Competitive heterogeneity

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Competitive heterogeneity is a concept from strategic management that examines why industries do not converge on one best way of doing things. In the view of strategic management scholars, the microeconomics of production and competition combine to predict that industries will be composed of identical firms offering identical products at identical prices. Deeper analyses of this topic were taken up in industrial organization economics by crossover economics/strategic-management scholars such as Harold Demsetz [1] [2] and Michael Porter. [3] Demsetz argued that better-managed firms would make better products (or similar products at lower costs) than their competitors. Such firms would translate better products or lower prices (an optimal decision based on lower costs) into higher levels of demand, which would lead to revenue growth. These firms would then be larger than the more poorly managed competitors.

Porter argued that firms in an industry would cluster into strategic groups. Each group would be similar and movement between groups would be difficult and costly (barriers to mobility). Richard Rumelt [4] and Stephen Lippman demonstrated how firms could differ in an industry in partial equilibrium-like circumstances. Richard Nelson and Sidney G. Winter [5] discussed how firms develop differing capabilities. During this time, industrial economics focused on industry characteristics, treated the differences among firms in an industry as trivial. This was a point of contention within strategy and between strategy and economics from about 1980 to the mid-1990s.

Early in the 1990s a number of papers were published under the rubrics of the Resource-based View [6] and Capabilities. [7] Both approaches continue to develop. However, the RBV won the public relations war (complete with, allegedly, removing dissenting opinions from Wikipedia). The RBV argues that firms vary in their resources and resource variances lead to varying competitive positions. Capability theories, building on earlier work by Nelson and Winter and Teece, [8] make a similar claim.

Developing ideas pioneered by Rumelt [9] and discussed by Levinthal [10] and Noda and Collis. [11] Hoopes, Madsen, and Walker [12] use the term competitive heterogeneity to describe the performance differences between close competitors. Hoopes et al. argue that the RBV is but one of many possible explanations for competitive heterogeneity. Thus, the title of their paper and special issue, "Why is there a RBV?" In addition to economics-based explanations noted above, Hoopes et al. point out that differing beliefs, preferences, and objectives lead firms pursuing similar customers to find and develop unique competitive positions.

Additionally, Hoopes et al. suggest that competitive advantage should be thought of in terms of each firm's economic contribution. [13] [12] Termed the V-C model, it is basically a bargaining model (see Tirole [14] ) over the surplus created by a firm's activities. A buyer and supplier bargain over the price (P) for a good that contributes a value (V) to the buyer and costs the supplier some amount (C) to produce. "Value is the price a buyer is willing to pay for a good absent competing products or services yet within budget constraints and considering other purchasing opportunities. Most work considers costs in terms of marginal cost. The good’s market price lies between value and cost. So, the buyer receives a surplus of value minus the price (V-P), and the supplier receives a profit of price minus cost (P-C). The supplier’s resources and capabilities, in turn, influence the value of the good to the buyer and/or the cost of producing it." [12] Also see Besanko, Dranove & Shanley,; [15] Ghemawat,; [16] Walker; [13] see also Postrel. [17] Under this theory, competitive advantage is deemed to be possessed by the firm who implements largest difference between value and cost when compared to rivals. This bargaining model has been further developed extensively in Johnson's account of economic opportunity rents [18] underpinning heterogeneous competition.

In summary, a theory of competitive heterogeneity seeks to explain why firms do not converge on a single best way of doing things as predicted by simple microeconomics. The RBV contains one approach. In recent years capability theories have expanded RBV logic. Recently, more work that focuses on heterogeneity has been published in strategy journals.

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In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessment of the internal and external environments in which the organization operates. Strategic management provides overall direction to an enterprise and involves specifying the organization's objectives, developing policies and plans to achieve those objectives, and then allocating resources to implement the plans. Academics and practicing managers have developed numerous models and frameworks to assist in strategic decision-making in the context of complex environments and competitive dynamics. Strategic management is not static in nature; the models can include a feedback loop to monitor execution and to inform the next round of planning.

In business, a competitive advantage is an attribute that allows an organization to outperform its competitors.

<span class="mw-page-title-main">Porter's five forces analysis</span> Framework to analyse level of competition within an industry

Porter's Five Forces Framework is a method of analysing the operating environment of a competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.

The following outline is provided as an overview of and topical guide to industrial organization:

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The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage.

The knowledge-based theory of the firm, or knowledge-based view (KBV), considers knowledge as an essentially important, scarce, and valuable resource in a firm. According to the knowledge-based theory of the firm, the possession of knowledge-based resources, known as intellectual capital, is essential in dynamic business environments. These resources contribute to lower costs, foster innovation and creativity, improve efficiencies, and deliver customer benefits. Collectively, they are considered key drivers of overall organizational performance. The proponents of the theory argue, that because knowledge-based resources are usually complex and difficult to imitate, different sources of knowledge and intellectual capital can be seen as the main sources for a sustainable competitive advantage.

<span class="mw-page-title-main">David Teece</span> New Zealand–American business academic

David John Teece is a New Zealand-born US-based organizational economist and the Professor in Global Business and director of the Tusher Center for the Management of Intellectual Capital at the Walter A. Haas School of Business at the University of California, Berkeley.

In organizational theory, dynamic capability is the capability of an organization to purposefully adapt an organization's resource base. The concept was defined by David Teece, Gary Pisano and Amy Shuen, in their 1997 paper Dynamic Capabilities and Strategic Management, as the firm’s ability to engage in adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment.

Capability management is the approach to the management of an organization, typically a business organization or firm, based on the "theory of the firm" as a collection of capabilities that may be exercised to earn revenues in the marketplace and compete with other firms in the industry. Capability management seeks to manage the stock of capabilities within the firm to ensure its position in the industry and its ongoing profitability and survival.

In management, the relational view by Jeffrey H. Dyer and Harbir Singh is a theory for considering networks and dyads of firms as the unit of analysis to explain relational rents, i.e., superior individual firm performance generated within that network/dyad. This view has later been extended by Lavie (2006).

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<i>Economics of Strategy</i>

Economics of Strategy is a textbook by David Besanko, David Dranove, Scott Schaefer, and Mark Shanley. The book offers a solid economic foundation for strategic analysis. The text was initially published in 1996 by John Wiley & Sons and, as of 2017, available in its seventh edition. Economics of Strategy is one of the leading books of its kind and has earned loyalty both as a classroom tool and as a professional reference book. The signature book covers feature famous impressionist paintings. The Economics of strategy, 5th édition has been translated into French by Thierry Burger-Helmchen, Julien Pénin and Caroline Hussler, under the title "Principes économiques de stratégie", edited by DeBoeck.

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<span class="mw-page-title-main">Jay Barney</span> American professor (born 1954)

Jay B. Barney is an American professor in strategic management at the University of Utah.

The composition-based view (CBV) was recently developed by Luo and Child (2015). It is a new theory that explicates the growth of firms without the benefit of resource advantages, proprietary technology, or market power. The CBV complements some existing theories such as resource-based view (RBV), resource management view, and dynamic capability – to create novel insights into the survival of firms that do not possess such strategic assets as original technologies and brands. It emphasizes how ordinary firms with ordinary resources may generate extraordinary results through their creative use of open resources and unique integrating capabilities, resulting in an enhanced speed and a high price-value ratio that are well suited to large numbers of low- to mid-end mass market consumers. The CBV has been commented as “a new view with significant application” for emerging market firms and for small and medium sized enterprises in many countries. The view cautions though that composition-generated advantages are temporary in nature and that composition itself mandates special skills in distinctively identifying, leveraging, and combining open or existing resources inside and outside the firm.

<span class="mw-page-title-main">Richard Rumelt</span> American professor (born 1942)

Richard Post Rumelt is an American emeritus professor at the University of California, Los Angeles Anderson School of Management. He joined the school in 1976 from Harvard Business School.

Organizational adaptation is a concept in organization theory and strategic management that is used to describe the relationship between an organization and its environment. The conceptual roots of organizational adaptation borrows ideas from organizational ecology, evolutionary economics, industrial and organizational psychology, and sociology. A systematic review of 50 years worth of literature defined organizational adaptation as "intentional decision-making undertaken by organizational members, leading to observable actions that aim to reduce the distance between an organization and its economic and institutional environments".

<span class="mw-page-title-main">Hart E. Posen</span> Canadian academic

Hart E. Posen is an academic, researcher, and business analyst. He is a Professor of Strategy and Entrepreneurship at Dartmouth College, Tuck School of Business.

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