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The Analysis Comment


Taking advantage


Academic analysis shows why some companies are more profitable for years longer than their competitors


Phebo Wibbens Assistant professor of strategy, INSEAD


Traditionally, strategy scholars have focused on a firm’s operating resources – assets and capabilities that directly affect profit – when analysing its competitive advantage. Based on that assumption, high-performing


firms were believed to have a run of success lasting on average about five years. But as IKEA, Apple and other firms have


shown, a much longer period of success is available to some companies. Discovering what gives these firms and


others like them their longer lasting success, I created a mathematical model based on empirical data covering 4,000 firms in the US over three decades. In Performance persistence in the presence


of higher-order resources, published in the Strategic Management Journal, I showed that firms can make their operating resources go further when they are complemented with often intangible but valuable higher- order resources, such as superior strategic planning, merger and acquisition teams, and innovation capabilities. With the model of the dynamics between


resources and profits, we can see that when both operating and higher-order resources were taken into account, firms enjoy a competitive advantage for 18 years on average.


advantage for 18 years on average


Competition Competitive advantage – conditions that give a company its favourable position – had been thought to last only about five years on average. When evaluating their firms, executives tend to only consider their


operating resources, ones that directly affect profit. Central to a firm’s long-term success, however, are higher-order resources, those intangible assets that improve a company and help drive long- term growth. Long-term successful companies must be able to change the way


they operate; this is the fundamental idea of higher-order resources, also called dynamic capabilities.


February 2019


taken into account, firms enjoy


resources and profits, we can see that when both operating and higher- order


between


resources were a


competitive


With the model of the dynamics


Higher-order resources are not quantifiable


the way that profits are. Fundamentally, both operating and higher-order resources are always idiosyncratic and unique. If there were a general prescription for better resource positions, every firm would be able to get them and these resources would no longer grant any advantage. This makes empirically measuring them a challenge. The average duration of competitive


advantage based on previously used models is five years, about half the duration from the estimate of using the new model with only operating resources. Adding the effect of higher-order resources almost doubles the estimated duration of competitive advantage again to approximately 18 years. To confirm the importance of higher-


order resources for prolonging competitive advantage, I had to consider the patterns expected in profit and other large-scale observable data, like the persistence of profit growth. Then I used statistical procedures


to find the data consistent with what we would expect in firms with higher-order resources – akin to how physicists use extensive computer models to detect the signal of otherwise undetectable new particles such as the Higgs boson.


Using Bayesian hierarchical analysis in the field of strategy can


provide new insights on core strategic questions, like what makes some firms more profitable for longer.


Implications for managers Operating resources lead to persistence in the level of profit differences; higher-order resources lead to persistence in the growth of profit differences. Higher-order resources help bolster operating resources. They produce persistently better resources over the long term, leading to a longer stretch of competitive advantage. Although broad, these findings demonstrate that acknowledging


the importance of higher-order resources is a decidedly valuable insight. CCR


www.CCRMagazine.com 11


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