COMPETITIVE ADVANTAGE

Competitive Advantage



Competitive Advantage

Introduction

Current models of competitive advantage emphasize economic factors as explanations for a firm's success but ignore sociocognitive factors. This paper integrates economic and cognitive perspectives, and shows how firms and constituents jointly construct the environments in which firms compete. We argue that competitive advantage is a systemic outcome that develops as firms and constituents participate in six processes that entail, not only use and exchange of resources, but also communication about and interpretations of those exchanges. The interpre-tations that firms and constituents make of competitive interactions affect decisions about how to exchange and use resources. As interpretations and evaluations of a given firm fluctuate, so do the resources the firm has access to and its competitive advantage in the marketplace. The actions and interpretations of constituents and rivals produce the shifting terrain on which competition unfolds. We illustrate these dynamics with a discussion of IBM's changing competi-tive advantage in the computer industry in the 1980s.

Discussion

For most of this century, IBM has inspired awe among managers and researchers alike for the market power it achieved. Over the years, the company erected formidable entry barriers in the mainframe market from extensive research, pro-prietary product design, scale economies, and the interalization of large network externalities achieved through standard-settinga nd customer service (Bain,1956).Strat-egy researchers working from the structure-conduct-performancep aradigmw ould argue that the structureo f the computeri ndustrya nd IBM's near-monopolyp osition in it was clearly the source of its much-envied competitive advantage

In recent years, a second view has gained prominence in strategy research-the resource-based theory of the firm. It points instead to the unique bundle of resources that IBM commanded and to the spectrum of economic rents associated with those resources (Bain,1956).Working from this perspec-tive, researchers would draw attention to the Nobel prizewinners on IBM's R&D staff or to its superbly trained sales force in order to demon-stratet hat scarcer esourcesh ave generatedR icard-ian rents, whereas superior use of resources has generated Pareto rents for IBM. The company itself recognized the importance of its resource base in its 1982 annual report.

THE COMPETITIVE TERRAIN

Competitive advantage derives from activities that span the four domains of action described in Figure 1. These four domains of the competitive terrain derive from two dimensions. The first dimension distinguishes the material and interpretational domains. It contrasts the emphasis by traditional strategy research on the role of material resources with the burgeoning literature that highlights how individual, group, and industry-level interpretational processes affect strategic interactions. Cognitive simplifi-cation , competitive blindspots, competitive categorization industry recipes , industry mindsets (Bain,1956)are known to bias, constrain, channel, and otherwise influence how managers perceive their environments and make strategic choices.

In this view, the competitive terrain is defined, not only by the resource conditions in various markets and potential rents associated with them but also by the knowledge, expectations, and sensemaking of firms' managers and of con-stituents that interact with firms in an industry. Sensemaking (Zajac,1991)in industries com-prises comprehending, understanding, explaining, attributing, extrapolating, predicting and-ultimately-deciding to engage in exchanges and to ...