1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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