Durability of Competitive Advantage

Durability of competitive advantage determines how long the competitive advantage can be sustained and is considered in terms of the ability of competitors to imitate through gaining access to the resources on which the competitive advantage is built.

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. —Warren Buffett (1999)

Durability of Competitive Advantage

The durability of competitive advantage of a company is a function of three factors: the height of barriers to imitation, the capability of competitors, and the general dynamism of the industry environment.

1. Barriers to Imitation

Barriers to imitation are factors that make it difficult for a competitor to copy a company’s distinctive competency. The longer it takes to imitate a company’s distinctive competency, the greater is the opportunity for the company to improve on that competency or build other competencies. Imitability refers to the rate at which others duplicate a firm underlying resources and capabilities.

  • The easiest distinctive competencies to imitate are those based on firm-specific tangible resources such as buildings, plant, and equipment, which are visible to competitors and can be readily purchased.
  • Intangible resources are more difficult to imitate. Brand names symbolize a company’s reputation, and are protected by law.
  • Marketing and technological know-how are intangible resources that are relatively easy to imitate.
    1. Marketing strategies are visible to competitors, and the movement of marketing personnel between companies facilitates the diffusion of know-how.
    2. Technological know-how should be protected by patents, but in practice, it is often possible to “invent around” patents.
  • Imitation of capabilities is more difficult than imitation of resources. Capabilities are often invisible to outsiders, and are based on the way in which decisions are made and processes managed deep within a company. Also, a company’s capabilities are not dependent upon one individual, but are the product of how numerous individuals interact within a unique organizational setting. Thus, no one person can duplicate capabilities, and therefore personnel movement will not be as useful in imitating capabilities.

2. Capability of Competitors

When a company is committed to a particular way of doing business based on a set of resources and capabilities, the company will find it difficult to respond to new competition if doing so requires a break with this commitment. This influence on the durability of competitive advantage is called capability of competitors.

  • Strategic commitment is the company’s commitment to a particular way of doing business that is to developing a particular set of resources & capabilities.
  • A related concept is absorptive capacity–that is, the ability of an enterprise to identify, assimilate, and utilize new knowledge. Firms with a low absorptive capacity may experience an internal inertia that slows their ability to innovate and imitate.
  • Therefore, when innovations reshape the rules of competition in an industry, value often migrates away from established competitors and toward new enterprises that are operating with new business models.

3. Industry Dynamism

Industry dynamism refers to the rate of product innovation. A high dynamism (rapid rate of innovation) means that product life cycles are shortening and that competitive advantage can be very transitory. Durability of competitive advantage is difficult for any company to sustain in a highly dynamic industry.

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