New research shows a firm’s competitive advantage can last more than three times as long as previously believed and that companies with ‘higher-order’ resources can greatly outlast their competitors.
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, Wibbens created a mathematical model based on empirical data covering 4,000 firms in the United States over three decades.
In my research, ‘Performance persistence in the presence of higher-order resources’, published in the Strategic Management Journal, 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 & acquisition teams and innovation capabilities. With my model of the dynamics between resources and profits, I found that when both operating and higher-order resources were taken into account, firms enjoy a competitive advantage for 18 years on average.
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, such as strategic capabilities. 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.
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 (column a) is 5 years, about half the duration from the estimate of using the new model with only operating resources (column b). Adding the effect of higher-order resources (column c) 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.
From an academic perspective, one of the key contributions of the article is to distinctly define operating and higher order resources in a mathematically rigorous way. In addition to the findings based on the model and theory, this article shows academics how 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
In the article, I have suggested ways for managers to evaluate their own firms’ higher-order resources and build strategies based around their organisations’ unique resource strengths. 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.