Why some companies are more profitable for years longer than their competitors

Middle East, Asia, Europe
16 January 2019

New research shows a firm’s competitive advantage can last more than three times as long as previously believed. INSEAD Assistant Professor of Strategy Phebo Wibbens found that companies with “higher-order” resources can greatly outlast their competitors.

Traditionally, strategy scholars have focused on a firm’s operating resources – assets and capabilities that directly affect profit – when analysing its competitive advantage. Based on that assumption, high-performing firms were believed to have a run of success lasting on average about five years. But as IKEA, Apple and other firms have shown, a much longer period of success is available to some companies.

Discovering what gives these firms and others like them their longer lasting success, Wibbens created a mathematical model based on empirical data covering 4,000 firms in the United States over three decades.

In  “Performance persistence in the presence of higher-order resources”, published in the Strategic Management Journal, Wibbens found that firms can make their operating resources go further when they are complemented with often intangible but valuable higher-order resources, such as superior strategic planning, merger & acquisition teams and innovation capabilities. With his model of the dynamics between resources and profits, Wibbens found that when both operating and higher-order resources were taken into account, firms enjoy a competitive advantage for 18 years on average.

 

Competitive advantage -- conditions that give a company its favourable position -- had been thought to last only about five years on average. When evaluating their firms, executives tend to only consider their operating resources, ones that directly affect profit. Central to a firm’s long-term success, however, are “higher-order” resources, those intangible assets that improve a company and help drive long-term growth, such as strategic capabilities. Long-term successful companies must be able to change the way they operate; this is the fundamental idea of higher-order resources, also called dynamic capabilities.

Higher-order resources are not quantifiable the way that profits are,” says Wibbens. “Fundamentally, both operating and higher-order resources are always idiosyncratic and unique. If there were a general prescription for better resource positions, every firm would be able to get them and these resources would no longer grant any advantage. This makes empirically measuring them a challenge.”

The model

 

The average duration of competitive advantage based on previously used models (column a) is 5 years, about half the duration from the estimate of using the new model with only operating resources (column b). Adding the effect of higher-order resources (column c) almost doubles the estimated duration of competitive advantage again to approximately 18 years.

To confirm the importance of higher-order resources for prolonging competitive advantage, I had to consider the patterns expected in profit and other large-scale observable data, like the persistence of profit growth. Then I used statistical procedures to find the data consistent with what we would expect in firms with higher-order resources – akin to how physicists use extensive computer models to detect the signal of otherwise undetectable new particles such as the Higgs boson,” explains Wibbens.

From an academic perspective, one of the key contributions of the article is to distinctly define operating and higher order resources in a mathematically rigorous way. In addition to the findings based on the model and theory, Wibbens’ article shows academics how using Bayesian hierarchical analysis in the field of strategy can provide new insights on core strategic questions, like what makes some firms more profitable for longer.

Implications for managers

In the article, Wibbens suggests ways for managers to evaluate their own firms’ higher-order resources and build strategies based around their organisations’ unique resource strengths. Operating resources lead to persistence in the level of profit differences; higher-order resources lead to persistence in the growth of profit differences.

Higher-order resources help bolster operating resources. They produce persistently better resources over the long term, leading to a longer stretch of competitive advantage. Although broad, these findings demonstrate that acknowledging the importance of higher-order resources is a decidedly valuable insight. 

About INSEAD, The Business School for the World

As one of the world's leading and largest graduate business schools, INSEAD brings together people, cultures and ideas to develop responsible leaders who transform business and society. A global perspective and cultural diversity are reflected in all aspects of its research and teaching.

With campuses in Europe (France), Asia (Singapore) and the Middle East (Abu Dhabi), INSEAD's business education and research spans three continents. The school’s 154 renowned Faculty members from 40 countries inspire more than 1,400 degree participants annually in its MBA, Executive MBA, Executive Master in Finance, Executive Master in Change and PhD programmes. In addition, more than 11,000 executives participate in INSEAD's executive education programmes each year.

In addition to INSEAD's programmes on its three campuses, INSEAD participates in academic partnerships with the Wharton School of the University of Pennsylvania (Philadelphia & San Francisco); the Kellogg School of Management at Northwestern University near Chicago; the Johns Hopkins University/SAIS in Washington DC and the Teachers College at Columbia University in New York; and MIT Sloan School of Management in Cambridge, Massachusetts. In Asia, INSEAD partners with School of Economics and Management at Tsinghua University in Beijing, and China Europe International Business School (CEIBS) in Shanghai. INSEAD is a founding member in the multidisciplinary Sorbonne University created in 2012, and also partners with Fundação Dom Cabral in Brazil.

INSEAD became a pioneer of international business education with the graduation of the first MBA class on the Fontainebleau campus in Europe in 1960. In 2000, INSEAD opened its Asia campus in Singapore. In 2007, the school inaugurated a Centre for Research and Executive Education in the United Arab Emirates and officially opened the Middle East Campus in Abu Dhabi in 2010.

Around the world and over the decades, INSEAD continues to conduct cutting edge research and to innovate across all its programmes to provide business leaders with the knowledge and sensitivity to operate anywhere. These core values have enabled INSEAD to become truly "The Business School for the World”.

Contacts for press

Chris Howells   
Tel +65 6799 5490
Email: chris.howells@insead.edu 

Aileen Huang
Tel: +65 6799 5552
Email: aileen.huang@insead.edu 

Cheryl Ng
Tel: +65 6407 7234
Email: cheryl.ng@insead.edu  

Zeina Sleiman
Tel + 971 50 640 31 91
Email: zeina.sleiman@insead.edu

Linda Furtado
Tel + 971 2 6515309
Email: linda.furtado@insead.edu

Insead Personalised Experience

icon

Relevant

icon

Save & Manage

icon

Connect

It is easy, simply log in:

Via Social

  • icons
  • icons
  • icons

Or

Use your email address