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their strengths may be chalked up to causal ambiguity. Absent evidence of superior skills (e.g., cost data, market research, competitive benchmarks relative to other firms, financial measures, or comments of knowledgeable observers, such as securities analysts), managers should never assume that they are more capable than competitors.

Dependence on Historical Circumstances

Competitors might also be unable to replicate the distinctive capabilities underlying a firm’s competitive advantage because the distinctiveness of these capabilities is partly bound up with the history of the firm. A firm’s history of strategic action comprises its unique experiences in adapting to the business environment. These experiences can make the firm uniquely capable of pursuing its own strategy and incapable of imitating the strategies of competitors. For example, in the 1960s and 1970s, Southwest Airlines was constrained by U.S. regulatory policy to operate out of secondary airports in the unregulated (and thus highly price competitive) intrastate market in Texas. The operational efficiencies and the pattern of labor relations it developed in response to these conditions may be difficult for other airlines, such as American and United, to imitate. Neither of these large carriers would be comfortable with Southwest’s smaller scale of operation and historically constrained route structure.

Historical dependence implies that a firm’s strategy may be viable for only a limited time. To use another airline example, People’s Express prospered in the period immediately after deregulation through a low-price strategy based on lower labor costs. This strategy was viable, however, only as long as the major carriers were burdened by high labor costs from their union contracts. In time, these costs were reduced as more labor contracts were renegotiated. This, in turn, made it difficult for People’s Express to sustain its advantage.

Social Complexity

A firm’s advantage may also be imperfectly imitable because it stems from socially complex processes. Socially complex phenomena include the interpersonal relations of managers in a firm and the relationship between the firm’s managers and those of its suppliers and customers. Social complexity is distinct from causal ambiguity. For example, every one of Toyota’s competitors may understand that an important contributor to Toyota’s success is the trust that exists between it and its component suppliers. But it is difficult to create such trust, however desirable it may be.

The dependence of competitive advantage on causal ambiguity, history, and social complexity implies that major organizational change runs the risk of neglecting these factors and thus harming the firm’s position. If the sources of advantage are complex and difficult to articulate, they will also be hard to consciously redesign. This may be why organizational changes, such as reengineering, are often more successful in new or “greenfield” plants than in existing ones.

EARLY-MOVER ADVANTAGES

This section discusses four distinctive isolating mechanisms that fall under the heading of early-mover advantages:

1.Learning curve

2.Reputation and buyer uncertainty

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3.Buyer switching costs

4.Network effects

Learning Curve

We discuss the economies of the learning curve at length in Chapter 2. A firm that has sold higher volumes of output than its competitors in earlier periods will move farther down the learning curve and achieve lower unit costs than its rivals. Firms with the greatest cumulative experience can thus profitably “underbid” rivals for business, further increasing their cumulative volume and enhancing their cost advantage.

Reputation and Buyer Uncertainty

In the sale of experience goods—goods whose quality cannot be assessed before they are purchased and used—a firm’s reputation for quality can give it a significant early-mover advantage. Consumers who have had a positive experience with a firm’s brand will be reluctant to switch to competing brands if there is a chance that the competing products will not work. Buyer uncertainty coupled with reputational effects can make a firm’s brand name a powerful isolating mechanism. Once the firm’s reputation has been created, the firm will have an advantage competing for new customers, increasing the number of customers who have had successful trials and thus further strengthening its reputation. And newcomers who wish to steal share from the incumbent will set a lower price in order to offer consumers an attractive “B–C” proposition.

Buyer Switching Costs

For some products, buyers incur substantial costs when they switch to another supplier. Switching costs can arise when buyers develop brand-specific know-how that is not fully transferable to substitute brands. For example, a consumer who develops extensive knowledge in using applications developed for the iPhone would have to reinvest in the development of new know-how upon switching to a smart phone that uses Google’s Android operating system. Switching costs also arise when the seller develops specific know-how about the buyer that other sellers cannot quickly replicate or provides customized after-sale services to buyers. For example, a client of a commercial bank whose managers have developed extensive knowledge of the client’s business would face a switching cost if it changed banks.

Sellers can design their products and services to increase switching costs in several ways. Sellers can offer coupons or “frequent-customer” points that tie discounts or special offerings to the completion of a series of transactions. Everyone is familiar with airline frequent-flier programs. Restaurants, car washes, and even law firms are among many other businesses that use similar programs to encourage customer loyalty. Manufacturers can offer warranties that become void if the product is serviced at an unauthorized dealer. Consumers will thereby tend to patronize authorized dealers, who usually charge higher fees and share the resulting profits with the manufacturer. Automakers and consumer electronics firms have imposed such requirements. However, in the late 1990s the U.S. Supreme Court overturned certain provisions of