Asset stock accumulation and sustainability of competitive advantage Dierickx and Cool (1989) Management Science Presented by Hyeonsuh Lee

Background Strategy literature focused too narrowly on privileged product market positions as a basis for competitive advantage. Critical resources are accumulated rather than acquired in “strategic factor markets” (Barney, 1986). Creates analytical and managerial problems Analytical problem: the opportunity cost of scarce assets should be considered. Otherwise, returns are inflated. Managerial problem: managers need to realize that bundle of assets leads to their firm’s success  needs to be protected from imitation and substitution. Barney (1986): “strategic factor markets” Where firms acquire resources necessary for strategy implementation Under the assumption of complete input markets, there are neither “strategic” input factors nor “unique” skills and resources Above normal returns due to superior information, luck, or both.

Objective 1) Discuss limitations of “strategic factor market” concept 2) Complementary framework based on notion of asset stock accumulation 3) Develop guidelines for assessing the sustainability of a firm’s competitive advantage

Incomplete vs. Imperfect factor markets Barney (1986) focuses on “imperfect” markets.  can all assets needed to implement a strategy be bought? NO (e.g., reputation) The implementation of a strategy may require assets which are non-appropriable and/or firm-specific markets for such assets do not exist Therefore, the central question is not merely whether strategic factor markets are perfect, but whether they are complete. Indeed, to what extent can factors which are freely traded in open markets be termed "strategic"? The fact that factor markets are incomplete, in addition to creating barriers to exit because of non-salvageable specific investments, also implies the potential for sustainable competitive advantage and above-normal returns.

Accumulation of non-tradeable asset stocks When neither the desired strategic input factor itself nor any close substitute for it can be acquired through a market, firms are constrained to "building" it. Strategic asset is the cumulative result of adhering to a set of consistent policies over a period of time (“flows”). Put differently, strategic asset stocks are accumulated by choosing appropriate time paths of flows over a period of time. R&D bathtub Stock of know how: current amount of water in the tub Flow: current R&D spending Flows can be adjusted instantaneously, but stocks cannot! Key task: appropriate time paths of relevant flow variables must be chosen to build required stocks of critical assets.  Strategic asset stocks are non-tradeable, non-imitable, and non-substitutable

Sustainability of privileged asset position If assets cannot be bought: imitation or substitution Imitation of asset stocks Time compression diseconomies: early-mover advantages Asset mass efficiencies: “success breeds success” Interconnectedness of asset stocks Asset erosion Causal ambiguity Substitution of asset stocks Threat that successful substitution renders original asset stocks obsolete  they no longer create value to the buyer.

Discussion According to Kogut and Zander (1992), firms can deter imitation by recombining their current capabilities (combinative capabilities). Since new ways of cooperating cannot be easily acquired, growth of firms occur by building on the social relationships within in a firm. Combinative capabilities: “the intersection of the capability of the firm to exploit its knowledge and the unexplored potential of the technology” How does the combinative capability be connected to the asset stock accumulation?