Third, because capability strengths and weaknesses affect competitive advantage, exploring how environmental and firm-specific factors influence their change over time increases our knowledge related to the durability of competitive advantage. In support of Wiggins and Ruefli (2005), we conclude that the durability of a competitive advantage is limited because strength and weakness sets change significantly over time in rivalrous markets (D’Aveni, 1994; Ferrier, 2001). As such, this research provides an understanding of some of the endogenous and exogenous factors affecting the temporal nature of competitive advantage.
Next, we examine prior literature on capability strengths and weaknesses and the theoretical frame provided by the RBV. This discussion concludes with the development of the concept of a firm’s strength and weakness sets, followed by specific theoretical arguments and hypotheses. We then present the methods and the results of the hypotheses tests. A discussion of the findings, emphasizing their contributions as well as the study’s limitations, concludes the paper.
Although several concepts related to weaknesses have been suggested, including core rigidities (Leonard-Barton, 1992), resource weaknesses (West and DeCastro, 2001), and competitive disadvantage (Powell, 2001), Arend’s (2004) conceptualization of weaknesses as strategic liabilities is the most formally defined. Stated simply, strategic liabilities represent ‘the other side of the ledger’ (Arend, 2004: 1006) in resource-based logic. Specifically, Arend contrasted strategic assets, those capabilities following RBV tenets (e.g., valuable, rare, etc.) with strategic liabilities, which are capabilities that are costly (lead to high cost for the firm), supply restricted and appropriated by the firm. Supply restricted implies that strategic liabilities are not equally distributed among firms and cannot be converted to a benign state with any benefit to the firm because of the costs involved to do so. Thus, strategic liabilities represent the worst of capabilities. We argue that additional utility can be achieved in extending the treatment of strategic liabilities by relaxing the absolute (internal to the firm) perspective and instead utilizing a comparative approach, thereby allowing a broader conceptualization of weakness.
A comparative lens allows for a more finegrained differentiation among rivals’ capabilities. As Peteraf and Barney argue ‘competitive advantage is the result of having more valuable resources than other firms’ (2003: 317, emphasis added). Thus, ‘it is the strengths relative to competitors that matter and not absolute strengths’ (Wernerfelt and Karnani, 1987: 192). However, while the application of a comparative lens may help identify capability strengths of a firm in a particular competitive context (Grimm and Smith, 1997), it simultaneously suggests a question regarding the effects of less valuable capabilities.
Traditionally, within the RBV vernacular, value is based on the ability of the firm to use a capability to exploit an opportunity, neutralize a threat, and/or improve the efficiency or effectiveness of a firm, while rarity represents insufficient supply (Barney, 1991). As a result, some RBV work has focused primarily on capabilities that have the potential to produce an absolute level of gain (value) and on those that are in short supply (rare). However, rarity can exist both in terms of a capability’s presence (or lack thereof) or its level. For a specific industry, it is likely that rarity will be more attuned to levels of effectiveness per capability as opposed to its mere existence. For example, Castanias and Helfat argue that ‘managerial human capital...is scarce if a manager possesses higher quality skills relative to his or her competitors’ (2001: 663). In other words, managerial capability is not rare per se, but high levels of managerial capability—beyond the skills possessed by competitors—are rare. Therefore, when using a comparative approach, the variance in the value of a capability across rivals delineates rarity and is important to competitive outcomes (Grimm and Smith, 1997).
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