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Part D. Statistical evidence on the

impact(s) of m power Twin hypotheses are:

Market profitability = f(market power)

Social harmfulness = f(market power)

But recall only the first of these is directly

observable. The second is an implication of the

first based on the view that any above normalprofits must come from the exercise of market

power and thus harm consumers.

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industrypartd 2

L&W chapters Chap 9 is very good, plus bits of 14 on the

evidence with respect to innovation

On alternative interpretations L&W is not

much use however

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And of course Recall how these relationships are complicated by

all sorts of non observed factors (statistical noise):

p disc., durability, countervailing power,conjectures, etc etc

And NB: A positive statistical relationship doesnot necessarily demonstrate causality, ie doesnt

prove that market power causes the higherprofits. (See my discussion of this on Wordversion of my notes on market power, p4). Otherplausible explanations have to be considered.

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Econometric evidence and debate Take a large number of different markets

and use regression analysis to examine;

Profitability = f(concentration, barriers, exitcosts, differentiation etc)

Examine the size and significance of the

estimated parameters of the relationship. Easy in principle, but harder in practice for

many reasons.

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Evidence on simultaneity There is evidence of simultaneity in the relationship. Researchers have

found a strong tendency for markets to consolidate or concentrateover time as the product life cycle plays out.

The evidence is that this has to do with economies of scale in R&Dand marketing (such as advertising). The outcome is both growing

concentration levels and increasing profitability. There seems to be areinforcement model at work, but not a causal model. Early entrantsget bigger faster, they do (absolutely) more R&D/marketing, soaccumulate R&D/marketing experience faster, so they tend to get evenbigger until entry becomes non viable.

Research inter alia by Klepper/ Sutton/ Davies and Lyons.andthe PIMS (US) database (profit impact of market strategies).

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And the result is It is all very difficult and so the results are not

very reliable despite being one of the mostinvestigated relations in all of economics (see

textbook for details of these issues) Statistically significant results have been found,

but not in all studies, and in any case when foundthe market power effects are not very large.

US evidence somewhat more positive than UKperhaps because UK is more open internationallyspeaking.

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Detailed case evidence Note Georges study of the many reports of the MMC

(monopolies and mergers commission) whose job it is toinvestigate dominant firm cases where a complaint of harmhas actually been made. What do these studies tell us?

In roughly 14% of the cases investigated profits werejudged to be excessive. Of course some judgements havebeen disputed but overall this is not exactly a rousingconfirmation of the harmful hypothesis!

However a later study of 73 cases by Davies found that theMMC condemned something or other in 2/3rds of them.But interestingly the most common finding concernedvertical restraints (rpm, tie-ins) not excessive prices!

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Estimates of the Harberger loss See textbook on this for details.

First, follow the derivation of the expression

for the size of the Harberger triangle (H). H = dP. dQ.

Which can be manipulated to give us:

H = .R.ed.(p-c) Each element of which in principle we can

measure or at least guesstimate. Results ?

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For the puzzled d Means the change in (increased price and

reduced quantity as a result of monopoly)

R is monopoly revenue

ed is elasticity of demand at the mon price

p-c is the price cost margin at the mon price

See textbook if still in trouble!

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Results for Harberger losses Vary considerably because of different time

periods, countries and samples. And of

course different guesstimates of theunobservables. Some find significant losses

(5/6% of output) and some such as

Harberger himself find very small to

negligible losses. Useful, but still lot of

room for debate then.

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Posner losses

Recall Posners (questionable) idea discussed earlier thatthe losses of monopoly go beyond the H triangle to includeall the costs of competing efforts to win m power.

Estimates of these losses (Cowling-Mueller) naturally

produce bigger more dramatic outcomes. Ultimately theresources devoted to searching for monopoly will include,he argued, all the economic profits thought to be available!

See my notes on this and the textbook for an evaluation.Personally I do not find the logic compelling or the results

meaningful. Paradoxically it makes competition theproblem, not monopoly! It sees no redeeming features incompetitive efforts. But you have to decide the issue foryourself.

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Organisational efficiency losses Although intuitively appealing the impact of

market power on org eff is by no means easy toestablish empirically. It is true that public sector

statutory monopolies in countries such as Britainhad a poor reputation for efficiency but to whatextent this was the result of monopoly as opposedto public ownership and poor labour relations isnot clear. Having politicians and civil servants incharge, and powerful unions, undoubtedly hadnegative effects on efficiency as well. (seeGeorge on this issue)

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industrypartd 14

Org eff cont Studies by Nickell of the UK manufacturing sector (72/86)

found that higher levels of competition were associated on

average with higher firm level productivity and faster

productivity growth. But he also found that bettercorporate governance (outsider pressure from owners)

reduced the significance of competitive pressures. So he

concluded that the evidence was not conclusive against

market power.

Plus remember if employees benefit from less pressure

then it is arguably not a deadweight social loss anyway!

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Olley & Pakes found evidence that entry and exit

promoted faster productivity growth in the UStelecoms equipment market as it was deregulated.This was driven by the higher productivity of newentrants compared to incumbents, who keptinefficient old technology plants going on toolong.

Other studies appear to confirm the role of newentrants adopting improved technologicalopportunities in driving productivity growth ratherthan the existing level of rivalry in a sector.Remember competition for rather thancompetition in?

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How many rivals is enough? Researchers have studied the question of howmany rivals it takes to produce enoughcompetition to approximate the perfect

competitive outcome. It turns out, if theirevidence is good, that it doesnt take very many.

A widely quoted study by Bresnahan and Reiss(1991) examined a large number of localmarkets for plumbers, car repairs, doctors etc andfound the following.

With three (non coop) rivals competition is aboutintense as it gets. You dont need large numbers!

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Evidence on entry/ exit rates What about entry rates?

There is a lot of evidence on entry levels,

covered well in L&W chap 8.7.

Generally entry seems to happen and to do

the job of keeping incumbents honest.

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industrypartd 18

Evidence on profit persistence Do profits of market power persist for a long time?

Sure, some dominant firm profits persist for 10/20 years.IBM had a long run, Xerox had a good run, Intel and

Microsoft are still on a run. (NB public sector monspersist but rarely profitably)

But dominant firm profits also decline, sometimesdramatically. IBM and Xerox both went through verysticky periods as entrants made good. Sears lost out to

Wal Mart. GM and Ford to the Japanese invasion. BT toVodaphone etc.

And look at the once mighty giants who are no longercontenders. Dunlop? Burroughs? ICI? Nat West Bank?

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Persistence of firm level profits A study by Waring, 1996, looked at the sectoral

determinants of firm level profit persistence. Itfound that firm profits persisted longer in sectors

characterised by high skill levels, unionisation,switching costs, and high levels of R&D.

However this was taken to support a compadvantage view as opposed to a barriers to entry

view of profits (discussed further later).That ishigh firm level profits persisted because evenexisting rivals couldnt easily imitate their successin R&D and in managing skills.

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Villalonga study 2004 Looked at firm performance sustainability using alarge sample and found that it was related to the

intangibility of its asset stock as predicted by

resource based advantage theory. However it isdouble edged sword. Intangibles can lock firms

into poor performance because of the sunk cost

effect. So it is a high risk strategy, producing both

winners and losers wrt persistence. Very usefulstudy. Check it out, it is on the web, under her

name. (JEB&O 2004)

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Evidence on innovation/ m power Is not very supportive of the mainstream hypothesis of

harm. No doubt because it is a very complex issue. Forexample the issue of causality. The two things may berelated but what causes what exactly?

Market structures may influence R&D investment andinnovation, but innovation success and failure also drivesmarket structures. Such interactions are very hard tocapture in empirical studies. Particularly givenmeasurement problems. We have seen that measuringstructure is hard but measuring innovation outputs is evenharder.

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See text book for summary of studies and

findings. George concludes: no simplerelationship is apparent. Many verycompetitive markets have a poor innovationrecord, some dominant firms have been

very innovative (Pilkington, Intel). R&D intensity is more driven by

technological opportunities than by marketstructures. If anything, a moderate degree

of market concentration seems best.Oligopolistic competition.

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Research findings A particularly thorough study of innovation

in the UK (1948-1983) by Geroski (1990)covering 4,400 significant innovationsfound some signs of a negative relationshipbetween mp and innovation but the size ofthe effect was very small. The author

therefore argued that the key to innovationdynamics was not market structure butevolving technological opportunities.

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More findings An OECD funded study by Symionidis (1996) came tomore or less the same conclusion. Although he looked atall the research from the Schumpeterian perspective (seeearlier slide on this) in which size and market power are

expected to be good for innovation.

So the research findings dont lend much support to eitherschool. Whatever the determinants of optimal innovationare they cannot be reduced to simplistic 2 dimensionalcause and effect views. Markets vary too much to expectsimplistic relationships to hold. For example the degree of

product differentiability (demand fragmentation) is a factorwhich seems to influence the relationship according toSymionidis (quoting the work of Sutton).

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Innovation by leaders New evidence on the monopoly/ innovation relationship.

Dominant firms in seeking to protect their dominance have

a greater incentive to invest in R&D than in markets where

there is no dominant player! Key is entry barriers. If these are not too high then the

dominant firm has to worry about about someone else

coming up with the next big thing. So the fact that

dominant firms stay dominant might show that they are in

fact competing hard to stay dominant.

Economist article, 22/5/04 (based on Economic Journal

article by Etro, April 04)

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However re McKinsey A McKinsey* study has recently concluded that there is

such a thing as incumbent inertia. Or slowness to respond

to environmental threats and oppos by innovating.

McK says this is due to cultural lock in (inability toaccept the world has changed) and incumbent fears of

making difficult choices.

However not all incumbents suffer. Some incumbents are

in fact very innovative. Intel, LOreal, Microsoft. So again

it is hard to generalise is the not very surprising message.

*Creative Destruction text, 2001

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Performance and innovation Foster and Kaplan, Creative Destruction,2001, a McKinsey research project found:

N

ot all innovators were winners but thatall winners were innovators!

Creative destroyers of the status quo. Dell,

Microsoft, Intel, Corning, Monsanto, GE,

Johnson and Johnson.

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Canadian study A new, well designed, study of Canadian product markets

based on new measures of specific marekt competitivenesshas suggested the relationship can go either way, ie be

positive or negative! It depends on very specific features

of firms perceptions about competition and about specificinnovation activities (for example process and productinnovations).

This supports my view that we simply dont have theknowledge to develop policies which are guaranteed toimprove innovation and that we should be cautious aboutanti trust actions.

Research policy, 35/1, feb 2006, J Tang

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Dont worry/ be happy About the lack of clear cut memorable results.

You have to remember that science isnt a list ofdefinitive results but a methodof investigating

complex controversial issues. We are movingdown a learning curve, improving what we know,and discovering what we still dont know, but notexpecting to find easy answers.

Economics is therefore best seen as a way ofthinking, a method, for developing and testingideas not a neat set of clear cut answers.

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Conclusions on market power evidence

We know a lot less about the nature of thecompetitive process and impact of market powerthan we think. And we all need to be more modest

until we know more. And we need to consideralternative ways of looking at businessperformance that do not assume to begin with it isall about seeking profits by means of exploiting

market power. George, generally more sympathetic than I am to

the mainstream view, in fact comes to a rathersimilar conclusion (p302)

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Evidence on firm specific performance

Instead of looking at structural determinants of market

level profits what about looking directly at drivers of

individual firm level profits? Good idea. Estimate:

Firm specific profitability as a function of the market(s) inwhich it operates. Several large scale published studies

have looked at this (see next slide).

And found that there is a statistically positive relationship,

but that it does not account for a lot of the profit variation

between firms. A lot of the variation seems to be firmspecific, not market driven.

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industrypartd 32

Evidence on firm specific performance

Rumelt study (1991, updated 1999): industry effects

account for 9/16% of variations in firm performance.

Porter/ McGahan 1997: huge US sample of firms over long

period. Industry/ market sector accounted for up to 19% of

firm level profits. Porter/ McGahan 1999: industry effects on firm

profitability are secondary to firm specific effects, by at

least 2 to 1.

PIMS (profit impact of market strategies): big US database on business performance. Market structure is relevant,

but firm specific factors generally drive business perf.

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Marakon 2003 Marakon consultants research (see web site)looked at 800 businesses over 10 years to 2002using Total Shareholder Returns (TSR) as the

measure of performance. Industry sector wasnt statistically important

although some such as entertainment andcomputers did better than others such as chemicalsand utilities. It was the individual businesses andtheir strategies that mattered. For example topperformers relied more on organic growth andavoided growth for the sake of growth.

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INSEAD 2001 Uses new data set on EVA from Stern Stewart and a

different methodology to study relative effects of industry/

firm specific factors. It produces an interesting new result.

That a big proportion of firm specific effects on average is

due to 2 best/2 worst performers. Argues that only for exceptionally good/ bad firms does

the distinction matter. For the majority industry (market)

is the key performance driver. Restores the concept of

structural determinants somewhat.

Hawawini et al, Insead research paper, 2001

This has a good review of the empirical literature to date.

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Part D cont: Debating

market power From the evidence to its interpretation

Remember the earlier argument that

traditional theory seems to assumesomething about the drivers of business

profitability and its persistence (its all about

market power) rather than seeking to

investigate the issue and look at the wider

evidence and alternative interpretations.

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industrypartd 36

Alternative interpretations

Looking for the brighter side of the market powerdebate.

The theory and evidence reviewed suggests atleast a possibility that firm conduct is not solely

(maybe not even largely) about seeking to captureprofits by harmful means (exploiting andprotecting market power) but could be aboutcreating and defending profits through developingsuperior firm specific qualities?

That is through developing comp. advantages. Asper the Austrian school and others such as Porter/Kay/ Peteraf. How might that work exactly?

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The Austrian view of competition According to this school the textbook focus on industry

structure is misguided. It is the FIRM alone that matters,because industry structure is a consequence of how firmscompete not vice versa

Market structure is an outcome of competition betweenfirms, the search for competitive advantage, not adeterminant. It is endogenous not exogenous. Firmactions and relative success determines both marketstructure and average profitability. The idea that marketstructure drives profits is thus spurious. Firms are unique

& heterogeneous. And everyone is competing witheveryone else for resources/customers.

See for ex Hill/Deedes, J of Man. Studies, 1996

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industrypartd 38

Firm specific comp advantage

and business performance What are these firm specific determinants

of relative success and failure, and

persistence, in value creation. Are there any useful generalisations to be

made about this, lessons to be learned,

which can help to guide the strategy processand public policy?

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Create competitive advantage

Cheaper (lower cost) producer: ?

Better (superior perceived quality): ?

Newer (more innovative/up to date/fashionable): ?

Faster (speed to market): ?

More desirable/ distinctive (successful branding):?

Better reputation: ?

First mover advantages: ? Provide your own examples of firms that compete

successfully on this basis.

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industrypartd 40

Consumers and value Note the obvious but absolutely fundamental point that a

business can only create and capture economic value ifwhat it does is valuable for consumers.

Basically in any market (comp or not) the total value

created is divided between consumers (surplus) andsuppliers (surplus). To capture any surplus as economicprofit firms must create it in the first place by identifyingand attracting paying customers. In this sense firms do notcreate value in a vacuum. They do it in conjunction with

customers. Point is there is a big difference between producingproducts and producing valuable products.

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industrypartd 41

Porters approach In Competitive Advantage Michael Porterargues that success depends basically on theindividual organisations ability to organise

and manage the cost and differentiationdrivers involved in a particular market so asto produce a cost advantage or adifferentiation advantage. (see next slide)

But this approach has problems and isincomplete as we discuss below.

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industrypartd 42

Competitive advantage Porter describes two sorts of business advantage.

1. Cost advantage: arises when one business achieves a lower overallcost structure than the average of its competitors in a particular market.A cost disadvantage is the opposite. This gives the business anopportunity to win market share or to extract a better profit from the

market. That is to increase value creation. Think of Toyota. 2. Differentiation Advantage: arises when one business achieves

higher price margins (prices above market average) because itsproduct/ service is perceived as superior compared to its rivals. Betterquality, more fashionable, newer, faster to market, better reputation,more attractive, etc. These of course arise from investments which

create significant costs but if done well can create benefits exceedingcosts. Assets may differentiate the business: branding, quality, safety,originality, etc. Think of LOreal for example. Or Sony.

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Cost differences between businesses

Arise for a variety of reasons, or some combination ofthese reasons:

Scale differences. (Nokia v its competitors)

Experience differences. Some businesses are muchfurther down the learning curve. (Intel)

Utilisation differences. Existing capacity may be better/more fully used. (British Airways)

Location. Some locations are less expensive to produce inthan others.

Economies of scope. Sony gets cost advantage from the

broad scope of its products & businesses. Also LOreal. Transaction costs: Toyotas approach to managing its

supply chain is renowned for its cost effectiveness.

And, see next slide for more on this

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Cost differences and organisation As discussed more fully below another important source of

cost differences is organisational design (architecture) and

effectiveness.

Two businesses may have similar scale/ scope/ experience

etc but one may simply be better organised than the otherand more effective at managing its operations. Better at

motivating and coordinating people and managing

complex operations. This is called organisational

architecture.

For example Wal Mart, RBS, AXA, BP, Toyota, and Dell

are superbly organised and managed compared to many of

their competitors.

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Therefore a successful low cost producer may

come about because a combination of superiorplant/ firm scale, superior learning/ experience,

superior utilisation levels, superior economies of

scope, superior transactional effectiveness, or

more effective organisation. In examining a particular market (eg for PCs) a

good place to start would be to consider what was

driving cost differences amongst businesses (such

as Dell, Compaq, HP etc) and how this influencedrelative performance and the evolution of market

shares.

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industrypartd 46

Cost differences and strategic

differentiation When comparing costs however it is important to comparelike with like. Cost differences between firms can reflectimportant differences in strategic intentions or differencesin the market niche being developed.

For example a business seeking competitive advantagethrough superior quality or product development may havehigh costs because it is aiming for a sales advantage. Or a

business seeking a distinctive market niche (Porsche) willhave higher costs than a mass market producer as PSA.

This shows the importance of defining the marketproperly and considering firm strategy when comparingcosts.

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industrypartd 47

Differentiation differences between businesses

Differentiation advantage may arise from a variety ofsources:

Product differentiation/ branding a la Coke or Nike

Qualitybased differentiation a la Toyota or George V

Speed to market with exciting new products a la Sony orApple

Cutting edge innovators such as Glaxo or Aventis

Fashionbased differentiation a la Armani or LV

Reputationbased differentiation such as McKinsey orHarvard Business School

Differentiation based on understanding emerging marketpatterns and developing/ positioning the right products atthe right time a la Airbus or Nokia

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industrypartd 48

Examples Businesses with Comp advantage: consider on

what exactly it might be based.

Toyota in mass market autos.

BMW in luxury autos.

LMVH in luxury goods.

Dell in desk top PCs

BA in airlines

Harvard for management education Some of those with no comp advantage:

Fiat, Ford, Air Canada, Alitalia,

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Some questions about Porter

Why does the more successful firm not buy the

less successful and teach it how to minimise costs?

Why does the successful firm not sell its expertise

in cost reducing to less successful firms?

Why does the successful firm not cut its prices anddrive its competitors out of business (dominance)?

Why does the unsuccessful firm not bid for the

executive(s) in charge of cost/ diff drivers from

the successful firm? (it happens, eg the battlebetween General Motors and Volkswagen for the

services of cost guru Mr. Lopez)

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industrypartd 50

Porters SCA Low cost/ differentiation may indeed be a proximate cause of CA but

they cannot be the ultimate source.

Low cost positions, superior quality, speed to market,or whatever, must come from something or other theorganisation has or does. From assets it has created, or

processes it has developed. For example in agriculture the superior returns achieved by some

farmers derives from lower costs which derive ultimately fromsuperior quality (ie more productive) land, a resource that is very hardto increase the supply of!

Nowadays Nokias or Dells superior returns come ultimately from

something similar, something (scarce and hard to make more of) whichallows them to do things which enable them to offer a better value formoney proposition to consumers. But what things exactly?

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Porters recipe

NB If it was possible for Porter literally to describe how tocreate and sustain competitive advantage (which is his

unique selling proposition) then surely all firms have equal

access to this knowledge once Porter has codified it in his

text. So can such knowledge literally be a source of SCA?

Or is it not perhaps simply a description of the necessary

conditions for success?

Isnt it a bit like saying that if you want to win the 1500m

gold medal you need to be able to run fast?

Furthermore if everyone reads the book and applies the

lessons it just raises the standards required for survival!

Lesson 101: Beware over hyped recipes!

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Beyond Porter

Can we now offer a better/ deeper

explanation of the roots of (and routes to)

superior business performance?

In the 90s a capabilities/ competencies

approach emerged as a new orthodoxy

leading to a distinctive resource basedview of the firm and approach to strategy.

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industrypartd 53

Porters approach to CA Low cost/ differentiation may indeed be the proximate cause of CA but

they cannot be the ultimate source!

Low cost positions, superior quality, speed to market, or whatever,

must come from something or other the organisation has or does

that other dont have or do.

For example in Ricardos time the superior returns (CA) of somefarmers came from lower costs which derived ultimately from superior

quality (ie inherently more productive) land, a resource that was very

hard for others to make more of!

Nowadays Nokias or Dells superior returns arguably come ultimately

from something similar, something (scarce and hard to easily make

more of) which they have created which allows them to do things in

ways that enable them to offer a better value for money proposition

to consumers. But what things exactly?

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industrypartd 54

Beyond Porter We can now suggest a better/ deeper explanation of the

roots of (and routes to) superior business performance, onewhich is consonant with the more recent evidence.

In the 90s a capabilities/ competencies approach

emerged as a new view leading to a distinctive resourcebased view of firm performance.

Question: What things or qualities could give a specificfirm a sustainable edge (cheaper/ better/ ) over its rivals?

A series of influential articles in the HBR and elsewheredeveloped this new approach (although it turned out itsorigins were much earlierEdith Penrose, or evenearlierDavid Ricardos theory of land rents)

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industrypartd 55

Collis and Montgomery (1995):

competing on resources Competitive advantage derives ultimately from the

ownership of a scarce valuable resource.

Superior performance derives from developing acompetitively distinct set of resources and

deploying them effectively.

Resources involved could be physical, intangible,

or organisational processes. Example given: Marks and Spencer (poor timing?)

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Hyper-competition No cost/quality advantages are truly durable but the

skills needed for generating new advantages can bedurable.

H. Requires ability to disrupt the market rapidly and

repeatedly so as to unsettle the competition. H. Requires competencies&capabilities insurveillance, intelligence, interpretation, initiative,opportunism, shaping situations as they emerge.

Success in H requires improvisation, inventiveness,

unpredictability, speed, surprise, changing the rulesof the game, and decisiveness.

DAveni, Hypercompetition, 1994

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A new economy view

All profits are transitory. They always attracts competition and get

squeezed. Success (?) generally comes from attack not defence. No

business can stand still. Not even a Microsoft. Success needs to be

constantly renewed by continued investment efforts. This depends on:

Creativity, innovation, newness, surprise, initiative, flexibility,

speed of reaction, decisiveness, opportunism, anticipation,

reinvention, organisational intelligence, identifying and exploiting

the right options, energising the business.

That is on developing and using competitive competencies and

capabilities to produce a competitive advantage, not on exercising

static mon. power.

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Distinctiveness is the key NB it isnt just a matter of having capabilities or competencies, but

having distinctive c and c. More effective than average for.

Production/ marketing effectiveness

Innovation effectiveness

New product generation effectiveness

Strategic thinking effectiveness Transactional/ coordinative effectiveness

Organisational effectiveness

People management effectiveness

Problem solving effectiveness

Financial effectiveness Marketing/ Customer relations effectiveness

Cost management effectiveness

Learning effectiveness

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industrypartd 59

Distinctive capabilities: Kay (1993)

In his best seller, The foundations of corporate

success John Kay argues that the source of

competitive advantage is the creation and

exploitation ofdistinctive capabilities.The value of any advantage created depends on its

sustainability and its appropriability.

Kay identifies only three basic types of distinctive

capability:

Corporate Architecture. Innovation. Reputation

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Why these things?

What is it about these things in particular?

Difficult to build and maintain.

Difficult to codify/ make into recipes.

Difficult to copy/ emulate/ replicate.

Cant simply be bought off the shelf like

a piece of machinery.

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RESOURCEBASED VIEW OF THE FIRM

A distinctive resource based view of firm performance

has emerged trying to formalise the capabilities approach.

The resource-based approach is concerned with the

nature of the firms resources and how these resources arecombined into capabilities.

Key example is Peteraf (1993). Her approach is outlined

below and summed up in this figure (at lecture). Note she

uses the term RENT common in US writing to connote the

outcome of sustainable competitive advantage (ieeconomic profit that isnt easily competed away).

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Peterafmodel

Heterogeneity

Ex-post limits

to competition

Imperfect

mobility

Ex-ante limits

to competition

Rents obtained

Rents captured

bythe firmRents sustained

Rents notoffset

by buildingcosts

Competitiveadvantage

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Competitive Advantage a la Peteraf

A firm is said to have a competitive advantage when it can:

achieve rents: which requires resource heterogeneitybetweenfirms (some have better bundles of resources than others).

enjoy rents that are not offset by the costs of achieving asuperior set of resources: which requires ex ante limits tocompetition for those resources.

appropriate those rents for the firm: which requires imperfectresource mobility.

sustain those rents: which requires ex-post limits tocompetition.

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Entrepreneurship and rent

So a firm needs the foresight to acquire resources andbuild capabilities in the absence of too much suchcompetition. This requires the presence of uncertainty,incomplete information and a willingness to take risks. If

everyone knows today what will be valuable tomorrowcompetition would raise prices.

The essence of successful ENTREPRENEURSHIP is ofcourse foresight and taking advantage of uncertainty andincomplete information before someone else does.

So what Peteraf seems to be saying here is simply that rentsderive from entrepreneurial activity. Which seemsintuitively reasonable to me.

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Summing up on SCA

The ultimate determinants of success and failurein the search for profits? No easy recipes to offerbut the starting point is being cheaper (low cost)/better/faster etc.

The capabilities/ competencies approachdeveloped in the 90s looks to the developmentand deployment of a distinctive set of resourcesand capabilities. Success is not the norm because itisnt so easy to create and deploy these things.

Success is not just about exploiting marketpower it is about organisation, reputation,innovation and entrepreneurship. F specificqualities.

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Summing up

The value of distinctive capabilities lies in the fact

that they are hard to create and maintain, hard to

codify or make into recipes, hard to copy or

emulate, and cant simply be bought off theshelf.

Organisational architecture is a fundamental

source of advantage. Strategy (what you do) and

structure (how you do it/ make sure it gets done)are closely connected as determinants of success.

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Part E: other aspects

Continue considering the consequences of

firm development into other areas, such as

vertical integration and M&As (timepermitting).