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Shelby D. Hunt& RobertM.Morgan
Comparative AdvantageTheory of Competition
A new theory of competition is evolving in the strategy literature.The authors explicate the foundations of this new theory, the "comparative advantage theory of competition," and contrast them with the neoclassical theory of perfect competition. They argue that the new theory of competition explains key macro and micro phenomena better than neoclassical perfect competition theory. Finally, they further explicate the theory of comparative advantage by evaluating a market orientation as a potential resource for comparative advantage.
The emperorhas no clothes. -Hans ChristianAndersen
hree recent streamsof researchportendmajorchanges in marketing theory and practice: works addressing strategic issues in marketing theory and research and (Aaker 1988; Bharadwaj,Varadarajan, Fahy 1993; Day and Wensley 1988; McKee, Varadarajan, Pride 1989), and those advocatinga marketorientationfor superiorfirm performance (Day 1984; Day and Nedungadi 1994; Kohli and Jaworski1990; Narverand Slater 1990; Shapiro 1988; Webster 1994), and those emphasizing the desirability of relationship marketingin strategic network competition (Berry and Parasuraman 1991; Dwyer, Schurr,and Oh 1987; Morgan and Hunt 1994; Parvatiyar,Sheth, and Whittington 1992; Thorelli 1986; Webster 1992). However, not all marketers are sanguine about the prospects for these three streams.Day (1992, p. 324, 328) points out that"withinacademic circles, the contributionof marketingto the development, testing, and dissemination of strategy theories and concepts has been marginalizedover the past decade,"and he observes that "the marketingconcept is nowhere to be found in ... discussion[s] of competing principles of managementpresumedto be causally relatedto the effectiveness of organizations." Moreover,he concludes that "theprognosis for marketing ... is not encouraging" in the ongoing "strategydialogue"regardingnetworksand alliances. Ourcentralthesis is thatthe strategydialogue Day refers to is evolving towarda new theory of competition-one that has significant advantagesover neoclassical theory. Our article contributesto the developmentof this new theory and examines its implications for marketing. Specifically, we T D. is Hoskins P.W. Professor Marketing, and Horn of MarShelby Hunt J.B. of Texas Area, keting Administration, TechUniversity. College Business M. Robert Morgan anAssistant is Professor Marketing, of of Department and of and AdminManagement Marketing, College Commerce Business of The thank Chris istration, University Alabama. authors Cox,Nicholls StateUniversity; Boal,SteveEdison, Menon, Kim Anil Robert Phillips, John Sparks, R. B. James Wilcox, Robert Wilkes, Tech and E. Texas Uniand JM for comments on versity; theanonymous reviewers their helpful drafts thisarticle. of Journal of Marketing Vol. 59 (April1995), 1-15
draw on (1) the evolving resource-basedtheory of the firm from the strategyliterature(Barney 1991; Conner 1991), (2) the works on competitive advantagefrom marketingand industrial organization economics (Bharadwaj,Varadarajan, and Fahy 1993; Day and Wensley 1988; Day and Nedungadi 1994; Porter 1980, 1985, 1990), (3) the theory of competitive rationality from Austrian economics (Dickson 1992), and (4) the theoryof differentialadvantagefrom marketing and economics (Alderson 1957, 1965; Clark 1961) to develop the foundationsfor a theory of competitionthat we label the "comparativeadvantage theory of competition."l We arguethatthis theoryexplains key macroand micro phenomena betterthan does neoclassical theory. By "neoclassicaltheory"we mean the theory of perfect competition, and "neoclassicist," then, is anyone whose work derives from, is consistent with, or assumes the foundationalpremises of perfect competition.Because economics texts present perfect competition as the ideal form of competition,it is the basis for most public policy (at least in North America). Furthermore,perfect competition is the only theoryof competitionthatcollege studentsever see. Although perfect competitiontheory casts marketingactivities as "creatorsof market imperfections,"because marketing texts themselves present no rival theory, our own students see only perfect competition theory. Indeed, even marketing's academic literatureoften adopts the neoclassical view. Consider such phrases as "assume a competitive market," "abnormalprofits," and "economic rents." These expressions-not uncommon in marketing-are terms of art in neoclassical theory and mean, respectively,"assumeperfect competition,""profitsdifferentfrom that of a firm in an industrycharacterized perfect competition,"and "profitsin by excess of the minimumnecessary to keep a firm in business in long-runcompetitiveequilibrium." Because perfect comis ideal, when marketingscholarsrefer to a marketpetition ing activity as "rentseeking,"they imply that the activity is economically undesirablefrom a public policy perspective. We should be mindful that when one adopts a term of art IGiventhe prominent of the resource-based role theoryof the firmin our own theory,an alternative, label equallyappropriate wouldbe the "resource-advantage of competition." theory The Comparative / Advantage Theoryof Competition 1
from neoclassical theory,one also adopts implicitly the theory thatgives the term its meaning.Therefore,we arguethat marketingacademics and practitionersshould avoid certain neoclassical terms. The dominant status of perfect competition notwithstanding,therehave been numerouscritiquesof neoclassical theory, ranging from Austrian to evolutionary schools of economics. (Even the works of many industrial organizational economists can be viewed as resulting from a dissatisfaction with neoclassical theory.) Although we acknowledge and appreciate these critiques, we do not overview them. We develop the foundationsfor a rival to perfect competition theory-we do not just critique it. One reason that perfect competition theory has retainedits dominantstatus despite its many deficiencies is the absence of a well-articulated rival thathas superiorexplanatorypower.We maintain thatthe strategyliterature evolving towardjust such a rival is and our objective here is to articulate its foundational premises. First, we identify the key phenomenathat any satisfactory theory of competition should be capable of explaining, and then we examine how perfect competition attempts to explain these key phenomena.Next, we develop the foundations for our theory and discuss its explanatorypower. Finally, we evaluatea marketorientationwithin the context of the comparativeadvantagetheory of competition.
2. Some producehundreds products otherssell only of and one; 3. Some are verticallyintegrated "hierarchies" (Williamson in 1975)andothersspecialize one activity; 4. Someareprofitable othersareunprofitable; and and 5. Someconsistently maintain relatively highprofitsandothers "fallbackintothepack." A theory of competition,we argue, should satisfactorilyexplain the micro phenomenonof firm diversity.Specifically, economies have such an extraordinarwhy do market-based diverse, ever-changingassortmentof firms?We now exily amine the theory of perfect competition and explore how it attemptsto explain both the macro and micro phenomena.
The Neoclassical Explanation
Table 1 displays the foundationalpremises of the neoclassical theoryof perfectcompetition.2As to consumerbehavior, neoclassical theory assumes that demand is homogeneous for every industry'sproduct.That is, though consumers are allowed to prefer different quantities of each industry's product(heterogeneityacross generic products),their tastes and preferencesare assumed to be identical with respect to desired product features and characteristics(homogeneous within industries).Consumersalso are assumedto have perfect information,which is costless to them, about the availability, characteristics,benefits, and prices of all products. Consumermotivation,one dimension of humanmotivation, is self-interestor utility maximization.3 The firm's objective is profit maximization or, in more sophisticated versions, wealth maximization, that is, the maximizationof the net presentvalue of futureprofits.Acting under conditions of perfect and costless information, neoclassical theory focuses on the firm producing a single productusing the resourcesof capital, labor,and sometimes land. These "factorsof production"are assumed to be homogeneous and perfectly mobile; that is, each unit of labor or capital equipment is assumed to be identical with other units and can "flow" from firm to firm without restrictions. The role of managementis to respondto changes in the environment by determiningthe quantity of product to produce and implementinga productionfunction that is identical across all firms in each industry. Competitionin neoclassical theory,then, is each firm in an industry(1) in the shortrunadjustingits quantityof product producedin reactionto changes in the marketprice of its productand the prices (costs) of its resources and other inputs and (2) in the long run adjustingthe scale of its plant. Therefore, the firm's environment strictly determines its 2These foundational are treatpremises implied the standard by ment of the axiomsof perfectcompetition foundin economics texts(e.g.,GouldandLazear 1989). 3Etzioni of (1988)discussesthe threeconceptualizations utility andutilitymaximization neoclassical in economics: a pleasure (1) utility(ethical egoismin moral terms), a tautology, (2) philosophy and (3) an emptymathematical abstraction. notes thatonly He or maximization a substantive is thesis pleasure utility, "P-utility," thatcouldpotentially empirically be tested.Furthermore,empirin ical worksand public policy recommendations, P-utilityis assumed. (See also HuntandVasquez-Parraga p. 79-80.) 1993,
Competition and Explanation
Theories contributeto scientific understanding explainby ing and predictingphenomena(Hunt 1991). Although a theory of competition might be requiredto explain numerous phenomena,the single most importantmacroeconomicphenomenon of the twentiethcenturyhas undoubtedlybeen the collapse of planned or "command"economies, which were premisedon cooperationamong state-ownedfirmsunderthe direction of a central planning board, and the concomitant economies, which are premisedon triumphof market-based competition among self-directed, privately owned firms. Perhapsthe greatest"natural experiment"in recordedhistory is now complete and the results are in: Economies premised on competing firms are far superiorto economies premised on cooperatingfirms in terms of total wealth creation, innovativeness,and overall quality of goods and services. Both the quantitativelack of goods and services (i.e., low gross domestic product)and the qualitativefact that the goods that were producedwere so shoddy plagued Eastern bloc economics. Therefore, why economies premised on competition are far superior to command economies in terms of the quantity,quality, and innovativenessof goods and services producedis a macro-levelquestion that should be answeredby any satisfactorytheory of competition. The micro phenomenon of the radical heterogeneity of firms is strikingly evident throughoutthe world's marketbased economies. Across and within countries, and across and within industries,firms differ radicallyas to size, scope, methods of operations,and financialperformance: 1. Somefirmsareso largethattheirsalesexceedthe GDPof many countries,whereasotherssell flowerson a single streetcorer; 2 / Journalof Marketing, April1995
Foundations of the Neoclassical
TABLE 1 and Comparative Advantage Theories of Competition Comparative Advantage Theory Heterogeneous withinindustries and costly Imperfect Constrainedself-interest Superiorfinancialperformance and costly Imperfect Financial,physical,legal, human, organizational, and informational, relational mobile Heterogeneous, imperfectly Recognize, understand,create, select, implement, and modifystrategies Influencesconduct and performance Comparative advantage
Neoclassical Theory 1. Demand 2. Consumer information 3. Humanmotivation 4. Firm'sobjective 5. Firm'sinformation 6. Resources 7. Resource characteristics 8. Role of management 9. Role of environment 10. Competition Homogeneous withinindustries Perfectand costless Self-interestmaximization Profitmaximization Perfectand costless Capital,labor,and land Homogeneous, perfectlymobile Determinequantityand implement function production determines conduct and Totally performance Quantityadjustment
conduct. In particular,all firms in an industry will inexorably produce at the output rate at which marginal cost equals marginalrevenue (the product'smarketprice). In the short run, in which such resources as plant and equipment are relatively fixed, each firm will incur profitsor losses depending on whetherprice is greaterthan or less than the average total cost of producingthe profit-maximizingquantity. However, in long-runequilibriumin a perfectly competitive market, all resources are variable and each firm produces the quantity at which market price equals long-run marginalcost, which itself equals the minimumlong-runaverage cost. The position of long-run equilibriumis a "noprofit"situation-firms have neithera pureprofit(or "rent") nor a pure loss, only an accountingprofitequal to the rateof returnobtainable in other perfectly competitive industries. Therefore,the firm's environmentstrictlydeterminesits performance (i.e., its profits). The welfare economics literatureinvestigatesthe conditions prevailingat the position of long-rungeneralequilibrium. If all industriesin an economy are perfectlycompetitive and no furtheradjustmentsin quantity produced are made by any firm in any industry,then at this general equilibrium position every firm has the optimum sized plant and operates it at the point of minimumcost. Furthermore, every resource or "factor" is allocated to its most producemployed tive use and receives the value of its marginal product. Moreover,the distributionof productsproducedis (Pareto) optimal at general equilibrium because the price of each product(reflecting what consumersare willing to pay for an additionalunit) and its marginalcost (the extraresourcecost society must pay for an additional unit) will be exactly equal. Therefore,the adjective "perfect"is taken literally in neoclassical theory:perfect competitionis perfect. Explaining Abundance Neoclassicists readily admit that such abundanteconomies as that of the United States are not characterizedby perfect competition. However, they claim that the U.S. economy is close enough to perfect competition to benefit from its efficiency-producing characteristics (Shepherd 1982; Stigler 1949). Therefore, neoclassical theory could potentially explain abundance by focusing on the efficiency of perfect
competition.4Whereascommandeconomies misallocate resources because of the lack of "signals" from the marketplace as to where planners should deploy resources, prices and profits in market-based economies serve as signals and motivators for efficient resource allocation. For example, because firms in a command economy are not profit maximizers, their survival does not depend on finding the most efficient scale of operation.As a second example, the absence of marketplace-determined prices would mean that such resourcesas aluminumand steel would likely not be allocated to their greatest value-producinguses. Consequently, overall efficiency suffers and outputis lowered. As for explaining the superiorinnovativenessof marketbased economies, though neoclassical economists no doubt have beliefs, their views are not derived from perfect competition theory.Indeed, long-run equilibrium,a cornerstone of neoclassical theory, is precisely the situation that would prevail after all innovation has ceased. That is, firms have maximally adjusted their product output, plant sizes, and consumption of various resources. These adjustmentsare the only kinds of innovativenesspermittedby perfect competition theory;all other forms of innovationare exogenous variablesin perfect competition.Indeed,underperfect competition, introducingan innovative feature to an industry's product can be considered a marketplace "imperfection" that would disturb the equilibrium and move the system away from an ideal state. In this vein, for example, neoclassical studies have consideredthe innovativefeaturesin yearly automobile model changes to have no benefits for con4Weaddthe qualifier becausein factthe standard "potentially" viewof neoclassicists untilthecollapseof theEastern was bloc up thatneoclassical no for markettheory provided grounds preferring
based over planned economies (Knight 1936; Lavoie 1985). For example, the neoclassicist Lekachman(1985, p. 396-97) concludes that socialist economists have "proved that a Central Planning Boardcould impose rules upon socialist managerswhich allocated resources and set prices as efficiently as a capitalist society of the pureststripe, and much more efficientlythan the capitalistcommunities of experience" (italics added). Similarly, Balassa (1974, p. 17) concludes that "economicargumentsare not sufficient to make a choice between economic systems."See Lavoie (1985) for a review of this issue.
The Comparative / Advantage Theoryof Competition 3
costs (Fishsumers, only injurious"productdifferentiation" er, Griliches, and Kaysen 1962). Similarly, perfect competition cannot explain why market-based economies have higher quality products than do command economies. The assumptions of homogeneous consumer demand and identical within-industryproduction functions mean that (1) all consumersmust desire precisely the same quality level within each product class and (2) firm-specific competencies are disallowed. Therefore,there is no reason to believe that Eastern bloc firms in each industry could not (and would not) have implemented in an equally competent manner the same standard production functions to produce the same quality productsas did their Western market-basedcounterparts.Unless consumers in Easternbloc economies desired lower quality products (an assumption refuted by the premium prices commanded by Westerngoods in such economies) or the resource endowment (e.g., labor) was intrinsically inferior in command economies (also a tenuous assumption),perfect competition cannot explain the historical shoddiness of Eastern bloc products. We should note also the implications of perfect competition for quality improvement.No firm in perfect competition would or could incur the extra expense of producinga productwith a quality level higher thanthe standard product because the homogeneous demand assumptionimplies that it could not charge a higher price. Moreover, if a firm did producea higher quality productand received a higher price for it, then this again could be interpretedas a marketimperfection that moves the marketaway from the ideal state of equilibrium. Theories of monopolistic and oligopolistic competition could potentially have served as the startingpoint for overcoming the explanatorydeficiencies of perfect competition theory because they-as neoclassicists put it-"relax" some of its foundational premises. In actuality, however, extant versions of these theories are not presentedin neoclassical theory as having any beneficial consequences for society. Rather, they are discussed as undesirable departuresfrom the preferredform of competition (note the pejorativetone to the labels "monopolistic"and "oligopolistic"). Consider,for example, Chamberlin'stheory of monopolistic competition. He (1933/1962, p. 214) realized that the "explicit recognition that productis differentiated... makes it clear that pure competition may no longer be regardedas in any sense 'ideal' for purposes of welfare economics." However, as a neoclassicist, he was methodologically wedded to finding equilibriumsolutions to his theory.His equilibrium analyses conclude that productdifferentiation(e.g., some firms producing higher quality products or products with innovativefeatures)always resultsin (1) productprices higher thanperfectcompetition's(p. 67) and (2) outputrates that are not at the lowest point on firms' long-run average cost curves (p. 77). Therefore, the theoretical import of Chamberlin'swork for neoclassicists is not the deficiencies of perfect competition (i.e., his conclusion thatpure competition is not "in any sense ideal"),butjust how imperfectmonopolistic competition is. Furthermore,when neoclassical works attempt to explore empirically the effects of devia-
tions from perfect competition,they focus on estimatingthe "social costs" resulting from misallocations of resources (e.g., Cowling and Mueller 1978; Harberger1954; Siegfried and Tieman 1974).5Tellingly for our purposes,no potential social benefits are estimated in such studies, such as those that might be related to innovativeness or quality. Indeed, why should they? How could departuresfrom perfection possibly have beneficial consequences? Explaining Firm Diversity Explaining the diverse assortmentof firms in market-based economies poses even more problemsfor neoclassical theory. Perfect competition implies numerous small firms in every industry,with each producinga single productin the quantitydictated by its most efficient plant size. But many industriesin marketeconomies are characterizedby a few firms of very large size thatproducenumerousproducts.Because perfectcompetitionis perfect, such large corporations must necessarily be inefficient and represent"marketfailures"broughtabout throughcollusive behaviorsor the existence (or erection) of "barriersto entry."Similarly, a firm with profits higher than the industryaverage is prima facie evidence of marketimperfectionsand the existence of "market power."Thus, perfect competition provides the foundations for suspecting that such large and profitablefirms as IBM in the 1960s, 1970s, and 1980s resulted from impermissible imperfections(Taylor 1982). Likewise, the continuing financialsuccess of Microsoft in the 1990s is, again, an imperfectionthat should be eliminatedas a matterof public policy (Business Week1991, 1994a, b). Two schools of economists have attemptedto explain the diversity of firms without resorting to such hypotheses as "collusion" or "barriersto entry." First, Chicago-school economists modify the assumption of identical, industrywide productionfunctions by acknowledging firm-specific competency differences (Demsetz 1975; Stigler 1951, 1964). For them, because "individualsare not all alike, ... the teams that make up business firms are not alike, and the effectiveness of firms differs"(McGee 1975 p. 101). Therefore, large firms may exist because of differencesin production efficiency rather than collusion. "Bigness" for the Chicago school is not necessarily "badness."Nonetheless, Chicago economists still adhere to the neoclassical belief thatsuperiorearningsbased on efficiency differenceswill be competed away by imitatorsin the long runand equilibrium restored.Therefore,sustainedsuperiorperformanceremains Chicasuspect (Demsetz 1973; Stigler 1966). Furthermore, go economists address only efficiency differentials,not the possibility that superiorearnings would result from either more innovative or higher quality products, that is, effectiveness differentials(Conner 1991). Transaction cost economics also criticizes the neoclassical view. Coase (1937) pointed out over half a century ago that firms can avoid both search and contract-negotiation costs by producing some of their own production inputs. Therefore,he maintained,each firm expands its operations until the marginalcost of producingan inputin house equals 5These social cost estimates commonly range from .1% to 13% of GDP.
4 / Journalof Marketing, April1995
the marketprice of that input. Indeed, his extension of perfect competition explains not only the existence of large firms on the basis of minimizing the costs associated with marketexchange, but the existence of small firms as well. That is, individualsband together under the direction of an to entrepreneur purchaseinputs and jointly produce an output because, compared with each individual acting alone, "certain marketing costs are saved" (Coase 1937/1952, p. 338). Extending Coase's ideas, Williamson (1981, p. 1537) believes that "the modem corporationis mainly to be understood as the productof a series of organizational innovations that have had the purpose and effect of economizing on transactioncosts," where such costs include all the "negotiation, monitoring, and enforcement costs necessary to assure that contractedgoods and services between and within firms are forthcoming"(Alston and Gillespie 1989, p. 193). Williamson's work (1975, 1981, 1983, 1985, 1989) identifies circumstances in which a firm's avoidance of marketplace transactioncosts are critical. If all humanbehavior is unrestrainedself-interest maximization and all firms maximize profits, then all firms will seek profits throughopportunism, that is, "self-interest seeking with guile" (1975, p. 6). Indeed, he maintains,without the assumptionof opportunism, "the study of economic organization is pointless" (1981, p. 1545).6 Because opportunismis the "deceit-oriented violation of implicit or explicit promises about one's appropriateor requiredrole behavior"(John 1984, p. 279), it will occur whenever producing a productrequiresa "transaction-specific asset,"that is, an asset whose value depends significantly on its being employed in conjunctionwith another specific asset. According to transactioncost economics, therefore,large, vertically integratedfirms exist because of the fear of marketplaceopportunism(Conner 1991). A Summary Evaluation How well does neoclassical theory explain either the abundance of or the diversity in marketeconomies? As we have seen, though neoclassical theory can potentially contribute to explaining the greaterwealth-producing potentialof market-based economies on efficiency grounds, it cannot explain their greater innovativeness or their goods and services' superiorquality.As to the diversityof firms in market economies, this diversity is directlycontraryto perfect competition theory. With respect to the Chicago school approach,though it allows some human agency in the productionfunction, its retention of other neoclassical assumptions limits the school's explanatory power. The situation with respect to transaction cost economics is more complex. Williamson (1981) identifies as foundationalthe behavioralassumptions of opportunismand bounded rationality(managers are in6Although Williamson acknowledges that not all economic agents behave opportunistically,he argues for assuming universal opportunismbecause it is "ubiquitous" (1981, p. 1550) and opportunistic "types cannot be distinguishedex ante from sincere types" (1975, p. 27) or, at the very least, "it is very costly to distinguish opportunisticfrom nonopportunistic types ex ante"(1981, p. 1545; italics added).
tendedlyrational,but only limitedly so). He also accepts the neoclassical maximizingtradition:"Neoclassicaleconomics maintains a maximizing orientation. This is unobjectionable, if all the relevantcosts [i.e., the transactioncosts] are included"(1985, p. 45). However,if all firms in an industry then the maximizingtraditionwould engage in opportunism, imply that all firms in an industrywould ultimatelywind up at precisely the same size, scope, and profitability-the one that minimizes total costs, including each firm's identical costs of opportunism. cost economics Therefore,transaction can contributeto explainingfirm diversityonly by diverging from such neoclassical assumptions as homogenous demand.7Whatis needed to explain firm diversityis a new theory of competition, one that reexaminesall the foundations of perfect competition.To this task we now turn.
The ComparativeAdvantageTheory of Competition
In Table 1, we display the foundationalpremises of the proposed theory.8Both the content and epistemology of each premise differ from its perfect competition counterpart. Specifically, because we adoptthe epistemology of scientific realism (Hunt 1991), each premise is offered as a proposition that can and should be subjectedto empiricaltesting. Thus, unlike the epistemology of perfect competition,if any foundationalpremise is found to be false, then it should be replaced with a premise that better describes the real world of competitionin market-based economies. First, rejecting the neoclassical assumptionof the gray sameness of humanconsumptionpreferenceswithin generic productclasses, we view industrydemandas significantly heterogeneous and dynamic (Alderson 1957; Dickson 1992). That is, consumers' tastes and preferences within a generic productclass, for example, footwear,not only differ but greatlyas to desiredproductfeaturesand characteristics, are always changing. Second, consumers have imperthey fect informationconcerningproductsthat might match their 7Williamson's(1981, p. 1551) profit maximizing equation appears, among other things, to deny the neoclassical assumptionof homogeneity of demand. Nonetheless, Williamson (1975, p. xi) views transactioncost theory as a "complement"to rather than being "in essential conflict with received microtheory." 8The use of the label "comparative advantage"is drawnin part from its use in international trade.There,classical Ricardiananalysis provides that internationaltrade is beneficial for all if each of countryspecializes in those productsfor which its "factors" production (which are heterogeneousand immobile across countries) make it, comparedwith other countries,more efficient. It need not have an absolute efficiency advantage in producing any product over all countries;it need only be relatively more efficient in producing some productsthan others. Similarly,our analysis assumes significant resource heterogeneityand immobility across firms in an industry.A firm, therefore, gains comparativeadvantageover other firms by making the best use of its heterogeneousresources. Note, however,thatthe resourcesassumedhere are much more sophisticatedthan the traditionalland, labor, and capital of international trade economics. Furthermore, such resources are not considered to be "natural" endowments (cf. Jones and Kenen 1984). Rather,some of the most importantresources are those intangible ones that collectively constitutecompetencies of the firm.
The Comparative / Advantage Theoryof Competition 5
tastes and preferences, and obtaining such information is often costly in terms of both time and money. Note that heterogeneity implies that few, if any, industrymarkets exist; there are only marketsegments within industries.For example, there is no "marketfor shoes,"or even separatemarkets for women's and men's shoes. Even though all consumers require footwear and one can readily identify a group of firms that manufacture shoes, the group of firms that constitutes the shoe industry does not collectively face a single, downwardsloping demandcurve-such an industrydemand curve would imply homogenous tastes and preferences.Indeed, to the extent thatdemandcurves exist at all, they exist at a level of (dis)aggregationthat is too fine to be an industry. For example, even if there were a men's walking shoe market,one certainlywould not speak of the men's walking shoe industry. Third, in their roles as both consumers of productsand managers of firms, humans are motivated by constrained self-interest seeking. This premise draws on Etzioni's (1988) argumentthatpeople have two irreduciblesources of valuation:pleasure(or, in Etzioni's notation,"P-utility") and morality.Because people do pursuepleasureand avoid pain, P-utility explains much behavior.However,both consumers and managers are constrainedin their self-interest seeking by considerationsof what is right, proper,ethical, moral, or In appropriate. ethical theory terms,deontological considerations constrain teleological considerations (Hunt and Vasquez-Parraga1993). This premise implies that opportunism is not assumedto prevailin all circumstances.We reject transactioncost theory's "guilt by axiom" (Donaldson 1990, p. 373). The extent to which people behave opportunistically in various contexts is a researchquestion to be explored and explained-not presumed. Fourthand fifth, the firm's primaryobjective is superior financial performance,which, consistent with Austrianeconomics (Jacobson 1992), it pursues underconditions of imperfect (and often costly to obtain) informationabout customers and competitors.Our view parallelsPorter(1991, p. 96), who identifies firm success as "superior sustainable and performance... relativeto the world's best rivals."There are, no doubt, other objectives-such as contributingto social causes or, as Porter(1991, p. 96) puts it, individuals"enjoying slack"-but we maintainthat such secondaryobjectives are enabled by the accomplishment of superior financial performance."Superior" implies thatfirms seek a level of financial performancethat exceeds that of its referents,often its closest competitors.Why "superior" insteadof maximum financial performance? Because firms do not maximize profits both because of the well-documented fact that they lack the informationto do so (i.e., they operateunderbounded rationality[Simon 1979]), and because moralityconsiderations at times constrain them (or some of them) from doing so. In short, superior financial performanceis constrainedby managers'views of morality.For example, many managers resist cheating or opportunistically exploiting their customersand suppliersnot only because of the P-utility fear of "getting caught,"but also because they believe such cheating and exploitationto be deontologically wrong. 6 / Journalof Marketing, April1995
Financialperformanceis indicatedby such measures as profits and return on investment, with the relative importance of specific financial indicatorsassumed to vary somewhat from firm to firm, industryto industry,and country to country.For example, in Germanyand Switzerland,where banks and othermajorshareholders rarelytradetheir shares, long-termcapital appreciationis valued more highly than it is in the United States (Porter1990). Rewardsflow to firms (and then to their owners, managers, and employees) that producesuperiorfinancialresults. Rewardsinclude not only stock dividends, capital appreciation,salaries, wages, and bonuses, but also promotions, expanded career opportunities, prestige, and feelings of accomplishment. Note that we do not characterizethe firm's objective as "abnormal" profits or "rents"that result from market "imperfections,"as does neoclassical theory. We urge all marketers to eschew such neoclassical expressions. Although one can compute such things as the average profits of a group of rivals for comparisonpurposes,the notion of "normal profits,"that is, the average firm's profits in a purely competitive industryin long-run equilibrium,is an empirically meaningless, arguably pernicious abstraction.Longrun equilibriumis neither something that exists nor something that groups of rivals are "tendingtoward"nor something that,if achieved,would be desirable(let alone perfect). Rather,marketsare never in equilibrium(Dickson 1992; Jacobson 1992) and activities that produceturmoilin markets have positive benefits because they are the engine of economic growth: "Capitalism,then, is by nature a form or method of economic change and not only never is but never can be stationary" (Schumpeter1950, p. 82). Sixth, resources are the tangible and intangible entities available to the firm that enable it to produce efficiently and/oreffectively a marketoffering that has value for some market segment or segments (cf. Barney 1991; Wernerfelt 1984).9 For example, a firm's core competencies (Prahalad and Hamel 1990) are intangible,higher orderresourcesthat enable it to perform-better perhapsthan its competitorsthe activities in Porter's(1985) "valuechain."10 Drawing on Barney (1991), Day and Wensley (1988), and Hofer and Schendel (1978), we propose that the multitudeof potential resourcescan be most usefully categorizedas financial(e.g., cash reserves, access to financial markets), physical (e.g., plant, equipment),legal (e.g., trademarks, licenses), human (e.g., the skills and knowledge of individualemployees), organizational(e.g., competencies,controls, policies, culture), informational(e.g., knowledge resultingfrom consumerand 9As used here, "value"refers to the sum total of all benefits that consumersperceive they will receive if they accept the marketoffering. It does not imply a ratio of benefits received to price paid, as in the trade'suse of "valuepricing." 10Porter (1991, p. 108), however,is critical of extant versions of resource-based theory:"Atworst, the resource-basedview is circular."For him, discussions of core competencies are "inwardlooking and most troubling"and "stress on resources must complement, not substitutefor, stress on marketplacepositions."For him, selecting the right industryand generic strategywithin an industry is key because industryis the "most significant predictorof firm performance" (Montgomeryand Porter 1991, p. xiv).
competitor intelligence), and relational (e.g., relationships with suppliersand customers). Seventh, resources are both significantlyheterogeneous across firms and imperfectlymobile. Resourceheterogeneity meansthatevery firmhas an assortment resourcesthatis at of least in some ways unique. Immobilityimplies that firm resources, to varying degrees, are not commonly, easily, or (the neoclassical readily bought and sold in the marketplace "factor"markets).Because of resourceimmobility,resource heterogeneitycan persist throughtime despite attemptsby firms to acquirethe same resourcesof particularly successful competitors(Collis 1991; Dierickx and Cool 1989; Peteraf 1993). When a firm has a resource(or, more often, a specific assortmentof resources)that is rareamong competitors,it has the potentialfor producinga comparativeadvantagefor that firm (Barney 1991). A comparativeadvantagein resources exists when a firm's resourceassortment(e.g., its competencies) enables it to producea marketoffering that, relativeto extantofferingsby competitors,(1) is perceivedby some market segments to have superiorvalue and/or (2) can be produced at lower costs. As Conner(1991, p. 132) notes, "distinctivenessin the productoffering or low costs are tied diin rectlyto the distinctiveness the inputs-resources-used to produce the product,much as the quality and cost of boeuf bourguignonne dependon the particular ingredientsused and the way in which they are mixed."A comparative advantage in resources,then, can translate into a positionof competitive advantagein the marketplaceand superiorfinancial performance-but not necessarily. Figure 1 shows nine possible competitivepositionsfor the variouscombinationsof a firm's relative(to competitors)resource-producedvalue for some segments and relative resource costs for producingsuch value.ll Ideally,of course, a firmwould preferthe competitivepositionof cell 3, where its comparativeadvantagein resourcesproduces superiorvalue at lower cost. The Japaneseautomobilecompanies,for examthe ple, had this positionthroughout 1970s and into the 1980s in the United Statesbecausetheirmore efficientand effective manufacturing processes producedhigherqualityproductsat lower costs. Positions identified as cells 2 and 6 also bring competitiveadvantageand superiorfinancialreturns,whereas cell 5, the parity position, produces averagereturns.But firmsoccupyingpositions 1 and 9, thoughhavinga comparative advantagein either value or costs, may or may not have superiorreturns. In position 1 the advantage of lower relative resource costs is associatedwith (or resultsfrom)a sacrificein relative value for consumers.Consequently,the offerings of firms in such a position will generally have lower prices than those, 1INotethatwe use "relative value"andnot resource-produced "relative differentiation We advantage." do so because(1) to be fromone'scompetitors not yield a position does simplydifferent of competitive is of (2) advantages, differentiationanoutcome provalue(not the same thingas producing ducingsuperior superior we be value),(3) as marketers should(of all groups) usingterms thatfocuson customers, (4) theword"differentiation" the and has in connotation-pernicious, ourjudgment-fromits use in neoclassicaleconomics the purpose offeringsuperior that of valueto one'scustomers to "escape rigors" perfect is the of competition.
FIGURE 1 Competitive Position Matrixa
Relative Resource-Produced Value
Competitive Competitive Advantage Advantage
Parity Resource Parity Competitive Position Disadvantage
7 8 9
Competitive Competitive Higher DisadvantageDisadvantage
aRead:The marketplace positionof competitive advantageidentified as cell 3 results fromthe firm,relativeto its competitors,being able to producean offeringforsome marketsegment or segments that is (1) perceived to be of superiorvalue and is (2) producedat lower costs.
say, in cell 2. Dependingon the extent to which the price reductionsare less than, equal to, or greaterthan their relative advantagein resourcecosts, cell 1 firms are at positions of competitive advantage,parity,or competitive disadvantage, For respectively. example,thoughAmericancar companiesin the 1970s and 1980s occupied position 7, in the 1990s they have a relativecost advantageover importedJapanesemakes (Lavin 1994). Nonetheless, because many consumers still perceiveAmericancars to be of somewhatlower quality,they occupy position 1 and competitiveadvantageis not assured. Position9, on the otherhand,is equallyindeterminate deand scribesthe Germancar companiesin the 1990s. Althoughthe resourcesof the Germanauto manufacturers continueto produce productsof superior perceivedvalue,they do so at much higher resource costs (Keller 1993). Unlike the 1970s and 1980s, when the Germancar companiesoccupiedposition 6, competitiveadvantageis now no longer assured. Cell 5, the parityposition,is the marketplace situationaddressed in partby perfectcompetitiontheory.If no firm can marketsegments producesuperiorvalue for some particular and no firmhas a cost advantage(which implies thatall innovation has stopped),then an equilibrating model of competition might apply.We should note, however,that this, the degenerativecase, is unlikelyto persistin manymarketsthrough time. Eighth, the role of managementin the firm is to recognize and understand currentstrategies,create new strategies, select preferredstrategies, implement or manage those selected, and modify them throughtime.12Strategiesthatyield 12The rationale including recognition understanding for the and of strategies thatsometimes firm'sstrategies is a or emerge areimplicit(Mintzberg for 1987).In suchcases,it is important firmsto and their or recognize understand emergent implicit strategies. The Comparative / Advantage Theoryof Competition 7
a position of competitive advantageand superiorfinancial will do so because they rely on those resources performance in which the firm has a comparative advantageover its rivals. Sometimes it is a single resource,such as a trademark; more often it is a combinationof interconnected that is, resources, a resource assortment.Sustained, superiorfinancial performance occurs only when a firm's comparativeadvantagein resourcescontinuesto yield a position of competitiveadvantage despite the actions of competitors. Because all firms seek superiorfinancial performance, competitorsof a firmhavinga comparative advantagewill attempt to neutralizetheir rival's advantageby obtaining the same value-producing resource.If the resourceis mobile, that then it will be is, readilyavailablefor sale in the marketplace, and the comparativeadvantageis acquiredby competitors, neutralizedquickly and effectively. If it is immobile, then competitorsinnovate.Accordingto Barney(1991), the innovatingbehaviorcan be eitherimitatingthe resourceor finding a substitute resourcethatis strategically A equivalent. thirdalwhich we proposeis more important thaneitherimternative, itation or substitution,is majorinnovation,that is, finding a new resource that produces value that is superior to-not strategicallyequivalentto-the advantagedcompetitor.Why more important?Because, whereas neutralizinga competitor's advantage through imitation or substitutionproduces only parity returns(cell 5 in Figure 1), identifying and obtaininga new resourcecan resultin a position of competitive advantageand superiorreturns(cells 2, 3, or 6). Ninth, whereasneoclassicaltheory-including traditional industrial organizationeconomics views (Bain 1956)-assumes that the firm's environment,particularly structure the of its industry, strictlydeterminesits conduct(or strategy)and performance (profits),our theorymaintainsthatenvironmental factors only influence conduct and performance. Relative resource heterogeneity and immobility imply that strategic choices must be made and that these choices influence performance.All firms in an industrywill not adopt the same strategy-nor should they. Different resource assortments suggest targetingdifferentmarketsegmentsand/orcompeting againstdifferentcompetitors. Competition, then, consists of the constant struggle among firms for a comparativeadvantagein resources that will yield a marketplaceposition of competitive advantage and, thereby,superiorfinancial performance.Once a firm's comparativeadvantagein resourcesenables it to achieve superiorperformance througha position of competitiveadvanin some market segment or segments, competitorsattage tempt to neutralize and/or leapfrog the advantaged firm or throughacquisition,imitation,substitution, majorinnovation. The comparativeadvantagetheory of competition is, therefore,inherentlydynamic. Disequilibrium,not equilibrium, is the norm,in the sense of a normalstate of affairs.It is also the normin the sense of a preferred stateof affairs,as we now show.
Insteadof the "assumewe stop the world and see how everyof thing would be allocated"procedure neoclassical,long-run the comparativeadvantagetheory of competiequilibrium, 8 / Journalof Marketing, April1995
in tion, displayedin Figure2, explainsthe greaterabundance market-based economies on the basis that rewards,through time, flow to the efficientand the effective. First,the comparative advantagetheory expandsthe kinds of resources(from land, labor,and capital) to include such intangibleresources as organizational culture, knowledge, and competencies. These higherorder,complex resourcesaremost important for modem companiesand their respectiveeconomies, as attested to by such moder-day successes as Japan,Singapore,and Hong Kong, which have virtuallyno naturalresources. Second, the theoryidentifiesthe searchfor a comparative advantagein resources as the powerful motivation for not only the efficient use of existing resources,but also for the creation of new ones. Thus, compared with command economies, market-basedeconomies are more effective in creating new resources, such as distinctive organizational competencies,that can then be used efficiently.After all, determiningsuch thingsas optimumplantsizes, a majorpartof neoclassical efficiency, is a narrow technical problem that could be solved to a high degreeof precisionby centralplanners.13But both central plannersand individualplant managers lack the motivation for creating new resources and, hence, new efficiencies. Therefore,the comparativeadvaneconomies continutage theory explains why market-based ously create resourcesthat can produce ever more efficient production processes, which in turn produce abundance. Thus, our theoryexplains not only why nationsthat are poor in naturalresources can be wealthy, but also why marketbased economies keep getting more efficient and more abundant. Comparative advantagetheorystraightforwardly explains economies are more innovative.Whereas why market-based in command economies there are no mechanisms for automatically rewarding innovation, rewards in market-based economies flow to firms and individualsthatdevelop innovative processes and products.First, breakthrough innovations or "Schumpeterian shocks"(Barney1991; RumeltandWensadley 1981) providethe innovatora significantcomparative vantagethat can often be sustainedthroughtime. For example, Xerox's plain papercopier in the 1960s providedan advantage that enduredfor about a decade (Ghemawat1986). Second, the many small innovationsin processes and products that also characterizemarket-based economies are predictedby comparative advantagetheory.These small innovations, throughtime, have a cumulativeeffect on resourceadvantageand, hence, on efficiency and effectiveness. Indeed, continuallyimprovingprocessesand productsis foundational for quality assuranceprogramssuch as those advocatedby Deming (Gitlow and Gitlow 1987). As to explainingquality,rather thanbeing exogenous or a marketimperfection,superiorqualityis a naturaloutcome of a system characterized the searchfor comparative advanby tage-rewards accrue to firms producinghigh-qualityproducts. In contrast,firms in plannedeconomies have no natural mechanismsfor rewarding higherqualitygoods and services. Consider again the case of the Japanesecar makers in the 13Thisis one of the argumentsby advocatesof planned economies was so effective convincing that in neoclassicists the of benefits socialism. of in superior (See references footnote 4.)
FIGURE 2 The Comparative Advantage Theory of Competition
Superior Quality, Efficiency, and Innovation
1970s and 1980s and their adoptionof Deming's views on quality. Such productioncompetencies as just-in-time purchasing constituteda resource that producednot just lower costs but moredurable,morereliable,higherqualityproducts. Their position of competitiveadvantageyielded superiorreturns.
Explaining Firm Diversity
The comparativeadvantagetheory of competition explains the diversityin size, scope, and profitability firms in each of on several grounds.First, because universalopporindustry tunismis not assumed,differentfirm sizes and scopes can be explainedon the basis that some firms develop relationships with suppliersand/orcustomersthat they can trustnot to exploit them (Morganand Hunt 1994), while others integrate backwardsor forwardsbecause they can find no such trustSecond, a firm may decide to conduct an worthypartners.14 in house, ratherthancontractit out, becauseit constiactivity of tutes, or is partof an assortment resourcesthatconstitutes, a competency.Simply put, firms do in house those activities they believe-sometimes wrongly-they have the capability of doing better.For example, whereasone auto manufacturer may perceive itself to have a distinctcompetencyin producto ing engine blocks andthusbe reluctant purchasethemfrom suppliers,anothermay outsourceblocks because it lacks this competency resource. Third, each firm in an industry is a uniqueentity in time and space as a resultof its history.Be14Note troubling the for of implications trustworthinessthestudies by Marwell Ames(1981)showing positive and a correlation between formaltrainingin economicsand prevalence "freeof riding."
cause of this unique history in obtaining and deploying resources, firms will differ from their competitors (Barney 1991; Dierickx and Cool 1989). For example, a firm's acquisitionof a piece of property its distantpastmay be now proin it a uniquesourceof comparative viding advantageand influits size, scope, or profitability. encing of Fourth,differentassortments resourcesmay be equally efficient or effective in producingthe same value for some marketsegments.These differentassortments, therefore,lead to firms of varying size and scope, where "scope"refers to product-market diversity(Chandler1990). Fifth, because of heterogeneousdemand,servicing differentmarketsegments will likely lead to firms in the same industrywith different sizes andscopes, for example,"niche"marketers. Sixth, some individualresourcesproducecomparative advantagefor only certainfirms,even thoughtheircompetitorsservice the same marketsegments.This is because, as discussed, it often is an assortment interconnected of resourcesthatproducesuch advantages as distinct competencies. Seventh, if one or more firmsservicingsome marketsegmentshave a comparative adcannotimitate,find subvantagein resourcesthatcompetitors stitutes for, or leapfrog with an entirely new resource,then these circumstanceswill produce diverse firms within the same industry.Eighth, the mixture of firms in an industry changes because of both changes in consumer preferences and the continuingsearchby all firms for a comparativeadvantagein resourcesthat will yield a position of competitive Sometimes these efforts at inadvantagein the marketplace. novationsucceed;sometimesthey do not. Considerthe substantial differencesin profitability among firms.Are these differencesprimarily, exclusively,attributor able to differencesin industrystructure, the determinism as of The Comparative / Advantage Theoryof Competition 9
neoclassicaltheoryimplies? Or do environmental factorsjust influence profitability,as maintainedby our theory and the strategicchoice school of researchers? Using 1975 Federal TradeCommission(FTC) line of business data,Schmalensee (1985) investigatedthe relativeimportanceof firm versus industry effects on firm profitability(firm returnon assets in each industry).Whereasindustryeffects accountedfor 19.5% of the variancein firm profitability, firm effects were not significant, leading him to conclude that corporatestrategyeffects "simplydo not exist"(p. 346)15Since then, severalstudies have questioned Schmalensee's finding that corporate (CubbinandGerosstrategyhas no effect on firmprofitability ki 1987; Hansen and Wernerfelt1989). For example, Rumelt (1991) extendedthe SchmalenseeFTC study by addingdata for 1974, 1976, and 1977. He found that industryeffects explained only 8% of the variancein rate of return,whereas 46% of the variancewas explainedby business unit effects. SupportingRumelt, Roquebert,Phillips, and Westfall(1994) found industryversustotalfirm (corporate plus businessunit) effects to be 10%and 57%, respectively.Roquebert, Phillips, and Westfall's findings are particularlynoteworthybecause theirsamplewas much larger(over 6800 corporations), a had broader base (over 940 StandardIndustrialClassification four-digitcategories),and includedboth small and largecorThe accumulated evidence,therefore,stronglysupporations. factorsmerely ports our theory'sposition thatenvironmental In influence, not totally determine,firm performance. short, humanagency matters.Strategicchoices matter. In conclusion,the comparative advantagetheoryof competitionperformsmuch betterthan neoclassicaltheoryin execonomiesaremorebountifuland plainingwhy market-based innovativeandhave higherqualitygoods and servicesthando command economies. It also explains better why marketbased economies exhibita rich diversityof firms,even within the same industry.
Williamson (1981) laments the "inhospitalitytradition"in economics thatviews with suspicionall organizational forms that departfrom perfect competition.Equally lamentableis the neoclassicalview thatmarketingis unnecessaryor a presumptivelynefariousmarketimperfectioncreator,or thatit is to "escape" rigorsof perfectcompetitionthatfirmsengage the in most marketingactivities.As to advertising,this inhospitality traditionhas resulted in the question "Is advertising anti-competitive?" being a cottage industryfor neoclassicists. Much worse, it led the neoclassicalhistorianKuhn(1970, p. 453) to see no differencebetween marketeconomies permitting advertisingand commandeconomies imposing "a common scale of values ... by force and propaganda"(italics added). As to product innovations, it led neoclassicists to of cereals by cereal arguethatthe introduction new breakfast manufacturers inherentlyanti-competitive is (CohenandGordon 1981). As to trademarks,it led Chamberlin(1962, p. S1Note with80%of thevariance attributed error only to that, and 20%attributed industry to resultsdo effects,even Schmalensee's notimplythatindustry structure determines profitability. firm 10 / Journalof Marketing, April1995
and Comparative Marketing Advantage
270ff) to argue against firms having exclusive use of their brand names on the grounds that "the protectionof trademarks... is the protectionof monopoly." "trademarks His are view led to the (unsuccessful)argument FTC monopolies" by attorneysthat Borden's equity in its ReaLemon trademark was anti-competitive (WallStreetJournal 1978). In contrast,recall thatcompetitionin the comparative adadvantagetheory is the constantstrugglefor a comparative vantagein resourcesthatwill yield a marketplace position of competitiveadvantageand,thereby,superiorfinancialperformance. All activitiesthat contributeto positions of competitive advantageor the absence of which would contributeto are positions of competitivedisadvantage presumptively proactivities are no exception to this competitive-marketing rule. "Presumptively" does not imply thatall pro-competitive the ways in which marketingactivitiesare carriedout are efficient, effective, or ethical or even ought to be legal. For example, it does not mean that all forms of advertisingshould necessarily be allowed or encouragedby society. Rather,it means that all forms of marketingactivities are specifically assumedto promotecompetitionunless (1) a form is demonstratedto be anti-competitive the basis of evidence, where on such evidence does not include the fact thatthe activityis (2) inconsistentwith or moves away from perfectcompetition. What we are arguingis analogous to the difference between a system of justice in which the defendantis presumed guilty until provedinnocent versus one in which one is presumed innocentuntil proved guilty. Treatiseson such topics as "Is advertisingpro-competitive?" have historicallystarted from the premise that "pro-competitive" meant "consistent with"or "leadsin the directionof" perfectcompetition.Not only is perfectcompetitionimperfect,but such a procedurebeing "guilt by axiom" (Donaldson 1990)-improperly places the burdenof proofon those engagingin the marketing activity. If marketingis presumptivelypro-competitive,what resources are distinctivelymarketingthat might yield a comThe marketingfunctionwithin organizaparativeadvantage? tions has been, at least since the 1960s, associated with the marketing concept and the "fourP's."Guidedby the markethas ing concept,marketing focused on decisions relatedto analyzing and selecting targetmarkets,productand branddeThe acvelopment,promotion,and channels of distribution. tivities relatedto each of these decision areas, it can be areven thoughthe degreeof congued, aredistinctlymarketing, trol marketing over each decision areavariesacrossfirms has and industries. Therefore,competencieswith respectto these areas constituteresourceswhen they contributeto the firm's ability to produceefficiently and/oreffectively marketofferings thathave value. Similarly,legal rights(e.g., trademarks), retailoutlets),andrelaphysicalassets (e.g., corporate-owned tional assets (e.g., brandequity) can be resources.Given the recentprominenceof marketorientationand the controversy it has raised,we focus on it as a potentialresource.In doing so, we furtherexplicate the comparativeadvantagetheory, show how it can be deployed, and highlight the role of resource-advantage in our theory.
The Natureof MarketOrientation
The idea of marketorientation tracesto the marketing concept and Jaworski 1990). Considereda marketingcorer(Kohli stone since its articulation developmentin the 1950s and and 1960s, the marketingconcept maintainsthat (1) all areas of the firm shouldbe customeroriented,(2) all marketing activities should be integrated,and (3) profits, not just sales, should be the objective. As conventionallyinterpreted,the concept's customer-orientation component,that is, knowing one's customers and developing products to satisfy their needs, wants, and desires, has been considered paramount. and Historicallycontrastedwith the production sales orientations, the marketing concept is consideredto be a philosophy of doing business that should be a majorpartof a successful firm's culture(Baker,Black, and Hart 1994; Houston 1986; Wong and Saunders 1993). "In other words, the marketing culture... thatput[s] concept defines a distinctorganizational the customerin the centerof the firm's thinkingaboutstrategy and operations" (Deshpand6and Webster1989, p. 3). Inshouldbe viewed ... as a guidingphilosophy deed, "marketing for the whole organization[because] our evidence points to improved performancesamong companies that adopt this wider approach" (Hooley, Lynch, and Shepherd1990, p. 21Therefore,thoughthe marketing 22). concept guides policies and behaviors,its culturalstatus makes it more permanent, more foundational,than, say, a strategy.Corporatecultures can be influenced, modified, formed, or shaped, but, unlike strategies,they are not selected. relateto Specifically,then, how does a marketorientation the marketingconcept? In contrastwith the marketingconcept's single focus on customers, a market orientationinvolves a dual focus on both customersand competitors(Day and Nedungadi1994;Jaworskiand Kohli 1993; KohliandJaworski 1990;NarverandSlater1990; SlaterandNarver1994; Webster1994). Therefore,we know whata marketorientation is not. It is not the same thing as, nor a differentform of, nor the implementationof, the marketing concept. Rather, it would seem that a marketorientationshould be conceptualized as supplementary the marketing to concept. Specifically, in mindthe role of management the theoryof comin keeping parativeadvantage(see Table 1), we propose that a market orientationis (1) the systematicgatheringof informationon customersandcompetitors, bothpresentandpotential,(2) the of the informationfor the purposeof desystematicanalysis veloping marketknowledge, and (3) the systematic use of such knowledgeto guide strategyrecognition,understanding, and creation,selection, implementation, modification.We include potential customers to guard against the hazards of firms being "customer-led" (Hamel and Prahalad1994), that is, focusing only on the articulated needs, wants, and desires of present customers. We include potential competitors to guardagainstthe hazardsof changingtechnologyresultingin new competitors. do not includeinterfunctional We coordination (Narverand Slater 1990) because, though it is a factor thatcan contribute implementing to successfullya marketorifactorsshould not appearin a entation,such implementation concept's definition. As to its ontologicalstatus,a marketorientation shouldbe considereda kind of organizingframeworkthat, if adopted
and implemented,could throughtime become culturallyembedded in an organization. such it would be intermediate As between a businessstrategy(e.g., cost leadership)thatcan be selected and the preeminentlycultural business philosophy identifiedas the marketingconcept. Just as a marketorientation would guide strategy selection, the marketingconcept would informthe use of the componentsof marketorientation by remindingmanagersto keep customers,as Webster(1994) puts it, "on a pedestal,"because they always have the "final say."
Market Orientationas a Resource
Is a marketorientation resource?Marketing'sstrategylitera ature has historicallycategorizedsources of advantageinto skills and resources,in which the formerare "the distinctive capabilitiesof personnel"and the latterare the "moretangible requirements advantage" for (Day and Wensley 1988, p. 2-3). Althoughits successfulimplementation requiresskills, a marketorientationis itself not a skill, nor is it more tangible thana skill. Thus, it seems not to fit this schema. Our theory views resourcesas the tangibleand intangibleentitiesthatenable a firm to produceefficiently and/oreffectively a market offeringthathas value for some marketsegmentor segments. In this view, a marketorientation would be an intangibleentithat ty thatwould be a resourceif it providedinformation enableda firmto produce,for example,an offeringwell tailored to a marketsegment's specific tastes and preferences.(Note thatTable 1 includesinformation a basic kind of resource.) as Could a marketorientation a resourceleading to combe A parativeadvantage? marketorientationstresses the importance of using informationabout both customers and competitorsin the formulationof strategy.Therefore,the knowledge about one's competitors-their products, prices, and strategies,for example-gleaned from implementinga market orientationcould potentiallyenable a firm to produce a marketofferingfor some marketsegmentsmoreefficientlyor effectivelythanone's competitors(Glazer1991). We say "potentially"because a marketorientationcan produce a comparativeadvantageonly if it is rareamong competitors(Barney 1991). If all competitorsadopt a marketorientationand implementit equally well, then a comparative advantageaccrues to none. Like the ante in a pokergame, a marketorientation would be a necessary precondition for playing the game. Is a marketorientationrare?Two studies suggest "yes." First, Jaworskiand Kohli (1993, p. 64) investigate the antecedents and consequences of marketorientationand conclude, "thefindingsof the studiessuggest thatthe marketorientationof a business is an important determinant its perof of formance,regardless the marketturbulence, competitiveinof in tensity or the technologicalturbulence the environment which it operates." NarverandSlater(1990, p. 32) inSecond, vestigate the effect of a marketorientationon business profitability using a sample of 140 strategicbusiness units of a and large forest-products corporation conclude, "forboth the commodity and noncommoditybusinesses, marketorientation is an important determinant profitability." of These studies suggest that a marketorientationis a resourcethatis rare because,if it were not, it would not be examongcompetitors The Comparative / Advantage Theoryof Competition 11
pected to lead to a position of competitiveadvantage(cells 2, 3, or 6 in Figure 1) and hence superiorperformance. Is a marketorientationa resourcepotentiallyleading to a sustainablecomparativeadvantageand hence a position of sustainable competitive advantage and, thereby, superior The long-runfinancialperformance? life span of a particular in resources-its sustainability-is comparativeadvantage determined factorsboth internaland externalto the firm. by Internal Factors A comparativeadvantagein resourcescan be dissipated,allowed to atrophy, just plain squandered severalinternal or by factors:(1) a failureto reinvest,(2) the presenceof causalambiguity,and (3) a failureto adapt.All resourcesrequireconstantmonitoringand maintenance (Dierickxand expenditures Cool 1989). Forexample,"abusinesswith a reputation sufor perior quality could experience an erosion in quality as a source of SCA [sustainable competitiveadvantage]if it fails to continueinvestingin processesthatcontributed the busito ness's reputationfor quality"(Bharadwaj, and Varadarajan, Fahy 1993). A firm may also allow a comparative advantage in resources to dissipate because the relationshipbetween theircompetitiveadvantage the marketplace theircomin and parativeadvantagein resourcesis causally ambiguous(Reed and DeFillippi 1990). In this respect,firmsare like nationsboth may lack an accurateunderstanding their sources of of wealth and both may squandersuch resources(Hayek 1960). or Finally,a firmmay fail to modify,sell, relinquish, abandon a resource or an assortmentof resources in response to a An changedenvironment. asset thatis a resourcein one environmentcan become a nonresource anotherif it no longer in contributestowardthe creationof value in the firm's market offerings.Even more seriously,somethingthatwas previously a resourcecan become what we label a "contra-resource" and actuallyinhibitthe creationof value in the firm's market offerings.As a case in point,considerthe permanent employment issue. Because "viewing employmentas permanent creates the best incentiveboth for the companyand its employees to invest in upgradingskills,"Porter(1990, p. 594) recommends that all companies "makethe commitmentto maintainpermanent employment to the maximum extent possible." In contrast,the view here is thatpermanent employment,either as a formalpolicy or as an informalelement of a firm's culture, is not necessarilya resourcein all environments.Consider IBM, an example used by Porter(1990). It is true that IBM successfully resisted involuntarylayoffs for over 70 years and thatthis fosteredworkerloyalty and a low personnel turnoverrate. By the 1990s, however,accordingto Hays (1994), the permanentemploymentaspect of IBM's culture into appearsto have been transformed a feeling by IBM employees thatthey were "entitledto theirjobs,"which then led to employee "lethargy." emThus, the resourceof permanent ployment became the contra-resourceof job entitlement (Hays 1994, p. A5): the 40 of Through mid-1980s Blueenjoyed percent the Big world-wide sales and70 percent all profits. of industry's Theno-layoffs backfired vow hit badlywhentrouble in the late 1980s. From 1986-1993,IBM took $28 billion in 12 /Journal of Marketing, April1995
half buy charges, of it forvoluntary outsandcutthepayroll by 37 percent. A policy of permanent employmentmay be a resource,nonresource,or contra-resource, dependingon a firm's competitive position and its environment. External Factors A firm's comparativeadvantagein resourcescan be neutralized by the actionsof consumers,government, competitors. or Changesin consumertastes and preferencesin a marketsegment can turn a resource into a nonresourceor contra-resource.Thus, for example, a distribution system that emphasizes franchised dealers can shift from resource to nonresource if consumersdecide that they desire to purchasethe items in question from discount stores. In like manner,governmentalactions can destroythe value-creating potentialof a resource throughlaws and regulation.Changes in patent, trademark,franchising, and other laws can destroy a resource'scomparative advantage. actionsthatcan neutralizea resource'scomCompetitors' parativeadvantageinclude attemptingto purchasethe same resourceas an advantaged competitor,imitatingthe competitor's resource, searching for a strategically equivalent resource, or searchingfor a strategicallysuperiorresource,that is, a majorinnovation(Barney1991; Dierickxand Cool 1989; Lippmanand Rumelt 1982; Peteraf 1993; Reed and DeFillipi 1990; Wererfelt 1984). The effectiveness of these actions and the time it takes for them to neutralizea specific competitor'sresource advantagesuccessfully depend on characteristicsof the marketplace offering, the resourcesproducing the offering,and the competitor'sresources. As to the marketplaceoffering, the key characteristic is know that consumers ambiguity.Although competitorsmay in the marketsegments stronglyprefer their rival's offering, theremay be greatambiguityas to preciselywhatattributes of the offering are making it perceived to be superior.Furthermore, there may be great ambiguityas to specifically which resourcesare being used to produce the highly valued attributes. These two sources of causal ambiguity (resource -- offering; offering -- consumer) can create great
and uncertainty thus renderineffective attemptsto neutralize a competitor'scomparative advantage. As to resources,the majorcharacteristics affectingthe life span of an advantageare mobility,complexity,interconnectedness, mass efficiencies, tacitness, and time compression diseconomies. The advantagebroughtby mobile resources, those that are commonly bought and sold in the marketplace can (such as machinery), be neutralized effectively andquickly. Intangible,higher order resources, such as an organizational competencyin new producttesting, cannotbe neutralized as quickly. Often difficult to neutralizeare complex reof sources,those involvingcombinations manyresources,and interconnectedresources, those for which competitorsmay lack access to a criticalcomponent.Mass efficiencies spring fromthe fact thatsome resourcesrequirea "criticalmass"before they can be deployedeffectively.Tacitresourcesencompass skills that are noncodifiable and must be learned by doing and thus cannot be bought. Time compression diseconomies refersto the fact that some resources,such as a rep-
utationfor trustworthiness, their very naturetake time to by acquire.All these factors make it more difficult for a competitorto acquireor imitatea competitor'sadvantage-producing resource,makingsuch a resource,to varyingdegrees,sustainable. In light of the preceding,is a marketorientationa source of sustainablecomparative Considera hypothetiadvantage? cal firm that is marketorientedand enjoying a comparative (Its advantage. competitors,as Aaker[1988, p. 13] puts it, are Thus, this firm chooses its targetmaroriented.") "internally kets morewisely thanits competitors its offeringsarebetand ter tailoredto its customers'preferences.Could its advantage be sustained? to internalfactors,thoughthe firmmightfail As to reinvestin its information-gathering activities(allowingits to dissipate), adaptingto changing customer readvantage and quirements competitoractionsis a specific componentof the firm's orientation.Furthermore, because the firm knows its customersand its competitors,this would contribute greatly to knowingitself, thus attenuating causal ambiguityas any to why it is enjoying superiorfinancialperformance. As to externalfactors, knowing its customersand competitorsshould allow the firm to respondto changes in consumer preferencesand competitorstrategiesin an informed, perhaps even optimal, manner.Furthermore, just as many firms give "lip service" (Aaker 1988, p. 212) to being customer oriented,competitorsmay not recognize a genuinely market-oriented competitorwhen they encounterone. Moreover, a marketorientationis intangible,cannotbe purchased in the marketplace,is socially complex in its structure,has has componentsthatarehighly interconnected, mass efficiencies, and is probablyincreasinglyeffective the longer it has been in place. Finally,thereis probablya significanttacit dimension to implementing a market orientationeffectively. Employees learn how to be marketorientednot solely from reading policy manuals or textbooks but from associating with other employees that are alreadymarketoriented.Consequently,there are good groundsfor believing that a truly market-oriented can enjoy a sustainable firm adcomparative thatcan lead to a position of sustainablecompetitive vantage advantageand superiorlong-runfinancialperformance.
The "strategy dialogue,"having alreadyproduceda new theof the firm, is evolving towarda new theoryof competiory tion. Ourpurposehas been to identifythe foundationsof this new theoryand its implicationsfor marketing. The set of ten foundationalpremises in Table 1 constitute,we propose,the groundsfor the comparative advantage theoryof competition. Although these premises, taken individually,have been discussed by othersat numeroustimes in many places, this article is the first to place them into a cohesive theory.Contrasting the theory's premises with those of neoclassical perfect the of competitionfacilitatesunderstanding structure this new theory.A theoryof competitionshouldbe requiredto explain not only why economiespremisedon competingfirmsare superiorto economies premisedon cooperatingfirms in terms of the quantity,quality,and innovativenessof goods and services, but also the phenomenonof firm diversityin marketbased economies. Ouranalysisindicatesthatthe comparative
advantagetheory of competition explains these key macro and micro phenomena better than its perfect competition rival. Because competitionis the constantstruggleamongfirms for a comparative in advantage resourcesthatwill yield a marketplaceposition of competitiveadvantageand, thereby,superiorfinancialperformance,marketingactivities shift from nefariousmarketimperfectioncreator being a presumptively to being, like otherfirmactivities,presumptively pro-competitive. As a consequence,some may view (and perhapsattack) the comparative advantagetheory as self-servingfor marketing. In response,self-servingnessis a red herring.Thoughour theorydoes indeed serve, and serve well, the interestsof marketing academeand practice,the self-servingnessof our theory is irrelevant.The relevantquestions are, "Is the theory true?Is the real world constructedas the theory suggests, or is it not?" (Hunt 1990, p.1). That our theory explains key macroand microphenomenagives us good reason,according to scientific realism (Hunt 1990), to believe that something exists that is like the entities and structure postulatedby the theory. Much conceptual and empirical work must be done to and implicatest, explore, and furtherexplicate the structure tions of the theory.Are thereadditionalfoundational premises thatshouldbe included?If so, which ones, and why? What otherresourcesaredistinctivelymarketing might provide that a comparativeadvantage?For example, is relationshipmarketing such a resourceand, if so, under what conditions?If perfectcompetitionshould not be the norm for guiding public policy, how can and should comparative advantagetheory be employed?Can and shouldthe theorybe mathematized? Finally, marketingshould harborno illusions, let alone delusions.We can and should work on developing the comparativeadvantagetheory,use it as a foundationfor research, promoteit as superiorto perfect competition,and-for our students-incorporate it in our texts. We also can expunge such neoclassical locutions as "economic rents,""abnormal "market and profits," imperfections," "assumingperfectcomfrom our discipline's lexicon. However,as the epipetition" graphremindsus, what we cannot do is have an impact on neoclassicaleconomic theory.The edifice of generalequilibriumtheory,with its base of perfectcompetitiontheory,is elegant, mathematicallyformalized, and aesthetically pleasing.16It is deeply embeddedwithin a discipline that is large and influential,especially when compared with marketing. Neoclassical economics has enormous sunk costs in perfect competition.Indeed, all evidence of the theoretical,predicand tive, explanatory, normativedeficiencies of the set of beliefs that has perfect competitionat its core has always been summarilydismissed. Perfectcompetitionis unshakable,immutable,and impregnable. Nothing can be done. Then again, Ptolemaic astronomyhad all the preceding of going for it plus the imprimatur the Church.Hmm.... that economics behas (1992)argues neoclassical 16Rosenberg come neitheran empirical sciencenor an appropriate normative idealforpublicpolicy.Rather, maintains neoclassical he that economicshasbecomea branch applied of mathematics. The Comparative /13 Advantage Theoryof Competition
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