Asset Stock Accumulation and Sustainability of Competitive Advantage Dierickx, I. & Cool, K. Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science, 1989 Eva Herbolzheimer University of Illinois at Urbana-Champaign

Background Strategy literature focused too narrowly on privileged product market positions as a basis for competitive advantage BUT: Resource Bundles are needed to achieve and protect this position  Creates analytical and managerial problems Barney (1986): “strategic factor markets” – where firms acquire resources necessary for strategy implementation – above normal returns due to superior information, luck or both. Asset Stock Accumulation and Sustainability of Competitive Advantage

Background Analytical Problem: If privileged position is achieved or protected by the deployment of scarce assets, the opportunity costs of those assets have to be considered  otherwise, returns are inflated Managerial Problem: Hidden cross-subsidization distorts performance appraisal and capital allocation decisions; Managers need to realize that bundle of assets leads to their firm’s success  needs to be protected from imitation and substitution Asset Stock Accumulation and Sustainability of Competitive Advantage

Objective Discuss limitations of “strategic factor market” concept Complementary framework based on notion of asset stock accumulation Develop guidelines for assessing the sustainability of a firm’s competitive advantage Asset Stock Accumulation and Sustainability of Competitive Advantage

Incomplete vs. Imperfect Factor Markets Barney (1986): Focus on “imperfect” markets  can all assets needed to implement a strategy be bought?  NO! (B-School can’t buy research reputation) Strategy-implementation requires non-appropriable assets (absence of clearly defined property rights…): - Loyalty, Trust - Firm-specific assets, accumulated internally - imperfect substitutes may be acquired and adapted  Because factor markets are not complete, framework is needed to gauge sustainability of stream of quasi-rents through the deployment of non-tradeable assets Asset Stock Accumulation and Sustainability of Competitive Advantage

Accumulation of Asset Stocks Strategic asset is cumulative result of adhering to consistent policies over a period of time (“flows”) “R&D-Bathtub” “Stock” of know how is the current amount of water in the tub Current R&D spending is what “flows” into the tub Depreciation of R&D know-how value is what flows out of tub  flows can be adjusted instantaneously, but stocks cannot! Key task: making appropriate choices about strategic expenditures with view to accumulating required resources and skills  Strategic asset stocks are non-tradeable, non-imitable and non-substitutable Asset Stock Accumulation and Sustainability of Competitive Advantage

Sustainability of Privileged Asset Position (I) Imitation of Asset Stocks Time Compression Diseconomies “Several generations of careful breeding,” early-mover advantages (e.g. “crash” R&D programs tend to be less effective) Asset Mass Efficiencies “Success breeds success”: historical success leads to favorable initial asset stock positions  facilitates further accumulation Interconnectedness of Asset Stocks Building of one stock is dependent on stock of other asset Asset Stock Accumulation and Sustainability of Competitive Advantage

Sustainability of Privileged Asset Position (II) Imitation of Asset Stocks (cont.) Asset Erosion “half-life” of asset and strategic entry deterrence (brand loyalty…) Causal Ambiguity e.g.: Pharma-Industry: Firms sink high R&D costs into projects with highly uncertain outcomes, but only few succeed Substitution of Asset Stocks Threat that successful substitution renders original asset stocks obsolete  They no longer create value to the buyer Asset Stock Accumulation and Sustainability of Competitive Advantage

Conclusion (I) Firms need to be analyzed from products and resource side, and the opportunity costs of scarce assets need to be accounted for (Barney) Competitive Advantage is created by accumulating asset bundles that are not freely-tradable Competitors need to “build” assets through a consistent time pattern of expenditure flows Sustainability of assets hinges on the ease of replication If assets cannot be bought: imitation or substitution Asset stocks are strategic to the extent that they are non-tradeable, non-imitable, and non-substitutable Asset Stock Accumulation and Sustainability of Competitive Advantage

Conclusion (II) Framework: Strategy involves choosing optimal time paths of flows Competitive Position is determined by level of stocks Trying to explaining performance differences on the basis of current strategic expenditure is likely to lead to conflicting results More attention needs to be paid to the distinction between strategic stocks and flows Asset Stock Accumulation and Sustainability of Competitive Advantage