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What we have wrong about why some companies are more successful than others

What we have wrong about why some companies are more successful than others


New research published in the Strategic Management Journal suggests a firm’s competitive advantage can last more than three times as long as previously believed. INSEAD Assistant Professor of Strategy Phebo Wibbens found that companies with “higher-order” resources can greatly outlast their competitors. Traditionally, strategy experts have focused on a firm’s operating resources – assets and capabilities that directly affect profit – when analysing its competitive advantage. Based on that assumption, high-performing firms were believed to have a run of success lasting on average about five years. But as IKEA, Apple and other firms have shown, a much longer period of success is available to some companies.

Discovering what gives these firms and others like them their longer lasting success, Wibbens created a mathematical model based on empirical data covering 4,000 firms in the United States over three decades.

In Performance persistence in the presence of higher-order resources, Wibbens finds that firms can make their operating resources go further when they are complemented by often intangible but valuable higher-order resources, such as superior strategic planning, merger & acquisition teams and innovation capabilities. With his model of the dynamics between resources and profits, Wibbens found that when both operating and higher-order resources were taken into account, firms enjoy a competitive advantage for 18 years on average.

Competitive advantage — conditions that give a company its favourable position — had been thought to last only about five years on average. When evaluating their firms, executives tend to only consider their operating resources, ones that directly affect profit. Central to a firm’s long-term success, however, are “higher-order” resources, those intangible assets that improve a company and help drive long-term growth, such as strategic capabilities. Long-term successful companies must be able to change the way they operate; this is the fundamental idea of higher-order resources, also called dynamic capabilities.

“Higher-order resources are not quantifiable the way that profits are,” says Wibbens. “Fundamentally, both operating and higher-order resources are always idiosyncratic and unique. If there were a general prescription for better resource positions, every firm would be able to get them and these resources would no longer grant any advantage. This makes empirically measuring them a challenge.”


Implications for managers

In the article, Wibbens suggests ways for managers to evaluate their own firms’ higher-order resources and build strategies based around their organisations’ unique resource strengths. Operating resources lead to persistence in the level of profit differences; higher-order resources lead to persistence in the growth of profit differences.

Higher-order resources help bolster operating resources. They produce persistently better resources over the long term, leading to a longer stretch of competitive advantage. Although broad, these findings demonstrate that acknowledging the importance of higher-order resources is a decidedly valuable insight.

The post What we have wrong about why some companies are more successful than others appeared first on Workplace Insight.

Source: Work Place Insight


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