Sundar G. Bharadwaj, P. Rajan Varadarajan, & John Fahy Sustainable Competitive Advantage in Service Industries: A Conceptual Model and Research Propositions The purpose of competitive strategy is to achieve a sustainable competitive advantage (SCA) and thereby enhance a business's performance. The authors focus on the distinctive organizational skills and resources underlying SCA in service industries and the moderating effects of the characteristics of services, service industries, and firms within an industry on the skills and resources underlying a business's competitive positional advantages. The proposed conceptual model of SCA in service industries and propositions builds on relevant literature in the fields of marketing, strategic management, and industrial organization economics. URING the past two decades, marketing scholars have focused on a broad range of issues pertaining to the marketing of services, as evidenced by two recent reviews of extant literature on services marketing (Fisk, Brown, and Bit- ner 1993; Swartz, Bowen, and Brown 1992). The emer- gence of services marketing as a distinct body of literature notwithstanding, there seems to be broad consensus that the boundary delineating services from goods is somewhat fluid. Often significant service components are integral to the consumption/use of tangible goods (e.g., automobiles, household appliances), as are significant tangible elements to the consumption/use of services (e.g., car rentals, air travel). As evidenced by Shostack's (1977) characterization of products (goods and services) in terms of the proportion of physical goods and intangible services they contain, there are few pure goods or services. Recognizing the fluid nature of the boundary delineating services from goods, the molecular model (Shostack 1977) views all market entities as exhibiting varying levels of tangible and intangible elements, and services as intangibles-dominant market entities. Along similar lines Berry and Parasuraman (1991) suggest that if the source of a product's' core benefit is more tan- gible than intangible, it should be considered a good, and if it is more intangible than tangible, it should be considered a service. In addition to intangibility, inseparability/simultaneity, heterogeneity, and perishability are generally viewed as the distinguishing characteristics of services. We focus on organizational skills and resources underlying the competitive advantages of service businesses, and the moderating effects of the characteristics of services, service industries, and firms within an industry on the skills 'Unless stated otherwise, the term "product" is used in the article to en- compass both goods and services. Sundar G. Bharadwaj is Assistant Professor of Marketing, Emory University. P. Rajan Varadarajan is Foley's Professor of Retailing and Marketing, Texas A&M University. John Fahy is Lecturer in Marketing, Trinity College, University of Dublin. The authors thank A. Parasuraman, Leonard L. Berry, the anonymous JM reviewers, and Thomas C. Kinnear for their detailed and constructive comments. and resources underlying a business's competitive positional advantages. Though an extensive body of literature focusing on a broad range of issues pertaining to competitive advantage has been published to date, this article is based on the premise that a closer examination of the sources of competitive advantage in the context of service industries can provide unique managerial insights into strategic problems and opportunities that may not be readily apparent from an examination of the sustainable competitive advan- tage (SCA) related issues at a more aggregate level. As Shostack (1977, p. 75) notes, "the greater the weight of intangible elements in a market entity, the greater will be the divergence from product marketing in priorities and approach." Recent reviews of literature on services marketing and management also allude to the dearth of strategic empha- sis in extant literature (Fisk, Brown, and Bitner 1993; Swartz, Bowen, and Brown 1992). Against this backdrop, we provide insights into the sources of SCA in service industries by reviewing and integrating research on SCA-related issues explored in the fields of marketing, strategic management and industrial organization economics and exploring the implications of the distinctive characteristics of service industries and firms for achieving SCA. The paper is organized as follows: First, an overview of the concept of SCA is presented. Second, a contingency model of SCA in service industries is proposed. Third, the moderating effects of the characteristics of services, service industries, and firms within an industry on potential sources of SCA are ex- plored and the propositions presented. We conclude with a discussion on managerial implications and future research directions. The Concept of Sustainable Competitive Advantage: An Overview In most industries, some firms are more profitable than others, regardless of whether the average profitability of the industry is high or low. The superior performers conceivably possess something special and hard to imitate that allows Journal of Marketing Vol. 57 (October 1993), 83-99 Sustainable Competitive Advantage / 83 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms them to outperform their rivals. These unique skills and assets (resources) are referred to as sources of competitive advantage in strategy literature.2 Competitive advantage can result either from implementing a value-creating strategy not simultaneously being implemented by any current or poten- tial competitors (Barney, McWilliams, and Tlrk 1989; Barney 1991) or through superior execution of the same strategy as competitors. Sustainability is achieved when the advantage resists erosion by competitor behavior (Porter 1985, p.20). In other words, the skills and resources underlying a business's competitive advantage must resist duplication by other firms (Barney 1991). Case in point: ServiceMaster is a company that manages support services for hospitals, schools, and industrial companies. It su- pervises the employees of customers' organizations en- gaged in housekeeping, food service, and equipment main- tenance. The company has been successful in using its unique resources and skills (specifically, system economies and specialized management skills) to raise the quality of its customers' maintenance services and at the same time lowering their costs. Using its data base (a firmspecific resource), which covers more than a decade of maintenance history on several millon pieces of equip- ment at thousands of locations, ServiceMaster can determine objectively how its customers' facilities should be maintained, when equipment purchases and maintenance will pay off, and when parts should be replaced. The ef- fectiveness of ServiceMaster's systems are reportedly such that its customers often invest jointly in new equip- ment and share the resulting productivity gains (see Quinn, Doorley, and Paquette 1990). Conditions for Sustainable Competitive Advantage A number of studies have explored the conditions under which a business's competitive advantage is sustainable (cf. Barney 1991; Coyne 1985). Barney lists four essential requirements for a resource/skill to be a source of SCA: * It must be valuable; * It must be rare among a firm's current and potential competitors * It must be imperfectly imitable; and * There must not be any strategically equivalent substitutes for this resource/skill. Firm resources and skills are considered valuable when they aid a firm in formulating and implementing strategies that improve its efficiency and/or effectiveness. However, if certain resources/skills are possessed by a large number of present or potential competitors, they cannot be a source of SCA. Valuable and rare organizational resources/skills can be sources of SCA only if firms that do not possess these resources cannot obtain them (as a direct consequence of a ca- pability gap [Coyne 1985], the critical resources being im- perfectly imitable [Lippman and Rumelt 1982; Coyne 1985; Barney 1986a; 1986b]). The final requirement for a resource/skill to be a source of SCA is that the resource/skill be nonsubstitutable. Substitutability can take two forms. If a competitor cannot duplicate a firm's resources/skills exactly, but can substitute similar resources that enable it to 2For a discussion on the distinctive competencies/competitive capabilities underlying the superior performance of two superior performers in the banking sector-Wachovia Corporation and Bank One-see Stalk, Evans and Shulman (1992, pp. 68-69). formulate and implement identical strategies and use very different resources/skills as strategic substitutes (see Barney 1991), then a resource/skill cannot be a source of SCA. Coyne (1985) points out that, not only must a firm have a skill or resource that its competitors do not have (i.e., there must be a capability gap), but also the capability gap must make a difference to the customer. In other words, for a business to enjoy a SCA in a product-market segment, the difference(s) between the firm and its competitors must be reflected in one or more product/delivery attributes that are key buying criteria. Furthermore, in order for a competitive advantage to be sustainable, both the key buying criteria and the underlying capability gap must be enduring. Additionally, in the face of changes in key buying criteria, the sus- tainability of a business's competitive advantage would depend on its ability to adapt to these changes and/or influence key buying criteria (see Boulding et al. 1993; Hamel and Prahalad 1991; Treacy and Wiersema 1993). A Conceptual Model of Sustainable Competitive Advantage A conceptual model of SCA in service industries, which builds on the works by Barney (1991), Coyne (1985, 1989), Day and Wensley (1988), Dierickx and Cool (1989), Lippman and Rumelt (1982), and Reed and Defillipi (1990), among others, is presented in Figure 1. Here a firm's distinctive organizational skills and resources are viewed as the source of a business's competitive advan- tages in the marketplace.3 The characteristics of services, ser- vice industries and firms within an industry are shown as moderating the skills and resources underlying a business's competitive positional advantages. The sustainability of a business's competitive advantages is viewed as contingent on barriers to imitation of its unique skills and resources. The model further suggests that sustainable competitive advantages are a key to sustained, superior long-term performance. Reinvestments in both present and new skills and resources are viewed as critical to strengthening (or preventing erosion of) competitive advantages. A detailed discussion of the constructs central to the model and the proposed links follows. Sources of Competitive Advantage Researchers generally distinguish between two broad sources of competitive advantage-unique resources (assets) and distinctive skills (capabilities). Day and Wensley (1988) characterize superior skills as the distinctive capabilities of a firm's personnel that set them apart from the personnel of competing firms and superior resources as more tangible requirements for advantage that enable a firm to exercise its capabilities.4 These two broad sets of sources enable a business to perform the various primary and secondary value activities that compose its value chain either at a lower cost or in a way that leads to differentiation. They fa3The skills and resources underlying a business's positional advantages listed in Figure 1 and discussed in this article are intended to be illustrative rather than exhaustive. The principal focus here is on skills and resources that could impact differentially on competitive advantage across service in- dustries. 4Finer distinctions of resources and skills are provided by Williams (1992), and Lado, Boyd, and Wright (1992). 84 / Journal of Marketing, October 1993 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms coSo r-C 2 iL T V) .) I)0 'p .. .._ C .0 co c 1- 0 4, 0 ac 0o C C 0 0 a U It .4 lqt Sustainable Competitive Advantage / 85 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms cilitate the attainment of competitive positional advantages in the form of (1) superior customer value through a differ- entiated good/service, and/or (2) lower relative cost through cost leadership.5 Firm-specific skills and resources are also referred to as the "drivers" of cost and/or differen- tiation advantages (Porter 1985). A wide variety of drivers has received attention in the literature, including resourcebased drivers such as economies of scale and scope, brand equity, and reputation, and skills-based drivers such as the skills underlying the innovativeness and superior quality of a business's offerings. Superior skills and resources do not, however, automatically give a business a competitive advantage. They only provide the business an opportunity to leverage its skills and resources to achieve competitive cost and/or differentiation advantages. This entails first identifying those skills and resources a company has that have the greatest potential to endow the firm with enduring competitive advantages. Also, as Aaker (1989) notes, multiple bases of competitive advantage may be needed for a business to compete successfully. A more detailed discussion on the skills and resources underlying a business's competitive advantage listed in Figure 1 is presented in a later section, along with the propositions. Competitive Positional Advantages Competitive positional advantages can be broadly construed as cost leadership and differentiation advantages. Cost leadership entails performing most activities at a lower cost than competitors while offering a parity product. Differentiation entails customers perceiving a consistent difference in important attributes between the firm's offerings and its competitors' offerings. The advantages, disadvantages, risks, and implementational requirements of cost lead- ership and differentiation as generic strategy alternatives Moderating Effects of the Characteristics of Services, Service Industries, and Firms In the proposed conceptual model (Figure 1), the following characteristics of services, service industries, and firms within an industry moderate the effects of skills and resources underlying a business's positional advantage. A. Characteristics of Services and Service Industries * Equipment intensive.....People intensive * Complexity of assets needed (High.....Low) * Number of co-specialized assets needed (Many.....Few) * Relative salience of intangibles vis-a-vis tangibles (High ....Low) * Salience of experience attributes (High.....Low) * Salience of credence attributes (High.....Low) * Service delivery process (Centralized.....Decentralized) B. Service Firm Characteristics * Size * Business portfolio composition * Order of entry into market Though other characteristics merit consideration as moderating factors in the context of specific service industries, the principal focus here is on characteristics that transcend industry boundaries. Such an orientation can be conducive to man- agerial learning by facilitating identification of and learning from the experience of organizations facing parallel situations in other service industries (see Lovelock 1983). Barriers to Imitation Central to the concept of SCA is the notion of durability or non-imitability. A key difference between entry barriers and barriers to imitation is that though the former are prone to free-riding (because they are the private collective asset of the industry), the latter are endogenous and idiosyncratic have been well documented (Porter 1980, 1985). (i.e., firm-specific) (Mahoney and Pandian 1992). OverlapShostack's (1987) analysis of the process of service provi- ping conceptualizations of barriers to imitation have been sion in terms of complexity (the number of steps involvedproposed by Lippman and Rumelt (1982), Coyne (1985), in providing the service) and divergence (the executional lat-Rumelt (1984, 1987), and Reed and Defillipi (1990). A itude at each step) and the positioning alternatives that map of the broad playing field of barriers to imitation is proemerge from this analysis-reduced divergence (a standard-vided by Rumelt's (1984) treatise on isolating mechaized, cost-efficient service), increased divergence (greaternisms.6 Dierickx and Cool's (1989) discussion on resource/ customization for specific segments), reduced complexity skills stock provides additional insights into the operation (a stripped down generic service), and increased complexityof barriers to imitation. (addition of services tending toward a multi-service posiIsolating mechanisms. These are essentially asymmetion)-provide additional insights into differentiation possi-tries in the skills and assets of competing firms that inbilities in service industries. Each of these positioning alter-crease the costs associated with strategic imitation. Engagnatives can result in differences in customer's perception ofing in the maintenance of these isolating mechanisms provalue. For example, a strategy of reduced divergence couldtects the competitive advantages derived from past and/or lead to some customers perceiving the shift as one that low-present managerial actions. Fisher (1989) notes that underers customization and limits their options and hence reject- standing the relative durability of each isolating mechanism ing a highly standardized service even if it costs less (see and marketing mix element has important implications for differentiation strategies pursued by service firms. Barriers Shostack 1987). to imitation are even greater when causal ambiguity exists over the factors responsible for a business's superior perfor5Though the value chain (a set of interdependent primary and secondary mance. Three critical characteristics of a firm individually value activities that are connected by linkages) is not explicitly shown in Figure 1, it should be recognized that a business's unique resources and 6An examination of the writings of Rumelt (1984) and Coyne (1985) on skills lead to competitive positional advantages by enabling it to performbarriers to imitation reveals considerable overlap if not synonymity of the various value activities either at a lower cost or in a way that leads tothought. Implicit in the business system, position, and organizational or differentiation. See Porter (1985) and Stalk, Evans and Shulman (1992) for managerial quality gaps outlined by Coyne are the various isolating mechadditional insights into value chains. anisms identified by Rumelt. 86 1 Journal of Marketing, October 1993 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms or in combination contribute to causal ambiguity (Reed and Defillipi 1990): (1) Tacitness is defined as the implicit and non-codifiable accumulation of skills that result from learn- know-how. The implication here is that when asset mass ef- ing by doing (Polanyi 1962); (2) Complexity results from Difficulties in "catching up" can be even greater when the asset accumulation process exhibits discontinuities; i.e., a critical mass is required (Dierickx and Cool 1989). Interconnectedness of resources/skills acts as a barrier the interrelationships between various skills and assets (Barney 1926b; Nelson and Winter 1982); and (3) Specificity entails the transaction-specific skills and assets that are util- ized in the production processes and provision of services for particular customers (Williamson 1985). Any of these can produce ambiguity regarding the firm's actions and outcomes and in turn create barriers to imitation (Reed and Defillipi 1990). Ambiguity over factors responsible for superior performance acts as a powerful barrier to imitation as well as a deterrent to resource mobility (Dierickx and Cool 1989). Resources that cannot be traded either because (1) their property rights are not well defined or (2) they are idiosyncratic to the firm and have no value outside it constitute immobile resources (Dierickx and Cool 1989). Furthermore, the complexity of firms often makes identification of their key suc- cess factors impossible. Also, treating key success factors separately may often be an inaccurate representation, because the interaction among the factors can be the cause of a business's success. Therefore, potential imitators may ficiencies are critical, building stocks of resources/skills by firms that have initial low levels of stock can be difficult. to imitation when some firms lack complementary resources/skills that are critical to competing in a product mar- ket. For instance, a new entrant to a market with a product (of comparable quality to that of incumbents) encountering difficulties in distributing the product because of no es- tablished dealer network would be at a competitive disadvantage. Performance Outcomes Competitive advantage can be expected to lead to superio marketplace performance (e.g., market share, customer sat isfaction) and financial performance (e.g., return on invest ment, shareholder wealth creation). Accounting ratios an market measures constitute two broad indicators of a bus ness's financial performance. However, they have been crit icized for their (1) inadequate handling of intangibles an (2) improper valuation of sources of competitive advantag Uncertain imitability results when the creation of new (i.e., allocating historic and current costs to satisfy tax re products is inherently uncertain and causal ambiguity about quirements [Day and Wensley 1988]). Financial perfor the process of asset stock accumulation (the building of mance measures characterized by a future orientation (e.g stocks of resources and skills) impedes imitation and/or mo- shareholder value creation potential) though not entirely bility of a firm's unique resources. Its relevance increases free of shortcomings, are generally viewed as more apwhen complex products and administrative structures are in- propriate for evaluating the desirability of planned inves volved (Lippman and Rumelt 1982). The lack of a clear-cut ments in defensible positional advantages. However, a de causal explanation between the actions and performance of tailed discussion of the merits and shortcomings of thes some large firms is supportive of the notion of uncertain im- measures is beyond our scope here.7 itability. Though economic theory suggests that the presfind it hard to develop an unambiguous list of factors responsible for a business's success. ence of excess profits in any industry can make markets con- testable (Baumol, Panzar, and Willig 1982) and bring down industry profits to normal levels, the theory of uncertain im- Reinvestments in Resources and Skills Because the barriers to imitation of a firm's skills and re- itability (Lippman and Rumelt 1982) suggests high profits sources are prone to decay in the absence of adequate "mainmay signal the presence of successful firms with difficult-to- tenance" expenditure (Dierickx and Cool 1989), the main- imitate capabilities that impede entry attempts. Resources/skills stock The imitability of a business's resource/skill stock are related to the characteristics of the pro- tenance of an SCA requires the constant monitoring of and reinvesting in the present sources of advantage, as well as investing in other potential sources of advantage.8 For exam- cess by which they are accumulated. Dierickx and Cool ple, a business with a reputation for superior quality could (1989) identify three major characteristics: (1) time compres- experience an erosion in quality as a source of SCA if it sion diseconomies, (2) resource/skill mass efficiencies, and fails to continue investing in processes that contributed to (3) interconnectedness of resources/skills stock. Time com- the business's reputation for quality. As Porter (1985, p.20) pression diseconomies refers to the accumulation of certain notes, a firm must offer "a moving target to its competiadvantages to firms owning a resource/skill for a long pe- tors, by reinvesting in order to continually improve its riod of time (e.g., firm reputation for quality). A firm may position." have built a reputation for quality by following a consistent set of production, quality control, and other policies over time. Such sources of competitive advantage can be neither acquired nor imitated by competitors within a short period of time. The presence of large amounts of existing stock of resources/skills facilitates further resource/skill accumulation. For example, firms that already have an existing stock of research and development may often be in a better position to make further breakthroughs and add to their existing stock of knowledge than firms who have low initial levels of 7See: McGuire and Schneeweis (1983) and Lubatkin and Shrieves (1986). Additionally, in the case of several resources and skills, their benefits may be in the long term and in some cases the benefits (such as fast information flow, understanding of market trends, fast procedures, and more effective customer service) may be difficult to quantify. In these cases, the use of standard hurdle rates may be inappropriate, and non-traditional criteria may be required (Shank and Govindarajan 1992). 8As evidenced by the links leading into and from the box labeled "Reinvestments in Resources and Skills" (Figure 1), there is an implicit time dimension in the proposed conceptual framework. Sustainable Competitive Advantage / 87 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms Sources of Sustainable Competitive Advantage In Service Industries: Propositions This section provides an overview of the skills and resources underlying a business's competitive positional advantages and a number of propositions delineating the moderating effects of the characteristics of services, service industries, and firms within industries on these sources. However, we present no formal discussion in reference to certain potential sources of competitive advantage listed in Figure 1 (superior skills in various functional areas and those re- lating to innovation, quality, customer service, and implementation) because their importance as determinants of supe- rior performance are widely recognized, transcend goods and service industry boundaries, and have been extensively tional or large-scale local advertising and sales promotion), billing and logistics-related activities enable a multi-unit ser- vice firm to achieve a cost advantage vis-a-vis single-unit and multi-unit service firms with fewer units. In many service industries, multi-unit firms are better equipped to achieve a competitive differentiation advantage over single-unit firms through systematization and standardization of the process of delivering services (Porter 1990). For example, a multi-unit firm that replicates its services at many locations by creating standardized facilities, procedures to guide the behavior of employees, and automating individual service delivery tasks (Levitt 1976) can achieve a differentiation advantage vis-a-vis single-unit service firms. P2: The larger the number of local units of a service firm operating under a common corporate identity within an indus- discussed in business literature. try (either company owned or franchised), the greater the Scale Effects tive cost advantage and institute systematization, standardization, and other differentiation features to achieve a dif- potential to exploit scale economies to achieve competi- ferentiation advantage. Given the decentralization of the service production process to a local level in many service industries, the potential for When a service product is a multi-attribute benefit bunachieving a competitive cost advantage by exploiting econdle characterized by the delivery of certain attributes of the omies of scale has traditionally been viewed as modest. Nevertheless, opportunities for exploiting scale economiestotal are service from dispersed site locations (e.g., purchase of travelers' checks) and other attributes from a central locasignificantly greater in equipment-based service industries than in people-based service industries. Service firms tion can (e.g., arranging for replacement of lost travelers' checks), firm size relative to competitors (e.g., market share/ also achieve economies of scale by centralizing service customer base) can be a major determinant of the economic production facilities while decentralizing customer-contact viability of investing in certain differentiation features that facilities (Upah 1980) or centralizing certain critical (and/or might endow the firm with a competitive differentiation adequipment-intensive) activities and localizing less critical vantage. Case in point: (and/or people-intensive) activities, as exemplified by clinical laboratories performing some tests in dispersed local An important attribute or key buying criterion in the conunits and others involving expensive equipment and/ortext of purchasing travelers' checks is the assurance that skilled personnel in regional centers (see Porter 1990). Opthey will be replaced promptly should they be lost or stoerating economies can also be realized through reconfiguralen. A state-of-the-art satellite communication system that tions such as replacing stand-alone with multi-unit motion allows customers who have lost their travelers' checks to picture theaters sharing a centralized projection room, ticket communicate with the firm from any part of the world, an selling booth, and refreshment stand (see Thomas 1978).office that is staffed 24 hours a day, 365 days a year by a team of well-trained employees, a supporting information Also, as Quinn and Gagnon (1986) note, in a number of sersystem that allows the staff handling the phone lines to vervice industries, the application of new technologies has alify the veracity of customers' claims regarding lost travellowed firms to realize significant scale economies. ers' checks on the basis of their responses to a few quesP,: The greater the equipment intensity of a service industry, tions, and a distribution system that is the most intensive the greater the importance of economies of scale as aand extensive (a worldwide network of branch offices and source of competitive cost advantage. agents) could conceivably be some of the basic building blocks (firm-specific resources and skills) that allows The inseparability of production and consumption of ser-only one firm in the industry to guarantee that if lost or stovices and the resultant inability to efficiently mass producelen, its travelers' checks will be replaced within eight hours or less. For a firm with a sizeable share of the marservices at a central location often necessitates service busiket, making substantial investments in satellite communi- nesses to make the service available at multiple sites. This cation systems, earth stations, and a state-of-the art inforin turn necessitates examining the implications of size on mation system to achieve such a differentiation advantage cost and differentiation advantages at the operating unit and may be an economically viable proposition; for competifirm level. Heskett (1987) notes that for service firms opertors with smaller shares of the market, however, this may ating under a common identity over a wide area, scale econ-not be the case. omies often are more important at the firm than operating unit level. A manifestation of the relative size (of firms com- Cost peting in an industry) at the company level is the number of and Demand Synergies dispersed local units (either company owned or franchised) Economies of scope are realized when a firm is able to mar- operating under a common corporate identity. Allket else entirely new services with little added costs through netequal, economies of scale associated with selection and trainworks or systems previously established for current ser- ing of employees, purchased goods and services, investvices. Communications and information-handling technoloments in specialized technology and R&D to systematize gies often facilitate distribution of a broader set of services the service delivery process, and shared marketing (e.g., to naa more diffused customer base, as well as lower the mar- 88 / Journal of Marketing, October 1993 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms ginal costs on old services, as equipment development and software investments are allocated over a broader line of ser- vices (Quinn and Gagnon 1986). Therefore, relative to single business firms, multi-business firms have the opportunity to (1) reduce costs by sharing activities between businesses; (2) increase revenues by cross-selling to customers of different businesses in the firm's portfolio; and (3) share knowledge and skills. For instance, a multibusiness firm such as ServiceMaster-whose subsidiaries include Ter- minix (termite and pest control service), ChemLawn and True Green (lawn care service), and American Home Shield (appliance insurance service)-has an opportunity to exploit demand synergies by cross-selling of services, and cost synergies by centralizing the accounts processing for various services. More importantly, competitive cost and dif- ferentiation advantages associated with synergy are less likely to be imitated, because these are often achieved under a unique set of circumstances as well as on the basis of unique firm specific resources and skill base. Case in point: In 1990, when AT&T launched its AT&T Universal Visa and MasterCard credit cards, it had access to the credit his- tories of 70 million AT&T long-distance customers (a firm-specific resource). By qualifying these potential customers in advance, the firm was in a position to respond quickly to inquiries from households that were good credit risks and lower its vulnerability to bad credit risks (Blattberg and Deighton 1991). An additional incentive it could offer to its credit card customers (a 10% discount on long-distance calls made over the AT&T network by using its cards), also attributable to a firm-specific resource, could be matched only by some of its larger competitors by entering into alliances with competing long dis- tance carriers such as MCI and U.S. Sprint. P3: The greater the cost (demand) interrelationships between vented around." For example, though Merrill Lynch obtained a patent for its Cash Management Account (CMA), which integrated four basic investor services into a single account, and holds a dominant share of the market, practically all its major competitors offers a similar service.9 Trade secrets, an alternative to patents, can offer protection from imitation, provided the secret is kept in the form of tacit knowl- edge. Whereas codified knowledge is transferable and more prone to be copied, tacit knowledge, being difficult to articulate, is difficult to transfer or copy (Teece 1981, 1988). A number of service firms have successfully used information technology to capture tacit organizational knowledge and retain property rights over the resulting innovations. For exam- ple, American Express developed an expert system called Authorizer's Assistant to facilitate credit authorization judgments. As a result, a decision that traditionally created a bottleneck (involving the scanning of 13 data bases or necessi- tating a judgment call) can now be made in a few seconds. The presence of cospecialized assets or the lack thereof also impacts on the imitability of innovations. When commercializing an innovation requires other specialized assets in marketing and/or production, and these assets are specific to the particular innovation, the imitability of the innovation will be impeded to the degree of complexity and num- ber of cospecialized assets needed to put the innovation to work. Even if competing firms were to find it easy to copy the innovation, they might face difficulties in putting together the organizational apparatus needed to bring the inno- vation to market. A complex set of cospecialized assets may therefore protect the innovation and allow it to continue to yield value (see Teece 1987). For example, it took more than two years for competitors to respond to American Hospital Supply Corporation's ASAP system, because they needed to computerize their inventory systems first (Vi- tale 1988). Though entering certain service businesses a particular service business in a firm's portfolio and could require a firm to possess complex and/or multiple co- other businesses in its portfolio, the greater the cost (demand) synergies as a source of competitive cost and/or differentiation advantage. may not be inhibited by such requirements. Product, Process, and Managerial Innovations Product, process, and managerial innovations can be used to gain a competitive advantage, to the extent that the tech- nology underlying such innovations remain proprietary. Technology held proprietary through patents, copyrights, or secrecy can deter new entrants, as well as achieve a compet- itive advantage by exploiting economies of scale and scope and/or through differentiation. Teece (1988, p.48) characterizes regime of appropriability as those aspects of the commercial environment, excluding firm and market structure, that govern an innovator's ability to capture the rents associated with the innovation. Relative to goods industries, in service industries, technology suffers from a weak regime of appropriability, which implies that patents can be "in9It is not clear, however, whether it was Merrill Lynch's patent application, the time it took for competitors to develop the technology needed to offer a similar service, the uncertainty created by the legal opposition to specialized assets, entering into other service businesses P: The greater the complexity of assets needed to market a service, the greater the importance of innovation as a source of competitive advantage. P^: The greater the number of cospecialized assets needed to market a service, the greater the importance of innovation a source of competitive advantage. Brand Equity'? Aaker (1991, p. 15) defines brand equity as "a set of brand assets and liabilities linked to a brand, its name and symbol, that add or subtract from the value provided by a product to a firm and/or that firm's customers." He distinguishes between five categories of assets that give rise to a brand's eq- uity: (1) brand loyalty, (2) name awareness, (3) perceived quality, (4) brand associations, and (5) proprietary brand assets such as patents and symbols. In the context of marketing of services, Berry and Parasuraman (1991) note that brand equity also could reside in the name of the firm itself. Here, the absence of a tangible physical product on which a the service raised by banks and state governments, or a combination of these factors that gave Merrill Lynch a five-year head start and market exclusivity (see Wall Street Journal 1989, 1993; Kerin, Varadarajan, and Pe- terson 1992). loThe discussion presented in this section builds on literature on brand equity in the marketing discipline and on reputation in the management and economics disciplines. Sustainable Competitive Advantage / 89 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms brand name can be affixed often necessitates assigning greater prominence to the corporate brand name on the various physical products and facilities used to deliver the ser- vice (e.g., displaying an airline's logo and name on airplanes, ground transportation vehicles, baggage handling equipment, ticketing counter, departure and arrival gates, etc.). Strong brand names or symbols impact positively on brand equity, both directly and indirectly, through perceived quality. Brand equity (1) helps differentiate the product from competitors' offerings (Park, Jaworski, and MacInnes 1986); (2) serves as a proxy for quality and creates pos- itive images in consumers' minds (Oster 1990; Kamakura and Russell 1991); (3) prevents market share erosion during price and promotional wars (Kamakura and Russell 1991; Johnson 1991); and (4) prevents market share erosion by giving a firm time to respond to competitive threats (Aaker 1991). Shostack (1977) suggests that since services are characterized by a greater degree of intangibility, "'tangibilizing" (managing the evidence) must be attempted in order to make the product more salient to customers. The need to tangibilize is inversely related to the level of intangibility of a service. Brand names and symbols used by firms to add tangible aspects to the product help reduce the search costs of consumers (Landes and Posner 1987), such as Prudential Insurance's use of the Rock of Gibraltar to present a message of strength and stability, and Travelers Insurance's use of an umbrella to convey a message of protection (Aaker 1991). P6: The greater the intangibility of a service, the greater the im- portance of brand equity as a source of competitive differentiation advantage. Nelson (1970) and Darby and Karni (1973) suggest that customers take a chance when they purchase an experience good. Unlike search goods, consumers cannot infer through simple inspection whether a product is of high or low quality with experience goods. A major challenge faced by a new entrant in an experience goods market is the need to convince consumers to take a chance on a new product when they are aware of the quality of the incumbent's prod- uct because of prior use (Schmalensee 1982). In general, the likely presence of variability in service quality, not only makes it difficult and riskier for consumers to evaluate the quality of a service, but also makes the consumers' pur- chase choices more complex (Murray 1991; Nayyar and Templeton 1991). Though on one hand, consumers may seek more information to make better choices, since informa- quality and therefore differentiate themselves from competition. Moreover, the additional marketing efforts that must be expended in order to overcome consumers' risk perceptions can often lead to a cost asymmetry between a firm own- ing brands with strong equity vis-a-vis its competitors. P7: The greater the experience and credence attributes of a ser- vice, the greater the importance of brand equity as a source of competitive cost and differentiation advantage. Information asymmetries also can be exploited by firms to diversify into new services and provide multiple services to its customers. In reference to service industries, Nayyar (1990) argues that each sampling by experience contributes to the information bank that consumers maintain. In reference to new service introductions he notes: When the producer of a brand introduces another brand, buyers may draw upon their information bank to form associative evaluations of the likely properties of the new brand. This "carry-over" of evaluative information tends to reduce information acquisition costs for buyers. Hence it can be expected that customers who have favorable impressions of current service providers will tend to favor such providers when making purchase decisions about other services that these providers may offer (Nayyar 1990, pp. 515-516). Furthermore, when appropriate, service providers who have created favorable impressions can attempt to capitalize on ongoing relationships by allocating more effort to convincing their existing customers (rather than new customers) to try their new services. In summary, a firm with a wellestablished brand reputation diversifying into new services that its existing customers may buy from can be expected to enjoy a competitive advantage, because of the lower information acquisition costs to consumers. P8: The greater the experience and credence attributes of a new service being marketed by a firm, the greater the importance of brand equity as a source of competitive advantage. Relationships/Precommitment Contracts" In general, firms can enhance their performance by cultivating new customers and/or retaining their existing customers and selling more to them. Cultivating new customers is generally more expensive than retaining existing customers, par- ticularly in mature markets. Riechheld and Sasser (1990) found a 5% reduction in customer defections to be associ- tion search is generally expensive (Stigler 1961), buyers seeking to economize on evaluation costs might be inclined to choose the product with the best brand reputation be- ated with profit increases ranging from 25 to 85% in the industries they studied. Findings such as these suggest that ser- When buyers cannot easily evaluate the capabilities of the action perspective) either through an implicit or explicit pre- service provider and the quality and value of the service provided (as would be the case with credence goods) brand reputation serves as an important proxy for quality and other key buying criteria that cannot be easily evaluated. Also, as pointed out by Levitt (1986), when buyers se- commitment have a greater potential of achieving cost advantages. Precommitment contracts, by removing a portion of the market from the competitive arena and thereby introducing an asymmetry between incumbents and potential entrants, act as entry deterrents (Oster 1990). cause it has the lowest evaluation costs (Rumelt 1987). lect a particular brand, they are engaging in an act of risk reduction. Though risk can be viewed as a function of the perception of variability in quality, in service industries, firms having strong brand names and symbols are better positioned to mitigate customers' perceptions over variability in vice firms doing business with their customers from a long- term relationship perspective (rather than a single trans- 1"Though the focus of this section is limited to relationships with customers, relationship marketing is more broadly construed in business literature to include relationships with suppliers, channel members, and other organizations as well (i.e., cooperating and partnering with other firms including competitors). For example, see Ohmae (1989). 90 / Journal of Marketing, October 1993 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms Developing relationships with and retaining customers are central to the concept of memberships, which constitute non-contractual approaches to precommitment. Service busi- tions is critical to achieving better facility utilization (Allen 1988). However, though the delivery of certain services nesses have successfully employed various methods to could require a firm to invest in multiple service delivery facilities at locations that are convenient to the served market "lock in" customers. Non-contractual switching costs created by airlines through their frequent flyer programs and hotel chains through their honored frequent guest programs are cases in point. The more formalized such relationships other services can be offered from a single centralized location (e.g., credit cards). Clearly, preemption of strategic locations is an important source of competitive cost and differ- (e.g., facilities for cash withdrawal and deposit), certain are, the greater are the benefits that accrue to the service pro- entiation advantage only in the context of the former, as vider. In return for exclusive privileges for members, valua- highlighted in reference to the banking industry. ble information collected about customers can be used to gain scope advantages (by cross-selling other services to cus- tomers), as well as to build non-contractual switching costs. For example, American Express reportedly has over 450 items of information on each customer that are used by its direct marketing division to sell consumer products to them (Newport 1989). Studies focusing on service industries have found that developing relationships with customers (through implicit contracts) has a positive impact on firm performance (Nayyar 1992; Crosby, Evans, and Cowles 1990; Crosby and Stephens 1987). Trust provides an alternative means to developing non-contractual precommitments with customers. Trust (i.e., a willingness to rely on an exchange partner in whom one has confidence) has also been shown to be positively associated with commitment to a relationship (Moorman, Zaltman, and Deshpande 1992). Precommitment contracts can not only deter entry but also prevent customers from exiting existing contracts. For example, in hospital management contracts, incumbent firms have a significant edge in contract renewals because of the substantial costs to hospitals of changing firms (Porter 1985). The switching costs become higher as (1) the cus- tomer gets accustomed to the procedures provided by the system, resulting in a procedural specificity (Malone, Yates, and Benjamin 1987); (2) the extent to which this procedural specificity is increased by an electronic integration effect (dependency of the customer on a vendor, created by the use of interorganizational or transaction-based systems [Malone, Yates, and Benjamin 1987; Glazer 1991]); and (3) the customers modify their own internal procedures as a re- sult of using the system (Barrett and Konsynski 1982; Runge 1988). Studies in the insurance industry have found that agents who were electronically linked with a particular insurance carrier showed a significant increase in the number of policies written with that carrier compared to agents who were not electronically linked to the carrier (Venka- traman and Zaheer 1990; O'Callaghan, Kaufmann, and Konsynski 1992). As noted previously, buying services with greater experience and credence qualities involves greater consumer risk taking. Relationships, by nurturing strong social and personal ties with consumers (Czepiel 1990), allow a firm to offer a greater assurance to customers and lower the perceived risk (see Crosby and Stephens 1987; Crosby, Evans and Cowles 1990). P9: The greater the experience and credence attributes of a ser- vice, the greater the importance of relationships as a source of competitive differentiation advantage. The simultaneity/inseparability characteristic of services implies that unlike goods, services are typically produced and consumed at the same time. Therefore, a consumer engaging in a financial transaction such as cash withdrawal must interface with a service deliverer, namely the bank teller. An alternative technological solution to serving this customer need is to install automated teller machines (ATMs). With ATMs in place, serving a customer need such as financial transactions processing does not have to be limited to the regular banking hours of 9:00 A.M. to 3:00 P.M. In effect, the simultaneity characteristic of services is no longer a constraint on the service provider. The service can be made available for 24 hours a day, 365 days a year. Also, to use the service, the consumer does not have to be physically present on the bank premises. The transactions can be processed through ATMs placed at strategic locations off the bank premises. The first firm that recognized the potential of this alternative technological solution had an array of opportunities to achieve a SCA. First, it had the opportunity to acquire or lease prime real estate at strategic locations (off-bank premises) for placing its ATMs at prices below those that would prevail later in the evolution of the market. (As the market for a resource such as strategic locations for placing ATMs became competitive, the price of this resource would have been bid up until it was equal to the net present value of future above-normal benefits that can be de- rived from this resource [see Barney 1986b]). This would have lead to a cost asymmetry between the first firm to make a significant investment in spatial preemption of lo- cations for placement of ATMs and later entrants. Sec- ond, under conditions of manufacturing capacity constraints in the supplier industry, by contracting with supplier firms for their entire output of ATMs, the firm could have delayed the availability of ATMs to other competing firms. Because of the response time lag inherent in the sup- plier industry (i.e., the amount of time that would have elapsed before ATM manufacturers would have been in a position to deliver ATMs to the competitors of the pioneer- ing bank), this source of competitive advantage would have endured for some period of time, though not indefinitely. In other words, even the firm's competitors who also recognized the potential of ATMs as an effective solution to the simultaneity characteristic of services would not have been in a position to immediately neutralize the differentiation advantage enjoyed by the pioneering firm at- tributable to a unique firm resource (ATMs). In summary, by making preemptive investments in key resources, a per- ceptive firm could have achieved an absolute cost advan- tage (through preemptive contracts for acquiring or leas- ing strategic locations for placing ATMs), as well as a differentiation advantage (through preemptive contracts to acquire the entire output of ATM manufacturers and spa- Spatial Preemption tial preemption of strategic locations). Understandably, Because demand for many customer services is based on convenience, preemptive identification of ideal service loca- the value of supplier industry response lag time as a source of competitive advantage would have diminished over time as manufacturers of ATMs stepped up their out- Sustainable Competitive Advantage / 91 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms put. Hence, firms need to constantly explore new bases of competitive advantage. PO: The more decentralized the service delivery process, the greater the importance of spatial preemption as a source of competitive cost and/or differentiation advantage. Communication Good Effects (1992). The preceding discussions relating to spatial preemp- tion and communication good effects suggest the following: P12: Potential opportunities for achieving competitive cost and/or differentiation advantage through spatial preemp- tion are greater for the market pioneer than for later entrants. P3: Potential opportunities for achieving competitive differ- The value of certain products (e.g., telephone network serentiation advantage through communication good effects vices, micro computer services) increases as the number of are greater for the market pioneer than for later entrants. users or adopters increase. These products, called communication goods (Connor and Rumelt 1991), serve as a means Corporate Culture of standardization, because a large user base brings a large An organization's culture is a complex set of beliefs and number of complementary goods into being. Case in point: ways of doing things that influence the organization's perThe importance of communication good effects as a spective of itself and the world around it. A key element of source of competitive differentiation advantage is highcorporate culture is the set of formal rules and structures lighted by the evolution of the video cassette recorder that governs the way people relate to one another in the (VCR) business. In the early years, when Sony's Betamax and Matsushita's VHS-format VCRs were coexisting, as workplace. Another is the set of myths and traditions that well as competing to become the industry standard, video help define the ideology of the organization (Mintzberg rental service businesses stocked an equal number of pre- 1983). Most of the literature on organization culture and perrecorded tapes in both formats. As the percentage of house- formance of a firm suggests that culture can have a signifiholds owning VHS format VCRs increased relative to the cant positive economic value for a firm (Barney 1986a; percentage owning Betamax-format VCRs, video rental Ouchi 1981; Deal and Kennedy 1982). The strong culture service businesses modified their inventory mix. In most hypothesis suggests that firms that have strong distinctive instances, they stocked multiple copies of video software traits, values and shared belief patterns will outperform orprerecorded in the VHS format, but only one copy in the ganizations that are weak on these dimensions (Dennison Betamax format. Over time, with (1) video software marketers (i.e., movie studios) increasingly offering their 1984). Strong cultures can (1) help attain a shared vision ware exclusively in the VHS format, (2) video rental ser- and goal congruence among employees to meet organizavice firms carrying only VHS-format tapes, and (3) most tional goals (Wilkins and Ouchi 1983); (2) empower employretail outlets stocking only VHS-format blank tapes, the ees to be flexible and achieve organizational goals (Pascale VHS format emerged as the industry standard. 1985); and (3) energize the employees of an organization. A recent study reports that firms with cultures that emphaWhen communication goods are also experience products size key managerial constituencies (customers, stockhold(such as computer software, disk operating systems), there ers, and employees) and leadership (at all levels) outperis a market for both standardization and reputation bonding. formed by a large margin firms that did not have those culTherefore, a particular brand becomes the industry standard and a powerful means of coordination (Rumelt 1987). Develtural traits (Kotter and Heskett 1992). Another recent study focusing on culture types as determinants of performance oping or setting industry standards makes a firm's position more sustainable (Porter 1985). In cases of products (Deshpande, in Farley, and Webster 1993) reports that Japawhich evaluation is difficult, akin to reputation, the indusnese companies with corporate cultures stressing competitry standard plays the role of an alternative cue that makes tiveness (markets) and entrepreneurship ("adhocracies") itself more salient to the customer. Therefore, outperformed those dominated by internal cohesiveness (clans) or rules (hierarchies). Services being primarily delivP,: The greater the experience and credence attributes of a serered by employees, the "people" component of service device, the greater the importance of communication good livery as perceived by customers plays an important role in effects as a source of competitive differentiation advanservice differentiation. Hence, a critical factor that endows tage. The importance of spatial preemption and communication good effects as potential sources of competitive advantage is also moderated by the order of entry of firms into an industry. Literature on pioneering or first-mover advantage, a major area of research in economics, strategic management, and marketing, suggests that on average, pioneers have higher market shares than late entrants (c.f. Robinson and Forell 1985; Robinson 1988).12 Potential sources of a service organization with a competitive edge is its employees, and the way they are influenced by the culture of the organization. 14: The greater the "people" intensity of a service industry, the greater the importance of culture as a source of competitive advantage. first-mover advantage and disadvantages associated with Organizational Expertise/Producer Learning/ Experience Effects13 Montgomery (1988) and Kerin, Varadarajan, and Peterson Organizational learning, or the improvement in skills and market pioneering are reviewed by Lieberman and '2The validity and generalizability of studies reporting a systematic relationship between order of entry and market share have, however, been questioned in light of their methodological shortcomings, such as operational definition of market pioneer, survivor bias, and sample composition (Kerin, Varadarajan, and Peterson 1992). abilities achieved through learning within the firm '3Given that organizational expertise and information technology appear to be equally important sources of competitive advantage across all service industries, no formal propositions are presented in the sections devoted to these sources of competitive advantage. 92 / Journal of Marketing, October 1993 This content downloaded from 198.150.52.18 on Tue, 29 Nov 2016 15:09:06 UTC All use subject to http://about.jstor.org/terms (Weston, Chung and Hoag 1990), can have at least two beneficial effects. The first is increased efficiency of individual workers or worker groups. Experience curves, an extension of learning curves, are the result of applying the learning curve principle to all value-added costs rather than to just production and labor costs.'4 The presence of experience effects (the average total cost per unit, measured in constant current declining by a constant percentage with every doubling of cumulative experience) have been documented in the context of both equipment-intensive service industries such as telecommunications and electric power utilities and people-intensive service industries such as life insurance (see Abell and Hammond 1980; Boston Consulting Group 1972). A second aspect of organizational learning is team ef- in attaining an SCA by (1) providing companies new ways to outperform rivals, through lowering costs and/or enhanc- ing differentiation; (2) building barriers to entry, building switching costs, and sometimes completely changing the basis of competition; and (3) spawning entirely new businesses (Porter and Millar 1985). For example, investments in IT allow a business to achieve a differentiation advan- tage by securing relationships through improved service quality and enhancing its ability to quickly respond to market shifts. Cases in point: A large medical supply company provides on-line order entry terminals and inventory manage- ment software for its customers and successfully achieves a competitive differentiation advantage and creates switching costs, thereby reducing buyer power. As customers' systems are integrated with those of suppliers, it becomes fort. As members of an organization work together over a pe- more difficult for customers to order from a competitor. Be- riod of time, the Williamson principle can take effect-that is, an organization may realize economies of information interchange through common training and experience, repeated interpersonal interactions, and the possible development of a compact code ( Williamson 1971,1975). In other words, inside the organization, information flows more efficiently and transaction costs are reduced, and the firm becomes more efficient as experience is gained. Furthermore, firms, by changing task designs to form self-managed crossfunctional and cross-trained service groups, could (1) improve the quality of service provided by controlling variance at source (Pasmore 1988), (2) improve the flexibility of the organization by empowering teams to respond to specific consumer requests (Tansik 1990), and (3) blend capabilities to solve complicated problems spanning several functional areas speedily and effectively. Enhanced performance resulting from employing teams has been documented in a number of empirical research studies (c.f. Johnson et al. 1981). cause changing suppliers would entail testing, implementation, and retraining costs, customers exhibit an inclination to remain loyal to their current suppliers. The more sophisticated the ordering system, the less the buyers' power to switch. The Limited, a major retail chain, reportedly is able Organizational learning or expertise can be a source of competitive advantage only when the (1) learning is tacit and not observable in use and (2) underlying knowledge is complex (Winter 1987). Competitors free riding on a firm's learning and expertise is more difficult under these conditions, as well as when few people are privy to the information and employee mobility is low. However, the characteristics of various service industries do not appear to moderate the role of organizational expertise as a source of com- petitive advantage. Information Technology15 Information technology (IT) refers to the collective means of assembling and electronically storing, transmitting, pro- cessing, and retrieving words, numbers, images, and sounds (Gerstein 1987, p. 5). IT's importance as a source of SCA stems from its potential to impact the transformation of a service firm's value chain (see Porter 1990). IT can aid 14The experience curve doctrine has been criticized for lacking a sound theoretical base. It has been pointed out that it treats a possible effect of achieving a cost advantage (share building) as a cause and what is actually a possible contributing cause of share building (achieving a cost advantage) as an effect (Alberts 1989). '5Because several studies published during the last ten years provide excellent insights into the importance of IT as a source of competitive advan- tage (cf. Benja