Beyond Competitive Advantage

Beyond Competitive Advantage: What Can Theories of Strategy Explain?
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BEYOND COMPETITIVE ADVANTAGE:
WHAT CAN THEORIES OF STRATEGY EXPLAIN?

J.W. Stoelhorst
University of Amsterdam
Amsterdam Business School
The Netherlands
j.w.stoelhorst@uva.nl

Flore Bridoux
Universit Catholique de Louvain, Louvain School of Management
Facults universitaires St. Louis
Belgium
bridoux@fusl.ac.be

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BEYOND COMPETITIVE ADVANTAGE:
WHAT CAN THEORIES OF STRATEGY EXPLAIN?
This paper critically evaluates the use of dependent variables in theories of competitive strategy
in general, and the resource-based view of the firm in particular. We show that seminal papers
diverge widely in their specification of what theories of competitive strategy should explain. We
argue that this divergence is the result of attempts to increase the managerial relevance of
theories of strategy. This is substantiated by a review of the explanatory moves that have been
made in the development of the resource-based view of the firm. In their search for relevance,
RBV papers have been moving between arguments derived from neoclassical, evolutionary, and
bargaining perspectives. We show that while these explanatory moves have indeed increased the
managerial relevance of the RBV, they have also put a strain on its theoretical rigor. We examine
what each of the three perspectives can, and more importantly, cannot explain when applied to
the study of competition between firms. We show that their explanatory logics, while
complementary, are based on incompatible assumptions. We demonstrate that each logic requires
a different concept of competitive advantage and discuss how these concepts complement each
other. We conclude that a balance between relevance and rigor in theories of competitive
strategy is most likely to be struck when we develop separate theories on the basis of each logic
and further our understanding of how to fruitfully move between them.
Keywords: competitive strategy, theoretical foundations, RBV, dynamic capabilities,
evolutionary theory, increasing returns, bargaining
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The definition of competitive advantage is at the core of strategic management and
deserves a spirited debate (Coff, 1999: 131)
INTRODUCTION
The question how firms achieve and sustain competitive advantage is perhaps the most
fundamental question in the field of strategic management (Rumelt, Schendel and Teece, 1994).
Explaining competitive advantage has been a centerpiece of theory development in the discipline
since the work of Porter (1980, 1985) and is a central concern of resource-based theories (e.g.
Barney, 1991; Teece, Pisano and Shuen 1997; Peteraf and Barney, 2003). However, despite its
widespread use in the theoretical discourse of the field, the notion of competitive advantage
remains elusive (cf. Winter 1995; Powell 2001; Rumelt 2003; Postrel 2006). Indeed, many
researchers use the term without stating explicitly what they mean. Some authors use the term as
synonym for superior financial performance (e.g. Peteraf, 1993; Ghemawat and Rivkin, 1999;
Foss and Knudsen, 2003). Others have defined competitive advantage in terms of certain firm
characteristics or attributes of strategy that enable financial performance (e.g. Porter, 1980;
Ghemawat, 1991; Barney 1991; Peteraf and Barney 2003).
This situation is problematic because it goes beyond a simple lack of consensus over the
definition of competitive advantage. Not only do different definitions of competitive advantage
coexist within the same stream of research, but also it is not very clear what role the concept
plays within the explanatory structure of the theories. It is sometimes treated as the dependent
variable of a theory, while at other times it is an intermediary construct that explains other
dependent variables. These other variables, in turn, differ across contributions and range from
profit and different types of rents, to value created and value appropriated, survival and growth.
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This calls into question fundamental issues with respect to the explanatory rigor of theories of
strategy (Powell, 2001).
Switching between dependent variables and their definitions within theories is likely to limit our
progress in developing theories of strategy. The lack of clarity surrounding the concept of
competitive advantage has already spurred some authors to develop clearer definitions of
competitive advantage (e.g. Peteraf and Barney, 2003; Postrel, 2006). The approach in this paper
is somewhat different. Our interest is in understanding the root causes of the lack of consensus
about the competitive advantage concept. We look beyond competitive advantage as such and
examine its place among the dependent and independent variables of theories in strategy. We ask
what theories of strategy have tried to explain and what they can reasonably be expected to
explain and we show that there are major discrepancies between the answers to these two
questions.
The focus of the paper is on the resource-based view (RBV), although we will argue that our
analysis also holds for theories of competitive advantage that have taken inspiration from
industrial organization (Porter 1980, 1981, 1991). We show that seminal contributions to the
literature on competitive strategy diverge widely in the dependent variables they use and in their
definitions of these variables. We argue that the resulting confusion over the explananda of
theories of strategy has its origins in attempts to increase the managerial relevance of the
competitive strategy literature. While these attempts are inherently worthwhile, they have led to
a number of explanatory moves that have put a strain on the explanatory rigor of theories of
strategy. The main purpose of this paper is to examine how future theory development in
competitive strategy can combine increased managerial relevance with explanatory rigor.
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The paper proceeds in three steps. First we review the use of dependent variables in seminal
contributions in the competitive strategy literature in general and the RBV in particular. We
show that there is considerable confusion over what theories of strategy should explain. We
argue that this confusion is the result of the fact that attempts to increase the relevance of
theories of strategy have led to the incorporation of different explanatory logics. While the
original statements of theories of competitive strategy were grounded in a neoclassical economic
logic, later contributions have incorporated arguments from evolutionary theory and a bargaining
perspective. As a result, our theories tend to incorporate arguments derived from different logics
that may not always be compatible, and the claim of this paper is that this incompatibility in turn
explains why we find ourselves switching between definitions and dependent variables within
streams of research.
The second part of the paper unravels the explanatory logic of neoclassical, evolutionary and
bargaining theory as they have been applied in strategy. Here we ask what each of these logics
can reasonably be expected to explain, what the nature of their explanations is, and which
assumptions they make to offer their particular explanation. We show that each of the logics
explains something essential about performance differentials between firms, but that the
explanations they offer are based on fundamentally different assumptions. Moreover, each of the
logics has inherent limitations, and none of them can explain all aspects of firm performance.
In the third part of the paper we link our analysis back to the notion of competitive advantage We
show that competitive advantage necessarily has a different meaning in the context of each of the
logics. We conclude that theories of strategy should not be pushed beyond what their underlying
logic can explain. Despite their power, each of the logics that have been used to develop theories
of strategy can only offer a partial explanation of performance differentials between firms.
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Moreover, given the fundamentally different nature of the assumptions that they make, attempts
to combine their explanations into one overarching theory will most likely merely add to the
confusion over the explananda of theories of strategy. We discuss how the explanations based on
the different logics complement each other and argue that attempts to combine rigor and
relevance in theories of strategy are best served by carefully moving between logics.
WHAT HAVE THEORIES OF STRATEGY TRIED TO EXPLAIN?
This section asks what theories of strategy have tried to explain. This question will be answered
by reviewing seminal contributions to the literature on competitive strategy. We focus our review
on the modern resource-based view of the firm, but will show that our analysis of the way in
which the RBV has developed over time also applies to the work of Porter (1980, 1981, 1985,
1990, 1991). We structure our review of seminal papers in the RBV around three major shifts in
the object of study. These are, first, the shift in focus from resources acquired in factor markets
to resources developed within the firm, second, the move from resources and capabilities
towards dynamic capabilities, and third, the move from the generation of value to its
appropriation. This allows us to distinguish among four streams of research: a market
imperfections stream, a capabilities stream, a dynamic capabilities stream, and a bargaining
stream. This evolution in the focus of the RBV is not merely anecdotic, but can be read as a
balancing act between rigor and relevance. The explanatory moves can be seen as worthwhile
attempts to increase the managerial relevance of the RBV. However, these moves have also
resulted in strains on the rigor of its explanatory logic that have not been sufficiently
acknowledged.
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A perusal of the dependent variables suggested by seminal papers in the RBV illustrates the
strains on the rigor of the explanatory logic of the RBV. Table 1 shows that there has been
substantial disagreement about what the RBV should explain, and that this confusion continues
until today. Key RBV papers discuss different dependent variables and disagree about the
definition of these variables. Some of the shifts in dependent variables and their definitions have
been beneficial for the field by clarifying what the RBV can or should explain, but the overall
trend has been of a proliferation of variables and a resulting confusion about the explananda of
the theory. Below, we argue that where changes in the nature of the dependent variable have
been suggested, these suggestions have typically not gone far enough, because they have failed
to match the explanatory moves that have been made in the RBV. This has resulted in a situation
where theoretical arguments are linked to dependent variables that they are unable to explain.
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Insert Table 1 about here
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Market imperfections
Early papers in the modern resource-based view were positioned relative to neo-classical
microeconomics (Barney, 2001). They explained resource and performance heterogeneity in
terms of departures from the assumptions of the perfect competition model. For instance,
Lippman and Rumelt (1982) relaxed the assumption of perfect information and showed that
uncertain imitability could explain the persistence of interfirm differences in cost efficiency.
Barney (1986) similarly reasoned in terms of deviations from the model of perfect competition.
His focus on imperfections in factor markets flowed from the observation that if strategic factor
markets are perfect the cost of acquiring strategic resources will approximately equal the
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economic value of these resources once they are used to implement product market strategies
(Barney, 1986: 1231). However, when factor markets are imperfect and firms and resource
owners have different expectations regarding the future value of a resource, firms can obtain
above normal returns by having superior information about the future value of a resource or by
simply being lucky (Barney, 1986).
Other foundational publications in the RBV also used market imperfection logic. Wernerfelt
(1984) discussed mergers and acquisitions as providing an opportunity to trade otherwise
non-marketable resources and to buy or sell resources in bundles. [] As is well known, this is a
very imperfect market A key implication is that a given target will have different values
for different buyers [] (Wernelfelt, 1984: 175). Peteraf (1993) developed her four conditions
for sustained competitive advantage in terms of departures from the assumptions of perfect
competition. Heterogeneity and ex ante limits to competition enable the firm to establish a
superior resource position, while ex post limits to competition and imperfect resource mobility
make it possible for the firm to sustain this competitive advantage in equilibrium.
Positioning this early body of RBV research relative to neo-classical microeconomics had the
advantage of rigor. First, the authors in this early stream agreed upon the nature of the dependent
variable of the theory. They developed arguments to explain positive economic profit (also called
rents) sustained in equilibrium. Second, the logic used to explain this dependent variable was
clear: departures from the assumptions of perfect competition explain differences in performance
that are not eroded by competition.
From factor market imperfection to capabilities
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While making use of neo-classical microeconomics brought rigor to strategy theory, it also
limited the managerial relevance of early RBV research. One of the problems of using neo-
classical theory as a benchmark was that it is based on a very simplistic theory of the firm
(Rumelt, 1984). Neoclassical economics was developed to study the working of the price system
and black-boxed the firm by reducing it to a production function. In contrast, what happens
inside firms is a central concern of strategic management research, and the first shift in the
perspective of the RBV occurred when strategy researchers started moving away from the
neoclassical perspective on the firm.
The resulting explanatory move is evident in Dierickx and Cools (1989) recognition that
resources with the highest rent earning potential are developed internally rather than acquired in
factor markets. Dierickx and Cool (1989) responded to Barney (1986) by pointing out that
resources critical to competitive advantage are often nontradeable and must be accumulated
inside the firm. In their view market incompleteness rather than market imperfection is the source
of persistent performance differentials among firms. Their arguments resonated with a large
audience within the nascent RBV. For instance, Barney (1991) argued that resources could be
imperfectly imitable because they are socially complex. Similarly, Peteraf (1993) explained that
non-tradeability causes imperfect mobility, which is a necessary condition for sustained
competitive advantage. Others emphasized resource complementarities and co-specialization
within the firm (e.g., Black and Boal, 1994) or the resource of management (Mahoney, 1995) as
major sources of performance. Many researchers have since focused their attention on resources
and capabilities built inside the firm (e.g., Helfat 2003).
Opening the black box of the neoclassical firm increased the managerial relevance of the field,
and the focus on firm specific resources and capabilities generated new insights with respect to
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possible sources of competitive advantage. However, this explanatory move also resulted in
confusion about the appropriate dependent variable in RBV research. For instance, Barney
(1991) set out to explain sustained competitive advantage in terms of unique product market
strategies sustained in equilibrium. Other authors maintained a focus on rents, but started
differentiating among many different types of rent. These types of rent include, but are not
limited to economic concepts such as Ricardian rents, Marshallian rents, monopoly rents, and
quasi rents (Peteraf 1993, 1994; Amit and Schoemaker 1993; Mahoney 1995). Amit and
Schoemaker (1993) specifically proposed to focus on organizational rents as the dependent
variable of the RBV. These are economic rents that stem from the organizations Resources and
Capabilities, and that can be appropriated by the organization (rather than any single factor)
(Amit and Schoemaker, 1993: 36). More recently, Peteraf and Barney (2003) responded to Foss
and Knudsens (2003) critique of the resulting resource-based tangle by advocating competitive
advantage as the dependent variable of RBV. In their view, competitive advantage is seen as an
intermediate outcome in the path leading from critical resources to economic rents. Greater
economic value supports the generation of rents, but does not automatically lead to sustained
superior performance because rents may be fleeting or may be appropriated by others. Since
then, Ray, Barney and Muhanna (2004: 24) have proposed the effectiveness of business
processes as an alternate class of dependent variables because a firm may excel in some
business processes, be only average in others, and be below average in still others. A firms
overall performance depends on, among other things, the net effect of these business processes
on a firms position in the market place.
From capabilities to dynamic capabilities
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A second shift in the focus of the RBV occurred when researchers started investigating the
process by which capabilities are developed and change over time. Rumelt (1984, in Foss, 1997:
134) already called for the investigation of the appearance and adjustment of unique and
idiosyncratic resources. He dismissed the use of static equilibrium condition to study these
phenomena to the benefit of Schumpeters vision of competition as a process of creative
destruction and Nelson and Winters evolutionary approach.
Teece, Pisano and Shuen (1997: 516) developed such a perspective with their dynamic
capabilities view (DCV). Dynamic capabilities were defined as the firms ability of integrate,
build, and reconfigure internal and external competences to address rapidly changing
environments. The competitive advantage of firms was seen as being shaped by managerial and
organizational processes that are in turn shaped by the firms specific asset position and the paths
available to it. This perspective again emphasized the importance of resources that must be built
because they cannot be bought, but added an explicitly dynamic view on competition that
emphasized path dependence. Such path dependence was seen as being amplified when
increasing returns exist.
This additional explanatory move aimed to increase further the managerial relevance of the
resource-based view by putting center stage dynamics and the key role of strategic management
in adapting to a changing environment. However, increased managerial relevance again went
hand in hand with confusion about the dependent variable of the theory. The opening statement
of Teece et al.s paper mentions no less than four different dependent variables:
The fundamental question in the field of strategic management is how firms achieve and sustain
competitive advantage. We confront this question here by developing the dynamic capabilities
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approach which endeavors to analyze the sources of wealth creation and capture by firms
The approach endeavors to explain firm-level success and failure. We are interested in building a
better theory of firm performance (p.509, emphasis added)
In contrast to the explicit effort the paper makes to define its independent variables, none of
these dependent variables is defined and the table that summarizes the contribution of the paper
in relation to extant perspectives in competitive strategy (I/O, RBV, bargaining) claims a fifth
dependent variable: Schumpeterian rents. The notion of Schumpeterian (or, entrepreneurial)
rents had also been proposed in other calls for the incorporation of the role of managers and
path-dependence to understand how organizational learning affects the evolution of resources
over time (Mahoney and Pandian 1992; and Mahoney 1995).
Despite ambiguities about its dependent variable, the dynamic capabilities perspective has had a
major impact on the further development of the RBV. Not only has it made the need for a more
dynamic version of the RBV abundantly clear, but also most researchers today seem to agree that
a dynamic version of the RBV should be an evolutionary theory (e.g. Barney, 2001; Helfat and
Peteraf, 2003; Zott, 2003). Moreover, a consensus seems to have emerged that dynamic
capabilities explain how resource configurations are changed and how firm heterogeneity arises
in the process (Eisenhardt and Martin, 2000; Helfat and Peteraf, 2003; Winter, 2003; Zott, 2003).
However, the link with competitive advantage remains unclear. Seminal articles do refer to the
concept, but without offering definitions.
Bargaining: From value generated to value appropriated
Bargaining has always been present in the modern resource-based view. For instance,
Wernerfelt (1984) started his analysis of the relationship between resources and profitability by
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referring to the bargaining power of resource suppliers and buyers. Peteraf (1993) argued that
imperfect resource mobility is necessary for rents to accrue to the firm because the resource
owners would otherwise appropriate them. However, recent work has gone further by more
explicitly integrating the resource-based view with a bargaining approach.
Coff (1999) was the first to offer an in depth discussion of the link between rent generation and
rent appropriation within firms. He moved away from the representation of the firm as a unitary
actor that the RBV had imported from neoclassical economics, and saw the firm as a nexus of
contracts. On the basis of the bargaining power literature, Coff showed that characteristics that
make resources more likely to be sources of sustainable advantage, such as causal ambiguity,
firm-specificity and social complexity, also grant employees substantial bargaining power. In
consequence, his work mounted a fundamental challenge to the use of above normal financial
performance as the dependent variable in the RBV. The generation of economic rents does not
automatically lead to sustained superior performance for the firm because the owners of the
resources employed by the firm, for example its employees, may appropriate the rents generated
by the firm by bargaining for better payment for their services.
Coff (1999) assumed that suppliers and customers lack bargaining power to be able to focus on
how internal stakeholders (management, employees, and shareholders) appropriate rents. He
mentioned, however, that when the firm is seen as a nexus of contracts the distinction between
inside and outside shareholders no longer applies. Other authors have included all resource
suppliers and customers in their analysis of the value captured by the firm. For instance,
Bowman and Ambrosini (2000: 9) argued that how much of the value created is retained by the
firm in the form of profit cannot be determined solely by an examination of the processes within
the firm. It is rather determined by: (1) comparisons customers make between the firms
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product, their needs, and feasible competing offerings from other firms, and (2) comparisons
resource suppliers make between the deal they have struck with this firm, and possible deals they
could make with alternative buyers of their resources.
A small but growing body of strategy research has made use of cooperative game theory to
model bargaining among economic actors (e.g., Brandenburger and Stuart, 1996; Lippman and
Rumelt, 2003b; MacDonald and Ryall, 2004). To understand better how the value created by co-
specialized resources is divided among these resources, Lippman and Rumelt (2003a&b) favor
the formalizations of cooperative game theory over a neoclassical logic. They argue that
cooperative game theory can replace the neoclassical logic of partial equilibrium analysis with a
formal system in which value created is known, but its division is subject to negotiation. Such an
explanatory move is seen as a contribution to the relevance of the RBV because it would
circumvent the limitations of the neoclassical logic, not least by replacing the chimera of
economic profit (Rumelt 2003) by observable payments to resources.
Comparing RBV to Porter
We may conclude that the RBV has made use of three different logics: a neoclassical logic, an
evolutionary logic and a bargaining logic. That these three logics capture something essential
about competitive strategy is perhaps best illustrated by the fact that the mainstream theory of
competitive strategy in the 1980s, exemplified in Porters work, made use of these same logics.
Porters (1980) five forces framework was firmly anchored in industrial organization economics,
a perspective in which equilibrium is a necessary feature of formalization. In this framework,
competitive advantage is derived from positions that exploit market imperfections such as entry
barriers, mobility barriers or switching costs. Porter (1985) subsequently moved on to address
the internal activities of the firm as sources of competitive advantage. With this new focus on
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relative efficiency rather than market power, the meaning of competitive advantage shifted to the
superior coordination of activities (Porter 1985, 1991). Moreover, in addition to using the logic
of market imperfections, his work also builds on bargaining and evolutionary logic. Both logics
were already present in Porters early work. Bargaining logic is manifested in the horizontal part
of the five forces model, which specifically addresses the bargaining power of suppliers and
buyers. Evolutionary logic underwrites the last part of the 1980 book where Porter discusses the
evolution of markets and technologies in terms of industry lifecycles, but Porters (1990, 1991)
later work is even more explicitly evolutionary (Foss, 1996).
WHAT CAN THEORIES OF STRATEGY BE EXPECTED TO EXPLAIN?
To understand what theories of strategy can reasonably be expected to explain, we must look at
what the underlying logics of these theories are actually capable of explaining. The previous
section has shown that mainstream theories of strategy have made use of three distinct logics: a
neoclassical logic, an evolutionary logic, and a bargaining logic. This section shows that each of
these logics has inherent strengths and limitations. Each logic can explain something essential
about performance differentials among firms, but does so on the basis of very specific
assumptions. Below, we discuss each of the three logics in turn. We clarify the nature of the
explanations they can offer by specifying the dependent variables they address, the independent
variables used to address them, and the causal logic that links independent and dependent
variables. We also specify how the assumptions that are made limit the scope of what each logic
can reasonably be expected to explain when applied to strategy.
The neoclassical logic
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Theories of competitive strategy derive their rigor from being embedded in economic logic, and
at the heart of this logic is neoclassical partial equilibrium analysis. The neoclassical model of
perfect competition grounds theories of competitive strategy not because it is an accurate
description of reality, but because it serves as a useful theoretical benchmark. In markets where
the assumptions of the model of perfect competition are met there is no room for performance
differentials between firms. It follows that when we do observe performance differentials, the
markets in question must deviate from the assumptions of the neoclassical model.
The assumptions that underwrite the neoclassical model are well known. The following
assumptions must hold in product and factor markets to have perfect competition:
1. There are many buyers and sellers in the market, no one of which is large enough to
affect the going market price. In consequence, buyers and sellers are price takers. With
respect to firms, this assumption can only hold if we assume decreasing returns,
otherwise some firms would grow larger over time and could exert power over prices.
2. There is no product differentiation. Buyers are totally indifferent as to which seller they
buy from, they choose among firms solely on the basis of price.
3. Sellers enjoy complete freedom of entry and exit. Entry and exit costs are negligible. This
assumption can only hold if resources are perfectly mobile and divisible.
4. Sellers and buyers are perfectly rational and have perfect information. Buyers maximize
utility and sellers maximize profits.
Under these conditions an equilibrium will be reached in which firms will earn zero economic
profit. Firms will make just enough to be able to pay for their resources and continue their
operations. When we observe levels of profit up and above what is strictly necessary to continue
a firms operations, this must be explained in terms of a deviation from the assumptions of the
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model of perfect competition. It is on these deviations that theories of strategy have focused.
Anchored in industrial organization, Porters (1980) work has emphasized deviations from the
large numbers and homogeneity assumptions, while early RBV work has emphasized deviations
from the resource mobility assumption (e.g., Barney, 1986).
Explanations of performance differentials based on deviations from the model of perfect
competition are grounded in a rigorous logic, but are also wedded to the inherent limitations of
neoclassical partial equilibrium analysis (cf. Lipmann and Rumelt, 2003a). The model of perfect
competition assumes away many phenomena that are of interest to strategy researchers such as
(1) transaction costs, (2) limits on rationality, (3) technological uncertainty, (4) constraints on
factor mobility, (5) limits on information availability, (6) markets in which price conveys quality
information, (7) consumer or producer learning, and (8) dishonest and/or foolish behavior
(Rumelt, 1984, in Foss, 1997: 133). Moreover, the neoclassical logic can only address a very
specific concept of profits, namely economic profits, i.e., rents that accrue to a firm when
competition has played out and the price mechanism has resulted in market equilibrium. Rents,
in turn, are revenues paid to resource owners over and above their opportunity costs. Note that
the neoclassical concept of profits is only defined in relation to a perfectly competitive market in
equilibrium. Economic profits are emphatically not the same as the accounting profits that are of
interest to managers and that can be readily observed empirically (Rumelt, 2003). In other words,
theories grounded in a neoclassical logic can offer at most a possible, and in all likelihood
partial, explanation of accounting profits.
Another limitation of the neoclassical logic lies in the equilibrium notion itself. This feature of
the explanatory logic renders it incapable of giving a dynamic explanation of performance
differentials between firms. Being grounded in this logic, mainstream theories of strategy have
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found it difficult to move beyond static explanations of profit differentials. A rigorous
explanation of performance differentials based on neoclassical logic can only be given in terms
of market conditions prevailing at a specific moment in time. This is what I/O and RBV do when
they explain profit differentials in terms of positional advantages in product or factor markets
that are sustained by barriers to competition. But they do not have much to say about the
dynamic process that explains where these barriers to competition come from (cf. Lieberman and
Montgomery, 1998; Hoopes, Madsen and Walker, 2003; Helfat and Peteraf, 2003).
In essence, the neoclassical logic has brought rigor to the discipline, but the theories that are
based on this logic also fall prey to its inherent limitations. They can only uphold their rigor
within the context of the assumptions of neoclassical partial equilibrium analysis. In its pure
form, the neoclassical world of perfect competition is a world in which technology and
preferences are given, and firms are black boxes that act as unitary agents. The further theories of
strategy move away from these assumptions, the more strain is put on the rigor of their
explanatory logic.
The evolutionary logic
As theories of strategy have tried to develop more dynamic explanations of why some firms
outperform others, they have increasingly turned to evolutionary arguments. This is a
fundamental shift in perspective. Evolutionary explanations do not make use of equilibrium
analysis, but offer a dynamic explanation of change over time in terms of the interplay of
variation, selection and retention mechanisms. The important difference in nature between an
evolutionary explanation and a neoclassical explanation has not received much attention in the
strategy literature. Evolutionary theories offer an algorithmic explanation of change over time
that is fundamentally at odds with equilibrium analysis. The essence of the evolutionary
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algorithm is that a combination of mechanisms of variation, selection and retention will
necessarily lead to evolution. Evolutionary theory applies to populations of entities. If there are
mechanisms to keep introducing variations in the population, consistent selection pressures, and
mechanisms to retain the variations that work, the population of entities will become adapted to
its environment. The crux of this explanation is the feedback loop from success (or lack thereof)
in interacting with the environment to the retention of certain behaviors. This feedback loop
means that an evolutionary explanation makes use of a recursive causal logic.
The standard evolutionary explanation assumes a regime of negative feedback in which
unsuccessful entities are eliminated. The original Darwinian logic is that nature selects the
organisms that are best adapted to their environment, but this natural selection does not result
from any positive act of the environment but is simply the result of the fact that the genes of
organisms that come up short in the competition for scarce resources are eliminated. The
Darwinian algorithm proceeds through endless cycles of generating new variations, testing these
variations in environmental interaction, and retaining successful variations by eliminating
unsuccessful ones for the next cycle.
Such a regime of negative feedback is not unlike a neoclassical world in which market
competition drives out inefficient firms. But there is one crucial difference. Evolutionary models
do not have to take technology and preferences as given, and as a consequence an evolutionary
world is about out-of-equilibrium competition. The competitive context is changing continuously
as a result of endogenously generated variation. As a result, the variation-selection-retention
algorithm is uniquely suited to explain how adaptive fit evolves under conditions of uncertainty.
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However, like any theoretical perspective, the evolutionary logic also has its limitations. Note
that there is nothing in an evolutionary logic that can explain profit. When applied to firms,
profits may be an essential part of the feedback loop from selection to retention (Nelson and
Winter, 1982), but as such they are part of the explanans of evolutionary theory, and not the
explanandum. The appropriate dependent variable in an evolutionary explanation is adaptive fit
and its dynamic relationship to differential survival. To be able to explain profits, we would have
to revert back to an equilibrium explanation in terms of competitive barriers that cause market
imperfections.
In its pure form an evolutionary perspective does not have much to say about where barriers to
competition come from. However, the emergence of barriers to competition in the evolutionary
process can be addressed when a regime of positive feedback is assumed. Such a regime is
presented in the increasing returns literature. This literature also gives an algorithmic explanation
of change over time, but relaxes what is arguably the most fundamental assumption of the
neoclassical model of perfect competition: that there are decreasing returns at the margin. When
there are increasing returns to scale, firms experience a regime of positive feedback, in which
there is a tendency for that which is ahead to get further ahead, for that which loses advantage
to lose further advantage (Arthur, 1996: 100). Positive feedback mechanisms can operate on the
supply side to lower costs (e.g. scale economies) or on the demand side to increase value (e.g.
network externalities).
The positive feedback of increasing returns mechanisms changes the evolutionary model in some
fundamental ways. In the version with negative feedback we have a world in which each entity,
be it organism in biology or firm in economics, is small in relation to the overall population of
entities with which it competes for resources. In biology this situation is an empirical fact,
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because each organism can only consume a limited amount of energy. In neoclassical economics
this situation is merely assumed. As soon as we allow for increasing returns, the population
dynamics change dramatically. We no longer have a situation in which we can predict that a
population of entities will become better and better adapted to the specific environmental
selection pressures that it faces, but one in which we can expect the entity that, for whatever
reason, gets ahead of its competitor to corner the market. Given pure increasing returns, this is a
logical consequence of the recursive causality by which firms that get ahead of the competition
incur advantages in customer value and costs. Such advantages will help a firm with a
competitive lead to get even further ahead of its competitors, which in turn increases the value of
its products and cost position, and so on until it corners the market.
The bargaining logic
The bargaining logic is another approach in which neoclassical assumptions are relaxed to shed
light on phenomena that would otherwise escape rigorous analysis. Here the crucial difference
with neoclassical theory is that firms are no longer assumed to be unitary agents (Coff, 1999).
Instead the firm is seen as a legal shell containing property rights to a set of resources or, in the
case of humans, resources-services (Lippman and Rumelt, 2003b). In other words, the firm is a
nexus of contracts (Coff, 1999) bringing together a coalition of resource providers (among which
employees and owners) within a supply chain of suppliers, complementors and buyers. These
different parties are at the same time collaborators in generating economic value and competitors
in claiming a share of the value that is created.
By considering a coalition of claimants that bargain over the appropriation of the value generated
by their joint activities, the bargaining perspective moves away from the neoclassical view of
market prices as drivers of economic behaviors. Instead it considers that rents appropriated by
22
resource suppliers are the negotiated payments for the services of scarce valuable resources
(Lippman and Rumelt, 2003b). These negotiated payments depend on the values that resource
suppliers could have created by bundling their resource with resources from alternative buyers of
their resource (Bowman and Ambrosini, 2000; Lippman and Rumelt, 2003b). The bargaining
perspective treats relations with buyers and sellers in a symmetrical way, so prices paid by
customers are similarly the result of negotiations between the firm and customers based on
comparisons customers make between the firms product, their needs, and feasible competing
offerings from other firms (Bowman and Ambrosini, 2000). Thus, in a bargaining perspective,
the important driver of behaviors is not a market price but the value that could have been
appropriated in alternative coalitions.
In the strategy literature, we observe two complementary versions of the bargaining perspective.
There is work that has concentrated on bargaining between firms (Brandenbruger and Nalebuff,
1995; Brandenburger and Stuart, 1996; McDonald and Ryall, 2004) and there is work that has
concentrated on bargaining within firms (Coff, 1999; Lipmann and Rumelt, 2003b), although
some authors have considered both simultaneously (e.g., Bowman and Ambrosini, 2000). When
studying bargaining between firms, the focus is on how the value generated by a supply chain is
divided among the focal firm, its suppliers, and its buyers. In other words, the dependent variable
in this version of the bargaining approach is the value appropriated by the firm. The value
generated by the coalition of players that is the subject of bargaining is bound by buyers
willingness-to-pay and the suppliers willingness-to-sell. When studying bargaining within firms,
the focus is on how the value appropriated by the firm is divided between its internal resource
suppliers, especially employees and owners. In consequence, the dependent variable this version
23
of the bargaining approach addresses is the value appropriated by a stakeholder or a group of
stakeholders (e.g., employees, shareholders).
The bargaining logic offers an essential complement to the explanations of performance
differentials between firms based on neoclassical and evolutionary perspectives, but also has its
limitations. The most obvious limitation is that the bargaining perspective has very little to say
about value creation. It assumes that value is created and focuses its analysis on how this value is
divided among claimants. Moreover, when formalized, the bargaining perspective uses
cooperative game theory to address how economic value is divided among claimants. While a
useful tool, cooperative game theory offers only a partial answer to the question of how much
value a player is going to appropriate. Brandenburger and Stuart (1996) explained that, under the
assumption of unrestricted bargaining (i.e., all favorable coalitions are identified and sought out
by the players, which rules out imperfect information), each player will capture at least the value
that it would appropriate in alternative coalitions and will not be able to capture more than the
value it adds to the coalition. This value is the difference between the value generated by the
coalition with the player included and the value that the other players of the coalition would
generate by replacing the player by the best alternative. Where the value appropriated by the
player falls in this interval depends on the structure of the game and may be formally
indeterminate (MacDonald and Ryall, 2004). Elements such as negotiation skills are not taken
into account in formal cooperative game theory even though in practice they may help explain
where the value appropriated by the player falls in the interval described above. Furthermore,
Lippman and Rumelt (2003b) pointed to Brandenburger and Stuarts (1996) use of a specific
solution concept, called the core, to define solutions. According to Lippman and Rumelt (2003b),
solutions to the bargaining game may well lie outside the core. They applied several solution
24
concepts for simple bargaining games, showing that these different solution concepts lead to
different results. Thus, in contrast to neo-classical microeconomics that provides a unique
equilibrium, cooperative games often have multiple equilibria.
COMPETITIVE ADVANTAGE
What do the fundamental differences between the logics discussed above mean for our
understanding of competitive advantage? While many authors have explicitly used competitive
advantage as the dependent variable of their theories, recent publications tend to argue that the
notion is better seen as an intermediate variable that can help explain some other aspects of
performance differentials between firms (Powell, 2001; Peteraf and Barney, 2003; Postrel,
2006). We concur. A first step towards clarifying the nature of competitive advantage is to
disentangle explicitly the notion itself from the performance differentials between firms it should
help explain. A second step is to specify competitive advantage in terms of a specific advantage
over specific others. Together, these two steps lead to three questions: (1) Which aspect of
performance differentials do we want to explain? (2) In terms of which advantage can this aspect
of performance be explained? (3) Over whom does the firm need to establish this advantage?
Answering these questions shows that competitive advantage necessarily means different things
in the context of the different logics (see Table 2). This is a direct consequence of the dependent
variables they are able to explain, the nature of their explanatory logic, and their underlying
assumptions.
-------------------------------
Insert Table 2 about here
-------------------------------
25
Within the context of the neoclassical logic of partial equilibrium analysis, competitive
advantage means a positional advantage over the break-even competitor in equilibrium, i.e., once
competition has played out (cf. Peteraf and Barney, 2003). It is such an advantage that explains
the firms ability to earn rents, which are defined as returns to a factor in excess of its
opportunity costs (Peteraf and Barney, 2003). The follow-up question concerns the nature of this
positional advantage. The advantages that have been proposed in the literature are twofold:
positional advantages in terms of a higher willingness-to-pay for the firms offering relative to
competitors, and positional advantages in terms of the firms ability to produce its offering more
efficiently than competitors. These positional advantages are in turn explained in terms of
product and factor market imperfections.
Within the context of the population dynamics of an evolutionary logic the analysis shifts from a
static equilibrium comparison with the break-even competitor to a dynamic comparison with the
average firm in the population of competitors. In an evolutionary context, uncertainty and
endogenously generated change force firms to adapt continuously to changing circumstances.
Here, the dependent variable is adaptive fit and its dynamic relationship to differential survival.
Whether a firm will be able to secure the necessary resources to survive from the environment
depends on how it compares to the average competitor. Over time, firms that do better than
average will survive while firms that perform below the average will fail. Note that this means
that the average performance in the industry is a moving target. This in turn means that this
notion of competitive advantage is fundamentally different from the equilibrium notion in the
neoclassical logic.
Within the context of increasing returns logic, the dependent variable is market share. As is the
case with evolutionary explanations, the explanatory logic of increasing returns builds on a
26
recursive causal logic. The difference is that the evolutionary algorithm is one of negative
feedback (underperforming firms are selected out), while the increasing returns logic is one of
positive feedback (firms that get ahead enjoy a self-reinforcing advantage). Positive feedback
changes the population dynamics in the sense that firms that do better expand, while firms that
do worse contract. At the limit, in a world dominated by increasing returns, only the best firm
survives. This means that competitive advantage is only defined in terms of an advantage over
the best alternative.
Finally, in the bargaining logic, the dependent variable is value appropriated by a stakeholder or
group of stakeholders. These stakeholders can be external or internal to the firm as the notions of
inside and outside the firm do not apply when the firm is conceived as a coalition of resource
suppliers and buyers. Here the analysis shifts to considering the outcome of bargaining over the
value generated. Competitive advantage is therefore best defined in terms of a bargaining
advantage over all other claimants.
1
This bargaining advantage depends on the stakeholders
access to key information, replacement cost for the coalition (which is the difference between the
value generated by the coalition with the stakeholder and the value generated by the coalition
with the best available replacement for the stakeholder), cost of moving to another coalition, and
capability of acting in a unified manner (Coff, 1999).
DISCUSSION
Our examination of the different logics that ground theories of strategy suggests an obvious
explanation for the fact that we have a tendency to switch between dependent variables and still
face definitional problems with respect to central constructs like competitive advantage. Each of
the logics discussed above highlights a crucial aspect of competitive advantage, but each logic
27
can only offer a partial explanation of performance differentials between firms. Consequently,
attempts to offer a complete explanation of performance differentials within theories of strategy
have invariably led to frameworks that combine arguments from multiple logics. While such
theory development may indeed increase the relevance of theories to practitioners, it comes at
the expense of rigor and opens the door to confusion about the nature of the dependent variable.
The evolution of Porters work is a case in point. The managerial relevance of his frameworks is
beyond doubt, and his work was instrumental in precipitating the economic turn in strategy that
brought rigor to the discipline. However, Porters (1980) five forces model mixes a neoclassical
logic with a bargaining logic, and it should therefore come as no surprise that modifications to
the model have been suggested from a bargaining perspective. It has been argued that the threat
of substitution should be outside of the framework because it affects the overall value created by
the industry rather than within-industry competition (Brandenburger, 2002; Postrel, 2006).
Moreover, by putting the dynamics of the industry lifecycle center stage, the second part of
Porters 1980 book developed an evolutionary perspective that does not combine well with the
underlying equilibrium logic of the five forces model (Foss, 1996). These strains on the
explanatory logic of his frameworks are also present in his later work. In his book on the firm
specific nature of the sources of competitive advantage, Porter (1985) still grounded his
arguments in the theory of industrial organization even if this approach is not particularly well
equipped to capture the complexities of internal activities. And his work towards a more
dynamic theory of strategy (Porter, 1991) continued to mix evolutionary arguments with notions
based on equilibrium analysis.
Current attempts to develop the RBV into a more dynamic theory face similar difficulties in
balancing relevance and rigor. Such attempts typically make use of evolutionary concepts, but
28
the increasing use of evolutionary arguments to explain firms abilities to adapt to environmental
change in the face of uncertainty makes the resulting explanation of competitive advantage more
and more difficult to integrate with the original RBV explanation of a firms ability to earn rents
in terms of factor market imperfections. While a neoclassically grounded RBV and an
evolutionary DCV can complement each other, their different logics mean that they simply
cannot, as some have claimed, be integrated into one overarching theory without losing
explanatory rigor. In that sense, claims for the development of different resource-based theories
(Barney, 2001) are more in line with the analysis presented above, but even then the idea of an
evolutionary resource-based theory (Barney, 2001, 2003) only makes sense if we explicitly
recognize that such a theory will necessarily address another dependent variable than the
traditional RBV and will also lead to a different conception of competitive advantage.
We believe that a balance between relevance and rigor in the development of theories of strategy
is best struck by carefully distinguishing among the different explanatory logics and by carefully
moving between them. There is no simple answer to what the appropriate dependent variable of a
theory of strategy should be. Our discipline is probably best served by focusing on variables that
are managerially relevant and easily observed empirically. The most obvious variables that meet
these criteria are survival, growth, and profit. But the explanatory logics that ground our theories
may not be particularly suited to explain these variables. We have seen that each of the logics
can offer a rigorous explanation of an important aspect of firm performance, but that none of
them can explain everything that would interest managers and be observable in empirical
research. We believe that it will be impossible to offer such all-encompassing explanations on
the basis of one overarching theory. A more fruitful road ahead would be to develop rigorous,
29
but necessarily partial, explanations of performance differentials between firms, and further our
understanding of how these explanations may complement each other.
--------------------------------
Insert Figure 1 about here
--------------------------------
Figure 1 presents a step towards this goal by showing how the different logics relate. It
incorporates the proposal by Hoopes et al. (2003) that a value-price-cost model may serve as a
generic framework for theories addressing competitive heterogeneity. We have modified this
framework by replacing price by revenue, which represents the mathematical product of price
and number of products sold. The different logics discussed above are represented as four
different angles on this concept of competitive heterogeneity.
In the bottom left corner, the evolutionary algorithm offers a way to explain how competitive
heterogeneity emerges out of processes of variation, selection and retention at the level of the
population of competing firms. Under conditions of uncertainty, variations in the resource
configurations of competing firms are generated continuously and endogenously. The resource
configurations of firms that are able to survive are retained in the population, and as a result the
population of surviving firms becomes better and better adapted to its environment. This logic is
about differential survival and as such it has nothing to say about profit. It simply differentiates
between firms that are able to survive and those that fail. Survival does not require profit, but
merely that the revenues (R) of the firm offset its costs (C). In other words, the relevant
advantage is that of the break-even competitor over competing firms that fail. However, over
time the level of efficiency at which firms in the population can break even will increase, so that
30
firms need to adapt continuously to a changing competitive environment. As such this mode of
explanation is about differences in the learning abilities of firms.
In the upper left corner, the explanation based on deviations from the neoclassical model of
perfect competition starts where the evolutionary explanation stops. It assumes the resource
heterogeneity that emerges from the evolutionary process, and explains economic rents in terms
of market imperfections prevailing when competition has played out and equilibrium has been
obtained. In this view, firms that are able to generate more economic value than the break-even
competitor will be able to earn economic rents. Economic rents can be earned when the buyers
willingness-to-pay for a firms products (V) is higher than that of the break-even competitor,
and/or when the costs of the resource configuration used to generate this value for buyers (C) is
lower than that of the break-even competitor. This is a mode of explanation that is based on
efficiency differentials between firms. However, it has nothing to say about who appropriates the
economic value created.
The bargaining logic in the upper right corner takes value created as given and focuses on how
value is appropriated by different claimants. It starts its explanation where the neoclassical
explanation stops and explains value appropriated in terms of the bargaining power of the
different members of the coalition that has generated the economic value to be divided. The
lower bound of the value that can be appropriated is set by the opportunity cost of each member
of the coalition (C), while the upper bound is set by the perceived value of the product produced
by the combined resources of the coalition (V). The bargaining logic explains where the
revenues (R) that accrue to individual claimants fall within this interval. This mode of
explanation is based on bargaining power. However, the bargaining power of the individual
31
claimants depends on the specific situation they face, and the bargaining logic as such does not
explain how these situations obtain.
In the lower right corner, the positive feedback logic of increasing returns gives a dynamic
explanation of how firms can achieve market power. Whether the conditions for increasing
returns are present and to what extent they play a role in the industry in question will determine
if this industry will become more or less concentrated. Under conditions of increasing returns, an
increase in market share will increase the perceived value of the product of the firm (V) and
lower its costs (C). Under such conditions, relative growth rates (R) affect relative value and
costs. This mode of explanation is based on how strategizing or luck can help a firm make use of
the positive feedback mechanisms of increasing returns. It complements the static notions of the
neoclassical and bargaining perspectives by showing how path dependent processes can affect
both the economic value created (under increasing returns the gap between V and C widens with
increased R) and the bargaining situations that firms may face (under increasing returns firms
can build bargaining power by dominating markets).
CONCLUSION
Our main conclusion is that individual theories should not be pushed beyond what their
underlying logic can explain. The different logics derive their strength from their ability to
explain very specific dependent variables, but the nature of these variables, and the assumptions
made to be able to explain them, differ between logics. When we try to explain all aspects of
firm performance at the hand of a single theory, we unavoidably have to mix logics and
conflicting assumptions. Doing so means losing rigor and diminishes rather than increases the
explanatory power of our theories. This, in turn, leads to definitional problems with respect to the
32
dependent variables that we attempt to explain. A better solution is to develop separate theories
that can uphold their rigor and focus on the ways in which they can complement each other.

1
This definition of competitive advantage differs significantly from MacDonald and Ryalls (2004) proposal to call
competitive advantage the minimum that an individual is guaranteed to appropriate in excess of the normal rate of
return. This minimum is the result of the competition among economic actors and is unrelated to bargaining.
33
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36
Table 1: Dependent variables and their definitions in the competitive strategy literature
Source Dependent
variable(s)
Definition of the dependent variable(s)
Positioning School
Porter (1980) Competitive
advantage
Competitive advantage grows fundamentally out of value a firm is able to crate
for its buyers that exceeds the firms cost of creating it.
Porter (1985) Competitive
advantage
The fundamental basis of above-average performance in the long run is
sustainable competitive advantage. Though a firm can have a myriad of
strengths and weaknesses vis--vis its competitors, there are two basic types
of competitive advantages a firm can possess: low cost or differentiation. (p.
11).
Porter (1991) Superior market
positions relative to
best rivals
The reason why firms succeed or fail is perhaps the central question in strategy.
(p. 95)
I will assume that firm success is manifested in attaining a competitive
position or series of competitive positions that lead to superior and sustainable
financial performance. Competitive position is measured, in this context, relative
to the worlds best rivals. Financial success derived from government intervention
or from the closing of markets is excluded. A successful firm may spend some of
the fruits of its competitive position on meeting social objectives or enjoying
slack. Why a firm might do this, however, is treated as a separate question (p. 96)
Ghemawat (1991) Competitive
advantage
the extent to which the benefit-cost gap for its product exceeds the benefit-cost
gaps for competitors products. (p. 68)
Ghemawat &
Rivkin (1999)
Competitive
advantage
A firm [...] that earns superior financial returns within its industry (or strategic
group) over the long run is said to enjoy a competitive advantage over its rivals
(p. 49)
Early RBV
Lippman &
Rumelt (1982)
Level of surplus
profit in equilibrium

Rumelt (1984) Firms survival
and profitability
(sections 1 & 5)
Positive
economic profit in
equilibrium or rents
(sections 2, 3& 4)
Business policy is concerned with those aspects of general management that
have material effects on the survival and success of business enterprises (p. 132)

No definition
Wernerfelt (1984) Profitability No definition
Barney (1986) Greater than normal
economic
performance
greater than normal economic performance obtained from creating
imperfectly competitive product market (p. 1231)
Conner (1991) Above normal returns
= economic rents
The firms ultimate objective in a resource-based approach generally is taken to
be above-normal returns. In the resource-based view, obtaining such returns
requires either that (a) the firms product be distinctive in the eyes of buyers (e.g.,
the firms product must offer to consumers a dissimilar and attractive
attribute/price relationship, in comparison to substitutes), or (b) that the firm
selling an identical product in comparison to competitors must have a low-cost
position (p. 132)
Peteraf (1993) Rents Firms endowed with [superior] resources are able to produce more economically
and/or better satisfy customer wants. (p. 180)
Firms with superior resources will earn rents (p. 180)
Earnings in excess of breakeven are called rents, rather than profits, if their
existence does not induce new competition. (p. 180)
First move: towards resources built internally
Dierickx & Cool
(1989)
Competitive
advantage, above-
normal returns
No definition
Barney (1991) Competitive
advantage and
sustained competitive
a firm is said to have a competitive advantage when it is implementing a value-
creating strategy not simultaneously being implemented by any current or
potential competitors. (p. 102)
37
advantage A firm is said to have a sustained competitive advantage when it is implementing
a value creating strategy not simultaneously being implemented by any current or
potential competitors and when these other firms are unable to duplicate the
benefits of this strategy. (p. 102)
Mahoney &
Pandian (1992)
Rents Rent is defined as return in excess of a resource owners opportunity cost (p.
364)
Amit &
Schoemaker
(1993)
Organizational rents The challenge facing a firms managers is to identify, ex ante, a set of Strategic
Assets (SA) as grounds for establishing the firms sustainable competitive
advantage, and thereby generate Organizational Rents. These are economic rents
that stem from the organizations Resources and Capabilities, and that can be
appropriated by the organization (rather than any single factor).
Black & Boal
(1994)
Sustainable
competitive
advantage

Mahoney (1995) Rents Rents may be achieved by owning a valuable resource that is scarce (Ricardo,
1817). [..] Second, monopoly rents may be achieved by government protection or
by collusive when barriers to potential competitors are high (Conner, 1991). Third,
entrepreneurial (Schumpeterian) rent may be achieved by risk-taking and
entrepreneurial insight in an uncertain/complex environment (Rumelt, 1987;
Schumpeter, 1934). Fourth, the firm may be able to appropriate rents when
resources are firm-specific (Aharoni, 1993). The difference between the first-best
and second-best use value of a resource the so-called composite quasi-rent
(Klein, Crawford, and Alchian, 1978) is precisely the amount that a firm may
appropriate to achieve above-normal returns. (pp. 91-92)
Peteraf & Barney
(2003)
Competitive
advantage
Rents
An enterprise has a Competitive Advantage if it is able to create more economic
value than the marginal (breakeven) competitor in its product market. (p. 314)
The Economic Value created by an enterprise in the course of providing a good
or a service is the difference between the perceived benefits gained by the
purchasers of the good and the economic cost to the enterprise. (p. 314)
Greater economic value supports the generation of rent
In equilibrium (the limit of this competition occurs when the residual value of the
least efficient firm is completely dissipated (p. 315)), this pool of excess
residual value is equal to the economic rents attributable to the more efficient
factors (p. 315)
We define economic rents as returns to a factor in excess of its opportunity
costs. (p. 315)
Ray, Barney &
Muhanna (2004)
Effectiveness of
business processes
An alternative class of dependent variables the effectiveness of business
processes is proposed as a way to test resource-based logic (p. 24) because:
1) a firm may excel in some of its business processes, be only average
in others, and be below average in still others. A firms overall
performance depends on, among other things, the net effect of these
business processes on a firms position in the market place (p. 24)
2) it is possible for a firms stakeholders to appropriate the economic
profits that can be generated by a firms business processes before those
profits are reflected in a firms overall profitability (p. 25)
Second move: Dynamic capability approach
Teece et al.
(1997)

Competitive
advantage; wealth
creation and capture
by firms; firm level
success and failure;
firm performance;
Schumpeterian rents
No definitions
Eisenhardt &
Martin (2000)
Competitive
advantage
Competitive advantage is not defined. However, the paper distinguishes between
long-term competitive advantage and temporary advantages:
Dynamic capabilities are necessary, but not sufficient, conditions for competitive
advantage (p.1106)
... their value for competitive advantage lies in the resource configurations that
they create, not in the capabilities themselves ... [they] can be used ... in the
pursuit of long term competitive advantage ... They are, however, also very
frequently used to build new resource configurations in the pursuit of temporary
38
advantages (p.1106)
Helfat & Peteraf
(2003)
Heterogeneity of
capabilities and
resources in a
population of firms

Zott (2003) A firms resource
configuration;
Differential firm
performance
Dynamic capabilities are modeled as leading to changes in a firms resource
configuration
Firm performance is modeled in terms of profit
Bargaining approach
Brandenburger &
Stuart (1996)
Value created by the
vertical chain and
value captured by a
firm
Value created by the vertical chain (the firm together with its suppliers and
buyers) = buyers willingness-to-pay suppliers opportunity cost
Under the assumption that there is no friction in the marketplace that prevents
every favorable deal from being sought out, each player captures an amount of
value which is no greater than that players added value:
Valued added by the firm = value created by all players in the vertical chain
value created by all players without the firm
Coff (1999) Observable rent in
performance
measures (rent that
accrues to
shareholders)
In order to predict when rent will be apparent in performance measures, we must
examine two questions in concert : 1) what resources generate rent? And 2) who
has bargaining power to appropriate rent? (p. 119)
[R]esearchers have generally assumed that strategic capabilities lead to above
normal financial performance that is easily observable. [] [I]f rent from a
resource-based advantage were observable in traditional performance measures, it
would reflect the tip of the iceberg. Employees would typically capture much of
the rent []. This assertion arises from a core premise of the resource-based view
sustainable advantages stem from causally ambiguous, firm-specific, or socially
complex assets. [] Thus, the factors that generated rent in the nexus also
enhance employee bargaining power (p. 129)
Bowman &
Ambrosini (2000)
Perceived use value,
exchange value,
profit realized
Perceived use value is the amount the customer is prepared to pay for the
product (p. 4)
Exchange value is the amount paid by the buyer to the producer for the perceived
use value (p. 4)
How much of the exchange value captured from customer is retained by the firm
in the form of profit realized cannot be determined solely by an examination of
the processes within the firm. [] The amount of profit realized on exchange of
those products is determined by:
(1) comparisons customers make between the firms product, their needs,
and feasible competing offerings from other firms;
(2) comparisons resource suppliers make between the deal they have struck
with this firm, and possible deals they could make with alternative
buyers of their resources (p. 9)
Lippman &
Rumelt (2003a)
Simple rent payments
for the services of
resources
In contrast to the neoclassical view, in the Payment Perspective there are no
difficult-to-define economic profits: the payments to the firms resource base are
the observed cash flows (p. 1070). These payments are the simple rents.
Simple rent measures the value of the scarce resource. [] Were the resource not
scarce, then simple rent would be zero (p. 912)
Lippman &
Rumelt (2003b)
Rents rents appears as the negotiated payments for the services of scarce valuable
resources. The use of [cooperative game theory] permits analysis of the division of
surplus as determined by the relative values created by different use combinations
of resources. (p. 1084)
MacDonald &
Ryall (2004)
Value appropriated
by a firm

Competitive
advantage
Positive value extraction from a cooperative game in all distributions that are
feasible (sum to at most grand coalition payoffs) and stable (immune to subgroup
defections)
An individual has a competitive advantage when the minimum that the individual
is guaranteed to appropriate exceeds the normal rate of return. This minimum is
the result of the competition among economic actors and is unrelated to
bargaining.
Other
Hoopes et al.
(2003)
Competitive
advantage = superior
[T]he firm that produces the largest difference between value and cost has an
advantage over rivals. It can either attract buyers due to the better surplus its
39
performance product offers (V-P) or make a higher profit (P-C) or both. (p. 892)
Value is the price a buyer is willing to pay for a good absent competing products
or services yet within budget constraints and considering other purchasing
opportunities. Most work considers costs in terms of marginal cost. (p. 891)

Table 2: The four logics
Neoclassical Evolutionary
negative
feedback
Evolutionary
positive
feedback
Bargaining
Dependent
variable
Rents Adaptive fit Market share Value appropriated
Explanans Differential
efficiencies
Differential
survival
Differential
growth
Bargaining power
Explanatory
logic
Neo-classical
equilibrium
Variation-
selection-
retention
mechanisms
Increasing
returns
mechanisms
Game theoretic
equilibrium
Neoclassical
assumptions
that are
relaxed
There are market
imperfections
Productive
knowledge is
endogenous
There are
increasing
returns
The firm is a
coalition of
claimants
Meaning of
competitive
advantage
Advantage in
economic value
created over the
break even
competitor in
equilibrium
Advantage in
ability to adapt
over the moving
average of the
population of
competitors
Advantage in
growth rate over
the best
alternative
among the
competitors
Advantage in
bargaining power
over the other
players in the
coalition that
generates the value

40
Figure 1: How do the logics relate?

V

R

C
NEOCLASSICAL BARGAINING
EVOLUTIONARY
negative feedback
EVOLUTIONARY
positive feedback
Economic
rents
Value
appropriated
Market
share
Adaptive
fit

Beyond Competitive Advantage

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Beyond Competitive Advantage: What Can Theories of Strategy Explain?

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