Sustainability of competitive advantage – Chapter 8
Demand Growth
The lifecycle of a product over time.
1. The process is the introduction stage where sales are small, and the market penetration is small,
since the product is unknown
2. The growth stage – accelerating market penetration, because of technical improvements
3. Maturity stage – saturation point (mætnings punkt)
4. Decline stage – challenge by superior technology advanced substitutes
Creation and diffusion of knowledge
New knowledge in product innovation is responsible for a industry’s growth, and dual processes of
knowledge creation help to shape the industry. For instance;

The beginning of the home computer industry led to the creation of data storage systems such as
audio tapes vs. floppy disks.
Dominant design and technical standards
Dominant design
Technical standards
Dominant design refers to the overall configuration of product or product
system – Boing 707 for passenger planes, because it did not set technological
upgrades that would dominate the industry, but was a new design.
Technical standards are a technology or specification that is important for
compatibility (embody intellectual property, such as patens or copyrights).
 Emerges where there are network effects – the need for users to
connect in some way with one another
From product to process innovation
The shift in emphasis from design to manufacturer triggers process innovation as firms seek to reduce cost
and increase product reliability through large-scale production methods.
How general is the life-cycle pattern?
The life-cycle of products differ form industry to industry. For instance, the hotel industry is over two
thousand years old. In the US the industry was booming during the construction of the railway in the 19’th
century. Furthermore, in the west the industry was growing rapidly after WW2 with expanding tourism. The
transition from maturity to decline came with Airbnb.



Industries that supplies necessities may never die. This could be food processing, residential
construction which we will always need.
Rejuvenation of a lifecycle is possible is seen in the market for TV receivers (Color TV, Flat screen,
Smart TV etc.)
Industries can have different life cycles in different countries – multinational companies can take
advantage by developing new products and introducing them in advanced industrial countries, then
shifting attention to other growth markets once maturity sets.
Implications of the life cycle for competition and strategy
Changes in demand growth and technology have implications for industry structure, the populations of
firms and competition. Table 8.1 (P.213) summarizes the principal features of each stage of the industry
cycle.
Organizational demographics and industry structure



Numbers of firms in an industry rapidly increase in the early stage of an industry’s life.
With the onset of maturity, the number of firms decline.
When the industry become increasingly concentrated and the leading firms focus on the mass
market, a new phase of entry for new firms is created.
- An example is resource partitioning: the brewing industry in the US dominated by a handful of
brewer’s opportunities arise for new types of brewers, microbrewers and pubs.
The nature and intensity of competition
These changes in industry structure over the life cycle – commodification, new entrym and
international diffution of production have implicationsfor competition:


First, a shift from non-price competition to price competition
Second, margins shrink as the intensity of competition grow
During the introduction stage, the battle for technological leadership means that price competition may be
weak, but heavy investment in innovation and market development depress profitability
Key success factors and industry evolution
Changes in demand and technology over the life-cycle have important implications for the sources of
competitive advantage at each stage of industry evolution:
Introductory stage
Scaling up
Maturity stage
Decline stage
Product innovation is the basis for initial entry and for subsequent success.
Once growth stage is reached the key challenge is scaling up. As market expand,
product design and manufacturing must adapt to the needs of large-scale
production.
Competitive advantage is increasingly a quest for efficiency, particularly in
industries that tend towards commodification
Intensifying pressure for cost-cutting and a requirement maintaining stability by
encouraging the orderly exit of industry capacity and capturing residual market
demand.
Why is change so difficult? The source of organizational inertia
Different theories of organizational and industrial change emphasize differ barriers to change
Organizational
routines
Social and political
structures
Conformity
Limited search
Complementarities
between strategy,
structure and
system
Capabilities are based on organizational routines – patterns of coordinated
interaction among organizational members that develop through continual
repetition.
Organizations are both social and political systems
 As a social system organization develop patterns of interaction that make
organizational change stressful and disruptive
 As political system, organizations develop stable distributions of power:
change represent a threat to the once in power
Both systems tend to resist change
Firms tend to imitate each other to gain legitimacy. The process (institutional
isomorphism) locks organizations into similar processes and structures that makes
change difficult.
Search drives organizational change.
Here organizations prefer exploitation of existing knowledge over exploration for
new opportunities
 Strategy is manifested as an activity system
 The organizational structure comes from the contingency theory, where
organizations form their organizations structure and system on the basis of
adapting to the external environment.
Organizational adaption and industry evolution
Institutional change and organizational change use ideas from biology. Evolutionary change is viewed as an
adaptive process that involves variation, selection, and retention. At which level do these processes occur?
Organizational ecology Is a broader theory of economic change based on the assumption of
organizational interia. As a result industry evolution occurs through changes in
the population of firms rather than by adaption of firms themselves
Evolutionary
Focuses upon individual organizations as the primary agents of change.
economist
Coping with technological change
The greatest threat that newcomers pose to established firms is during periods of technological changes.
Competence enhancing and competence destroying technological change


Some technological changes undermine the recourses and capabilities of established firms. They
are competence destroying.
Other changes are competitive enhancing – they preserve, even strengthen the resources add
capabilities of incumbent firms
Architectural and component innovation

Henderson and Clark argue that innovation which change the overall architecture of a product
create major difficulties for established firms because an architectural innovation requires a major
reconfiguration of a company’s strategy and activity system.
- The electrical engine is an architectural innovation, because it requires a total change in the
car design and involves the creation of ways in which the engine can be recharged.
Disruptive technologies


New technology that is sustaining – it improves existing performance attributes
Disruptive technology – it incorporates different performance attributes than the existing
technology.
Dual strategies and organizational ambidexterity
Duel strategies
positioning for the present and adapting for the future
 Dual strategies require dual planning systems: short term planning that
focuses on strategic fit and performance over a one- or two-year period;
 and longer -term planning to develop vision , reshape the corporate
portfolio, redefine and reposition individual businesses, develop new
capabilities and redesign organizational structures over periods of five or
more years.
Prosperity to favor exploitation over exploration applies equally to strategy:
 Competing for the present is more appealing than competing for the
future
Two types of ambidexterity (the ability to do any task equally well with either hand):
Structural
ambidexterity
Contextual
ambidexterity
Where exploration and exploitation are undertaken in separate organizational
units, on the basis that it is usually easier to foster change initiatives in new
organizational units rather in existing ones.
 E.g IBM developed its PC in Florida, far away from its headquarters in New
York. The leader claimed that this separation was critical to crating a
business system that was radically different form the IBM’s core
mainframe business.
Involves the same organizational units and the same organizational members
pursuing bot exploratory and explorative activities.
 The problem here is that the management systems and individual
behavior required for efficient exploitation are incompatible with these
needed for exploration.
Combatting organizational inertia
Interia (a tendency to do nothing or to remain unchanged.)
Most large companies exhibit periodic restructuring, involving simultaneous changes in strategy, structure,
management system, and top management personal. Such a restructuring results in declining performance
caused by either major
external shock or by a growing misalignment between a firm and its external environment.
The challenge for top management is to undertake measurements that prevent such declining
performance.
Creating perception
of crisis
Establishing stretch
Organizational
initiatives as catalyst
of change
Reorganizing
company structure
New leadership
Scenario analysis
Crises creates conditions for strategic change by loosening the firms attachment
to the strategy.
 This can be done by creating a perception of imminent crisis, so
necessary changes can be put into place before crisis hit
Another approach to weakening the power of organizational interi is to
continually pressure the organization by means of ambitious performance
targets.
 The idea is that performance targets are achievable needs employees to
be motivated creativity and initiative while attacking complacency
(selvtilfredshed).
By a combination of autocratic and charismatic leadership CEO’s may be able to
pioneer specific initiatives with a surprisingly extensive impact.
By reorganizing the structure top management can redistribute power, reshuffle
top management, and introduce new blood.
If an organization is doing poorly it is better to hire a new CEO from outside the
organization to lead new changes, than from within.
Not a forecasting technique, but a process for thinking about and analyzing the
future by drawing upon a broad range of information and expertise.
 Scenario analysis can be quantitative – analysis builds simulations models
to identify likely outcomes
 Qualitative scenario analysis – takes the form of narratives and can be
particulary useful in engaging the insight and imagination of decision
makers
 Scenario analysis is used to explore paths of industry evolution, the
development of countries and the impact of new technologies.
The value of scenario analysis is not in the results but in the process
Developing new capabilities
Distinctive capabilities can be traced back during companies founding and initial development. These core
capabilities are subject to path dependency – a company’s capabilities today are a product of its history.

ExxonMobile is known for its outstanding financial management which can be traced back to its
role in providing overall financial management for Rockefeller’s standard Oil Trus.
Integrating resources to create capability
To understand how to develop new capabilities one must look at the structure of organizational
capabilities. This integration has different requirements:
Sustainable processes
Without processes, organizational capability will be completely dependent on
individual skills. With processes (or organizational routines) we can ensure that
the task performance is reliable, efficient, and repeatable.
Structure
The staff and processes that contributes to an organization’s capability needs to
be located within the same organizational unit if they are to achieve the
coordination needed to ensure a high-performance capability.
Motivation
Without motivation individuals will give less than their best and they will not
set aside their personal preferences and prejudice to integrate as a team.
Organizational
Exceptional performance requires that all components of a capability works to
alignment
perfection.
To develop new capabilities all these requirements must go hand in hand.
Dynamic capabilities
The ability of some firms (IBM, Toyota etc.) to adapt to new circumstances while others haven’t been able
suggest that the capacity for change is itself an organizational capability. Hence the term dynamic
capabilities come to play (created by David Teece):

It is firm’s ability to integrate, build, and reconfigure internal and external competences to cope
with changing environments. Teece proposes that dynamic capabilities can be disaggregated into
the capacity;
1. To sense and shape opportunities and threats
2. To size opportunities
3. Maintain competitiveness through enhancing, combining, protecting and when necessary
reconfiguring the business enterprise’s intangible and tangible assets (see last chapter)
Gary Hamel on the other hand believes that change requires breaking away from existing management
practice.
Using knowledge management to develop organizational capabilities
Development of capabilities by organizations has been influenced by a set of concepts and referred to as
knowledge management.
Knowledge management
(correspond to the two
types of knowledge)
Knowing about
Know how
At the core the concept comprises:
 The application of information technology to management
processes – the use of databases, expert systems groupware for
analyzing, storage, and disseminating information
 The promotion of organizational learning
Comprises facts, theories and sets of instructions and can be commuicatet
Skills that are expressed through their performance, such as riding a bike or
playing the piano
Dynamic capabilities: What are they?
Tautological = et logisk udsagn der er sandt for alle tildelinger af værdier til udtrykket. Det modsatte af
orden er selvmodsigelse
RBV= resource based view
DC= dynamic capabilities
What is the text about?
Eisenhardt and Martin's paper on dynamic capabilities is an attempt to explicitly answer critiques of Teece
et als definition of dynamic capabilities as being tautological and vague by focusing on specific examples.
Capabilities theory
Capabilities theory is described in terms of an expansion on the resource base
view of organizations (RBV). Both attempt to use an analysis of processes and
routines to offer a description of organizational activity with clear high-level
implications for strategies that, implemented by managers, can result in higher
firm performance and help explain the difference in performance among firm
How to perceive
dynamic capabilities
One of the best ways to understand dynamic capabilities is through a definition,
based on the perceived shortcomings, in the resource base view of the firm.
In RBV, firms are treated as collections of resources

examples of resources might include assets, knowledge, or relationships
to other firms.
However, RBV seem to have little to say about the way that resources are
created, won, or released. Some critics of RBV believe that the result, is a model
of organizational interaction that is overly static. The consequence of strategy
built on RBV is a strong focus on choice of resources and not enough emphasis
on they are created and built.
How can dynamic
capabilities be
understood?
The authors suggest that one way that dynamic capabilities can be understood is
as a reaction and challenge to this simplified description of RBV.

The core argument for dynamic capabilities is focused on the fact that
many of the most important strategic resources rarely just exist; instead,
they are built or created, integrated, and then released or given up
through processes or routines within firms.
In this sense, Dynamic capabilities can be viewed as a response to RBV in the
sense that it changes the focus of analysis to questions around the processes that
secure and maintain resources rather than just about choice and management.

Dynamic capabilities avoid the discussion of resource choice and focuses
more on one of resource development, acquisition, reconfiguration,
and renewal.
Although Dynamic capabilities can be pitched as a response to RBV, it can also be
described as complementary.
Dynamic capabilities

Eisenhardt and Martin take this tack as they describe that DC can,
"enhance RBV," and elsewhere say that DC is, "at the heart of the RBV."
In this sense, DC can be understood as building on the RBV;

firm performance is, but is not only, based on the strategic use of firm
resources. DC highlights the use of processes and routines which help
secure, manage, and adapt these resources.
Teece and colleagues (1997), define dynamic capabilities as:
‘The firm’s processes that use resources—specifically the processes to
integrate, reconfigure, gain and release resources—to match and even
create market change. Dynamic capabilities thus are the organizational
and strategic routines by which firms achieve new resource configurations
as markets emerge, collide, split, evolve, and die.’
Eisenhardt and
Martin build on this
definition
They describe the Teece’s view of dynamic capabilities as being "routines to learn
routines" - a definition critiqued as tautological by others.
Instead, Eisenhardt and Martin attempt to tie their alternative conceptualization
to a set of identifiable, specific, organizational and strategic processes that
include product innovation, strategic decision-making, alliancing, and others
which managers of firms use to build, create and alter the set of resources
available to them.
Eisenhardt and Martin also focused on a key distinction about DC based around the nature of the market in
which a firm is operating. Eisenhardt and Martin divide markets into "high-velocity" and normal markets to
illustrate this point.
High velocity markets
Dynamic markets in which market boundaries and successful business models
are unclear and market players are ambiguous and shifting

In these markets existing knowledge and resources are less useful than
the ability to quickly create new situation-specific knowledge
While they offer important challenges for the traditional view of DC, these high velocity markets also
provide one of the strongest arguments in favor of the more nuanced version of DC and for a DC theory in
general.

The DC critique of RBV is most strong in a rapidly changing market environment. What is
strategically most important is not any particular resource but the ability to reconfigure resources
quickly and to adapt. In these environments, the strategic importance of more fungible processes
and their relationship to firm performance is both most clear and most
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