Chapter 3: Internal Analysis: Strengths, Weaknesses, and Competitive Advantage
Opening Case: Disney: No Mickey Mouse Company When most of us think of the Disney Company, we think of Mickey Mouse, Disneys oldest and most important in a long line of memorable characters. As the companys spokesman, he appears prominently on the Disney home page. 1 Everyone knows Mickey, but few know the story of Mickeys birth; even fewer understand how Mickeys birth in 1928 helped create a set of resources and capabilities that continue to drive profits for Disney more than 85 years later. In 1923, Walt Disney and his brother Roy settled in Burbank, California. They created the Disney Brothers Cartoon Studio to capitalize on a series of Laugh-O-Gram animations that Walt had produced in their hometown of Kansas City. Later that year, movie distributor Margaret Winkler contracted with the new studio to produce a series of single-reel cartoons based on a character from Walts first movie, Alices Wonderland. 2 After 56 successful episodes of the Alice Comedies, Winklers husband Charles Mintz contracted with the Disneys in 1927 to produce a new character, Oswald the Lucky Rabbit. Oswald quickly gained popularity, due in large part to the Disneys insistence on quality drawing and animation sequences known as the illusion of life, which enabled characters to move smoothly, like real humans. 3 In 1928, Walt and his wife Lilly headed east to negotiate with Mintz for more money to expand the successful series. They were met with a shock when they arrived in New York. Not only would Mintz not pay more, he 2
fired Walt! Mintz held the rights to the Oswald character, and he set out to produce Oswald without the Disney brothers. Crushed at the loss of their main character and income source, Walt and Lilly boarded the cross-country train to return to Hollywood. Lilly recalled, Walt showed me some of his sketches on the train coming home. They were cute little things; they could do anything. I asked him what he was going to call the character. Mortimer Mouse, he said. I said, That doesnt sound very good, and then I came up with Mickey Mouse. 4 That mouse, conceived in adversity, would soon lead his creator to prosperity. Mickeys public debut in Steamboat Willie in late 1928 introduced not only a cute mouse performing laughable antics, but also a company incorporating the latest technology to bring its stories to life. Sound was just beginning to make inroads in Hollywood, and Steamboat Willie represented the first synchronous sound movie. Mickeys motions and voice were perfectly timed with the music and audio in the cartoon, a major advance in motion pictures. The Disneys learned well from Charles Mintz the importance of owning, not just creating, characters. Ownership of their most important resources allowed the brothers to control the use of characters by licensing the images to others. Walt entered his first licensing agreement in 1929 with a stationary company that produced Mickey Mouse emblazoned notecards. By the time WWII broke out in 1942, Disney earned 10 percent of its revenue from licensing. 5
Mickey Mouses combination of a lovable character and cutting edge technology became a Disney hallmark. The company pioneered a series of firsts: Technicolor, used for the first time in a film in 1938s Snow White and the Seven Dwarfs. 3
The use of a multi-plane camera that enhanced the illusion-of-life artistry. A precursor to modern surround-sound technology. Debuted in the 1940 film Fantasia, this innovative technology would not spread industry wide for another two decades! 6
Walts capability to innovate continued throughout his career. He realized the potential of television in its infancy, and on October 27, 1954 the first episode of Disneyland aired. The show would later become Disneys Wonderful World of Color to capitalize on the potential of color television. And, it would last. In some version, new Disney programming has been on weekly network television for more than 60 years. Walt entered the world of television in order to fund his grandest innovation of all: The countrys first destination theme park. Disneyland opened in July of 1955 on 270 acres of land in Orange County, California. 7 Disneyland defied all skeptics and proved a huge success from the day it opened. The park combined the companys skills in engineering and entertainment. In fact, Walt called his designers imagineers. Walts almost maniacal focus on creating a clean setting also helped to set Disneyland apart from the myriad local amusement parks that constituted the competition. Local Ferris wheels and roller coasters were no substitute for Magic Mountain or the Tea Cups, and the clean, inviting family atmosphere proved difficult for cash-strapped local parks to imitate. Overview Why did the Walt Disney Company become such a great success? The Disney brothers built a set of unique resources and capabilities that enabled them to carve out a successful niche in animated shorts and then parlay that success into feature films, merchandising, television, and theme parks. External analysis, the focus of Chapter 2, helps managers answer the question, Where could we compete? Choosing an attractive industry environment certainly helps, 4
but competitive advantage requires a match between external opportunities and the internal characteristics of the firm. Managers sometimes have little control over the industry structure or environmental opportunities and threats, but they have lots of control over what goes on inside their firms. The Disney story, from a strategic perspective, captures the essence and power of a firms internal abilities, the resources and capabilities that can create and sustain a competitive advantage. The Disneys young studio survived and eventually flourished in spite of a harsh industry environment. Large integrated studios such as Metro Goldwyn Mayer (MGM), United Artists, and others competed fiercely, and the industry produced over 800 films a year throughout the 1920s. 8
When micro-economists study markets, they assume that all firms in a market are homogeneous, or alike. In such a world, internal analysis would be a fruitless exercise because any differences among firms performance would arise from industry-level factors. Strategists, however, assume that firms are heterogeneous, or varied. Firms vary in meaningful ways along significant factors of production, the critical inputs they use and the activities they engage in to create products and services. Those differences may translate into abilities to produce products or services at lower cost (Chapter 4), to meet customer needs in unique ways (see Chapter 5), to cooperate more efficiently with partners (Chapter 8), or to compete in global markets more effectively (Chapter 10). The strategists view of firms as heterogeneous has one other, huge, implication: Not all firms in an industry will not all earn the same level of profits; some firms will earn better profit returns than their rivals. For example, Figure 3.1 displays the five-year operating profitability of Disney and its competitors in filmed entertainment 9 . As you can see, these firms earn very different rates of operating profit as a percentage of sales. 5
The concepts and tools in this chapter will help you to evaluate a firms internal abilities in order to answer the question, How can a firm create unique value for all the firms stakeholders? The first section of the chapter explains how firms create competitive advantages over rivals, and the second section discusses the sustainability of those advantages over time. Internal analysis seeks to allow informed and meaningful judgments about a companys ability to win in its market, both in time (during any year or product cycle) and over time (as long as a decade or longer) 10 . Winning in time means that a firm has a competitive advantage; winning over time requires that advantage to be sustainable. We end the chapter by describing how to use a tool called the Company Diamond to create a meaningful visual model of the internal attributes that underlie a firms competitive advantages. As weve mentioned, strategists assume that firms differ. How can we describe those differences in a clear way that highlight how they contribute to the overall strategy? The value chain provides a logical way to divide the firm into important strategic activities. 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% News Corp Disney Time Warner Viacom NBCUniversal O p e r a t i n g
P e r c e n t a g e
Company Figure 3.1: Operating Profit average, 2008 to 2012, Filmed Entertainment Source: Company 10 K filings 6
The Value Chain Figure 3.2 displays the value chain. Developed by Michael Porter, the value chain is a way to depict and evaluate the activities a company performs. The horizontal elements in Figure 3.2 capture the production process that a firm uses to acquire and import raw materials, transform them into valuable outputs, and put them in the hands of customers. The vertical axis represents four administrative elementsfirm infrastructure, human resource management, technology development, and procurementthat span all of the firms economic activities. Porters value chain not only gives you a framework to describe the activities a company performs, it also can help you to identify which activities represent the firms competitive strengths and weaknesses. Wal-Marts sophisticated information system is part of both firm infrastructure and technology development activities. The system gives Wal-Mart an advantage in inbound logistics because it can find low-cost ways to move products from its suppliers to warehouses, and in outbound logistics, when it uses the same systems to move products at low cost to its retail stores. High-end retailer Nordstroms legendary return policy is part of its core activities in marketing and sales as well as after-sales service. The 7
ability to return virtually any Nordstrom item with no receipt and no questions asked creates unique value for customers. Apples dominance in its markets can be traced to its strengths in the support activities of technology development and procurement. It designs easy-to-use products and procures unique raw materials such Cornings ultra-strong Gorilla Glass. 11 Apples iTunes website and unique and trendy Apple Stores showcase its strengths in operations. The company is also well-known for its strong marketing and sales, including its sleek logo and advertising campaigns featuring silhouetted dancers and white ear buds have made Apple products a must have image product for billions across the globe. Disneys early strength, as the opening case indicated, came in operations, via its illusion-of-life cartooning process and innovative film production, both of which were enabled by the companys technological development. The company later developed a world-class brand identity that now gives it strength in marketing and sales. The value chain helps you identify areas in which a firm has an absolute strength, but provides no guidance about strength relative to competitors. So, you can use the value chain to answer the important question, What is a firm good at? But, you cant use it to answer the critical question, What is the firm better at than relevant competitors? Well help you answer the second question through two processes. First, well define a set of conceptsresources, capabilities, and prioritiesto help you understand in a deep way the sources of a firms strengths. Second, well introduce you to VRIO thinking, a way of measuring the magnitude and durability of a firms strengths versus competitive rivals.
8
The Resource-Based View We can think about resources, capabilities and priorities as answers to basic questions that firms face. Resources are the specific whats that a firm employs to create value and competitive advantage. Capabilities represent how firms do things, the processes they use. Priorities are the whys that determine how firms allocate critical resources to achieve key objectives. 12
Resources Resources provide the answer to the question, What creates the firms strengths? An early definition proposes that resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness. 13 This definition clearly identifies what could be a resource, but its breadth makes it difficult to use in practice. Most resources are, or could be, counted and quantified on a firms balance sheet as assets. Accountants classify resources as tangible or intangible assets. Tangible resources are those with physical presence, such as land, factories, machinery, equipment, or cash. Intangible resources are economically valuable assets which do not have physical presence, and include brands, licenses patents, knowledge, and reputation. 14
Four categories of resources are important contributors to competitive advantage: Physical resources, such as plant or equipment Financial resources, such as free cash flow Human resources, including employee and management skills and talents 9
Intangible resources, the intangible assets held by firms, such as brands and patents Resources enable the operational and support/administrative activities that you identified in the value chain. Nordstrom could not have any operations without the physical resources of stores or a website for customers to visit, or without the financial resources of cash or credit to purchase inventory. Similarly, without the human resources of salespeople and the intangible resource of a strong brand, there would be no excellent customer service, which gives Nordstrom its strength in marketing and sales. Finally, without the intangible resource of Nordstroms culture contributes to the firms infrastructure, and the human resource of its training programs, the shopping experience would provide little of the satisfaction that customers have come to expect. Resources contribute to a firms strengths because resources are used to create valuable products or services. The importance of resources was highlighted in the early 1800s by economist David Ricardo. Ricardo noted that the amount of labor farmers needed to produce one bushel of corn was fairly constant but that the land upon which grain was raised differed in quality and productivity. 15 Farmers who owned the most fertile, well- watered, and easily accessible land, produced more grain with the same labor than farmers with poor land. Ricardo referred to the difference in their output as rent. Modern strategists use the term Ricardian rents to describe the competitive advantages and high profit returns available to companies because they own or control assets or resources that are more valuable than those of competitors. 16 Those resources may be land, buildings, patents, machines, or people. The job of strategists is to make sure their firms find and own the most valuable resources, allowing the firm to capture Ricardian rents. 10
Capabilities Capabilities are processes that the firm has developed to coordinate human activity in order to achieve specific goals. McDonalds corporation holds a commanding 24 percent market share in the U. S. fast-food industry, nearly four times as large as rival Wendys. 17
McDonalds operates more than 33,000 stores worldwide, many of them in highly accessible locations, such as freeway off-ramps, or attractive downtown and mall locations. The stores themselves are resources. But, McDonalds has also developed a set of operating capabilities, or processes, that it implements in each of these stores. The companys ability to fill customers orders at industry-leading speed exemplifies a capability, one at the heart of what makes McDonalds successful. This capability involves several discrete steps: procuring customer orders, communicating the orders to those who cook the food, cooking the food, packaging it, and delivering it to the customer. This process is repeated hundreds of times a day at all 33,000 individual store locations, leading to high store-level capability for fast-food turnaround. Competitive advantage relies on a strong set of operating capabilities. A firms advantage becomes stronger if it develops dynamic capabilities, processes that are designed to continuously expand existing resources or to improve or modify operating capabilities. 18 Dynamic capabilities are practiced and refined over time and through repetition. For example, Procter and Gamble has many brand resources, such as Crest and Tide. But it also has been through the process of creating a new brand many times. Through repetition, P&G has refined its capability to create new brands to the point that it now has a dynamic capability that can help it expand its existing brand resources with new additions, such as the Swiffer. 11
Dynamic capabilities can help firms modify and evolve processes to keep pace with environmental changes or to utilize new technologies. They can also enable firms to incorporate learning into their processes. For example, P&G used its formidable skill in brand management to create value in its purchase of Gillette, helping the consumer products company introduce a string of new brands such as Fusion for men and Venus for women brands. Companies with strong dynamic capabilities have a more secure foundation for competitive advantage than those without them, for two reasons. First, dynamic capabilities entail complex connections and coordination among different internal units within the firm. For example, finding the optimal site for a restaurant requires input from marketing about demographic information and target customer segments; the corporate counsel about sales contracts and local regulations; and real estate professionals skilled at identifying, negotiating, and closing on properties. Companies that have developed strong coordination processes are likely to also gain the competitive advantage of good restaurant locations. Second, dynamic capabilities take time to develop and require significant learning. Processes or routines represent deeply engrained, often tacit, habits of behavior that take years for companies to perfect. As firms and their managers master the ongoing process of learning and adjustment in the face of environmental change, they develop a formidable set of dynamic capabilities. 19 Read more about one of Disneys critical dynamic capabilities, the ability to protect its intellectual property, in the Strategy in the Real World feature.
12
Strategy in the Real World: Preserving Disneys Capabilities: Dont Mess with the Mouse!
Walt learned early about the importance of copyrights to his characters, and over the years, his company developed a set of dynamic capabilities to protect those resources. 20 Those capabilities paid huge dividends in 1998.
Steamboat Willie, aka Mickey Mouse, debuted on screen in 1928. Under existing copyright law, Disneys copyright protection on the fabled mouse would expire in 2003, 75 years after the characters origination. In 1988, Disney led a group of Hollywood studios, music labels, and other content owners in the entertainment business to successfully lobby Congress to extend the copyright protection on Mickey, and other characters created between 1923 and 1978, for another 20 years. 21
With so much riding on the mouse and his friends, Disney makes every effort to safeguard its property. The rise of YouTube and other user- generated content (UGC) sites has presented a new front in the copyright wars. Users can upload content to these sites whether or not they have rights to the material. Disney recognized this threat early and realized the resulting legal battle would be global, long-running, and very, very expensive. Rather than threaten YouTube and other technology providers, Disney General Counsel Alan Braverman decided on a different strategy: Disney would agree not to sue UGC sites as long as those sites worked to scrub copyrighted content on their own. 22 The delicate negotiations took over a year, but industry giants Disney, Microsoft, Viacom, Myspace, NBC, Dailymotion, and Chinese UGC site Youku.com agreed to a set of rules to protect content copyrights.
Priorities Resources and capabilities help firms create and deliver unique value. So what drives the choices of which resources and capabilities a firm should invest money and time to try to build? The answer is priorities, which are a firms ranking of the tasks, projects, or principles that are most important. Priorities answer the question what matters most? and are driven by a companys underlying values, its leaders beliefs what is right and wrong, good and bad, desirable and undesirable. 20 th Century management guru Peter 13
Drucker described values as the ultimate test for action. 23 Drucker noted that corporate decisions about hiring from the inside or outside, a companys stance about the importance of R&D, marketing, or any other function look like technical questions of strategy; however, they are really questions about what companies, and their leaders, truly value. Values lead to priorities that help executives make decisions. Priorities drive the creation of resources and capabilities in two ways. First, priorities guide resource allocation processes such as capital investment, human capital acquisition and training, and brand development. Second, priorities maintain those allocations over time when things get tough. Toyota, the worlds leading automobile maker, operates on the core value of respect for four constituencies: society (the laws and cultures of the markets where they operate), customers, employees, and the natural environment. Respect for customers has led the company to make quality a priority. For example, Toyota hires more engineers than competitors do, in order to focus specifically on quality. Respect for the natural environment led to a set of priorities and investments that resulted in the Prius, the worlds first hybrid fuel vehicle produced at large scale. 24 Read in the Strategy in the Real World feature how priorities influenced the design of a new headquarters building for Pixar Studios (then a Disney partner, now a Disney subsidiary). Strategy in the Real World: Priorities at Pixar When Steve Jobs bought Pixar Animation Studios in 1986, he refocused the company, away from its founding focus on high-tech hardware, and further in a direction it had already started, toward creating computer- generated animations that would sell. The refocus was critically, as well as financially successful. In the same year of Jobs purchase, Pixars short film Luxo Jr. (reminiscent of Disney and Steamboat Willie) received an Oscar nomination. Two years later, the companys Tin Toy won the Oscar for best animated short film. Thus began a run of Oscar-winning films that included the feature-length movies Toy Story, A Bugs Life, and others. 14
Jobs valued innovation and creativity, and he believed they were the keys to Pixars success. Jobs also believed that innovation is sparked when individual creative people can spontaneously get together with one another and share ideas. As Jobs oversaw the design of the new Pixar Studios building he made sure that the architecture itself would reinforce his values, by making interaction among employees a design priority. As Jobs biographer Walter Isaacson recounts:
The headquarters was to be a place that promoted encounters and unplanned collaborations. Pixars campus design originally separated different employee disciplines into different buildings one for computer scientists, another for animators, and a third building for everybody else. But because Jobs was fanatic about these unplanned collaborations, he envisioned a campus where these encounters could take place, and his design included a great atrium space that acts as a central hub for the campus.
Brad Bird, director of The Incredibles and Ratatouille, said of the space, The atrium initially might seem like a waste of spaceBut Steve realized that when people run into each other, when they make eye contact, things happen.
And did it work? Steves theory worked from day one, said John Lasseter, Pixars chief creative officer Ive never seen a building that promoted collaboration and creativity as well as this one. 25
At Pixar, values favoring creative collaborations led to a design priority: interaction. Building a workspace that promoted these interactions maintains and enhances Pixars rich capabilities for innovation in both technical design and storytelling. These capabilities, in turn, drive the creation of valuable resources, including Pixars Oscar-winning films.
Creating a Sustainable Competitive Advantage: The VRIO Model of Sustainability Walt Disneys experiences with Oswald the Rabbit illustrate the difference between having a competitive advantage and sustaining that advantage through time. Oswald incorporated many of Walts cartoon illusion-of-life animation techniques. The first cartoons were both profitable and promising of a strong future. However, Oswald lacked sustainability. For Walt Disney, the Oswald advantage was unsustainable because he didnt own the rights to the character. Charles Mintz proved unable to sustain Oswald because 15
Mintz lacked the capability to keep Oswald alive the way Disney kept Mickey Mouse alive through products, TV shows, and theme park. Oswalds life on film ended in 1943, shortly after Disney gave birth to Bambi, Dumbo, and Pinocchio. 26 Walt Disney lost a valuable competitive asset when Mintz enforced his ownership of the copyright on Walts fateful trip to New York, but Mintz lacked the capability to sustain the character he had captured. Competitive advantages arise when resources or capabilities possess two attributes: Value and rareness. Two other principles determine the durability, or sustainability, of competitive advantage: Inimitability, the characteristics that make a resource or capability difficult to imitate, and an organizations ability to exploit profit returns generated by its unique and valuable resources. Together, these four characteristicsvalue, rareness, inimitability, and organization to exploit profitsare often abbreviated as VRIO. Well examine each one in turn. Value Mickey Mouse earned returns for Disney and allowed the company to grow because he created value for film distributors and viewers. Value denotes worth to someone and for strategists that someone is the firms customer. Customers only find value in the companys products or services when they create pleasure, satisfaction, or happiness for them. Users wont pay for products or services without value. In fact, a fundamental premise of our economic system holds that the price someone will pay for a good depends on the value that good produces: The higher the value, the higher the price that buyers are willing to pay. Although not an absolute rule, resources and capabilities that allow firms to produce and sell at lower costs than their rivals may produce pleasure for users, but low costs also 16
provide indirect benefits to consumers. Purchasing products and services at low cost leaves users with more money to spend on additional, other things that directly provide them pleasure or satisfaction. Similarly, products or services that are different in some significant way from competing ones will create direct pleasure or satisfaction for customers. Resources that help a firm create such differentiated products and services have value to the firm. (Chapter 4 discusses how firms can create cost leadership strategies and Chapter 5 considers differentiation.) Rarity To be rare is to be uncommon, or not held by others. Unique is often used as a synonym for rare. Disneys illusion-of-life animation technology represented a rare capability throughout much of Disneys history. So did Walts ability to create films that told good stories and his visionary use of technology. Rare or unique resources create competitive advantage through a basic principle of economics: Scarcity. When products or services are scarce, or few, users become willing to pay a higher price for them than they would be if the same products or services were more commonly available, leading to higher company profits. Inimitability Inimitability is the extent to which competitors cannot reproduce the unique value created by a product. Mickey Mouse was inimitable for two reasons. First, copyright laws protected the mouses image. Second, Disneys capabilities in creating the illusion of life meant that imitators couldnt create a mouse with the same lifelike motions. Several factors drive inimitability, thereby acting as barriers to imitation. Well describe each one below. 17
Path dependence. Path dependence means that the process through which a resource or capability came into being may make it difficult for competitors to imitate. During World War II, British aerospace companies focused on building small fighter planes while Boeing, the American company, built many large bombers and tankers. After the war, Boeing leveraged its learning and investments in large aircraft to introduce the first truly successful commercial jetliner, the 707, in late 1957. 27 A British company, De Havilland, actually developed the first commercial jet aircraft, the Comet. However, the Comet failed because De Havilland simply wasnt as far along the learning curve on designing or building large aircraft that could safely fly passengers. Path dependence helps to block imitation when resources or capabilities follow a sequential development path, for example when previous investments enable later ones, or when significant learning underlies the resource or capability. Tacit Knowledge. For many processes, such as cooking French fries at McDonalds, the actions needed to imitate the sequence can be codified, or written down like a recipe, and easily learned by others. Such easy to codify and learn knowledge is referred to as explicit knowledge. Tacit knowledge is just the opposite. Many valuable skills and processes, such as Walt Disneys ability to choose good stories or Steve Jobs ability to spot great design in a product, cant be learned easily, if they can be learned at all. 28 These skills are difficult, even impossible, to learn, teach, or coach because they are based upon tacit knowledge. Tacit knowledge is sticky, or immobile, and difficult to imitate by competitors. Causal Ambiguity. Causality refers to the notion that one thing causes another: A leads to B. Sometimes, however, the causal relationship is unclear, or ambiguous; the 18
relationship between Variable A and Outcome B is difficult to disentangle. 29 You may have learned in statistics courses that correlation does not equal causation; just because A and B appear together does not mean that A causes B. Steve Jobs studied calligraphy at Reed College and yogic meditation from gurus in India. Jobs credited these two experiences as highly influential in his aesthetic abilities, but most entrepreneurs will not find that calligraphy classes or meditation trips to India bestow upon them the same aesthetic abilities that Jobs possessed. Complexity. Resources, capabilities, and priorities become difficult for competitors to imitate when they span the organization or contain many interrelated elements; in a word, when they exhibit substantial complexity. Creating synchronous sound for Steamboat Willie proved a complex task in 1927. Walt learned that the key lay in timing the cartoon framing and motion with the beat of the music (12 frames and beats per minute). Today, much of Disneys competitive advantage rests on the complex interplay between film production, distribution in theaters and television, branding, merchandising, and theme park management. NBC Universal has similar resources, but its profit rate is only about one-fourth of Disneys. Disney mastered the complex art of managing multiple, interrelated business over several decades, while NBC Universal combined these resources through a merger. Time Compression Dis-economies. Timing is crucial in the development or deployment of many resources, capabilities, or priorities. 30 If a project requires a $20 million investment over two years, time compression diseconomies mean you cant get the same results by spending $40 million in one year. Resources that are likely to be subject to time compression diseconomies include those that rely on natural or physical processes, 19
such as biological growth limits in biotechnology and pharmaceutical research or forestry; differences in individual or organizational abilities to learn; 31 or feedback, such as customer responses to new products. Network effects and first-mover advantages. Recall from Chapter 2 that much of the reason eBay is so successful has to do with network effects, which economists call positive network externalities. If you want to sell your old stuff, where do you want to sell? Some place where there are lots of potential buyers. If you want to buy stuff, where would you look? In a place with lots of sellers! eBay wins because of its network effect: More sellers attract more buyers, who in turn attract more sellers. Its a virtuous circle. As eBay grows, other online auction sites become less valuable because everyone wants to be where they have the greatest exposure or selection. Network effects represent a specific form of a first-mover advantage. 32 eBay has been able to lock up the best sellers and most active buyers for its site because it was the first mover in the market. Being the second to enter is difficult, as eBay learned in Japan, where it exited the market because Yahoos auction site had captured the first-mover advantage. 33 First movers establish a number of advantages. In addition to customers, they can lock up other resources, such as locations, patents, or scarce raw material inputs, They can establish long-term contracts with customers. They can set industry standards that favor their products. These actions make it difficult for rivals to profitably imitate the first mover. Organized to Exploit A firm may employ valuable, rare, and difficult to imitate resources and yet still lack a sustainable competitive advantage because the firm may not be organized to exploit the 20
Ricardian Rents from these resources. 34 Consider National Football League (NFL) players. Payments from television networks for the rights to broadcast NFL games have grown from $47 million per year in 1970 to just over $4 billion each year in 2012, a compound annual growth rate of an impressive 12 percent. Over that same period, the players share of revenue has jumped from 35 percent in 1970 to 57 percent in 2011. 35 How were players able to increase their share of this huge pie by over 60 percent? Before 1970, the NFL Players Association (NFLPA) had been a weak collection of player representatives. During the 1970s, however, the NFLPA emerged as a true, well- organized union, capable of engaging owners in meaningful contract negotiations backed up by credible threats of strikes and legal action. The contracts the NFLPA negotiated for its members have garnered an increasing percentage of a growing revenue pie. The NFLPAs stronger organization enhanced both its legal standing and administrative abilities, allowing players to capture the Ricardian Rents from their valuable, rare, and inimitable resources. Assessing Competitive Advantage with VRIO Figure 3.3 shows the relationships between VRIO attributes of resources or capabilities and competitive advantage. You can assess the strength and durability of a companys position by answering a yes or no question for each element in the matrix. Both resources and capabilities should be subjected to the VRIO questions to determine the strength of a companys competitive advantage. 21
As Figure 3.3 shows, in the real world, firms that cant create value for their stakeholders dont survive. These businesses experience competitive failure. Many companies, especially new start-ups, introduce valuable products that are also unique and rare and enjoy a period of competitive advantage. The combination of value and uniqueness create a short-run competitive advantage in time for a firm. Over time, however, competitors imitate these resources and create competitive parity in the industry. To create competitive advantage in the long runan advantage that endures over several yearsa firm must create barriers to imitation. Barriers make it difficult for competitors to offer similar products or services, drive prices down, and dissipate the firms superior profits. Barriers to imitation provide a potentially durable advantage literally, a sustain-able competitive advantage. Moving from sustain-ability to sustainability requires an organizational structure and design that captures the value from 22
resources and capabilities. Companies that realize sustained competitive advantage combine the legal elements, such as contracts or intellectual property rights; administrative elements, including organizational structure; and cultural elements, such as norms regarding rewards and what constitutes equity that allow them to capture high profits that come from their valuable, rare and inimitable resources, capabilities, or priorities. Managers may work hard to create resources and capabilities that are VRIO, only to then witness changes in technology, consumer tastes and preferences, government regulations, or other forces that imperil their source of competitive advantage. The Strategy in the Real World feature describes how Disney responded when a new technology for cartooning presented a threat to its sources of competitive advantage. Strategy in the Real World: Disney Responds to a Competitive Threat Disneys competitive advantage since the 1920s arose from the companys ability to combine illusion-of-life animation and the latest technological advances with classic stories. Steamboat Willie, which pioneered synchronous sound Fantasia, which debuted Technicolor; and Snow White, the first full-length animated feature film, all still stand as classics. Modern classics, including The Little Mermaid, The Lion King, and Beauty and the Beast, built upon and reinforced Disneys valuable, rare, and difficult to imitate brand and character resources, as well as its story-telling capabilities.
Eventually, however, a leapfrog technological innovation threatened Disneys core source of competitive advantage. In 1986, Pixar Animation Studios secured its first Oscar nomination for its animated short film, Luxo, Jr. The wonderful, family-friendly story of a small lamp signaled that computer generated animation (CGA), coupled with a great story line, could prove a viable competitor to Disneys illusion-of-life capability.
With the development of its RenderMan software in 1987 36 , Pixar could produce settings that looked absolutely real, said Pixar director John Lasseter. 37 Pixar used this new technology to produce a series of blockbuster hits, including Toy Story, Toy Story 2, Monsters Inc., The Incredibles, and Wall- 23
E. Wired magazine would later peg Lasseter as the next Walt Disney. 38
Disney had used CGA since the production of Tron in 1982, but only as a complement to, never a substitute for, hand-drawn animation.
Disney lacked the in-house skill or software to compete with Pixar. The company also found itself boxed in strategically. Mickey Mouse turned 60 in 1987, and the Disney brand evoked images of family entertainment. Furthermore, the look and feel of its animated character family appealed more to children than to teenagers or adults. CGA posed a threat to Disneys brand and character resources and to its illusion-of-life and storytelling capabilities.
How did Disney respond? At first Disney captured a percentage of Pixars profits by partnering with Pixar, providing distribution for Pixar films, as well as financial resources for production and marketing. In return, Disney received a percentage of the films profits. The partnership prospered through six movies, including the blockbusters just mentioned.
During the time it partnered with Pixar, Disneys own films, built around its illusion-of-life animation, such as Treasure Planet, were mostly unsuccessful. Eventually, Disney decided it needed to own Pixars cutting- edge CGA capabilities. In 2006, Disney finally bought Pixar for $7.5 billion, adding Pixars capabilities to its own pool of Disney capabilities.
The Company Diamond: A Tool for Assessing Competitive Advantage Weve introduced some important concepts to help you understand how a companys internal resources and capabilities may allow it to deliver unique value and achieve superior performance. Internal analysis depends on more than concepts, however, and so now we present an analytical process and tool that allow you to identify and catalog a firms potential for sustained competitive advantage. The Company Diamond tool will help you in the academic work of this course, but it will prove even more valuable as you decide whether to invest in or work for a particular company. You can also use the diamond after you take a job, when you work on teams assigned to create strategy for your 24
company or to understand the strategic strengths of your competitors. This tool will prove particularly helpful should you want to start your own company. The diamond also invokes a powerful metaphor about internal sources of competitive advantage. Diamonds are valuable, but the creation of that value depends on the actions of people and organizations. The diamonds you see in a jewelry store have been taken from their original, raw state and cut, shaped, and graded to increase their value. Companies create sustainable competitive advantages by taking raw factors or production and molding them into VRIO resources and capabilities. Figure 3.4 illustrates the Company Diamond. The diamond shape helps you to integrate the different internal elements that create layers of competitive advantage. 39 In the top layer are the activities that create strengths and weaknesses. Resources and capabilities lie below, in the center layer, because they lay the foundation for and fuel the activities in the top layer. The bottom of the diamondthe deepest driver of competitive advantagecaptures the values and priorities that guide the development of resources and capabilities. The numbered questions can be answered in order to help you move down the diamond to discover the different sources of competitive advantage for a company. When you are finished gathering and analyzing data to answer them, you should be able to draw a diamond or create a table for the company that provides a robust and detailed picture of the companys strategic advantages. 25
Gathering Data for Company Diamond Analysis Data to complete a diamond profile may come from a number of sources. You can use three main types of data: Archival data - Written or numeric information that you can find in the library or on the Internet Interviews Interviews can range from personal questions to impersonal surveys. Observation Your own experiences, such as visits or use of products or services If you want to create a Diamond profile for a private company, you may find very little archival data, but you may find it simpler to locate people willing to grant interviews or to directly observe the company. For public companies, the reverse often proves true. 26
Abundant archival data exists, but company firewalls make interviews difficult and the size of the company means that observations provide only a limited view of the company. Appendix 1 helps you know what to look for as you perform a Diamond analysis, and Appendix 2 describes in detail different data sources you can use to do the analysis. As you gather data and use the questions to sort and categorize what you find, remember the GIGO principle from computer programming: Garbage in; garbage out. Stated more elegantly, the more attention you pay to gathering, verifying, and comparing the data, the richer, more robust, and more insightful your finished product will be. You should always rely on at least two types of data (e.g., archival records and interviews), and use multiple sources of data within each type. For each strength, weakness, resource, capability, value, or priority that you identify, include the source from which you drew your data. If your data all comes from a single source such as a website, Business Week, Fortune, or Wall Street Journal article, then your diamond will be weaker than if drawn from multiple sources. Tapping other data sources, such as doing an interview or scheduling a plant visit, may seem daunting, but doing so will pay great dividends in creating a richer, more complete profile of the company. Be very careful to balance your data sources. Dont rely exclusively on data provided by the company or solely on data that comes from the companys detractors. Both have a point of view that differs from the real company. If you are thinking about accepting a job with a company, or one of its competitors, youll want to dedicate significant time and energy to developing the richest diamond you can. Using the Company Diamond 27
You can use the diamond to focus on a companys strengths or its weaknesses. It is often simpler to create a separate analysis for strengths and weaknesses as a first step. Table 3.1 shows the results of a simple Diamond Analysis to compare the strengths of two excellent national retailers: Wal-Mart and Nordstrom. As you can see from the table, both Wal-Mart and Nordstrom have clearly identifiable strengths that customers, suppliers, and others can readily see. Company Questions Wal-Mart Nordstrom What is company good at? Low prices Customer service What resources and capabilities create those strengths? Stores located in rural areas Number of stores Logistics, planning Distribution centers IT systems Pricing policies
Posh stores Talented staff In-store Merchandising Selection and retention of staff
How does the company create value for customers? Low prices enable customers to purchase more total items,
Pleasure and satisfaction through the shopping experience and the goods purchased 28
What priorities support/ sustain those resources and capabilities? Frugality Striving for excellence Outstanding service Empowered employees Competitive Advantage Rare? Yes size and scale Yesreputation/brand Inimitable? Yescomplexity Yescausal ambiguity Organized to exploit? Yescentralized Yesdecentralized Sources: Author interviews with selected organizational members, store visits and tours, various articles in popular press such as The New York Times, Wall Street Journal, Business Week, Fortune, and Forbes.
What if you wanted to create a Diamond profile to focus on a companys weaknesses? Consider Sears Holdings, the company created by the 2004 merger of Sears and K-Mart. K- Mart began operations in the late 19 th Century and was a competitor of Wal-Mart until Wal- Mart drove them into bankruptcy. Sears opened its first retail store in 1925 and enjoyed a run as Americas largest retailer through most of the 20 th Century. A visit to a Sears store would allow you to observe both the companys strengths and weaknesses. Sears boasts a broad line of major national brands and some very famous house brands, including Kenmore appliances and Craftsman tools. Sears offers its goods at multiple price points. 40 However, while you would see a broad selection, you would also likely see a store with outmoded lighting, worn carpeting or tile, and a merchandising and product mix that lacks excitement. Articles in the popular press indicate that Sears 29
strategy centers on store closings and layoffs, rather than on investing in new capabilities. 41
A read of Sears Holdings 2011 Annual Report of 10-K filings would reveal a company with a 2011 loss of over $3 billion and cash resources that declined from $1.3 billion to $754 million over the same period. 42
The mission and values statements at the companys website talk about building lifetime relationships with customers, quality products, and positive energy. You may notice, however, that these values dont translate into priorities that connect with the companys current strategy of selling off its assets, which one commentator sees as the early stages of liquidation. If you use the VRIO process described in Figure 3.3, you would see that the rareness of Sears resources diminishes with each sale of a valuable set of assets, a brand, or a retail operation. Specialty retailers, such as local appliance stores or dedicated tool shops, not only imitate Sears broad selection of products, they often exceed it and provide more knowledgeable service and support. Discount and big-box retailers such as Sams Club, Costco, or Home Depot match any price advantage Sears offers. Finally, you might notice that, as of 2012, Sears seems to be organized to sell, rather than grow, any superior profit returns from its resources and capabilities. Questions Sears Holdings What is company good at? Broad Selection of goods Appliances, tools
30
What are the companys weaknesses?
Outmoded stores Poor merchandizing Unmotivated employees What resources and capabilities are lacking and contribute to those weaknesses? Lack of financial resources for reinvestment Lack of strategic consistency to support training, merchandizing How does the company create value? Better value can be had through specialty stores or discounters, such as Wal-Mart or Home Depot What values support/sustain those resources and capabilities? Stated values and goals not consistent with current actions. Priority seems to be survival Competitive Advantage: Rare? Diminishing through asset sales Inimitable? No. Specialty retailers offer better products, services. Low-cost retailers offer better prices. Organized to exploit? No. Corporate focus is on creating cash flow through asset sales.
The diamond profiles for Wal-Mart, Nordstrom, and Sears Holdings help you understand the variety of strategies available to retailers. Company Diamond analysis also reveals the level of alignment between strengths, resources, capabilities, and values at 31
winning companies Wal-Mart and Nordstrom, and the misalignments that plague Sears Holdings. The profiles help you understand why Wal-Mart and Nordstrom generate superior returns for their shareholders and why Sears loses money. Chapter Summary Internal analysis matters! This chapter has introduced you to a powerful set of strategy tools you can use to understand better how companies create and sustain competitive advantages through their own efforts, as opposed to merely relying on the industrys structure.
The value chain provides a broad and comprehensive roadmap for you to identify the sources of a firms strengths and weaknesses among its different value-creating functions and infrastructure elements.
The factors of production that a firm uses to create competitive advantages can be divided into three categories: Resources, capabilities, and priorities. Priorities support the development of capabilities, and they enable the creation and deployment of unique and valuable resources.
Valuable and rare resources and capabilities create competitive advantages for firms. The durability or sustainability of those resources depends on inimitabilityhow difficult it would be for a competitor to imitate the resource. Finally, the firm must be organized in legal and administrative ways that capture the rents created by those resources.
The Company Diamond is a tool to help you identify, categorize, and assess the overall strategic advantages of a firm. The Company Diamond allows depth of analysis and understanding about the root causes of a firms competitive advantages.
32
Appendix 1: A Framework for Identifying Resources and Capabilities Resource
Measures
Physical Resources
Productive capacity Annual revenues Number of Full-time equivalent (FTE) employees Annual revenues production square feet Location Number of locations per relevant market versus competitors Ease of access for customers/suppliers versus competitors
Financial Resources
Data and figures can be calculated from a companys financial statements and other online or archival industry sources. Online resources like Investopia, and even Wikipedia, can help you calculate these numbers if they are unfamiliar to you.
Borrowing Capacity
Debt ratio versus industry average Debt-equity ratio versus industry average Net cash flow to Total Invested Capital
Liquidity Quick Ratio Current Ratio Inventory turns versus industry average Credit rating Gross cash flow net cash flow to equity Sustainable growth rate ROE (1- Dividend payout ratio)
Human Resources
Education Sum of employees years of education FTE Employees
Training Training hours/year FTE Employees
Employee commitment Percent of absentee days versus industry average Total amount of sick leave taken Total amount of sick leave available
Trust Annual number of workplace thefts Annual number of complaints (such as to the Equal Employment Opportunity Commission, 33
Occupational Safety and Health Administration, or Consumer Product Safety Commission)
Intangible Resources
Organizational Knowledge Average FTE employee tenure Employee turnover versus industry average
Reputation/Brand Customer satisfaction scores (e.g., Net Promoter ScoreSee Chapter 5) Percent of revenue from repeat customers Average length of customer relationship Brand equity measures (if available)
Patents and Intellectual Property Total number of patents, trademarks, and copyrights
Capabilities Indicators
Raw materials and logistics Exclusive control over raw material supplies (e.g., ownership) Size and dispersion of distribution network Distribution costs sales compared to industry average
Research and development Revenue from products less than 5 years old Number of new products introduced annually R&D expenditures revenue versus industry average
Product design Design awards won (e.g., J. D. Power awards) Presence of unique design features versus industry competitors
Manufacturing Average plant size versus industry average Plant output versus industry average Manufacturing costs sales, net of input costs versus industry average Maintenance expense/ revenues versus industry average Unique plant layouts, designs, or workflows 34
versus competitors
Technology Sophistication of website versus close competitors Number of personal computers, smart phones, and handheld devices and upgrade cycles
Financing Cash flow position versus industry average (Earnings Before Interest, Depreication, and Amortization (EBIDTA) versus industry average Weighted cost of capital versus industry average
Sales and marketing Advertising expenses sales versus industry average Advertising awards won Breadth and depth of product line versus competitors
After sales service and warranty Warranty revenue /warranty costs versus competitors Customer service awards (e.g., J. D. Power ratings)
Source: Adapted from Warren D. Miller, Value Maps, 2010. Wiley
35
Appendix 2: Sources for Internal Analysis of a Firm Data exist for you to use the Company Diamond tool, but finding, filtering, and using those data can be challenging. Here are some important rules to follow as you look for and collect data: Be sure to include multiple types of data. Researchers call this the principle of triangulation. Each data type offers you a particular view of a firm. Financial reports give you a picture of the firms financial condition. Interviews with employees open a window to give you a view of the firms culture and operating procedures. Observations offer you the chance to see the firm in action. Triangulation allows you to create a composite view of the firm using all of the different views youve collected. Be sure to include data beyond the information provided by the firm itself. Company information may be biased toward presenting a positive view of the firm, and if you only rely on information the company provides you will not have a complete picture. Conversely, dont rely solely on the firms critics, whether disgruntled employees, customers, regulators, or social activists. They have their own biases, which can also obscure the true nature of the firm. Use multiple sources within each type. Your goal in doing a Diamond analysis is NOT to get a quick, superficial picture of a company, but rather to uncover the rich variety of resources, capabilities, and values that underlie the firms strengths and weaknesses. It will take time, but using multiple sources within each data type, as described below, will help you create a robust portrait of the firm. The goal is to see a motion picture, not just a snapshot. To truly understand where a firm is today, and where its headed tomorrow, you have to understand where it came from. Make sure that, whatever type of data you use, your data provides a view of the firm across a span of time rather than only at a single moment in time. Search financial results and archival sources for multiple years of data. Take time to understand the history of the company, either through written histories or interviews. Looking dynamically over time helps you see how resources and capabilities have developed, and how values and priorities have guided the company over time. Private companies will require more reliance on interviews and observations. Private companies have no obligation to disclose their financial results and many private companies receive little media attention. That means that archival sources of data for private companies may not exist, or they may be quite thin. You may need to rely heavily on interviews, surveys, and observations to gather meaningful data on private companies. However, you may find it easier to talk with stakeholders of private companies because many, but not all, have fewer bureaucratic restrictions and firewalls than their public company counterparts.
36
Sources of Data Data Type Source of Data Where to find the Source Notes Archival (written data that are stored somewhere) Books (histories, analyses, stories, exposes, etc.) Your university library Amazon.com. WorldCat global library search engine (www.worldcat.org) Books are excellent sources for values and priorities, path-dependent resources and capabilities.
Articles (academic journals, magazines, newspapers, trade journals) ABI/Inform (www.proquest.com ) EBSCO (www.ebscohost.co m/academic) Factiva (www.dowjones.co m/factiva) JSTOR (www.jstor.org) Excellent source for current information on strengths and weaknesses. Good source for capabilities and their development. Your university library may have subscriptions to these and other sources
Company financial reports: 10Q, 10K, 8Q, Annual Reports (Public companies only.) Annual reports are usually available through a companys website. Look for the Investor Relations tab. 8Q, 10Q, and 10K reports are available at www.edgar.sec.gov (a searchable database). Excellent source for understanding the resources (tangible and intangible assets) of a firm Company and business databases Factiva (listed above) IBIS World (www.ibisworld.com) LexisNexis Academic (http://www.lexisnexis. com/en- us/products/lexisnexis- academic.page)
Websites Company websites Better Business Bureau Chambers of Commerce Google searches for complaints, problems,
37
success stories, testimonials Interview Data (stakeholder groups)
When done properly, interviews will help you understand all levels of the Diamond. Customers Customers are a rich source of data on strengths and weaknesses as they perceive them. Employees and Suppliers Employees, suppliers, and partners can provide some insight on assets, but deep insights into a companys capabilities. Regulators Regulators and investors have valuable insights on resources and capabilities. Investors Owners will provide their view of all elements of the Diamond, but they, along with community activists, are excellent sources to understand underlying values and priorities. Investors Owners Community Activists
Tips on creating good interview/sur vey questions Academic sources: http://owl.english.purdue. edu/owl/resource/559/06 / Industry sources: http://help2.surveymonke y.com/?l=en_US http://survey-software- review.toptenreviews.com/ tips-to-creating-a-good- survey.html
Observatio n Observation allow you to see and evaluate the outcomes (products or services) that firms create. Plant tours You can see resources in 38
capabilities in action during plant visits. Office visits and information interviews You can get a feel for the company culture and operating procedures through an office visit. Product placements (in stores, etc)
Company advertisements Product trial and/or use
References
1 See http://thewaltdisneycompany.com/, accessed 10 December, 2012. Youll find Mickey displayed in the latest news section and on the flash video images that dominate the home page. 2 Bob Thomas, Building a Company: Roy O. Disney and the Creation of an Entertainment Empire (New York: Hyperion, 1998).pp. 46-47. 3 J. P Telotte, The Mouse Machine Disney and Technology (Urbana: University of Illinois Press, 2008). P. 27. 4 Thomas, Building a Company., pp. 57-58. 5 Ron Grover, The Disney Touch (Homewood, Ill: Irwin, 1991). P. 7 6 Telotte, p. 15. 7 Thomas, p. 178-187 8 http://www.1920-30.com/movies/. Accessed 28 November, 2012. 9 NAICS 512110. 10 Warren D Miller, Value Maps Valuation Tools That Unlock Business Wealth (Hoboken, N.J.: Wiley, 2010), http://site.ebrary.com/id/10388356., pp. 35-36 11 Brian Gardiner, Glass Works: How Corning created the ultrathin, ultrastron gmaterial of the future, Wired, 24 September, 2012. Available at http://www.wired.com/wiredscience/2012/09/ff-corning-gorilla-glass/all/, accessed 03 January 2013. 12 Clayton M Christensen, James Allworth, and Karen Dillon, How Will You Measure Your Life? (New York, NY: Harper Business: Imprint of HarperCollins Publishers, 2012). 13 Jay Barney, Firm Resources and Sustained Competitive Advantage, Journal of Management 17, no. 1 (March 1, 1991): 99120, doi:10.1177/014920639101700108., quotation from page 101. 14 Stice and Stice, Financial Accounting, 7 th Edition, p. 537. 15 D. Ricardo, Principles of Political Economy and Taxation, in The Works of David Ricardo, ed. J. R. McCulloch (Honolulu: University Press of the Pacific, 1817), 584., pp. 35-36. 16 Margaret A. Peteraf, The Cornerstones of Competitive Advantage: A Resource-Based View, Strategic Management Journal 14, no. 3 (March 1, 1993): 179191. 17 Research firm IBIS Worldwide has data on the major competitors in the fast food industry as of 2012. See http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=1980#MP347824, accessed 05 December 2012. 18 For a discussion and definition of dynamic capabilities, see David J. Teece, Gary Pisano, and Amy Shuen, Dynamic Capabilities and Strategic Management, Strategic Management Journal 18, no. 7 (August 1, 1997): 509 533, doi:10.2307/3088148. 19 Ibid.
21 Janet Wasko, Understanding Disney: the Manufacture of Fantasy (Cambridge, UK; Malden, MA: Polity; Blackwell, 2001). pp 85-86. See also Sprigman, C. 2002. The mouse that ate the public domain: Disney, the 39
Copyright Extension Act, and eldred v. Ashcroft. Available at http://writ.news.findlaw.com/commentary/20020305_sprigman.html, accessed 17 November, 2012. 22 Mullich, J. 2011. Disneys GC Works His Magic. Super Lawyers Business Edition. September. Available at http://business.superlawyers.com/california-southern/article/Disneys-GC-Works-His-Magic/83da6d0f-3047-4a9e- 8464-36710c6be140.html, accessed 17 November 2012. 23 Peter F. Drucker, Managing Oneself, Harvard Business Review 83, no. 1 (January 2005): 100109. 24 A statement of Toyotas values can be found at www.toyota-industries.com/corporateinfo/philosophy/, and the story of the Prius at Alex Taylor, Toyota: The Birth of the Prius, Fortune, 21 February, 2006. Available at http://money.cnn.com/2006/02/17/news/companies/mostadmired_fortune_toyota/index.htm, accessed 12 January, 2013. 25 Walter Isaacson, Steve Jobs (New York: Simon & Schuster, 2011). P. ?? 26 A list of Disney movies, by year, can be found at http://d23.disney.go.com/archives/a-complete-list-of-disney- films/, accessed 06 December 2012. 27 The Boeing 707 was not the first jet aircraft, but the first one to hold the jet-transport formula right. See http://www.boeing.com/stories/timeline.html, accessed 07 December 2012. 28 Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change (Harvard University Press, 1982). 29 Richard Reed and Robert J. Defillippi, Causal Ambiguity, Barriers to Imitation, and Sustainable Competitive Advantage, The Academy of Management Review 15, no. 1 (January 1, 1990): 88102, doi:10.2307/258107. 30 Ingemar Dierickx and Karel Cool, Asset Stock Accumulation and Sustainability of Competitive Advantage, Management Science 35, no. 12 (December 1, 1989): 15041511. 31 Wesley M. Cohen and Daniel A. Levinthal, Absorptive Capacity: A New Perspective on Learning and Innovation, Administrative Science Quarterly 35, no. 1 (March 1990): 128, doi:10.2307/2393553. 32 Marvin B. Lieberman and David B. Montgomery, First-Mover Advantages, Strategic Management Journal 9 (July 1, 1988): 4158, doi:10.2307/2486211. Marvin B. Lieberman and David B. Montgomery, First-Mover (Dis)Advantages: Retrospective and Link with the Resource-Based View, Strategic Management Journal 19, no. 12 (December 1, 1998): 11111125, doi:10.2307/3094199. 33 Chris Gaither, Internet: eBay exits Japan for Taiwan. New York Times, 27 February, 2002. Available at http://www.nytimes.com/2002/02/27/business/technology-briefing-internet-ebay-exits-japan-for-taiwan.html, accessed 07 December, 2012. 34 Russell W. Coff, When Competitive Advantage Doesnt Lead to Performance: The Resource-Based View and Stakeholder Bargaining Power, Organization Science 10, no. 2 (March 1, 1999): 119133, doi:10.2307/2640307. 35 Data compiled from Pankaj Ghemawat, Commitment: the Dynamic of Strategy (New York [N.Y.]: Free Press [etc.], 1991); Vrooman, John, The Economic Structure of the NFL, in The Economics of the National Football Leauge: The State of the Art, ed. Quinn, K. G. (New York [N.Y.]: Springer Science + Business, 2012), 335. 36 Information drawn from Pixar Animation Studios History, available at http://www.fundinguniverse.com/company-histories/pixar-animation-studios-history/, accessed 19 November, 2012. 37 Wasko, Understanding Disney. p. 160. 38 Daly, James, et al. Hollywood 2.0. Wired 5.11 (1997): 200-215. Cited in Wasko, p. 163. 39 Michael E Porter, What Is Strategy? (Boston, Mass.: Harvard Business School Press, 1996). Or the Strategy Canvas suggested by W. Chan Kim and Rene Mauborgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (Boston: Harvard Business School Press, 2005). 40 Author visits to local Sears stores, 2011-2012. 41 Dana Mattioli and Karen Talley, Pared-down Sears posts profit on asset sales, Wall Street Journal, 17 May, 2012. Available at http://online.wsj.com/article/SB10001424052702303360504577409722818223112.html, accessed 04 January, 2013. 42 See Sears Holdings, 10-K filing, pages 24 (profit reporting) and 37 (cash reserves). Available at http://www.searsholdings.com/invest/docs/SHC_2011_Form_10- K.pdf#pagemode=thumbs&page=1&zoom=100,0,0, accessed 04 January, 2013.