Barney and Sustained Competitive Advantage.
When we left off in the last seminar, we were just starting to talk about firm specific advantages. According to Barney and his article Firm Resources and Sustained Competitive Advantage, a few things are needed to gain a firm specific advantage. But also, he argues that a firm can gain a Sustained Competitive Advantage. SLIDE According to Barney, a firm has 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 dublicate the benefits of this strategy.
But what does a company need to gain such an advantage? First of all, it needs certain resources, which can include assets, capabilities, products, information, knowledge etc. SLIDE But these resources must have four attributes: 1. they must be valuable in the sense that they exploit opportunities or neutralize threats in a firm’s environment. This goes without saying. 2. They must be rare among a firm’s current and potential competition. This simply means that this resource or strategy cannot be implemented by other firms at the same time. They must be imperfectly imitable (hard to copy for other firms) and 4. There cannot be strategically equivalent substitutes for this resource that are valuable, but neither rare or imperfectly imitable. Can anyone think of a specific firm, or a type of business or industry, which has a clear example of sustained competitive advantage? Short discussion. SLIDE We thought about what kind of a firm could gain a sustained competitive advantage, and came to the conclusion that certain pharmaceutical companies are able to gain perfect sustained competitive advantage.
To explain why, we need to have a look at the pharmaceutical market. To make things a bit simple, we can divide the industry into two different categories: Companies which develop new kinds of medicine, and others which copy the original medicine, and produce what is called generic drugs. Some companies actully do both. SLIDE Companies which develop new medicine spend huge amount of money on research and development when making a new drug. They get the best scientists from all over the world, gather huge amounts of medical information, test the drugs etc.
They also need to prove the safety of a new drug, and demonstrate it’s effect, in special clinical trials. And of course, they need to market the new drug. This process can cost huge amounts of money. Lets say a company spends millions of dollars and ten years on developing a new drug that cures all kinds of cancer. It would be rather disappointing for that company if generic drug companies were able to copy the drug the moment it hits the market, only spending money on manufacturing the drug, but not on development and testing.
The maker of the original drug would probably soon run out of business. SLIDE So, to protect the original drug, the company can get a patent for the new drug. For how long is different between countries, but for example in the US, patents give 20 years of protection. But for as long as a drug patent lasts, the firm enjoys a period of market exclusivity, or monopoly if you like. Under those circumstances, the company is able to set the price of the drug at a level which maximizes profitability. The profit can greatly exceed development and production costs of the drug.
Often, when the patent runs out and many other companies start making generic drugs, the prices fall dramatically and real competition starts. But to sum things upp, new developed medicine can fit Barney’s theory: They can be valuable, rare and not only hard to copy, but simply impossible. SLIDE The point is – if a firm can develop a new important type of medicine, and get a patent so it wont be copied, it has a perfect sustained competitive advantage while the patent is still valid, and therefore, fits well into Barney’s theory.
