Competitive Heterogeneity

by

Tammy L. Madsen

• LAST REVIEWED: 26 October 2023
• LAST MODIFIED: 26 October 2023
• DOI: 10.1093/obo/9780199846740-0181

Introduction

It is widely accepted that positioning for competitive advantage is related to how value is created and captured. Yet, despite substantial theoretical work on competitive advantage, empirical work has been less cohesive and accretive. Contributing factors include, but are not limited to, differences in conceptual definitions, misalignment between theory and operational designs, and variation in analytical approaches. In response, the theory of competitive heterogeneity emerged with the intent of providing a more comprehensive explanation of persistent differences in intra-industry performance, the core focus of the strategy field. Formally, competitive heterogeneity refers to enduring and systematic (superior) differences in strategic positioning—and, in turn, performance—among relatively close rivals, where a firm that produces the largest gap between the value (V) of a good or service to a buyer and the cost (C) of producing that value holds an advantage, or superior position, relative to that of rivals. The theory adopts a bargaining model (Value-Price-Cost) to define superior performance differences independently of resources and capabilities. If resources or capabilities associated with performance heterogeneity are not protectable, then the persistence of an advantage must be associated with something other than costly imitation. It follows, then, that important sources of value and cost differences among firms may lie outside the Resource-Based View’s (RBV’s) boundaries. As such, work on competitive heterogeneity has broader theoretical roots than the RBV. Additionally, research on the factors and conditions promoting persistent and systematic (superior) differences in performance among firms benefits from the integration of multiple theoretical lenses, research methods, and techniques. This diversity informs a wide array of research topics (e.g., the Value-Price-Cost model; value-based strategies; value creation and value capture dynamics; value appropriation; performance heterogeneity; persistent performance heterogeneity; temporary advantage; isolating mechanisms and barriers to imitation; micro and macro influences) and employs a host of analytical techniques (empirical, descriptive, formal theory, mathematical modeling). This bibliography discusses the contributions from these complementary areas but the bibliography’s scope (and page limits) precludes a detailed treatment of all areas that intersect with competitive heterogeneity and its origins. As a result, and guided by the definition of competitive heterogeneity, this annotated bibliography provides an overview of the primary research streams, with specific attention to influential writings and those that detail the scope of contributions in an area. The research topics are presented in a particular order, beginning with the theory’s core, the Value-Price-Cost bargaining model, conceptual definitions, and theoretical insights, and then shifting to empirical studies on performance heterogeneity, persistent advantage, and value creation and capture.

The Theory of Competitive Heterogeneity: Introduction

According to Hoopes, et al. 2003, competitive heterogeneity refers to enduring and systematic (superior) differences in strategic positioning, and, in turn, performance, among relatively close rivals, where a firm that produces the largest gap between the value (V) of a good or service to a buyer and the cost (C) of producing that value holds an advantage, or superior position, relative to that of rivals. Value is defined as the price a buyer is willing to pay for a good in the absence of competing products or services yet within budget constraints and having considered other purchasing opportunities. In this model adopted from Tirole, a buyer and supplier bargain over the price (P) for a good that creates a value (V) or benefit to the buyer and costs the supplier some amount (C) to produce; the buyer captures a surplus (Value minus Price, V-P) and the supplier captures a profit (Price minus Cost, P-C). The firm that produces the largest difference between value and cost has an advantage over rivals. It can either attract buyers due to greater surplus it creates for them (V-P), capture a larger profit (P-C), or both; for additional discussion, see Hoopes, et al. 2003 and Peteraf and Barney 2003. The theory yields several insights. For one, two rivals may hold different bundles of inimitable resources and capabilities but achieve the same Value minus Cost gap. If we introduce industry constraints on bargaining over price, the dissimilar resources and capabilities of the two firms yield the same economic profit (P-C). The implication is that a resource or capability is only a potential source of advantage when it increases the difference between a firm’s value and cost relative to that of its rivals. Second, theories of sustainable heterogeneity typically focus on differences among firms in efficiency, rarely on differences in buyer value, and even more rarely on differences in both efficiency and buyer value simultaneously. Yet, as Adner and Zemsky 2006 and Besanko, et al. 1998 point out, ignoring the demand side reduces opportunities for understanding how resources may create a buyer surplus and in turn, potential sources of advantage. The VPC model considers both the demand side (V) and the supply side (C) of a transaction. Third, the theory does not equate competitive advantage with standard performance metrics (e.g., a firm’s income statement does not include buyer value [V]) and avoids risk of tautological reasoning since competitive advantage is defined independent of a firm’s resources and capabilities. Lastly, since the value captured by a firm may strengthen or erode over time due to shifts in competition or consumers’ valuations of the firm’s offerings, the theory allows for a more integrated analysis of sustained differences in strategic positioning by explicitly accounting for dynamic sources of heterogeneity; see Lippman and Rumelt 2003 and MacDonald and Ryall 2004 for additional discussion. Despite these benefits, Lieberman 2021 offers stylized examples of the Value-Price-Cost framework to highlight challenges in applying the framework to understand competitive advantage.

• Adner, Ron, and Peter Zemsky. “A Demand-Based Perspective on Sustainable Competitive Advantage.” Strategic Management Journal 27.3 (2006): 215–239.

  DOI: 10.1002/smj.513

  This study models how demand-side sources of heterogeneity (consumer heterogeneity and marginal utility) interact with supply- or firm-side sources of heterogeneity (resources, technology) to affect value creation and capture. Available online by subscription or purchase.

• Besanko, David, Sachin Gupta, and Dipak Jain. “Logit Demand Estimation under Competitive Pricing Behavior: An Equilibrium Framework.” Management Science 44.11 (1998): 1533–1547.

  DOI: 10.1287/mnsc.44.11.1533

  Considering demand- and supply-side factors, the authors show that even when a firm’s strategy is “stuck in the middle” the firm can achieve a higher economic surplus than rivals based on a larger difference between its product value and the marginal cost to produce that value relative to rivals. Available online by subscription or purchase.

• Hoopes, David G., Tammy L. Madsen, and Gordon Walker, eds. “Guest Editors’ Introduction.” In Special Issue: Why Is There a Resource-Based View? Toward a Theory of Competitive Heterogeneity.” Strategic Management Journal 24.10 (2003): 889–902.

  The authors define and motivate the competitive heterogeneity logic, discuss how the theory and the VPC framework informs the study of strategic positioning and competitive advantage, and identify future research directions. Available online by subscription or purchase.

• Lieberman, Marvin. “Is Competitive Advantage Intellectually Sustainable?” Strategic Management Review 2 (2021): 29–46.

  DOI: 10.1561/111.00000016

  Lieberman argues that the Value-Price-Cost gap analysis is useful for analyzing rivalry and sources of profitability but may not solve the strategic management field’s challenge of converging on a robust definition of competitive advantage.

• Lippman, Steven A., and Richard P. Rumelt. “A Bargaining Perspective on Resource Advantage.” Strategic Management Journal 24.11 (2003): 1069–1086.

  DOI: 10.1002/smj.345

  Lippman and Rumelt emphasize that strategy is about creating, evaluating, managing and deploying unpriced specialized scarce resource combinations and use cooperative game theory to analyze how the (value) surplus is divided among agents (resources). Available online by subscription or purchase.

• MacDonald, Glenn, and Michael D. Ryall. “How Do Value Creation and Competition Determine Whether a Firm Appropriates Value?” Management Science 50.10 (2004): 1319–1333.

  DOI: 10.1287/mnsc.1030.0152

  This study uses cooperative game theory to explore the conditions under which parties in an exchange appropriate value. The logic is applied to various topics related to competitive advantage—for instance, whether uniqueness, inimitability, and competition ensure appropriation. Available online by subscription or purchase.

• Peteraf, Margaret A., and Jay B. Barney. “Unraveling the Resource-Based Tangle.” In Special Issue: Integrating Management and Economic Perspectives on Corporate Strategy. Edited by J. Rajendran Pandian and Paul L. Robertson. Managerial and Decision Economics 24.4 (2003): 309–323.

  DOI: 10.1002/mde.1126

  In response to criticisms of the RBV, the authors offer a more precise definition of competitive advantage informed by the VPC model; in their construal, value is labeled as “perceived benefit”. Available online by subscription or purchase.