Sustained Competitive Advantage and Persistent Superior Performance

1
Sustained Competitive Advantage and Persistent
Superior Performance

• Robert R. Wiggins
• Tulane University
• and
• Timothy W. Ruefli
• University of Texas at Austin

2
Sustained Competitive Advantage

• The fundamental basis of above-average
  performance in the long run is sustainable
  competitive advantage.Porter (1985, p. 11)

CREATING AND SUSTAINING SUPERIOR PERFORMANCE
3
Sustained Competitive Advantage

• Fundamental component of the resource-based view
  of the firm
• Resource-based view objective of the firm
  above-normal returns (Conner, 1991, p. 132)
• Resources that can lead to sustained competitive
  advantage are rare

4
Competitive Advantageand Performance
Superior Economic Performance
CompetitiveAdvantage
Persistent Superior Economic Performance
Sustained CompetitiveAdvantage
5
Research Questions

• Can superior economic performance persist over
  time, in a manner consistent with sustained
  competitive advantage?
• How many firms achieve persistent superior
  economic performance?
• Over what time frames can persistent superior
  economic performance be maintained?
• Do the periods become shorter over time, in a
  manner consistent with hypercompetition?

6
Data

• COMPUSTAT PC/Plus Database
• 20 year period 1974-1997
• 40 U.S. Industries
• McKinsey Excellent Firms
• 400 Firms
• 1962-95
• U.S. Mutual Funds
• (4000 annually, 8000 quarterly)
• 1978-97

7
Performance Measures

• Return on Assets (ROA)
• Accounting measure
• Tobins q
• Market measure
• Firms market value relative to replacement cost
  of its assets
• Operationalized as market-to-book
• Total Return to Stockholders (TRS)
• McKinseys Measure

8
Methodology

• Iterative application of Kolmogorov-Smirnov
  technique to stratify sample from high to low
  performance
• Formation of supersets to allow cross-period and
  cross-sample comparability

9
Theoretical Distributionsfrom Stratification
10
Actual DistributionsPharmaceutical Industry
19.84
-14.33
1.56 n11
5.41 n24
.07
14.54
-52.38
3.86 n36
0.76 n22
56.26 n3
7.05
1.21 n77
N173
11
Kolmogorov-Smirnov Non-Parametric Test

• Compares two distributions
• Looks for widest point
• Sensitive to differences in mean, variance, and
  skewness

12
COMPUSTAT Study

• 6772 Firms
• 40 Industries
• 1974-1997
• ROA, Tobins q
• COMPUSTAT
• 5-Year Window Analysis

13
Window Analysis
1968 1969 1970 1971 1972 1973 1974 1975
1976 1977 1978
Per 1
Per 2
Per 3
Per 4
Per 5
Per 6
Rolling Window Five Transitions
14
Results
15
Output Format
16
Office Equipment and Computing Machines
17
Office Equipment and Computing Machines ROA Strata
18
Computer Industry 1974-1993 Periods of Superior
Economic Performance
Apple Computer
Cray Research
Diebold
DYNATECH
Emulex
Hewlett-Packard
IBM
IIS Intelligent Info
Intergraph
Interface Systems
NCR
SBE
Tandy Corp.
Return on Assets (ROA) N390
19
Computer Industry 1974-1993 Periods of Superior
Economic Performance
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
CYR
Cray Research
SBL
Symbol Technologies
4155BI
Threshold
Tobins q (q) N290
20
Pharmaceutical Industry
21
Pharmaceutical Industry 1974-1993 Periods of
Superior Economic Performance
Thompson Medical
Abbott Laboratories
American Home Products
Bolar Pharm.
Bristol Myers Squibb
Carter-Wallace
Forest Labs
Glaxo Holdings
Johnson Johnson
Eli Lilly
Marion Merrell Dow
Merck Co.
Mylan Labs
Pfizer
Schering-Plough
Smithkline Beckman
Syntex
SYN
UPJ
Upjon
Return on Assets (ROA) N183
22
Pharmaceutical Industry 1974-1993 Periods of
Superior Economic Performance
American Home Prod.
Alza Corp.
Bolar Pharm.
Carrington Labs
DDI Labs
DDIX
GLX
Glaxo Holdings
GRPI
Greenwich Pharm.
Key Pharm.
KPH
MKC
Marion Merrell Dow
MRK
Merck Co.
POLFX
Polydex Pharm.
UG
United Guardian
Tobins q (q) N173
23
Trucking Industry
24
Trucking Industry 1974-1993 Periods of Superior
Economic Performance
Arnold Industries
Consolidated FTW
Hunt Transport
Kenan Transport
Overnite Transportation
Roadway Trucking
U. S. Truck Lines
UTRK
Arnold Industries
ARN
Return on Assets (ROA) N71
25
Trucking Industry 1974-1993 Periods of Superior
Economic Performance
Leaseway Transportation
Hunt Transport
Roadway Services
Yellow Freight System
Tobins q (q) N71
26
Automotive Parts Accessories
27
Automotive Parts Accessories 1974-1993 Periods
of Superior Economic Performance
Clarcor Inc.
Filtertek
Modine Mfg. Co.
Universal Mfg. Co.
Return on Assets (ROA) N98
Simpson Industries
Echlin Inc.
Gentex Corp.

Tobins q (q) N98
28
COMPUSTAT Summary
29
Firms Achieving 20 or More Years of Persistent
Superior Performance (Tobins q), 1974-1997
Industry
Years
SIC
Firm
267x
Paper and Paperboard
Tambrands, Inc.
1974-1997
2721
Periodical Publishing
CCH Inc.
1974-1994
331x
Steel Works and Blast Furnaces
Worthington Industries
1974-1997
5411
Grocery Stores
Food Lion Inc.
1974-1997
30
Firms Achieving 20 or More Years of Persistent
Superior Performance (ROA), 1974-1997
SIC
Industry
Firm
Years
2621
Paper Mills
P.H. Glatfelter Co.
1974-1993
267x
Paper and Paperboard
Minnesota Mining Mfg Co.
1974-1996
Tambrands, Inc.
1974-1997
2721
Periodical Publishing
Plenum Publishing Corp.
1976-1997
2834
Pharmaceuticals
American Ho
me Products Corp.
1974-1997
Lilly (Eli) Co.
1974-1997
2851
Paints and Allied Products
Moore (Benjamin) Co
1977-1996
3089
Plastic Products
Liqui-Box Corp.
1976-1997

Rubbermaid Inc.
1975-1995
331x
Steel Works and Blast Furnaces
Worthington Industrie
s
1974-1996
357x
Computing Machinery
Office Equipment
Hewlett-Packard Co.
1974-1997
3714
Automotive Parts
Clarcor Inc.
1974-1997

Universal Manufacturing Co.
1974-1997
3841
Surgical and Medical Instruments
Stryker Corp.
1977-1997
3845
E
lectromedical Apparatus
Medtronic Inc.
1977-1997
421x
Trucking
United Parcel Service AM Inc.
1974-1997
Arnold Industries Inc.
1976-1997
31
(Continued)
SIC
Industry
Firm
Years
481x
Telephone Communications
Hickory Tech Corp.
1977-1997
5311
Department Stores
Mercantile Stores Co. Inc.
1974-1996
5411
Grocery Stores
Albertsons Inc.
1974-1997

Brunos Inc.
1975-1994
Food Lion Inc.
1974-1995
Publix Supe
r Markets Inc.
1974-1997
Weis Markets Inc.
1974-1997
Winn-Dixie Stores Inc.
1974-1997
5812
Eating Places
Bob Evans Farms
1974-1996

Luby's Cafeterias Inc.
1974-1997

McDonalds Corp.
1974-1997

Ruby Tuesday Inc.
1974-1994
6211
Securities Brokers a
nd Dealers
Edwards (A G) Inc.
1974-1997
7011
Hotels and Motels
Hilton Hotels Corp.
1974-1996
Marcus Corp.
1974-1997
32
Duration of Periods of Persistent Superior
Economic Performance
33
ROA Transition Rates
To gt
1
0
-1
From
1
0.784
0.195
0.021
0
0.038
0.919
0.042
-1
0.030
0.208
0.762
34
Tobins q Transition Rates
To gt
1
0
-1
From
1
0.711
0.244
0.045
0
0.025
0.957
0.018
-1
0.121
0.260
0.618
35
McKinsey Excellent Firms

• 400 Firms
• Total Returns to Stockholders
• ? 0.2 !!!!!!!!
• 1962-95

36
Computer Industry
37
(No Transcript)
38
Chemical Industry
39
(No Transcript)
40
Pharmaceutical Industry
41
(No Transcript)
42
All Excellent Firms
43
(No Transcript)
44
Mutual Funds

• Morningstar Data
• 4000 funds
• 1978-1997
• Returns

45
(No Transcript)
46
Mutual Fund Strata Numbers
 
 
47
TRS Means by Stratum
48
Selected Funds
Fund Name
Category
91
92
93
94
95
96
Acorn
Small Growth
0
1
1
0
2
1
Astra Sh-Term Multi-Mkt
Short-term Bond
-1
-1
-4
-1
-4
-2
DFA U.S. 9-10 Small Co.
Small Blend
0
0
0
0
2
1
Excelsior Income Growth
Mid-Cap Blend
0
-1
1
0
2
1
Fidelity Sel Computers
Specialty-Tech.
0
0
1
1
3
2
Fidelity Sel Software Comp
Specialty-Tech.
0
0
0
0
3
1
First Eagle Fund of America
Mid-Cap Value
0
-1
1
0
2
2
Guardian Park Avenue A
Large Blend
0
-1
1
0
2
1
Idx CPI
Index
-1
-2
-3
-1
-2
-3
Idx Russell 2000
Index
0
-1
0
0
2
1
Idx SP 500 Index
Index
0
0
0
0
0
0
Invesco Strat Financial Svcs
Specialty-Financial
0
-1
1
0
2
1
49
Selected Funds
50
Bonus Industry Data

• 442 Compustat Industries
• TRS
• 1978-97
• ? 0.2

51
Industry
SIC
Periods
Electric and Other Serv Comb
4931
11
Real Estate Investment Trust
6798
10
Phone Comm Ex Radiotelephone
4813
9
State Commercial Banks
6022
8
Unit Inv Tr, Closed-End Mgt
6726
8
Electric Services
4911
7
Natural Gas Distribution
4924
7
Radio, TV Broadcast, Comm Eq
3663
6
Electromedical Apparatus
3845
6
Winners
Fire, Marine, Casualty Ins
6331
6
Electronic Components
3679
5
Water Supply
4941
5
Life Insurance
6311
5
Pharmaceutical Preparations
2834
4
Petroleum Refining
2911
4
Tele and Telegraph Apparatus
3661
4
Semiconductor,Related Device
3674
4
Srch,Det,Nav,Guid,Aero Sys
3812
4
Grocery Stores
5411
4
National Commercial Banks
6021
4
Security Brokers and Dealers
6211
4
Hospital and Medical Svc Plans
6324
4
16 periods maximum
52
Industry
SIC
Periods
Cookies and Crackers
2052
-3
Tobacco Products
2100
-3
Prefab Wood Bldgs,Components
2452
-3
Heating Eq,Ex Elec,Air Furnc
3433
-3
Losers
Jewelry,Silverwr,Plated Ware
3910
-3
Musical Instruments
3931
-3
Eating and Drinking Places
5810
-3
Lessors of Real Property
6519
-3
Real Estate Agents and Mgrs
6531
-3
Hotels, Other Lodging Places
7000
-3
Svcs to Motion Picture Distr
7829
-3
Spec Outpatient Facility
8093
-3
16 periods maximum
53
McKinsey Project Evergreen
54
Emerging Findings from Project Evergreen
Harvard Business School
Heidrick Struggles

• PROJECT EVERGREEN

Steering Committee Review 3
August 20, 1998
McKinsey Company
55
MEDIAN TOTAL RETURN TO SHAREHOLDERS ACROSS QUADS

• Median cumulative return to stakeholders (year 0
  1)

• Sharpbender (SB)

Sharpbenders provide returns that consistently
bend sharply upwards
Never Had Its and Lost It in roughly the same
place at end of first 5-year period
Sharpbenders and Found Its in roughly the
same place at end of first 5-year period

• Found It (FI)

• Lost It (LI)

• Never Had It (NHI)

56
FORMAT FOR REVIEWING PERFORMANCE AND ROBUSTNESS
OF THE QUAD COMPANIES
1987-1997
57
FINANCIAL FORMULA THAT DEFINES WINNERS AND LOSERS
ELEVEN VARIABLES EMPHASIZING OPERATING
PROFITABILITY AND FORWARD INVESTMENT

• Variable

• What it measures

• Top line
• Operating measures
• Bottom line
• Balance sheet
• Forward investing

• Sales growth
• Pretax ROIC
• Declining pretax ROIC growth
• Gross margin
• NOPLAT growth
• Net profit margin
• Long-term debt/sales
• Growth in invested capital/employee
• Cumulative CapEx/year 1 invested capital
• Invested capital growth
• CapEx/invested capital

• Year-to-year revenue increase
• Profits as a percent of dollars invested in the
  business
• Year-to-year change in ROIC
• Value added (after materials, labor cost)
• Year-to-year increase in operating profit less
  adjusted taxes
• Net profits as a percent of sales
• Debt structure as a percent of sales
• Change in dollars invested in business per
  employee
• Total CapEx over period normalized to year 1
  investment in the business
• Change in dollars invested in the business
• Portion of capital invested in PPE

• 1.
• 2.
• 3.
• 4.
• 5.
• 6.
• 7.
• 8.
• 9.
• 10.
• 11.

58
THESE TWELVE VARIABLES ARE HIGHLY PREDICTIVE OF
WINNING AND LOSING

• Companies beating their peers in 10 of 11
  variables

• Predictive power of winning

• 92

• Predictive power of losing

• Companies lagging their peers in 9 of 11 variables

• 97

No company studied beat their peers in all 11
variables Source Compustat Harvey Wagner (UNC)
59
OF THE 11 VARIABLES, THREE APPEAR TO BE MOST
CRITICAL
Percent

• 2 of 3 measures

• All 3 measures

• Sales growth
• Pretax ROIC
• Invested capital growth

• Predictive power of winning

• 61

• 86

• Predictive power of losing

• 80

• 59

60
EMERGING FINDINGS

• Level of certainty

• We used TRS (total return to shareholders) as
  our proxy for performance. This generated a
  very robust set of companies
• The financial formula is pretty simple and
  quite hard in practice
• Winners pull the compensation lever very hard
• The extraordinary differences in the senior
  executive teams are in their mindset, not their
  demographics. High performers play to win . . .
  not win, place, or show

• High-performing executive teams demonstrate a
  relatively high turnover rate, but their
  lower-performing counterparts are even higher
• Winning boards have a venture capitalist mindset
  towards governance
• Winners pursue truly innovative products,
  services, and business systems

61
But
Conditional Probability of Transition  
62
Hypercompetition

• Increased Levels of Competition
• Rapid Erosion of Competitive Advantages
• Industry Transformation

63
Hypercompetition Methods

• Discrete Time Event History Analysis
• Logistic Regression
• Hazard function dependent variable Exit from
  above average strata
• Hazard (chance of losing SCA) function

64
Hypercompetion Results
Chance of losing SCA
Linear Trend
74-
76-
78-
80-
82-
84-
86-
88-
78
80
82
84
86
88
90
92
Period
65
Test of Short-run Pattern
 
ROA
Tobins q
First half
Second half
First half
Second half
133
188
140
72
15562
19571
15366
12087
35345
27774
??? significant at the 0.001 level.
66
Conclusion

• Sustained competitive advantage is rare
• On average about 5 (ROA), 2 (Tobins q) of
  firms achieve it for 10 years or more
• Less than 0.5 of firms achieve it for 20 years
  or more by either measure.
• Less than 0.5 of firms achieve it for 10 years
  or more with TRS as measure
• The market is very efficient.

67
Implications for Theory

• For Neoclassical and Austrian Economics
• Existence of persistent superior economic
  performance at odds with models
• For Porters SCP I/O Approach
• Rarity of persistent performance reduces impact
  of normative models
• For the Resource-Based View
• Rarity of persistent performance consistent with
  concept of rare resources

68
Implications for Managers

• Single sustained competitive advantage
  unrealistic as a goal
• Series of short competitive advantages more
  realistic
• Focus on strategy implementation rather than
  strategy formulation
• Focus on business processes
• Implications for consulting practice

69
Future Research

• Longer time frames (50 years)
• Investigations into antecedents of persistent
  superior performance
• Expanded study of hypercompetition to determine
  industries affected

70
ITERATIVE KOLMOGOROV-SMIRNOV METHODOLOGY

• Tim Ruefli Robert Wiggins

71
EXAMPLE
Year
1
2
3
4
5
Firm A
0.05
0.06
0.08
0.09
0.10
Firm B
0.04
0.07
0.11
0.12
0.13
72
EXAMPLE
Year
1
2
3
4
5
Firm A
0.05
0.06
0.08
0.09
0.10
Firm B
0.04
0.07
0.11
0.12
0.13
Build Incidence Distribution
Bins
1
1
1
1
1
1
1
1
1
1
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
73
EXAMPLE
Year
1
2
3
4
5
Firm A
0.05
0.06
0.08
0.09
0.10
Firm B
0.04
0.07
0.11
0.12
0.13
To find Frequency Distribution
Divide Incidence by 5
.2
.2
.2
.2
.2
.2
.2
.2
.2
.2
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
74
EXAMPLE
Form Cumulative Distributions
.2
.2
.2
.2
.2
Frequency








.2
.4
.6
.8
1.0
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
.2
.4
.6
.8
1.0
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
75
EXAMPLE
Form Cumulative Distributions
.2
.4
.6
.8
1
0
0
0
.2
.2
.4
.4
.4
1
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
.2
.4
.6
.8
1
0
0
0
0
.4
1
1
1
1
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
76
EXAMPLE
Graphical Approach
1.0
0.8
0.6
0.4
0.2
1.0
.8
.6
.4
.2
1.0
.8
.6
.4
.2
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
77
EXAMPLE
1.0
0.8
0.6
0.4
0.2
1.0
.8
.6
.4
.2
1.0
.8
.6
.4
.2
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
78
EXAMPLE
1.0
0.8
0.6
0.4
0.2
1.0
.8
.6
.4
.2
1.0
.8
.6
.4
.2
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
79
EXAMPLE
Find Maximum Difference
0.6
1.0
0.8
0.6
0.4
0.2
1.0
.8
.6
.4
.2
1.0
.8
.6
.4
.2
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
80
EXAMPLE
Max Difference 0.6
Compare to Critical Value
0.86
Since the Difference is Smaller than the Critical
Value, there is no Significant Difference
between the Distributions.
1.0
0.8
0.6
0.4
0.2
1.0
.8
.6
.4
.2
1.0
.8
.6
.4
.2
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
81
EXAMPLE
For there to be a significant difference in this
case, the distributions would have to look
something like this
Maximum Difference 1.0
1.0
0.8
0.6
0.4
0.2
1.0
.8
.6
.4
.2
1.0
.8
.6
.4
.2
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
0.22
82
ITERATIVE PROCESS
83
ITERATIVE PROCESS Stage I
Firm A
Firm B
Firm C
Firm D
Firm E
Firm F
Firm G
Firm H
Firm I
84
ITERATIVE PROCESS
Select Target Firm
Firm A
Firm B
Firm C
Test
Firm D
Firm E
Firm F
Firm G
Firm H
Firm I
85
ITERATIVE PROCESS
Firm A
Firm B
Firm C
Test
Firm D
Firm E
Firm F
Firm G
Firm H
Firm I
If Subcritical
86
ITERATIVE PROCESS
Firm A
Firm B
Firm C
Test
Firm D
Firm E
Firm F
Firm G
Firm H
Firm I
If Supercritical
87
ITERATIVE PROCESS
Firm A
Select Next Target Firm
Firm B
Firm C
Test
Firm D
Firm E
Firm F
Firm G
Firm H
Firm I
88
Etc.
Until all firms have been tested against
remainder of firms.
89
PRELIMINARY STRATA
Firm A
Firm B
Firm C
Firm D
Firm E
Firm H
Firm I
Firm F
Firm G
90
ITERATIVE PROCESS Stage II
Test Excluded Firms Against Each Other
Firm A
Firm B
Test
Firm C
Firm D
Firm E
Firm H
Firm I
Firm F
Firm G
91
ITERATIVE PROCESS Stage II
Firm A
Firm B
Firm C
Firm D
Preliminary Strata
Firm E
Firm H
Firm I
Firm G
Firm F
92
ITERATIVE PROCESS Stage III
Try to find a home for the orphans.
Firm A
Firm B
Firm C
Test
Firm D
Firm E
Firm H
Firm I
Firm G
Firm F
93
FINAL STRATA
Firm A
Firm B
Firm C
Firm D
Firm E
Firm H
Firm I
Firm G
Firm F
94
Output Format
95
ATTRIBUTES
KS test is sensitive to all moments of a
distribution
Mean
Variance
Skewness
96
Low Mean
High Mean
97
Low Variance
High Variance
98
Low Skew
High Skew
99
ATTRIBUTES
KS test is sensitive to all moments of a
distribution
KS methodology is nonparametric
IKS method does not require specification of the
number of groups a priori
IKS method can be sensitive to the reference
group employed
100
LIMITATIONS
One dimensional
Sequence independent
i.e., .2, .4, .6, .8, .10 is equivalent
to .10, .8, .6, .4, .2
101
LIMITATIONS
One dimensional
Sequence independent
Computation-intensive