from i-o economics' s-c-p paradigm through strategic groups to competence-based competition:...

8/4/2019 From I-O Economics' S-C-P Paradigm Through Strategic Groups to Competence-Based Competition: Reflections on t

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British Journal of Ma nagem ent. Vol. 10, 127-140(1999 )

From I-O Economics' S-C-P ParadigmThrough Strategic Groups toCompetence-Based Competition:Reflections on the Puzzleof Competitive StrategyHoward Thomas and Timothy Pollock*

Universi ty of Il l inois at Urbana-Champaign, College of Commerce & Business Administrat ion.1206 South Sixth Street , 260 Com me rce We st . Cham paign, Il l inois 61820. US A andUniversi ty of Wisconsin-Madison, Grainger Hall . 975 Universi ty Avenue. Madison, Wisconsin 53706, USAOver the past 20 years one basic question which has occupied the attention of hothresearchers and practitioners in the Jitrategic man agem ent field i;* 'with whom and howdo firms compete?' How researcii in strategy has attempted to answer this questionover the past 2U years is the suhject of this article. We hegin hy reviewing the lite ratu reson industrial organiza tion, spatial competition, strategic gro up s cognitive com munitiesand networks and examine how each of these theoretical perspectives have been usedto answer basic questions of competition and rivalry. We then show how the resource-based view of the firm and the theory of competence-ba.sed competition cun he usedto integrate these perspectives. We conclude hy proposing six issues which shouldmotivate future strategy research, and which can help and enhance our understandingof how firms compete.

IntroductionOver the past 20 years one basic question whichhas occupied the attention of both strategyresearchers and practitioners is 'with whom andhow do firms compete?' Key to answering thisquestion is determining the sources of com-petitive advantage for firms, identifying wherethese competitive advantages reside and specify-ing how they can be sustained. The additionalquestions that follow from these basic questions,and the way these questions are framed, definethe manner in which research on these questionsis conducted. To illustrate the fundamental natureof this issue, we will use as an example some re-cent research on the competitive context ofthe Scottish knitwear industry (Porac, Thomasand Baden -Fuller, 1989; Porac era/., 1995).

The production of wool has been an importantpart of the Scottish economy for over 8(K) years.The Scottish border towns of Galashiels andHawick were centres of the wool trade forhund reds of years, and later, especially during theindustrial revolution, became centres of knitwearmanufacturing. K nitwear prod ucers in this regionspecialize in high quality, fully fashioned sweaters,where yarns of different colours are com bined onthe knitting machines to produce the garments.This production process contrasts with the "cut-and-sew' or 'piece dying' production techniquesused by other knitwear manufacturers which,although less costly, produce lower quality gar-ments. The yams used in production, and theskilled labour force that makes the garments, areacquired locally. The major characteristics alongwhich products vary are size, shape, colour and

1999 Bri tish Acade my of Ma nage men t


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128 H. Thomas and T. Pollockknitting design. Although a few of th e iarger firmshave small in-house design staffs, they all hireoutside design consultants. Finished product isdistributed throughout the world through inde-pendent agents, who work with the firms on acommission basis. It is primarily these agents whoprovide the Scottish knitwear producers withinformation regarding market demands for theirproducts.

Determining who competes with whom in thisindustry, and the dimensions along which com-petition and differentiation occur, requires thatthe characteristics of the industry's dynamics beunderstood and that individual firms be groupedin some way. Com petitors in the Scottish k nitwearindustry can be grouped in a variety of ways.Geographically, they are almost ali clustered indifferent areas within a relatively small region ofScotland. As Porac, Thomas and Baden-Fuller(1989) point out. some of the top managers ofcompeting firms live within walking distance ofeach other. Using this perspective, all of the firmsin a geographical cluster seem relatively homogen-ous. The firms in the Scottish knitwear industrymay also be grouped according to the financialand economic assets they possess, such as size,debt load, public or private status, fixed assets,volume of outp ut and so on. Using this lens allowsthe observer to find a bit more differentiationwithin the industry. A third way these firms couldbe grouped is based upon the mental modelswhich the top management of each firm possessregarding the co mpetitive dynamics within the in-dustry. Firms whose managers share similar men-tal models regarding the struc ture of the industry,and who therefore adopt similar competitivestrategies, may also be seen as a differentiatedgroup within the industry. Finally, firms could begrouped based upon their networks of relation-ships with other firms. Tliis perspective wouldallow for groupings not only in terms of rivalrynetworks, but also in terms of a firm's relationshipwith particular suppliers, agents, the manu facturersof other products which the agent represents, thesocial networks to which a firm's managers belongand so on. Each of these lenses, or perspectives,could provide a slightly different, yet overlap-ping, view of the competitive and strategic dy-namics which exist within the Scottish knitwearindustry.

As the previous example illustrates, to answerthe question who competes with whom, and how.

requires that researchers adopt a unit of analysismore fine-grained than the industry level ofanalysis advocated by the so-called structure-conduct-per form a nee (S-C-P) paradigm (Bain,L956. 1968; Mason. 1957). However, the level ofaggregation should be greater than the firm level.Over the years, the question who competes withwhom and how has been addressed from severaldifferent theoretical perspectives, each of whichhas explained an additional piece of the variancein the relationship between strategy and perform-ance (for example. Rumelt. 1991). Industry, group,and firm-level factors have all been considered . Therole of competitive strategy theory and researchin integrating these perspectives, and providing amufti-dimensional framework for understandingthese basic issues of com petition and rivalry, is thesubject of this paper. Economic, cognitive andsocial forces can all influence the ways competitorsare defined, the strategies adopted by these firmsin pursuing their interests and the outcom es of boththeir contests and collaborations. In this paper wewill trace the history of how academic researchhas attempted to address these issues. This reviewis not intended to be a comprehensive survey ofall the relevant work associated with the theoret-ical perspectives covered here. Rather, the intentis to examine the basic arguments, contributionsand limitations associated with these literatures,and to presen t a set of issues which can be usefulin guiding future research in this area.

Beginning with the earliest theories regardingspatial competition, we will move on to researchwhich draws largely from the literature onindustrial-organizational (I-O) economics to ex-amine how the economic characteristics of firmswithin an industry have been used to explainindustry dynamics and place firms within strategicgroups. We will then consider research which,drawing from the literature on managerial cog-nition, attempts to identify cognitive com mun itieswithin an industry based upon the shared mentalmodels which executives use to evaluate theirenvironment, identify their rivals and define thedimensions along which they compete. Next, wewill examine how the methods and perspectivesof social network analysis have been used to ex-amine issues of both inter-organizational rivalryand cooperation within industries. Finally, we willuse the literatures on the resource-based view ofthe firm and competence-based competition tointegrate the economic, cognitive and social


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Reflections on Competitive Strategy 12approaches to competition, and to develop a setof issues to guide future research in this area.

Theoretical perspectivesLocation within a cornpetilive spaceThe earliest, and most abstract, approach to exam-ining the question who competes with whom,and how, was presented by Hotelling (1929).'Hotelling assumes that:1 two firms are competing in a market charac-terized by a linear product space;2 the relocation cost within that product space iszero;3 the num ber of customers available along theentire product space is constant;4 the market demand is such that firms cannotdifferentiate on price for the same product.Hotelling argues that, within a linear marketspace, if one firm locates itself anywhere otherthan in the exact centre of the product space,thereby dividing the space into two segments ofunequal length, the other firm will locate itself onthe side of the first firm which faces the longermarket segment. The first firm can then imitatethe second firm's strategy, leap-frogging thesecond firm and locating itself next to the longermarket segment. This process will continue untilthe two firms are located in the cenlre of thelinear market. Hotelling's theory suggests a ten-dency towards minimum product differentiation,and firm clustering within a product space. Latertheory and research applied these principles todimensions other than just products, such asreliability, availability and strategic dimensions.

More recently, other economic theorists havechallenged Hotelling's conclusions, and haveargued Hotelling's central tendency function doesnot necessarily hold when the assumptions regard-ing utility function, customer density, number offirms, sequence of firm entry into the marketand relocation costs are varied (for example,D'Aspremont, Jaskold-Gabszewicz and Tliisse,1979; Economidies, 1986). They argued that ifrelocation costs are high and firms are far apartfrom each other in the product space, then they

will tend to stay separated. However, firms whichare close together, and which do not have as fato move, experience lower relocation costs anwill tend to cluster. This suggests that within aindustry one should be able to observe clusters ofinns which are homogeneous, but which are separated in distance from other, heterogeneous groupsThe primary contribution of the theory ospatial competition is that it provides a theore ticabasis for the expectation that groups within anindustry exist. It was one of the first attempts texplain why firms competing in the same markemay adopt different strategies, and thus experience different levels of performance success. Thprimary weakness of this theoretical perspectivehowever, is that it is difficult to test empiricallyDifferentiation may occur across some dimensionbut not othe rs. Firms may thus adopt differenspatial profiles, and may be grouped differentlydepending upon the dimensions used in the analysis. Also, spatial competition theory takes a topdown approach, beginning at the industry leveand working its way downwards to a lower leveof abstraction. Given that groups within aindustry are likely to exist, a new set of questionregarding the competitive strategies these grouppursue, and the degree of success they are able tachieve could now be addressed.

Strategic groupsAt its most basic level, strategic-groups theorargues that within an industry firms with similaasset configurations will pursue similar competitivstrategies with similar performance results. Firmmay therefore be clustered together into groupbased upon their similarities in asset configuratioAlthough performance within a strategic group expected to be similar, different strategic groupare expected to experience different levels operformance.The origins of research on strategic groupcan be found in the I-O economics hteraturMichael Hunt was the first petson to coin thterm strategic groups in his 1972 doctoral disertation (Hunt, 1972). Hunt identified thresources of 'asymmetry' between firms in the majhousehold-appliance industry, and used theasymm etries to distinguish between four differestrategic groups, and the barriers to entry in eacof these groups (e.g. full-line national man


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130 H. Thom as and T. Pollomanufacturers' brand producers, private brandproducers and national retailers). Around thesame time several other individuals, includingMichael Porter, were also attempting to usethe same general principles and apply a modifiedversion of the structure-conduct-performanceparadigm of I-O economics to the study of stra-tegic groups.- Briefiy, the S-C-P paradigm sug-gests that the structure of the industry influencesthe strategic behaviours of firms, which in turninfluences their performance. Firm behaviour isessentially treated as a theoretical "black box'.The strategic groups perspective turned the S-C-Pparadigm on its head, and argued that the stra-tegic behaviours of firms influence both the struc-ture of the industry (the formation of strategicgroups) and the performance of the industry.The early research in this area focused upon theindustry level and examined entry barriers, suchas capital requirements and regulatory barriers,which shaped industry membership and com-petition. Caves and Porter (1977), and later Porter(1980) took this concept and applied it at thestrategic group level, suggesting that just as entrybarriers for an industry exist, 'mobility barriers'between groups within the industry also exist.Tliey argued that mobility barriers inhibited theability of firms already in the industry to changefrom one strategic group to another. It was there-fore in the interests of high-performing strategicgroups to erect substantial mobility barriers, soas to prevent other firms from changing strategiesand entering into their group. Early research in thisarea focused primarily on between-firm differences.Other researchers (for example, Hatten, 1974;Hatten and Schendel, 1977) developed m ethodolo-gies which established intra-group homogeneityamong firms in a strategic group, while preservinginter-group heterogeneity. One of the limitationsof this early research is that it tended to focus ononly one industry, and that all of the companiesengaged only in that single line of business. Sub-sequent research (for example, Harrigan, 1980;Oster. 1982) expanded strategic groups researchto include multi-industry considerations as well.

Throughout the 1970s and most of the 1980sresearch on strategic groups followed thiseconomic vein. Strategic groups were defined bythe researcher, using various sets of financial and

strategic variables gleaned from financial statements and other public sources of information, tclassify companies into various strategic groupFirms with similar asset configurations were expected to occupy the same 'resource space' withitheir environment, to compete more with eacother for similar resources (capital, raw materiacustomers), and to be more subject to the samenvironmental forces than other firms in thindustry which occupied somewhat differenresource spaces.^ Given these similarities, firmwithin a strategic group were also expected tpursue the same competitive strategies. Performance was assumed to be relatively homogeneouwithin these groups, with greater performancheterogeneity occurring between the various strategic groups. How groups of firms came to sharthe same resource space and asset configurationwas not considered. Researchers came to recognize this limitation, as well as the need to b roadethe strategic groups literature's theoretical perspective (McGee and Thomas, 1986). Severascholars also began to note that the assumptionregarding performance variations between strategic groups was somewhat equivocal, and thastrategic groups often displayed strong withingroup performance variations as well (Cool anSchendel, 1988: Fiegenbaum and Thomas, 1990Thomas and Venkatraman, 1988).

Research in the strategic groups area alsfailed to determine whether or not the strategidecision-makers in companies sharing similaasset configurations also shared similar mentamodels of the competitive landscape within theiindustry, and whether or not they actually chosesimilar strategic paths. The ou tcomes of these p rocesses were treated as a given, and as the startingpoint for various statistical clustering proceduresFinally, as Thom as and Venkatraman (1988) poinout in their recomm endations for future directionin strategic groups research, the boundaries owhat constitute an 'industry' can be extremelyfuzzy. With the globalization of competitive markets and the participation of firms in multiplemarkets, reliance upon simple product-baseddefinitions, such as SIC code classifications, fo

During this same period, population ecologytheorists in sociology were developing a parallel streamof research which examined how resource availabilityand competition structured groups of firms within an in


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Reflections on Competitive Strategy 131defining a company's industry, may significantlymisrepresent the competitive dynamics which thecompany actually faces. Thomas and Venkatramansuggest that a more fruitful approach for definingstrategic groups is to use 'environmental types', or'profiles', which cut across industry designationsand focus upon the similarity of environmentalconditions a firm faces and the strategy it uses tocope with these conditions.

Taken together, all of these issues suggestedthat a greater understanding needed to be devel-oped regarding how strategic activities which takeplace at the individual firm level influence the waystrategic groups are formed. About this time,researchers began attempting to actively explorethe cognitive processes of managers, and how 'man-agement cognitions' regarding the compositionand capabilities of firms within an industry couldbe used to identify clusters of firms, or 'cognitivecommunities', within an industry.Cognitive communitiesCognitive communities take a psychologicalapproach to the exploration of collectives of firmswithin an industry. Managers are motivated toevaluate the strengths and weaknesses of theirfirms, and how they can be used to take advantageof opportunities and avoid threats which mayexist in their environments. Managers developthese 'cognitive maps' (Weick, 1979) of their firmsand their environment through trial and error,through observation of the activities and outcomesof others and through trade publications, formalinstruction and interactions with oth ers w ithin theindustry. This process results in a socially con-structed understanding of the structure of theindustry and what it takes to compete. The shar-ing of a particular set of beliefs of managers ofdifferent firms results in a 'cognitive community'(Pbrac et al., 1995). TTiese consensual sets of beliefsmake up the norms, or 'recipes' (Spender. 1989),for doing business and competing within anindustry. Shared beliefs establish the identity ofindividual firms and help to create a stable trans-actional network in which the actions of rivals areat least somewhat predictable (Huff, Huff andThom as. 1992). Managerial pe rceptions and sharedbeliefs can also be expected to influence industryevolution (Reger and Huff, 1993). This process ofcategorization, whereby managers develop a senseof self and a sense of others in the context of the

competitive environment has been labeled the pro-cess of 'competitive s ensemak ing' (Weick. 1995).A number of studies have been conductedexamining how the mental models of managersin individual firms help shape the competitivestructure of industries (for example. Hodgkinsonand Johnson, 1994; Porac and Thom as. 1990.1994;Porac, Thomas and Baden-Fuller, 1989; Forac,Thomas and Emme, 1987; Porac et al., 1995;Reger. 1988; Reger and Huff, 1993; Walton,1986). In their initial study of the Scottish knit-wear industry. Porac, Thomas and Baden-Fullerfound that the structure of the industry bothdetermines, and is determined by, managerialperceptions of the environment. In a subsequentstudy. Porac et al. (1995) were able to derive a six-category industry model of organizational formsbased upon such attributes as firm size, tech-nology, product style and geographic location,and showed that this categorization scheme wasreproduced within the rivalry network, therebyhelping to structure competition within the in-dustry. In a study of grocery-store competitionwithin a single community Porac and Thomas(1994) found that managers focus on a relativelynarrow band of rival firms, and that a middle-levelset of categorization taxonomies, differentiatingbetween specific types of grocery stores, was themost consistent with the manag ers' mental models.Finally. Fiegenbaum and Thomas (1995) suggestedthat strategic groups can act as 'reference groups'for their members as they engage in strategicdecision-making.-" In a longitudinal study of theinsurance industry. Fiegenbaum and Thomasfound support for this contention. They alsofound that over time firms adjust their strategicbehaviour towards the group's reference point orcentral tendency, so that competitive strategieswithin a strategic group become more homo-geneous. However, the degree to which this occursvaries between groups, and is a function of thecompetitive dynamics that exist within each group.

The strategic-groups literature begins at theindustry level and works downwards, clusteringfirms that appear similar using some externallydefined set of criteria. In contrast, the cognitiveapproach to identifying industry groups begins' See also Huff. Huff and Thomas (1992) for adiscussion of the cognitive factors which influence theconditions under which firms will and will not altempito change their strategies.


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132 H. Thom as and T. Pollockat the firm level and moves upwards, usingmanager's mental models to identify firms whosemanagers share similar conceptions regarding thestructure of ihe industry, and ihe rivalries thatexist therein. The biggest challenge facing cog-nitive research ers is how to identify and measurethese shared maps or recipes. One of the primarymethod s used to date has been face-to-face inter-views with manag ers. Various analytical metho d-ologies, including repe rtory grid technique, causalmapping and multi-dimensional scaling havebeen used to structure the nature of the inter-views and guide the interpretation of the data.^Data collection, especially when it comes to issuesof determining how m anagers from different firmscome to share a single mental model, and how toaggregate mental models across managers andfirms, still poses substantial challenges for researchon cognitive communities. Porac f/rt/. (1995) useda network analytic approach to begin to answersome of these processural questions. In the nextsection we will discuss how inter-organizationalnetworks have been used to examine issues ofboth rivalry and cooperation within industries.

Inter-organizational networks in cooperationand com petitionNetwork approaches to studying who competeswith whom and how are a relatively recent phe-nomeno n in the strategy literatu re. By identifyingand focusing on the relationships which existamong org anizations, researchers can begin to de-velop a more accurate picture of the competitivedynamics at play within an industry. Networkapproa ches have also opened up a new area of in-quiry - the ways in which firms within an industrymay also collaborate with one another.Competition and collaboration has been viewedfrom a network perspective in a variety of indus-tries, including the knitwear, car, movie and bio-technology industries (Nohria and Eccles, 1992;Porac et al, 1995; Powell. 1990). The Porac e( al.Scottish knitwear study is one example of how anetwork approach can be used to understand theways in which firms identify their strategic rivals.Porac and his colleagues identified and collecteda variety of data on the salient firm charac-teristics and categorizations which the managing' See Huff (1990) for a more detailed discussion ofthese methodological approaches.

directors of the knitwear firms used to developindustry categorizations. They also collected infor-mation regarding which firms within the industrywere considered to be rivals by each managingdirector. Using a variety of clustering and net-work analytic techniques, they were able to showthat a six-category model of organ izational formsbest describes the general conceptualization ofcompetition within the Scottish knitwear industry,and that these categorizations were based on arelatively small numb er of factors. They found thatthis industry model was reproduced within the ri-valry network which structured competition withinthe industry. They also found that competitionwithin the industry was imperfect, that is. a num-ber of asymmetries were identified when firmswere asked to specify their competitive rivals.Firms may also use networks strategically, byforming alliances, joint ventures, equity-sharingagreements, collaborative research pacts, researchconsortia, reciprocity deals or satellite organ-izations which allow them to either develop newskills, leverage current skills or compensate forweaknesses {Hamel, 1991; Khan na, Gu lati andNohria, 1998; Powell, 1990; Powell, Koput andSmith-Doerr, 1996). Powell (1990) suggests that:'Firms pursue cooperative agreements in orderto gain fast access to new technologies or newmarkets, to benefit from economies of scale injoint research and/or production, to tap intosources of know-how located outside the bound-aries of thefirm,and to share the risks for, activ-ities that are beyond the scope or capability of asingle organization.' (p. 315)

Firms may form these strategic networks withcompetitors, suppliers and customers, sharingknowledge and resources in some arenas, whilekeeping other resources separate and secret.Powell uses the example of the car industry, whereAmerican and Japanese car-makers own sig-nificant equity stakes in each other (for example.Ford and Mazda, GM and lsuzu, as well as GMand Suzuki). These firms frequently share parts,product designs and or production facilities forsome models (such as the Mitsubishi Eclipse andthe Plymouth Laser, which for a time were built atthe same production facility) yet still competewith each other in other markets (for example,the competition between the Dodge Viper andthe Mitsubishi 30()0GT in the high-performancesports-car market). The relationship between


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Reflections on Competitive Strategy 133major pharmaceutical firms and biolech start-upsis another example of mutually-beneficial net-work relationships (Powell, Koput and Smith-Doerr. 1996). Biolech firms gain access to thecapital, production and distribution capabilitiesIhat major pharmaceutical manufacturers suchas Merck, Pfizer and Glaxo possess, while themajor manufacturers gain access to the new tech-nologies and innovative capabilities which thesmaller, more nimble biotech starl-ups possess,and which the major manufacturers could neverhope to replicate. Firms grow and remain com-petitive by becoming involved in benefit-rich col-laborative networks where knowledge is developedand shared, rather than attempting to developand exploit the knowledge internally.

Although network forms of organization canoffer a number of advantages, they have limi-tations as well. For example, although networksopen up opportunities for interaction, they alsoserve to constrain network members* options andbehaviours. If the organization's environmentwere to suddenly change, the restrictions of thefirm's current network might not allow the firmto change along with it. Networks can also resultin significant transactions costs, although the bene-fits of developing and participating in the networkshould more than outweigh these costs. If thenature of the transactions is routine and the assetsbeing transferred are mundane comm odities, thenmarket transactions may be a more effective andless costly way of organizing the transaction.Thus far we have examined several differentperspectives which have been used in attemptingto answer the question of how. and with whom,firms compete. Each of these perspectives, ortheoretical lenses, has provided unique insights.However, each of these perspectives also possess

certain hmitations. What is needed is a unifyingtheoretical perspective which explicitly attemptsto accommodate the effects of a firm's assets andpositioning, the cognitive structures of manage-ment and the interdependence and interactionswhich exist among firms in an industry. Thomasand Carroll (1994) explored the conceptual over-laps which exist among the strategic groups, cog-nitive, and network perspectives (see Figure 1).*'

SimilarcognitivestructuresSimilarassets andpositioning

'' Adapted from Thomas and Cairoll (1994). p. t6 . Fora discussion of methodological approaches to integrat-ing these three perspectives see Gruca, Nath and

Network interdependenceand interactionFigure 1. Co nceptual overlap.',- among strategic groups

They argued that three criteria - similar cognitivestructures, similar assets and positioning, andinterdependence and interaction - could be usedto define each of the perspectives. Using a meta-phor adapted from efficient market theories infinance, they proposed that weak, semi-strong,and strong form definitions could be developed.For example, the weak-form definition of stra-tegic groups requires that firms only need sharesimilar assets and positioning (sections A, B. Cand F in Figure 1). The semi-strong definitionadds the requirement that firms also share similarcognitive structures, so only sections A and Bwould apply. The strong form of the definitionstipulates that these firms also interact with eachother. Only section A fits this definition. Thomasand Carroll go on to suggest that cognitive com-munities can have either a weak {A. B, D and E)or semi-strong definition (A and D). and thatonly a weak-form definition for networks cur-rently exists (A . C, D and G) .Thomas and Carroll argue that the differentdefinitional forms could be used to answer differ-ent theoretical questions. They also suggest thatrecognizing these different forms can help reducethe probability that a mismatch between the defin-ition used to develop hypo theses and the constructsused to test the h ypotheses occurs. It is likely th at

hypotheses based on strong definitions will not besupp orted if operational constructs satisfying only


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134 H. Thomas and T. PollAlthough illustrative of the commonaltieswhich exist among the strategic groups, cognitivecommunities and inter-organizational networkperspectives, Thomas and CarrolTs discussion isstill somewhat abstract, and does not provide aunified theoretical perspective which can be usedto explore the linkages among these perspectives.In the next section we will examine how twotheories, the resource-based view of the firm andthe theory of competence-based competition, canbe used to integrate the perspectives and developa new set of questions whieh can guide strategyresearch and practice in the future.

The resource-based view and competence-basedcompetitionThe resource-based view of the firm can trace itsroots back to the work of Edith Penrose (1959) andher classic book The Theory of the G rowth of theFirm. Disenchanted with neoclassical economicsand its handling of real-world problems, Penrosedeveloped a new concep tual schema of the firm as'both an administrative organization and a collec-tion of resources'. The resource-based view is aconceptual framework for understanding firm-level growth, using reso urces as the basic buildingblocks (Amit and S ehoemak er, 1993; Barney.1991; Peteraf. 1993; Wernerfeld, 1984). These re-sources may be financial, human, intangible,physical, organizational or technological (Farjoun,1994). The rate and direction of a firm's growth isinfluenced by how management conceptualizesthe firm's resou rce base. These conceptualizationsin turn shape what managem ent considers to be thefirm's feasible expansion paths, and the growthstrategies they choose to pursue. Prahalad andBettis termed these mental schemas the 'dom-inant logic' of management {Prahalad and Bettis.1986). They define the dominant logic as the wayin which m anagers concep tualize the business andmake critical resource-allocation decisions. These'internal* choices and resources interact with thecompetitive environment to determine the firm'seconomic performance. Prahalad and Bettis sug-gest that managerial dominant logics are based inlarge part on what has worked for the firm. Ifthe structure or competitive requirements of theenvironm ent change, or if the firm adds a new lineof business, management must learn and adaptits dominant logic to the new industry conditionswhich it faces. If management misperceives the

firm's resources, and thus pursues a strateginconsistent with the firm's reso urce base, or fato recognize a resource which a firm possessethen the firm will chronically underperform, anin the worst case, fail.Another theoretical perspective which is close

related to the resource-based view and the theorof dominant logic is that of competence-basecompetition (Prahalad and Hamel, 1990).' Prahalaand Hamel introduced the idea of identifyinand leveraging the 'core competencies" of a firm their 1990 Harvard Bu,siness Review article. Acording to Prahalad and H amel. core competenciare the ou tcome of collective learning in the organization which are communicated across boundariewithin the organization to coordinate productioskills and integrate multiple technologies. Thesuggest that firms which successfully identify ancultivate their core competencies can use them tobtain a sustainable competitive advantage againtheir rivals.

Prahalad and Hamel describe three tests whicthey say can be used to identify core competencies within a com pany:1 a core competence provides potential acceto a wide variety of markets;2 a core competence should make a significan

contribution to the perceived customer benefits of the end product;3 a core competen ce should be difficult imitate.A core competence is therefore a knowledgbase or set of skills which is general enough to bapplied in a variety of settings, results in a clearldefined benefit to the consumer, and is difficulif not impossible, for other firms to replicatSimply outspending your competitors in R&Dcutting overhead via sharing facilities or makina larger percentage of the workforce telecommuters is not a core competence. Nor is it eveconsidered a strategic behaviour (Porter. 1996Core competencies develop over time, and continue to grow, rather than diminish with repeateused.We would like to illustrate how this concept cabe applied by using Microsoft as an example

^ See Sanchez, Heene and Thonnas (1996a) for an indepth exploration of competence-based approaches tstrategy.


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Reflections on Competitive Strategy 135Although it is the leading provider of operatingsystems, spreadsheets and word-processing pro-grams, many would argue that Microsoft's corecompetence is not in programming. Its programs,especially early versions, often lack desirablefeatures that comparable programs possess, arelate to market and are filled with bugs. Micro-soft's ability to dominate the software industrylies in its marketing and distribution capabilitiesand relentless competitiveness. Early in Micro-soft's existence Bill Gates negotiated somewonderful contractual relationships with IBM,Compaq and other PC manufacturers whichmade their operating system the de facto standardin the industry. Soon every IBM-compatible PCshipped in America included MS-DOS, and laterWindows, as its standard operating system. Thefamiliarity of the Microsoft name m ade users morelikely to adopt their products when they expandedinto spreadsheets and word-processing programs.Microsoft used the same distribution technique,pre-installing Microsoft applications software{later packaged as the now familiar MicrosoftOffice suite) with every new PC shipped, to estab-lish do minant positions in these app lications m ar-kets as well. Microsoft developed and identified adistinctive competence which could be applied tomultiple product markets, which provided a dis-tinctive benefit to the end user - familiarity andease of adoption - and which other software m anu-facturers could not replicate.

Recognizing the integrative potential ofcompetence-based approaches to strategy, re-searchers have begun to develop and explore thecompetence-based perspective {Bogner, Thomasand McGee. 1996; Collis and Montgomery, 1995;Gorman and Thomas, 1997; Hamel and Heene,1994; Lei, 1997; Sanchez, Heene and Thomas,1996b; Scarboroug h, 1998; Spencer. 1996). Anexample of the empirical research in this area isthe Bogner. Thomas and McGee (1996) study ofEuropean entry into the US pharmaceuticalindustry. Thomas and his colleagues found thatthe resources of European parent drug manufac-turers shape the e ntry strategies and effectivenessof their US subsidiaries. They also found thatparental resources influenced subsidiary choicesregarding expansion paths. Their findings suggestthat the use of competencies or resources as thebasis for a multi-domestic approach to inter-national strategy still requires a parent firm totransfer or build com petencies for its subsidiaries

if it is to gain competitive advantage in a newmarket. Resource differences can lead to differ-ences in the way that firms attempt to directlyenter new m arkets. Entry and expansion strategiesmay vary by m arket, as well as by firm resources,due to entry barrier/resourc e interactions. Finally,their findings also suggested that parental resourcescan act as a constraint on subsidiary d evelopm ent.The strength of the resource-based view andcompetence-based competition is that thesetheories begin at the firm level and focus on thedistinctive capabihties of the firm relative to itscompetitors. The weakness of both these theoriesis that they do not provide clear guidelines foridentifying what exactly are the core compe-tencies and inimitable resources of the firm, andhow they compare to the resources and compe-tencies of others competing in the same market.In addition, the identification of inimitable re-sources or core competencies does not constitutethe development of a strategy. Rather than signalthe end of the strategy development process, theidentification of competencies and resources signalthe beginning of the process. Resources and com-petencies are the basic building blocks whichshould be leveraged through the strategy develop-ment and implementation processes.

Tying it all togetherThe resource-based view and com pete nee-basedcompetition incorporate elements of the spatialcompetition, strategic groups, management cog-nition and network streams of research (Tangand Thomas, 1992; Thomas and Carroll, 1994).Notions of competitive space are discussed withincompetence-based competition. Hamel andPrahalad (1994) suggest in their book Competingfor the Future that rather than behaving reactivelyand trying to figure out how to compete withintheir existing competitive space, those firmswhich will be most successful in the future strivenot only to shape their existing competitive space,but to create new competitive spaces for them-selves as well. The resource-based view encom-passes elements of both the strategic-groups andthe management-cognition literatures. The resourceconfigurations identified by strategic-groups re-searchers interact with the cognitive recipes whichmanagers possess to shape the ways in whichgrowth strategies are developed and implemented.


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136 H. Thomas andT. PollocEach can influence the other, and the degree towhich management correctly identifies and lever-ages its resources impacts the firm's potential fordeveloping a sustained competitive advantage.Firms do not develop these cognitive recipes inisolation, however. As Porac et al. have shown,networks of relationships am ong com petitors canhelp to shape individual mental models anddevelop stable, commonly shared beliefs regard-ing firm capabilities and patterns of competitionwithin an industry. Powell and others have dem-onstrated that networks can be used for co-operative as well as competitive purposes, thatnetworks of relationships can be used to developand leverage a firm's core competencies andthat the ability to develop and manage networkrelationships can be a core com petence in itself.

Future directions iu strategy researchThe resource-based view and competence-basedcom petition possess four q ualities which will allowresearchers to extend and refine the discussion ofwho competes with whom, and how. First, thistheoretical perspective places substantial emphasison performance, specifically the ability to developand maintain sustainable competitive advantage.Questions regarding why some firms outperformothers are the province of strategy researchersalone.Second, this perspective is dynamic, rather thanstatic in nature. Much of the past research instrategy has attempted to answer the question'What do firms do?' More useful questions are'How do firms do what they do?' and 'How dothey sustain their competitive advantage?' Thedynamic systems and routines through whichcompetencies or resources are developed andleveraged are then considered explicitly, ratherthan just assumed to occur.Third, this perspective encou rages a focus uponlongitudinal evaluations of strategic activity.Much past and current strategy research is cross-sectional rather than longitudinal in design.**This tendency has been driven in large p art by thegreater ease with which cross-sectional data canbe acquired for conducting publishabJe research.* See Bogner, Thomas and McGee (19%) and Fiegen-baum and Thomas (1995) for examples of exceptions tothis general trend.

The temporal and path-dependent nature oflongitudinal process examinations is significantin developing a greater understanding of firmstrategy development and use. and should beincluded in future research.Finally, this perspective is process, not justouteome. oriented. Resources alone are not thekey. The implementation of strategy is integralto the understanding of strategy itself; the twocannot be separated. Studying assets alone is notuseful because tangible assets themselves becom erelatively insignificant in comparison to the waysin which they are deployed.We would like to propose six issues which wethink should drive future strategic research. Theyare:

1 definitional issues;2 measurement issues;3 the unit of analysis considered;4 the study of processes, not states;5 the examination of organizational failures, aswell as successes:6 a greater consideration of micro-analytic datafrom within the organization.Definitional issuesTo date we as a field have not reached consensuson precise definitions (Sanchez, Heene andThomas, 1996b; Teece. Pisano and Shuen, 1997).Although a certain amount of this is to be ex-pected, given the relative newness of competence-based research, the haggling and hair-splittingover the definitions of key constructs will becomecounter-productive if it continues for too muchlonger. For example, what is the real differencebetween resources, capabilities and competencies?One way to answer that question is to ask. 'arethese distinctions empirically tractable?' In otherwords, can we measure them, and if so, does eachconstruct really measure different things? If theanswer to these questions is no. then the constructshould be discarded, or redefined in a moretractable and useful way. The same tests may beapplied to discussions of competence buildingversus competence leveraging, and the relation-ship between goals and performance. It is unlikelythat the question, "are competence building andleveraging distinct activities?" has a simple yes orno answer. Whether, through a given activity, afirm is building or leveraging a competence may


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Reflections on Competitive Strategy 137be a matter of degree, and may also be somewhatcontext dependent. Issues regarding how we de-fine what constitutes firm performance, and howdifferent performance measures are related to thefirm's goals, also need to be revisited. Accountingmeasures such as ROI and ROA - while con-venient - are imperfect, may be subject tomanipulation and may or may not be related tothe firm's true strategic goals and objectives.

measures and towards the change in value of ameasure or m easures over time, as well as the ra teat which they change. Many traditional measuresused in strategy research, which to date have onlybeen examined cross-sectionally, could be exam-ined from this perspective as well, and could pro-vide new insights (Pettigrew, 1990; Ring and Vande Ven, 1994; Thomas, Gorman and Sanchez,1996; Van de Ve n, 1992).

Measurement issuesDeveloping consistent definitions of constructssuch as competencies, competence building/leverage, and p erformance is only half the ba ttle.In order to be useful, these definitions must alsobe measurable (Hen derson and C ockburn, 1994).If a construct is conceptually clear but empiricallyimpossible to measure, then it is of limited utilityin advancing our quest for knowledge. This doesnot necessarily mean that measurement must beeasy, but it must be possible. Alternative - andin some cases, less quantitative - measures ofthe key constructs mentioned above need to beconsidered (Sanchez and Thom as. 1996).Unit of analysisStrategy research has at one point or anotherconsidered the business unit, the firm, the group,the product market, the process market and theindustry as appropriate units of analysis. Al! ofthese units of analysis are helpful in framingcompetition. The identification and leveragingof core competencies is a concept that can spanand have an impact at all units of analysis. Indetermining a firm's core competencies andhow they affect firm performance, future researchmay find it useful to consider the impact at two ormore of these units of analysis simultaneously(see Figure 1, and the overlaps among the stra-tegic groups, cognitive and network perspectives,each of which was developed by focusing upona different unit of analysis). Such an approach p ro-vides necessary triangulation, and enhances thevalue of the concept of competence (for exam ple,Bogner, Mahoney and Thomas, 1998; Oliver, 1997).Study processesThe longitudinal study of processes suggests achange in focus away from the absolute values of

Examine organizational failuresIn a cross-sectional study of existing firms in anindustry, firms that have failed are by definitionexcluded from the study. By taking a longitudinalapproach, researchers may more easily examinethe causes of organizational underperform anceand failure, as well as success (Miner et ai. 1996;Moulton and Thomas, 1993). It is important toremember, however, that asking why firms fail isnot simply the converse of asking why firmssucceed. These factors need not be opposite endsof a single continuum. They may in fact reflecttwo separate continua which interact. A firmthat takes actions which lead to failure, but thatalso takes other actions which lead to success,may continue to exist, but in a chronic state ofund erperform ance . Such a firm is different thana firm which sits in the middle range of bothcontinua. Firms which simultaneously occupy th eextremes of both continua may have a greaterpotential for superior performance if they canlearn how to reduce those factors which, all elseequal, would lead to failure. Researchers alsoneed to make a greater effort to study outliers inan industry - both good and bad (see for exampleDay, Lewin and Li, 1995). By focusing on theseextreme cases, researchers are more likely tolearn about those factors which determine successand failure. Thus researchers should en deavo ur tobreak with the analytic approach which currentlydominates strategy research that is, focusing onthose factors which result, in convergence andidentify central tendencies within the data.

Consider micro-analytic dataThere is a need to get inside the firm and studyprocesses at the individual - or perhaps moreappropriately - team level (see Figure 2) (Eden,1992, 1995). Network approaches to studying thedecision-making processes within teams, especially


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13 8Firm

H. Thomas and T. Polloc- 4- FirrTi 2

Firm

1 . Study micro-level processesoperating Inside the firm

2. Study how entities within thelinrti rela te toeach other

3. Study inter-firm relationsFigure 2. Network effects of micro-level phenomena

top management teams within an organization,and the interactions and dynamics between teamswithin an organization may be especially useful.Such research would provide us with a greaterunderstanding of how the firm works, andwhereits true competencies may lie. This micro-levelbehavioural data may then behnked toorganiza-tional behavioural data, thus linking individuals(or teams) to organizational processes. It is throughthese linkages that organizational competenciesmay be identified and highlighted.

ConclusionAttempting to answer the question "with whom,and how. do firms compete?', has been at thecentre of much strategy research over the last

25 years. What started out as an analytical con-venience, the notion that firms could be arrangedinto strategic groups, was discovered to be aphenomenon with significant implications for thestructure and function of corporate competitionand performance. Over the years scholars haveapplied a variety of theoretical perspectives inthis area of inquiry, and have raised as manyquestions as they have answered. In this articlewe have attempted to reflect upon the work thathas been done in this area, and to suggest anintegrative theoretical perspective, and set ofissues which may be used to guide future strategyresearch. The use of multiple lenses for viewingphenomena, increased precision in the definitionsof constructs and the measures used to test them,the adoption of dynamic longitudinal designsand a focus on multiple units of analysis all will


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Reflections on Competitive Strategy 139continue to further our understanding of the wayscompanies cooperate and compete for sustainedadvantage.

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from i-o economics' s-c-p paradigm through strategic groups to competence-based competition:...

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