what the firm does better. * Innovations that neutralize the firms advantage Some companies seem to sustain competitive advantage year after year. Examples: Coca Cola, Walmart, Apple, Microsoft

3. Threats to sustainability
Even in oligopolistic or monopolistic markets, where entry is blockaded sometimes the incumbent may not stay successful.
2011 Japanese Earthquake devastated the Japanese car supply chain, allowing American and South Korean cars an opportunity to increase market share.
Suppliers and Buyers who can bargain can reduce a successful firms profitability. (MLB)
Differentiated sellers can take market share and profit away from strong incumbents (McDonald’s losing market share to Burger King)

4. The resource based theory of the firm
To achieve competitive advantage a firm must create more value than their competitors. This depends on the firms stock of resources * firm specific assets (patents, brand names) * factors of production (human resources) * distinctive capabilities (activities that the firm does better than the industry)
Competitive Advantage: The ability of a firm to outperform its industry The ability of the firm to earn a higher rate of economic profit than the industry,

5. Imperfect mobility
A firm that possesses a scare resource can sustain its advantage if that resource is “imperfectly mobile”
Imperfectly mobile means resources that cannot “Sell itself”
A valuable house is an imperfectly mobile resource to the landlord and a perfectly mobile asset to the tenant.
Talented employees can sell their services to the highest employer

6. Case study Xerox vs canon
In the 1970’s there was one name in photocopiers – XEROX – this name was so synonymous to photocopying that in the dictionary
Verb -to produce a copy of (a document, illustration) by this process
However, their success was not that they were the first mover in the market but they had an excellent after sales service, with on site teams all across the market. Canon broke that advantage by creating low priced copiers that did not break.
What do you think happened to the market dynamics between Xerox and Canon after Canon created their new copiers
What do you think the photocopier market share is going to be currently?
What do you think will happen to the photocopier market in the future?

7. Impediments to imitation
Legal Restrictions
(Patents, Copyrights, Trademarks)
Government restrictions (CTC)
Superior access to inputs or customers
Nike and signing Basketball stars
Market size and scale economies
The reason we worry about the Indo Sri-Lanka Free Trade Agreement (ISFTA)
Intangible barriers to imitating a firms distinctive capabilities
Causal Ambiguity – Competitors might not know what firms do to achieve their success.
Dependence on historical circumstances – in the 1960’s US airline regulations limited Southwest Airlines to certain routes and airports. Routes that they continue to operate today. Bigger competitors would find it difficult to replicate these routes in those smaller airports. And Southwest developed relationships with those smaller airports.
Social complexity – Toyota successes because it has created trust between them and their component suppliers, but that trust is difficult to create.

8. Early mover advantages
Learning Curve (See earlier slides)
Buyer Switching Costs – for example switching from one phone carrier to another.
Reputation and Buyer Uncertainty – companies like to work with proven firms. New firms find it difficult to create reputation.
Network Effects – consumers place a higher value on products if other consumers also use it.
Are their early mover disadvantages?

9. Group questions What is competitive advantage?
How do you create competitive advantage in your chosen product?
How do you prevent new entrants from coming into your market?