Essay outlines: Innovation & Substitutability (Strategy FHS)

Innovation from substitutability section of Wk3 sustaining CA.

- Some FMA (innovate)/SMA (don't innovate, be fast follower instead) often used in arguments

2022

“If your only defence against invading armies is a moat, you will not last long. What matters is the
pace of innovation. That is the fundamental determinant of competitiveness” – Elon Musk. Would you
agree? Discuss in relation to theory and illustrate with examples.

 Not bad answer
 **PLEASE REVIEW MY COLLECTIONS PAPER & BRAINSTORMED STRUCTURE of 2022 paper Q4
(different from this)
 Intro:
o Stance: while innovation is important for competitiveness, Elon Musk underplays the
competitive value of a moat and overstates innovation's importance by suggesting it is
the only means for SCA.
o We first consider why moats can provide SCA for a respectable time, given different
definitions of moats
 (i) VRIN resource in RBV
 (ii) high barriers to entry in positional view
 (iii) isolating mechanisms against perfect competition
o Innovation important for competitiveness:
 Sustaining innovation can be used to further strengthen position as incumbent
in industry
 Also, moats do not last forever, especially in the face of substitutes
 Disruptive innovation as a protection measure against substitutes (then deploy
innovation or have sleeping patent)
o But innovation is not the only method to defend against substitutes: acquisitions, fast
follower
 Under RBV, possessing VRIN resources is an inherent moat that enable SCA (sustained
competitive advantage) for some time

o VRIN resources produce SCA (Barney 1991)
o Moats as conditions needed for CA like ex post imperfect imitability, substitutability;
imperfect resource mobility (Peteraf, 1993)
o Hard to imitate resources (Dierickx & Cool, 1989) enable persistence in rents
 Time compression diseconomies: Brand, US CPG (Bronnenberg et al. 2009)
 Asset mass efficiencies: VC Sequoia and a16z, incubator YC
o Examples:
 Data: Meta has troves of user data which enables it to produce a highly effective
targeted advertising product
 ASML's photolithography technology

,  Da Beer's diamond mine control
 Samsung's OLED displays to smartphone market
 GE's power generator and jet engine business require advanced materials and
turbine engineering
 Under positional view, moat is high barriers to entry to a profitable industry with favourable
market structure
o Porter's 5 forces (Porter, 1979)
o Inter-industry variation (McGahan & Porter 1997)
o Persistence of performance higher in some industries given industry structure like high
R&D intensity, EoS, switching costs, skill, few firms (Waring 1996)
o Examples:

 Profitable pharma vs unprofitable airlines
 Aerospace: high capital requirements, regulatory hurdles, IP and expertise
needed to build a SpaceX competitor
 Predatory pricing: Lawsuit filed by traditional taxi company Flywheel Taxi in San
Francisco against Uber for predatory pricing, offering rides at a loss to dominate
the market and chase out competitors
 More generally, moats as isolating mechanisms that impede perfect competition
o Barriers to imitation: legal restrictions, superior access to scarce input/ customers, EoS
and limited market size, intangible barriers like historical circumstance, social
complexity, Early mover advantages: learning curve, brand, switching costs, network
effects (Besanko et al, 2007)
o Examples:
 Superior access to scarce input:
 De Beers historically had superior access to scarce diamond mines,
allowing them to control a significant portion of the global diamond
supply
 Spotify’s deals and relationships with large music labels, especially in
the early days where music labels were hesitant to allow their music to
be streamed enabled Spotify to gain dominance.
 Switching costs: Enterprise software Oracle/ SAP/ Salesforce
 Superior access to scarce customers: Coca-Cola's retail partnerships, global
distribution network enables it to put new products in front of customers at
scale more cheaply and quickly.
 Legal examples: patents in pharmaceuticals, legal route rights for airlines
 EoS and limited market size: Walmart in rural towns that can only support one
large supermarket
 Network effects: social media companies TikTok
 Superior access to scarce input: D&B credit information in 19 th century
 But sustaining innovation can be used to further strengthen position as incumbent in industry
o Same as below