Asset Stock Accumulation and Sustainability of Competitive Advantage Ingemar Dierickx and Karel Cool (1989) Management Science, 35(12): Jae Kyun Yoo Foundations of Strategy Research (Fall 2013)

Introduction Strategy literature focuses too narrowly on privileged product market positions as a basis for competitive advantage and above-normal returns (Gabel 1984; Wernerfelt 1984; Barney 1986). Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12): Opportunity cost of deployment of scarce assets to achieve market position needs to be assessed. Barney’s “strategic factor market”: a market where the resources necessary to implement a strategy are required” Firms may obtain above normal returns only when they have superior information, when they are lucky, or both. Firms should focus on their “unique skills“. Limitations, complementary framework, and guidelines for assessing sustainable competitive advantage.

Incomplete vs. Imperfect Factor Markets Barney’s (1986) assumption: All required assets can be bought and sold. The implementation of a strategy may require assets which are non-appropriable. Complementary framework to gauge quasi rents generated through deployment of non-tradeable assets. Successful implementation of a strategy often requires highly firm-specific assets. Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12):

Accumulation of Asset Stocks Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12): Examples: reputation of quality, firm specific human capital, dealer loyalty, R&D capability, etc. Strategic asset stocks are accumulated by choosing appropriate time paths of flows over a period of time. With Non-tradeable Asset Without Non- tradeable Asset Deploy Build

Accumulation of Asset Stocks (cont.) Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12): While flows can be adjusted instantaneously, stocks cannot. “bath-tub” metaphor stock of know-how at a particular moment in time R&D spending depreciation of know-how A key dimension of strategy formulation may be identified as the task of making appropriate choices about strategic expenditures with a view to accumulating required resources and skills.

Sustainability of Privileged Asset Positions Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12):  Imitation of Asset Stocks  Time Depression Diseconomics “strictly convex adjustment costs” “law of diminishing returns” when one input, viz. time, is held constant MBA students’ accumulation of knowledge in a one-year program vs. a two-year program. Given rate of R&D spending over a particular time interval vs. twice the rate of R&D spending over half the time interval.  Asset Mass Efficiencies “success breeds success” When asset mass efficiencies are important, building asset stocks starting from low initial levels may be difficult. Setting up a dealer network in a new geographic area.

Sustainability of Privileged Asset Positions (cont.) Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12):  Imitation of Asset Stocks New product and process developments find their origin in customer requests or suggestions -> difficult for firms without extensive service networks All asset stocks “decay” in the absence of adequate “maintenance” expenditures. R&D know-how -> technological obsolescence Brand awareness -> consumer population not stationary, consumers forget  Interconnectedness of Asset Stocks  Asset Erosion  Causal Ambiguity Accumulation asset stocks may be stochastic and discontinuous May stem from inability to identify some of the relevant variables as well as our inability to control them “uncertain imitability”

Sustainability of Privileged Asset Positions (cont.) Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12):  Imitation of Asset Stocks  Substitution of Asset Stocks  Time Depression Diseconomics: decreasing returns to the fixed factor time  Asset Mass Efficiencies: the initial level of an asset stock significantly influences the pace of its further accumulation  Interconnectedness of Asset Stocks: the pace of an asset’s accumulation is influenced by the level of other asset stocks  Asset Erosion  Causal Ambiguity

Conclusions Ingemar Dierickx and Karen Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 35(12): Quasi rents generated through nontradeable assets Asset stocks are built or accumulated through consistent time pattern of expenditures or flows. Sustainability of asset stocks Imitability Sustitutability Asset stocks are strategic when they are nontradeable, nonimitable, and nonsubstitutable. Time Compression Diseconomies Asset Mass Efficiencies Interconnectedness Asset Erosion Causal Ambiguity  Asset Stock Accumulation