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Dimensions of Competitive Advantage Downing – Volume 16, Issue 2 (2018) Journal of New Business Ideas & Trends Vol. 16, Iss. 2, September 2018, pp. 1-8. ”http://www.jnbit.org” Dimensions of Competitive Advantage James A Downing Department of Management College of Business Administration California State University, Chico Email: [email protected] Abstract Purpose: The purpose of this paper is to analyse industry structures and the components of a competitive advantage for firms operating in different markets. The intention is to provide a depth of understanding for how firms compete differently in fragmented industries. Design/methodology/approach: This paper is a theoretical discussion which develops general schemas from the literature. The schemas are then used to understand how firms create and appropriate value. Originality/value: The paper provides an in-depth review of the strategy literature to provide useful schemas on industry structure and competitive advantage. The ideas of competitive advantage for fragmented industries are unique when seen by the form of capital, industry politics, information asymmetry, and forms of competitive advantage. Keywords: Competitive advantage; industry structure; cartel; oligopoly; fragmented industry. JEL Classifications: D41; L10 PsycINFO Classifications: 3660 FoR Codes: 1503 ERA Journal ID #: 40840 © JNBIT Vol.16, Iss.2 (2018) 1 Downing – Volume 16, Issue 2 (2018) Introduction Industry as a unit of analysis is considered a ‘system for ordering’, or an overall distribution and allocation mechanism of industry resources among firms. The business strategy literature has used this ordering system foundation (Mason, 1937) as the main argument to the theory of industry structure determining firm behaviour (Bain, 1956), or the ‘structure-conduct-performance’ (S-C-P) paradigm. Structure refers to a set of related elements to characterize industries allowing for assessment of competitiveness or attractiveness. As structure elements are contrasted by a variety of overall metrics then a profile can be formed to determine the conduct available to firms participating in the industry. The conduct of output and pricing strategy will be based on the industry structure that determines the performance, defined as profitability and efficiency, for individual firms as well as the industry as a whole. Thus, the S-C-P approach suggests that highly competitive markets may be the most efficient structure for an industry. While the resource-based theories (Peteraf,1993) focus on resources and capabilities and is still being theorized today (Nason & Wikland, 2018), the S-C-P paradigm is concerned with positioning. In this regard, the S-C-P paradigm can be considered a modern-day 'invisible hand', depicting structure-determining behaviour due in response to the environment. This research analyses the elements of industry structure and the nature of positioning to understand the dimensions of competitive advantage. Method This paper employs a theoretical analysis in which discussion of the relevant issues is used to develop general schemas from the literature. The schemas are then used to understand how firms create and appropriate value. The approach used in this paper is an examination of the extant literature with particular attention to industry constructs which develops a conceptual understanding of different industry structures. The paper then uses those conceptual general schemas to develop the dimensions of competitive advantages, or the creation and appropriation of value, in different industry structures. The methodology is a qualitative approach to theoretical analysis of the literature. Industry Structure Industry structure limits the executable strategies used to gain rents (Bain, 1956). For example, a consolidated industry (e.g., oligopolies or cartels) has one or two dominate firms with a clear value chain structure, which allow incumbent firms to benefit from the strong structural mechanisms of high entry and exit barriers (Williamson, 1975). Consolidated industries will likely experience economies of scale and/or asset possession to ensure long-term performance (Chandler, 1990), while firms in fragmented industries behave differently due to a different set of limitations of executable strategies (Chandler, 1977). The general characteristics of fragmented industries are low entry barriers and hard- to-differentiate products. Low barriers to entry allow for a constant flow of competitor entry and exit, which maintains fragmentation and allows for unpredictable conduct (Downing & Ma, 2017). In addition, fragmented industries do not allow for scale economies as a strategy since value differentiation is based on a localized technology of customization (Downing & Shanley, 2017). Therefore, fragmented industries are characterized with many competitors and no structural mechanisms requiring different strategies for rents. Firm conduct for economic rents will be those executable strategies to best compete within a given industry structure, so oligopoly firms will use collusion within a clear value © JNBIT Vol.16, Iss.2 (2018) 2 Downing – Volume 16, Issue 2 (2018) chain, for example the metal mining industry (Spar, 1994). Firms in structured industries will look to long-term performance with valuable assets and distribution channels. Firms in fragmented industries will create value from individuals using general industry knowledge and individual relationships. The three industry structures (oligopoly, structured, fragmented) are delineating by the industry elements in Table 1. An industry’s basic descriptive elements will define or limit the executable strategies of firms participating in a particular industry. However, the conduct will be determined by the abilities and judgment of the firm’s entrepreneurs. The following general schemas developed from the literature in Tables 1 & 2are frequently seen in the economics literature to understand the ‘pure’ definitions of fragmented industries and competitive advantage. Table 1: The Elements of Industry Structure Industry Cartel/Oligopoly Perfect/Structured Fragmented Characteristics Number of Firms Firm size Very large Large to small Small # of competitors Few Many Many # of dominant firms One Few None # of buyers Few to many Many Many # of fringe firms None to few Few to many Many Output Level of output Low Low or High High Level of None/Low Low or High High Substitution Barriers Entry/Exit Barriers High entry/exit Varying entry/exit Low entry/some exit Structural Barriers Coercion/fiat Governmental (i.e., Trade association licensing) certifications Scale Scale Economies Yes Maybe No Groups Strategic Groups One industry leader Yes, with one or more Many industry leaders Specificity Transaction Costs Commodity Asset Temporal Firm Strategy and Structure Firm Structure Agreements Hierarchical Flat/autonomous Firm Strategies Collaborative and Absolute cost advantage Performance entry threats and differentiation differentials and strategic groups Examples of Diamond jewellery Hotels or food trucks Strategic groups: Collaborative value network independent insurance agents or realtors The economics literature clearly describes industry structural differences (Coase, 1937; Chandler, 1990) limiting the executable strategies for firms (Bain, 1956). While an industry may not seem attractive – in terms of a five forces analysis (Porter, 1980) – firms will either seek to limit their market (i.e., geographic segmentation) or invest to create self- made structures. Thus, the traditional strategy concept of pricing in low-barrier industries does not consider behaviour when pricing experienced in fragmented industries is multi- dimensional. Therefore, fragmented industry elements will determine the competitive © JNBIT Vol.16, Iss.2 (2018) 3 Downing – Volume 16, Issue 2 (2018) behaviour for an unattractive industry in the form of investments in reputation, branding collusion, alliance with complementary products or the like. The business strategy literature has developed from the fundamental questions of ‘Why do firms exist?’ (Coase, 1937) and ‘Why do multi-person, multi-process firms exist?’ (Malmgren, 1961). These questions are usually answered by understanding the theory of the firm to be a system for allocating means between inputs and outputs, endlessly referred to as a ‘black box’. The allocation decisions of firms are made by individuals that plan and coordinate the economic activities for the firm. The dominate, contextual logic within strategy research has been to examine the actions and decisions of large firms possessing control over their industry. Firms competing in industries against non-cooperating rivals compete for resources and talent while responding to the competitive environment. Sir Dennis Robertson described the firm-industry relationship as “islands of conscious power in this ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk” (1928: 85). This metaphorical view describes a more dynamic understanding of the firm rather than the traditional strategy view of static positioning. The ‘Buttermilk’ metaphor also provides a good mental model of firms cooperating within a firm and the firm cooperating with competitors. The devoted research efforts to understand competitive advantage for firms in structured product industries have provided relatively little attention to the unique aspects of gaining a competitive advantage in fragmented industries. While the competitive advantage research in economics is based on firm performance, the strategy
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