Recognize sustained competitive advantage

166 Pages·2012·3.98 MB·English



Recognize sustained competitive
advantage

- A comparison in the automotive industry out of an investors’
perspective -

Jan Willem Barnhoorn
Student Number 4054040
August, 2012

Delft University of Technology
Faculty Technology, Policy & Management
Graduation section Technology, Strategy & Entrepreneurship
Programme: Management of Technology
Supervisors:
Dr. E. den Hartigh
Prof. dr. C.P. van Beers
Dr. Ir. W. Lemstra
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Contents
Chapter 1. Introduction ....................................................................................................... 6
1.1 Problem description .................................................................................................. 7
1.2 Research objective..................................................................................................... 9
1.3 Research questions .................................................................................................. 10
1.4 Research methods ................................................................................................... 11
1.5 Document structure ................................................................................................ 12
Chapter 2. Literature review ............................................................................................. 14
2.1 Sustained competitive advantage ............................................................................ 14
2.2 Strategic theories .................................................................................................... 18
2.2.1 Theory 1: Industrial Organization theory .......................................................... 19
2.2.2 Theory 2: Evolutionary Economics .................................................................... 23
2.2.3 Theory 3: Resource-based view ........................................................................ 27
2.2.4 Theory 4: Dynamic capability theory ................................................................ 30
2.2.5 Consolidated theories ...................................................................................... 33
2.3 Competitive advantage factors ................................................................................ 34
Chapter 3. Proposition development ................................................................................. 37
3.1 Expert survey ........................................................................................................... 37
3.2 Testable and sustainable factors .............................................................................. 39
3.3 Conceptual framework ............................................................................................ 43
Chapter 4. Research methodology .................................................................................... 48
4.1 Domain description ................................................................................................. 48
4.2 Operationalizations ................................................................................................. 51
4.3 Research framework and study sample .................................................................... 56
4.4 Research design ....................................................................................................... 59
4.4.1 Case study protocol ......................................................................................... 59
4.4.2 Conduct of the case study ................................................................................ 62
Chapter 5. Performance of the market leader ................................................................... 65
5.1 Correction factors .................................................................................................... 65
5.2 Financial performance ............................................................................................. 70
5.3 Factor performance ................................................................................................. 76
5.3.1 Market share ................................................................................................... 76
5.3.2 Economies of scale ........................................................................................... 82
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5.3.3 Organizational age ........................................................................................... 89
5.3.4 Corporate reputation ....................................................................................... 91
5.3.5 Financial resources........................................................................................... 95
5.3.6 R&D Intensity ................................................................................................. 104
5.4 Combination of factors .......................................................................................... 114
5.5 Consolidated factor performance .......................................................................... 118
5.6 Superior factor performance ................................................................................. 120
Chapter 6. Sustainable performance ............................................................................... 122
Chapter 7. Conclusions and recommendations ................................................................ 126
7.1 Conclusions ........................................................................................................... 126
7.2 Managerial implications and recommendations ..................................................... 128
7.3 Suggestions for further research ............................................................................ 129
7.4 Reflection .............................................................................................................. 130

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PART I – INTRODUCTION

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Chapter 1. Introduction
One of the fundamental questions in the field of strategic management is how firms achieve
and maintain competitive advantage1. Since the existence of strategic management as a
research field (1950s and 60s), various theories and models have been suggested in order to
answer this fundamental question. However, despite all intends, no general and genuine
excepted explanation has yet been found to address the origin and drivers of competitive
advantage. This might result from the fact that strategic management is a complex discipline
of the social sciences that has to cope with – among others – ambiguity, predictions, non-
objectivity and a high degree of individual judgment(Nag, Hambrick et al. 2007). Therefore a
universal and widely accepted framework concerning competitive advantage is not yet
expected. Although a lot of research has been done, and a growing number of factors that
influence competitive advantage are being understood, it appears that the 21st century is not
working in its favor. The pace of change and complexity has skyrocketed in the last decades.
On the one hand because more companies have been founded and entered the global
marketplace. On the other hand because knowledge creation and technology has been
growing exponentially and constantly changes the business dynamics. As a research of IBM
summarizes the three main conclusions of 1500 CEOs around the world: 1) Complexity is
escalating, 2) enterprises are not equipped to cope with this complexity, and 3) creativity is
now the single most important leadership competency(IBM 2010). Despite this increasing
complexity, the strategic management literature grew greatly and added knowledge on the
sources of competitive advantage. However, to a lesser extent attention is paid on how
investors could capitalize on that knowledge by proving measurements that might predict the
ability of a firm to maintain its competitive advantage. It is in this context that we ask the
question how the long-term investor is able to judge and analyze the ability of a market leader
to maintain its sustained competitive advantage over time.
This research is the first step to study and address the question how a long-term investor
might be able to recognize sustained competitive advantage. First of all, the problem
description, the research objectives and questions are defined in order to delineate the scope
and boundaries of the study. The relevance of the research is explained and knowledge gaps
are identified. Second, an extensive literature review will be conducted and the different
theories and factors regarding competitive advantage will be delineated. Thereafter
propositions will be developed and the methodology of the research thoroughly discussed. An
empirical study will follow and finally the outcomes, conclusions and recommendations will be
presented.

1 For a review of the fundamental questions in Strategic Management see Rumelt, R. P. and D. J. Teece (1994). Fundamental
issues in strategy: A research agenda, Harvard Business Press..
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1.1 Problem description
The long-term investor seeks investments in outstanding companies and intents to hold that
investments at least ten or twenty years from now. Instead of speculating on the capital gains
on the stock market, the long-term investor favors the steady payment of dividend and thus
pays minor attention to the stock price developments of its investment (Graham 1949).With
this investment paradigm, the long-term investor circumvents the ‘sins of investing’ that have
proven to be unfavorable for acceptable investor return: short-term horizon, overtrading and
playing the trend (Montier 2006). The search for outstanding companies drives the long-term
investor in the corner of market leaders, as market leaders are known for being among the
best performing companies in their respected industry (Treacy and Wiersema 1997).
Moreover, the long-term investor seeks market leaders that are ought to have a sustained
competitive advantage to ensure the continuous stream of dividend within his long-term
holding period (Fisher 1997). However, the recognition of this sustained competitive
advantage is directly the greatest limitation for the long-term investor. The analytical tools
that are currently available to assess a company’s ability to maintain its competitive advantage
are rather poor as will be shown in the next paragraph. It therefore hinders the analytical
judgment of the investor with respect to competitive advantage.
In this state of the world, the analytical tool for investors to analyze whether a company enjoys
a competitive advantage over its competitors is based on higher financial performance
measures in terms of return on assets (ROA), return on equity (ROE) or return on sales (ROS).
Empirical evidence shows that competitive forces should drive relative high profits towards
more normal levels (Mueller 1986; Jacobsen 1988; Rumelt 1991; Rumelt 2005), although some
research also reported exceptions to this trend (Mueller 1986; Muller 1990). The result of
relative high profits is generally reflected in higher financial performance figures of the firm.
Hence, investors assume that if companies report higher financial performance figures
compared to their direct competitors for a considerable amount of time, it should intrinsically
enjoy a kind of competitive advantage. That is, when a company is able to persist relative high
profits over time compared to its direct competitors (Hunt and Morgan 1995). Despite the
usefulness of these financial performance figures, two main limitations could be identified.
First, above-average financial performance is normally the result of having competitive
advantage(Barney 1997). Knowing that, the long-term investor is not measuring the sources of
competitive advantage but rather an effect of it. Therefore, this might not be a good predictor
of the ability to maintain competitive advantage. Second, financial performance figures only
measure whether a company had a competitive advantage, although it fails to recognize
whether a company is able to maintain its competitive advantage. In other words, the current
analytical tools used by investors only reflects historical achievements but lacks a predictable
assessment about the future of that competitive advantage. It is the aim of this research to
close this knowledge gap by providing investors with new measures to assess the ability of the
market leader to maintain its competitive advantage in the future. The practical relevance of
this research is thus to broaden the limited measurement possibilities of sustaining
competitive advantage. To reach that goal, the knowledge and research methods of the
strategic management school will be consulted.
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A way of doing research on competitive advantage by strategic management scholars is by
asking oneself why a particular company is performing better than others. This can be done by
determining the average performance of an industry by, for instance, using performance
indicators as return of investments (ROI), return of assets (ROA) and return of sales (ROS).
Thereafter, a pattern may appear which distinct companies that consistently perform above
the industry average, and companies that perform below that average. It is in this difference in
which strategic management scholars are interested. As a result, the above-average
performing companies could be analyzed to answer the question what these companies do
differently than their less performing competitors. These differences might then be explained
in terms of sources of competitive advantage. Thus, in sum, researchers use financial industry
data to determine which companies perform above average and intend to investigate the
sources of that performance which might be competitive advantage. These sources of
competitive advantage might be good indicators in the search for predicting future-oriented
measurement that could be used by investors to assess the ability to maintain competitive
advantage. This study intends to address the research problem as presented in this chapter by
using a similar research perspective.
The empirical support we aim to generated with this study - that a specific resource or
capability may enable a firm to sustain a competitive advantage in a particular industry setting
- contributes to the academic value of the research as it brings scholars closer to the answer
on how firms attain and maintain competitive advantage. That being said, the research also
contributes towards new academic value via exploring generic sources of competitive
advantage within a specific industry that might be used to recognize the ability to maintain
competitive advantage. That is, an academic contribution is made by investigating sources of
competitive advantage that might hold true regardless the enterprise-level strategies of a firm
(Newbert 2008). However, some limitations to such contributions apply.
Since industries and their characteristics defer significantly, one could not expect that the
same factors that enable competitive advantage in one industry, also hold true in another. For
that reason it is necessary to narrow the scope of this research to a single industry. The most
practical and academic value is captured when the research will be conducted in a dynamic
industry, in which the search for attaining new forms of competitive advantage is a continuity.
Hence, the research will constrain itself to the automotive industry.

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1.2 Research objective
The objective of the research project is to contribute to the analytical judgment of the long-
term investor on whether the market leader in the automotive industry is able to maintain its
competitive advantage over its competitors, by analyzing a number of factors that have an
impact on a firm’s competitive position, and testing these factors with publicly accessible
information of the firm. The deliverable is a list of empirically investigated factors that have a
plausible positive effect on the ability of the market leader to maintain its competitive
advantage.

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1.3 Research questions
In order to achieve the research objective, the following main research question is formulated
and split into five separate sub questions.
Research questions;
How could the ability to sustain competitive advantage of a market leader in the automotive
industry over its direct competitors be measured by using publicly accessible information?
a. Which factors that positively influence the ability to maintain competitive
advantage are suggested by literature?

b. Are the factors suggested by literature measurable by using publicly accessible
information?

c. Does the market leader in the automotive industry have a consistent superior
financial performance over its direct competitors?

d. Is the market leader in the automotive industry performing better in the factors
that have a positive impact on a firm’s ability to maintain competitive advantage
over its direct competitors?

e. Can the factors that have a positive relation on the market leader’s consistent
superior performance be considered sustained in the automotive industry?

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