Business Policy Unit 1 (2024-2025) PDF

UNIT 1. Value creation and fragility of competitive advantages Business Policy 2024-2025 1 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 5. T...

UNIT 1. Value creation and fragility of competitive advantages Business Policy 2024-2025 1 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 5. The process of creative destruction 6. Main barriers to change Bibliography: Grant (2018), chapter 8 Guerras and Navas (2015), chapters 1 to 7. Hitt, Ireland and Hoskisson (2019), chapters 1 to 5. Rothaermel (2021), chapters 1 to 6. 2 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 3 1. Introduction § Strategy is the set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors. A good strategy is the one that is capable of obtaining better results than rivals. § Elements of strategy: (1) a good diagnosis and analysis of the environment and the internal situation of the company, (2) a formulation of the strategy, and (3) the implementation. § AFI strategy framework 4 1. Introduction § Main objective of Business Policy or Strategic Management: to explain why some companies have a better performance than others. With this purpose, we analyse the company from an integral point of view. To think like a manager that tries to obtain good results. § Results differences among companies: § From the environment (variables that we cannot control) § From the company’s behaviour (variables that we can control) 5 1. Introduction Factors from the environment: § General environment: they affect all the companies of a given geographical context. PESTEL analysis (analysis of political, economic, sociocultural, technological, ecological and legal factors). § Specific environment: they affect companies in a certain industry. Five- forces model of Porter (degree of industry rivalry, threat of new entrants, threat of substitute products, bargaining power of suppliers, and bargaining power of customers). § Empirical evidence: companies from the same geographic environment and industry obtain very different results. § These results also depend on the strategic positioning of the company: § To offer products or services of a high value-added (differentiation) § To offer products or services at a very low price (cost leadership) 6 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 7 2. Competitive advantage and value creation § Concept of competitive advantage § It is a relative concept, not absolute (we have to compare the results of the firm with its competitors). A company has a competitive advantage when it has a better performance than competitors or the average in its industry. § Through this course, we are going to see that a company has a competitive advantage when it is capable of creating more value than rivals. § Example: Tesla vs GM, Ford or Chrysler in the last years. § Concept of sustainable competitive advantage § A company is capable of overcoming rivals for a long time (Unit 2) § Example: Apple with the introduction of the IPhone over Microsoft and other competitors in the industry. § Concepts of competitive disadvantage and competitive parity 8 2. Competitive advantage and value creation To achieve a competitive advantage, a company needs to create more value than all its rivals. For this, a company should (1) provide to its customers products or services of a higher perceived benefit than rivals, having a similar cost structure, or (2) make products or services similar to the ones of competitors but with a lower cost structure, offering them at a lower price. § These combinations of perceived benefit-costs of the company are called strategic positioning. § Value created (VC) = Perceived customer benefit (PCB) – Costs (C) § Perceived customer benefit (PCB): value given by a customer to the product or service of the firm (it includes a subjective component). Differentiation strategies are focused on increasing the PCB. § Costs of the company (C): costs of the company to provide the product or service to the customers. Cost-leadership strategies are focused on reducing the costs. They include both fixed and variable costs, and direct and indirect costs. 9 2. Competitive advantage and value creation Distribution of the value created among agents: companies and customers. § Value created (VC) = PCB – C = (PCB – Price) + (Price – Costs) = CS + FP § Consumer Surplus (CS) = Perceived Customer Benefit (PCB) – Price. It is the component of the value created that it taken by the consumers. § A consumer will buy a product if its CS is positive § Among different products with a positive CS, the consumer will choose the one with the higher CS. § Firm’s Profit (FP) = Price – Costs. It is the component of the value created that it taken by the companies. § It is the firm’s margin, the profit of each sale of the company § To be sustainable the FP has to be positive. To calculate it we need to take into account all the costs of the company. § The company that is capable of creating more value is going to have a competitive advantage in this market. 10 2. Competitive advantage and value creation § It is also interesting to understand the concept of 'shared value creation' (Porter and Kramer, 2011). § It is not only the economic value (CS + FP) that matters, but also the social and environmental value. It goes beyond philanthropy. § In addition to the consumer (CS) and the company (FP), other agents can receive value from the activity of companies (employees, suppliers, community, environment...). § Business and society (in a broad sense) are not opposites. There are important trade-offs between them (see next slide). A healthy society has a positive impact on business activity and a good business fabric generates more developed communities (win-win situation). 11 2. Competitive advantage and value creation § Shared value can be created in different ways. Among them, we can highlight: a. Redefining products or services. Example: Nestlé b. Redefining productivity in the value chain. Example: Mercadona. c. Enable the development of local clusters. Example: Hijos de Rivera and the Galician food cluster. § Business activity also has significant negative externalities (pollution, exploitation of natural resources, etc.). Who takes care of them? 12 2. Competitive advantage and value creation § To achieve a competitive advantage (create more value than competitors), there are different types of strategies: 1. Differentiation strategy: Provide products or services of greater perceived benefit than those of competitors, while incurring a similar cost. 2. Cost leadership strategy: Manufacture products or services with a perceived benefit similar to those of the competition, but at a lower cost. 3. Blue Ocean strategy: A case of hybrid strategy. Offering a product or service with a perceived benefit superior to that of the competition while incurring a lower cost. Much more complicated to implement successfully (more BP usually means more costs). It involves creating a new value curve. 13 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 14 3. Strategic positioning § Strategic positioning refers to: 1. The dimension of value created on which the company is primarily focused. 2. The scope of its activity in the market. § The company may be better positioned than its rivals in the perceived profit dimension (differentiation strategy) and/or in the cost dimension (cost leadership strategy). § Furthermore, a company can offer its products and services to the entire market (broad approach) or to focus on a certain segment of consumers (narrow approach). § The company with the best strategic positioning in the market will be the one that manages to create the most value and therefore has a competitive advantage. 15 3. Strategic positioning Cost leadership strategy § This strategy seeks to offer a product as cheap as possible (so, the company needs to lower its costs) but without neglecting the PCB. § The company has to think in which activities its costs are higher and to look different options to reduce them. § Two ways of obtaining a cost-leadership competitive advantage: (1) To do the same activities than rivals but better and cheaper, (2) To change our processes, reconfiguring our value chain. § Drivers of this strategy: (1) economies of scale, (2) economies of scope, (3) economies of experience, and (4) other cost drivers. 16 3. Strategic positioning Differentiation strategy § This strategy seeks to offer a product with the highest as possible perceived customer benefit, with the goal of convincing the consumers to pay a higher price, without neglecting the cost. § We have seen that: PCB = Gross profit – cost of use – cost of purchase, so we can modify each of these components. § To increase the gross profit, improving attributes such as the quality of the product, the image of the company… § To lower the cost of use, making a more intuitive product or service or facilitating some information to the customer. § To lower the cost of purchase, facilitating some information to the customer and easing that the product arrives to the place where the customer is. 17 3. Strategic positioning Two kind of differentiation strategies: vertical and horizontal § Vertical differentiation: all the customers have the same preferences, so it is possible to distinguish the better and the worst products and services (all consumers agree). § The strategy of the company is focused on doing a product as best as possible for the whole market. § Horizontal differentiation: customers preferences are not coincident. For a same quality level, there are a set of attributes or characteristics for which customers have different preferences (location, color, size..). This kind of differentiation is more common in products with many attributes. § The strategy of the company is focused on satisfying the preferences of some segments of consumers. 18 3. Strategic positioning Broad and narrow scope § In the broad scope, the company offers its products to the entire market, while in the narrow scope it does it to a specific segment (consumers who share certain characteristics). 19 3. Strategic positioning Is it possible to reconcile both generic business strategies? § A good strategic positioning requires some trade-offs, because the cost- leadership strategy and the differentiation strategy have to go in opposite directions. § It is very difficult to satisfy groups of consumers that have very different preferences about the price or about the PCB of a product or service. § If a company wants to do a very cheap product, it has to look for cheap raw materials, to invest in less advertisement, to give up to add some additional attributes and characteristics to the product. Consumers who want a differentiated product will be difficult to satisfy. § If a company wants to do a product or a service of a very good quality, it has to implement different activities and actions to increase the PCB, which is going to considerably increase its costs. § Stuck in the middle: companies that do not achieve a good strategic positioning neither in costs nor in differentiation. 20 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 21 4. Sustainability of competitive advantage § Sustainability of competitive advantage refers to a situation in which the firm that has a competitive advantage is able to maintain it despite the efforts of its rivals. § Thus, creating more value than rivals over time is a necessary condition for sustainable competitive advantages. § Many firms that enjoyed competitive advantages for a while have been replaced by other firms. Examples: Nokia, Kodak, Blockbuster... § However, some companies have been able to maintain their competitive advantages over long periods of time. Examples: Amazon, Coca-Cola, Apple.... 22 4. Sustainability of competitive advantage Globalization Growing importance of emerging countries Sustainable Deregulation competitive Industrial convergence advantage More aggressive competitive behaviors Technological evolution … Temporary competitive advantage 23 4. Sustainability of competitive advantage ▪ However, some companies maintain strong positions after long periods of time. Examples: Amazon, Coca-Cola, Apple.... Kantar BrandZ Most valuable global brands (2023) 24 4. Sustainability of competitive advantage § Different stages can be identified when examining the evolution of a competitive advantage: 1st Construction 2nd Exploitation time Adoption of a unique competitive positioning 25 4. Sustainability of competitive advantage § Different stages can be identified when examining the evolution of a competitive advantage: 1st Construction 2nd Exploitation time Adoption of a Sustainable or temporary unique competitive competitive advantage? positioning 26 4. Sustainability of competitive advantage 1st Construction 2nd Exploitation 3rd Erosion Temporary competitive advantage time 1st Construction 2nd Exploitation Sustainable competitive advantage time 27 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 28 4.1 Isolating mechanisms of competitive advantages § On what does it depend whether the exploitation phase is maintained over time, making the competitive advantage sustainable? § Competitive advantages mainly erode due to: 1. The entry of new players into the market 2. Imitation by other firms 29 4.1 Isolating mechanisms of competitive advantages § Therefore, two types of barriers can protect the firm with a competitive advantage: § Barriers to entry: they make it difficult for new competitors to enter the market. However, these barriers do not prevent established firms from imitating the firm with a competitive advantage. § Barriers to imitation: they prevent the firm with a competitive advantage from being imitated by existing or future rivals. § Entry barriers are to the industry what imitation barriers are to the firm. § Both types of barriers act as isolating mechanisms, making it difficult for competitors to surpass the value created by the firm with a competitive advantage. Sustainability of the competitive advantage is therefore greater. 30 4.1 Isolating mechanisms of competitive advantages Barriers to entry Different factors can create barriers to entry, some of the most frequent are: I. Licenses, authorizations or operating quotas. In some industries, entry is not free but regulated, which limits the number of potential competitors. Examples: pharmaceuticals, cabs or equivalent (Uber, Cabify…), mobile telephony, etc. II. A large initial investment. Not all companies will be able to make this investment to enter the market, which substantially reduces the number of potential rivals. III. Economies of scale, scope and experience. Established firms operate at a lower cost than new firms, which reduces the profits of potential entrants and discourages their entry. 31 4.1 Isolating mechanisms of competitive advantages Barriers to entry IV. Switching costs. A cost must be assumed for consuming the products/services of another supplier. Therefore, it is more difficult for new competitors to attract users (less PCB, predictably less CS) and obtain profits. Entry is less attractive when there are switching costs. Conclusion: The existence of entry barriers makes it easier to maintain the competitive advantage due to the smaller number of rivals the firm has to face. 32 4.1 Isolating mechanisms of competitive advantages Barriers to imitation I. Legal barriers that protect intellectual property § They give the owner the right of exclusive use and exploitation, preventing other competitors from taking advantage of it. There are five main ways to protect intellectual property: (1) Patents, (2) Industrial designs, (3) Copyrights, (4) Trademark rights, (5) Industrial secrets § By preventing rivals from imitating the process, product or design on which the firm creates value, it protects its competitive advantage and makes it more sustainable over time. Example: Coca-cola. § Important: property rights can be sold/bought. Examples: Google's purchase of Motorola Mobility, the sale of the Reebok brand... 33 4.1 Isolating mechanisms of competitive advantages Barriers to imitation II. Causal ambiguity § The reasons why a company is able to create more value than its rivals are not clear, which makes it very difficult to replicate its sources of value creation. Tacit knowledge and distinctive competencies are very important in raising this imitation barrier. § Example: Apple. III. Social complexity § The firm with a competitive advantage is immersed in a system of complex interactions with other agents (suppliers, employees...). Replicating this system to create the same value as that firm is very difficult. § Examples: the relationship between Toyota and its suppliers; Google and its organizational culture.... 34 4.1 Isolating mechanisms of competitive advantages Barriers to imitation IV. Historic or path dependence § The firm built its competitive advantage under unique historical conditions that are unlikely to be repeated, or did so through a process that cannot be replicated in the short to medium term. § Rivals are not able to replicate the process of building competitive advantage immediately (or may never be able to). § Examples: rise of certain platforms in the context of the coronavirus pandemic, cost advantage due to economies of experience... Conclusion: If there are barriers to imitation, the source of the advantage is more protected, favouring the sustainability of that advantage. 35 4.1 Isolating mechanisms of competitive advantages § The timing of market entry can determine which company will have a competitive advantage. Pioneer advantages have been found to exist in many industries. § This is a particular case of competitive advantage in which the ability to create more value than other firms depends on the time of entry into the market. The pioneer creates more value than followers (firms that enter later). Examples: Movistar, Netflix, WhatsApp.... § Three mechanisms explain why a pioneer can create more value (Lieberman and Montgomery, 1988): § Technological leadership § Better access to scarce resources § Network effects and switching costs 36 4.1 Isolating mechanisms of competitive advantages I. Technological leadership This leadership can be obtained in two ways: a. Exploitation of the learning curve: The learning curve model reflects that unit production costs fall with cumulative output. When followers enter, the pioneer has already accumulated a certain volume of production that has allowed it to incur a lower unit cost than followers (cost advantage). Examples: Ford and the mass production process (Model T) or Tesla, more recently. § Assuming a similar PCB, the lower cost will allow the pioneer to set a lower price which will increase the CS, increasing demand for the pioneer's products (more market share). § By increasing its market share, the pioneer will have to increase its production volume, moving even faster along the learning curve (reinforced cost advantage). 37 4.1 Isolating mechanisms of competitive advantages I. Technological leadership This leadership can be obtained in two ways: b. R&D and patents (or other intellectual property rights). Being the first to launch a new product or to use a novel process can mean benefiting from patents or other legal protection. This type of protection is particularly important in certain industries, such as pharmaceuticals. § Examples: Pfizer and Viagra; GE and light bulbs; Gillette and disposable blades... 38 4.1 Isolating mechanisms of competitive advantages II. Better access to scarce resources § The first-mover may be able to gain advantage by preempting followers in the acquisition of scarce assets. Such assets may be physical resources or other process inputs. § Alternatively, the assets may relate to positioning in “space,” including geographic space and product space. § Examples: location of a hotel/restaurant in a coastal area; pioneer controlling an oil or gas exploitation... 39 4.1 Isolating mechanisms of competitive advantages III. Network effects and switching costs They are different concepts but two sides of the same coin: § Switching costs imply that consumers must invest additional costs or time to consume the followers' products. Thus, late entrants must invest extra resources to attract customers away from the first-mover. Several types of switching costs can arise, including: § Consumers are familiar with the products/services offered by a given firm (the pioneer) and must make an extra investment to adapt to the products of another supplier. Examples: Android vs. iOs operating system; Microsoft Office... § Some switching costs are artificially created through long-term contracts or loyalty programs. Examples: mobile operators, Decathlon, Mango… 40 4.1 Isolating mechanisms of competitive advantages III. Network effects and switching costs § Network effects occur when the PCB of a given product/service depends on the number of people already using it (direct network effects) or the number of compatible products (indirect network effects). § Example of direct network effects: Social media. If no one uses the same social network as me, what’s the point? The perceived customer benefit of a social network will be greater the more people use it. 41 4.1 Isolating mechanisms of competitive advantages Large installed base of users (more PCB than other apps) New users join Current users do the app not want to change (Switching costs arise) Installed base grows 42 4.1 Isolating mechanisms of competitive advantages III. Network effects and switching costs § Example of indirect network effects: game consoles or video players. If I can't find videotapes compatible with my video player, what use is that player? If the games I like are not compatible with my console, what use is that console? The perceived benefit of the base product (player or console) will be greater the more compatible products there are. 43  4.1 Isolating mechanisms of competitive advantages More PlayStation (switching costs arise) (PS) owners Increased perceived More people will buy benefits of PS PS compatible games Game developers have more incentive to make PS- compatible versions 44 4.1 Isolating mechanisms of competitive advantages Are these isolating mechanisms fully effective? No § Some barriers to entry or imitation can be overcome in certain cases. § For example, if potential competitors have sufficient financial resources, they can more easily overcome the barriers created by licenses (if auctioned) and high initial investments. § Similarly, if these competitors have sufficient financial resources, they can buy patents or other property rights and face the penalties resulting from an infringement of those rights. § In addition, isolating mechanisms are conditional on the stability of environmental conditions. 45 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 46 4.2 Contingent factors of sustainable competitive advantages Two main groups of factors may condition the sustainability of competitive advantages: 1. Factors that modify the conditions of the environment § If environmental conditions change, the sources that originated the competitive advantage may lose value and the mechanisms for isolating that advantage may lose effectiveness. § The environment in which firms operate is not static but dynamic. The conditions of the environment can change due to: (1) Technological evolution, (2) Industrial convergence, (3) Changes in consumer needs, requirements or tastes, (4) Significant changes in legal, economic or political market conditions. 2. Factors that determine firm competitive behaviour § A sustainable competitive advantage means being able to create more value than rivals over time despite the competitive efforts of these rivals. The competitive behaviour of the latter will therefore make this task more or less easy. 47 4.2 Contingent factors of sustainable competitive advantages 1. Factors that modify the conditions of the environment The environments in which companies operate are not static but dynamic. The conditions of the environment can change due to: technological evolution industrial convergence changes in consumer tastes, demands or needs significant changes in the legal, economic or political conditions of the marketplace... 48 4.2 Contingent factors of sustainable competitive advantages I. Technological evolution § Technological improvements change the boundaries of firms, bringing countless opportunities but also threats. § For example, technology has eliminated intermediaries (Airbnb, BlablaCar, Wallapop...) or replaced them with platforms (Booking, Skyscanner...). § These improvements have also favoured the emergence of new business models within the gig economy (Uber, Glovo, TaskRabbit...). § Leading firms that have not been able to adapt to the technological changes in their environment have been displaced by other companies with new value propositions, losing their competitive advantages (TV channels, BlackBerry, Kodak...). 49 4.2 Contingent factors of sustainable competitive advantages II. Industrial convergence § Technological dynamism also blurs the boundaries between sectors by expanding industry boundaries. § Industrial convergence means that players from different sectors meet in the market by offering value propositions that satisfy the same customer needs. § This increase in value propositions makes it difficult to maintain competitive advantages. 50 4.2 Contingent factors of sustainable competitive advantages III. Social or cultural changes § The society in which firms operate is not static either. Its values, customs, beliefs... (i.e., informal institutions) can evolve. § Although social changes occur more slowly than technological ones, they have a significant influence on consumer behavior, determining the perceived value of firms’ products/services. § Some of the most important social changes that have occurred recently are: greater concern for climate change; greater protection of animal rights; gender equality; need for inclusion of minority groups or groups at risk of exclusion; greater concern for health care.... 51 4.2 Contingent factors of sustainable competitive advantages IV. Political, economic and legal changes § The political environment and the rules and laws of a given market may also change (i.e., formal institutions). This evolution is often driven by prior changes in informal institutions. § Example: increased awareness of animal rights has resulted in regulations prohibiting the use of animals in entertainment. § The modification of formal conditions in the market may imply changes in the rules of the game that may invalidate the value propositions of leading firms. Example: Ringling Brothers Circus versus Cirque du Soleil. § In addition, environmental conditions can be substantially altered by unexpected and difficult-to-predict events (black swan events). Examples: terrorist attacks, global coronavirus pandemic... 52 4.2 Contingent factors of sustainable competitive advantages 2. Factors that determine firm competitive behaviour The competitive behaviour of rivals can be more or less intense depending on several factors, among them: I. Market structure § Structure-conduct-performance (S-C-P) paradigm § In market structures closer to perfect competition, firms compete more intensely, making it more difficult to maintain competitive advantages (worse firm performance). § On the contrary, in oligopolistic structures, collusive behaviors are more likely and the maintenance of competitive advantages is easier (better firm performance). 53 4.2 Contingent factors of sustainable competitive advantages 2. Factors that determine firms’ competitive behavior II. The degree of multimarket contact between rivals § Multimarket contact (MMC) refers to a situation in which firms compete simultaneously with each other in several markets (product or geographic markets). Examples: Telefónica and Orange-Vodafone; P&G and Unilever. § A firm that competes with its rivals in a single market receives attacks or responses from these rivals exclusively in that market (single-market competition). § When there is MMC between firms, they may deploy their competitive behavior in all the markets in which they compete with each other, which has a more negative impact on firm performance (multimarket competition). § Fear of retaliation may encourage firms with a high degree of MMC to tolerate each other (mutual forbearance behaviour). 54 4.2 Contingent factors of sustainable competitive advantages 2. Factors that determine firms’ competitive behaviour Competitive intensity High Low Low High Degree of MMC 55 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 56 5. The process of creative destruction § The economist Schumpeter, in his book Capitalism, Socialism and Democracy (1942), referred for the first time to the concept of the "process of creative destruction". He described capitalism as a perennial gale of creative destruction leading to industrial mutation. § Unlike other economists, Schumpeter understood competition as a dynamic process and not as something static: is it market structure that determines the competitive behaviour of firms (S-C-P) or the other way around? Classical approach to Dynamic approach to strategy strategy 57 5. The process of creative destruction § Why do industries evolve? Technological evolution opens the door to innovation. Each technological discontinuity allows new firms to launch more attractive value propositions that displace established firms (including market leaders). § This substitution process is occurring at an ever-increasing pace: Hypercompetition. So there is a need to constantly update the sources of competitive advantages (innovation, Unit 3). time 58 5. The process of creative destruction The need to constantly update Hypercompetition INNOVATION the sources of the advantage 59 5. The process of creative destruction “Here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” (Lewis Carroll, 1871) Adapt (innovate to stay alive in the market) vs. Evolve (innovate to lead changes) What type of innovation should be applied in each case? (Unit 3) 60 Index of contents 1. Introduction 2. Competitive advantage and value creation 3. Strategic positioning 4. Sustainability of competitive advantage 4.1. Isolating mechanisms of competitive advantages 4.2. Contingent factors of sustainable competitive advantages 5. The process of creative destruction 6. Main barriers to change 61 6. Main barriers to change § If firms are aware of environmental dynamism and the need to adapt to it to stay alive in the market, why are they often reluctant to introduce changes? § Organizational inertia refers to resistance shown by firms to introduce changes in their organizational structures and in their ways of operating or relating to their environments. § What is the source of organizational inertia? The main barriers to change stem from: § Sunk costs § Core competencies and skills § Limited search § Complementarities between strategy, structure, and systems 62 6. Main barriers to change I. Sunk costs § Sometimes, firms have made large investments in specific assets to operate in the market. This restricts their business scope and limits their capacity for innovation. § Firm dilemma: do I take advantage of the investment made despite limiting my innovation capacity, or do I lose that investment and undertake a new one to innovate? II. Core competencies and skills § They are a double-edged sword. Firms sometimes rely too much on these competencies, overestimating their potential to create value in the future. § Core competencies become organizational rigidity: competency traps + corporate myopia. Examples: BlackBerry; Blockbuster. 63 6. Main barriers to change III. Limited search § Firms that are well-positioned in the market are more likely to engage in exploitation than exploration activities. § On the contrary, new or underperforming firms are more likely to introduce greater changes because they are in a worse position and have incentive to improve. They tend to seek more creative solutions to improve their market positions. Example: Nintendo. IV. Complementarities between strategy, structure, and systems § The relationship between strategy, organizational structure, systems and organizational culture is usually established in the early stages of a firm's life. § All these elements are usually well linked in established firms with a longer history in the market, which makes it difficult to introduce changes. 64