The dynamic interplay of capability strengths and weaknesses: investigating

Strategic Management Journal

Strat. Mgmt. J., 31: 1386–1409 (2010)

Published online EarlyView in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.893

Received 10 June 2008; Final revision received 1 July 2010

THE DYNAMIC INTERPLAY OF CAPABILITY

STRENGTHS AND WEAKNESSES: INVESTIGATING

THE BASES OF TEMPORARY COMPETITIVE ADVANTAGE

DAVID G. SIRMON,¹* MICHAEL A. HITT,¹ JEAN-LUC ARREGLE,² and JOANNA TOCHMAN CAMPBELL¹

¹  MaysBusinessSchool,TexasA&MUniversity,CollegeStation,Texas,U.S.A.

²  EdhecBusinessSchool,Nice,France

Foundational RBV work suggests that firms possess capabilities that represent strengths and others that represent weaknesses. In contrast, contemporary research has examined capability strengths while largely ignoring weaknesses. Addressing this oversight, we examine the direct and integrated effects of sets of capability strengths and capability weaknesses on competitive advantage and its empirical correlate—relative performance. Additionally, we explore how environmental and firm-specific factors influence change in these drivers of competitive advantage over time. Results suggest that weakness sets have a negative effect on relative performance, while strength sets have an increasingly positive effect. The integrative effects of strength and weakness sets affect relative performance in a complex manner. For example, while high strength/low weakness firms perform at high levels, firms integrating high strength with high weakness perform well, but experience considerably more variance in their realized outcomes. Lastly, we find that the strength and weakness sets change significantly over time in markets where competition is more intense, thereby undermining the durability of competitive advantage. Our theory and results indicate that achieving temporary advantage is more difficult than previously thought and that the erosion of advantage occurs routinely as a result of dynamic and interactive rivalry. Copyright  2010 John Wiley & Sons, Ltd.

INTRODUCTION

Understanding the sustainability of competitive advantage is central to strategic management (Barney, 1991; Porter, 1985; Schendel, 1994). Prior work—primarily conducted in related fields, such as economics—suggested that sustained competitive advantage is possible in that while the performance of most firms converges toward average, some firms are able to resist this trend (e.g., Mueller, 1986; Waring, 1996). However,

more recent work in strategic management demonstrates that such outcomes are rare and often only operative for short periods of time (Wiggins and Ruefli, 2002). Increases in rivalry—extending even to the levels of hypercompetition (D’Aveni, 1994)—and rapid technological changes (Bettis and Hitt, 1995) undermine the sustainability of a competitive advantage (Thomas, 1996). For example, dynamic and aggressive rivals can erode the market share of industry leaders, eventually leading to their dethronement (Ferrier, Smith, and Grimm, 1999). In fact, Wiggins and Ruefli (2005) concluded that prior research identifying firms with sustained competitive advantage likely identified companies that achieved a series of temporary advantages over time. Thus, evidence suggests that achieving sustained competitive advantage requires managers to understand the bases of competitive advantage as well as the factors that lead to dynamic changes in these bases that allow them to concatenate a series of temporary advantages.

A primary theory upon which to understand the bases of competitive advantage is the resourcebased view (RBV) (Barney, 1991). The RBV suggests that when a firm resource is both valuable and rare, a competitive advantage is possible. A recent meta-analysis suggests that, indeed, the basic tenets of the RBV are largely supported (Crook et al., 2008). However, a review of the foundations upon which the RBV is based suggests that there is more to a competitive advantage than is often considered. The work of Selznick (1957), Penrose (1959), Wernerfelt (1984), and Rumelt (1984) (among others) proposes that the firm is a bundle of resources and capabilities^[1] which together influence the achievement of a competitive advantage. Importantly, these scholars suggest that this bundle of capabilities is composed of both strengths and weaknesses. For example, Wernerfelt (1984) defines a resource as ‘anything which could be thought of as a strength or weakness of a given firm’ (1984: 172), Selznick (1957) discusses distinctive inadequacies in addition to a firm’s distinctive competencies, and Penrose argues that deficient managerial talent can inhibit, at least temporarily, organizational objectives.