Understanding the nature of competitive advantage is at the heart of strategic management (Grimm and Smith, 1997). As such, more fully identifying and investigating the bases of competitive advantage, as well as the factors that influence their change over time, is important to both theory and practice. By exploring the role of capability weaknesses along with capability strengths, we more fully describe the bases of competitive advantage. Moreover, our investigation of factors that affect change in firms’ capability weakness and strength sets over time adds to the field’s limited understanding of the dynamics related to the durability of competitive advantage. In total, our work demonstrates that the bases of competitive advantage are more complex than previously thought; strengths are not the only driver of competitive advantage—weaknesses matter greatly as well. Additionally, the durability of any advantage is undermined by rivals’, even indirect rivals’, ongoing and dynamic capability investments.
While Chen and Miller (1994) suggested that considering weakness is important to the strategic management of firms, research on the RBV has largely ignored the effects of capability weaknesses (Montgomery, 1995). Especially absent is empirical research on the effects of weaknesses on competitive advantage. As such, we build on prior conceptual work to theoretically differentiate capability strengths and weaknesses by viewing value and rarity through a comparative lens. Additionally, because firms are conceptualized as bundles of integrated capabilities, we focus on sets of capability strengths and weaknesses. And, as our results show, both strength and weakness sets have important direct and integrated effects on competitive advantage via its empirical correlate, relative performance. These results indicate that, indeed, the exclusion of weaknesses has limited our understanding of competitive advantage. In fact, our results suggest this void in prior research likely represents a critical limitation. Addressing this oversight is important for a more complete and accurate understanding of competitive advantage, but especially regarding the temporal nature of competitive advantage. A temporary advantage does not result only through the development or protection of strengths alone; weaknesses also matter.
More specifically, our empirical results show that a firm’s set of capability strengths has an increasingly positive relationship with relative performance. This result is important for at least three reasons. First, this outcome suggests that synergistic effects exist among strengths. Second, the results suggest that continuing to build capability strengths pays major dividends. Thus, firms should not remain static after achieving success; they should continue to develop their capabilities, thereby adding to their competitive advantage and resulting performance. Third, this research is the first to specify and support the functional form of the firm’s strength set: strengths complement one another and yield increasingly positive relative performance.
Another important finding pertains to the direct effects of weakness sets on competitive advantage and relative performance. While we hypothesized a negative curvilinear relationship, we found a strong negative linear relationship. Perhaps the curvilinear effect, which was expected to occur at the highest levels of weaknesses, is not identified because firms exit markets when they have such high levels of weakness. Regardless, the negative outcome demonstrates that weaknesses are important to relative performance and should be considered in future RBV research.
The importance of weaknesses is underscored by the results of the integration hypotheses. The limited theory pertaining to strength/weakness integration suggests that a counterbalancing relationship with performance exists; one that favors the greater force (Powell, 2001; Ray et al., 2004). The nonsignificant results for the integration of low strength and low weakness sets are consistent with this logic, as are the results for Hypothesis 3b, which show that integrating a low strength set with a high weakness set negatively affects relative performance. Firms in this latter condition possess an overall competitive disadvantage. However, it is important to note that without consideration of weaknesses, RBV-based logic would have suggested that these firms would, perhaps, be adequate performers because some level of strength is possessed; while not the best performers, these would not be expected to perform so poorly. Our results indicate that modeling weaknesses along with strengths provides a more accurate picture of firm outcomes.
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