Let's return to our Analyzing Capabilities. We've discussed the value chain, we've discussed alignment. Now, let's discuss the third important factor here. That is, the degree to which any capability provides an advantage, and that advantage is sustainable over time. So what do we mean by sustainable? The degree to which a competitive advantage is both captured and sustained. Now you might remember when we discussed competitive advantage, that is always in the relative. It's not that you just have a great capability, that you have high quality products and the like. It matters how it is compared to your peers and your competitors. A competitive advantage is only when your capability is superior to others. So what do we think about when think about capturing and sustaining a competitive advantage? Well I want to think about two elements here. First, what we call imitability, and second, durability. So let's dive into imitability here. Imitability is very simply, can others do what we do? This harkens back again to our fundamental principle of business strategy here. If others can imitate you, then it's very hard for you to get these economic to have a competitive advantage. If we go back to our VRIN analysis, our valuable, rare, inimitable, non-substitutable analysis, this is the rarity and inimitability conditions that we would discuss in that type of analysis there. So again, the question we need to ask is can others imitate the capabilities that we have. Well, there a number of ways that we can create barriers to imitation. First and foremost, there might be legal barriers present here. Perhaps there is a license required to be able to operate an industry, as we talked about in our t-shirt vendor case. Perhaps there's a patent that you have on your technology, that gives you tight legal protection on your intellectual property. Maybe it's a copyright. Consider Disney, for example. Part of Disney's success, arguably, has been these iconic characters, that they've created over the years, that provide them value in a number of different ways, be it their theme parks, their movies, merchandise, and the like. Going all the way back to Mickey Mouse, and all the up to the more present day with their acquisition of Marvel and its stable of characters. Second thing to think about, whether you control scarce supply. You can think about this in a number of different domains. For example, real estate. The old adage, location, location, location. If you own a valuable piece of real estate that others cannot occupy, that can be a source of competitive advantage. Think about that in the restaurant industry. Having that restaurant that maybe has that sunset view over the ocean. Or in New York City when we have Central Park, there we have Tavern on the Green that's occupied there for many many years. A privileged position there that gives them, arguably, a competitive advantage. Third thing we want to think about. Whether these capabilities have been developed over some unique historical path. And it's that unique historical path that makes it very hard for someone to come along and replicate it later on. Intel and the semi-conductor industry, has moved down a learning curve over time that has allowed them to have a superior knowledge, arguably, of creating microprocessors than many of their peers. Southwest Airlines discusses how early on in their history, they faced a critical point in which they were financially constrained, they had to sell one of three airplanes that they had, leaving them only two left. And Herb Kelleher, the CEO at the time argued, we're gonna keep the same number of flights despite the fact of having one fewer airplanes. It was that act that then forced them to learn how to quickly turn around flights and get them back into the air. And arguably, became the source of their competitive advantage down the road, of having their low cost structure that they do. Related to this is this fourth idea that capabilities are socially complex. This is where we bring in things like culture. These ways in which capabilities are arising out of this dense integration between a number of different factors that end up being very hard to imitate. Go back to Disney again. One of the other advantages Disney has is to provide a superior level of customer service in their theme parks and other venues and the like. At the end of the day, trying to imitate and mimic what Disney does is very hard for others, because it has grown up in this complex exchange of culture and other factors that they have in their organization. This is related to our fifth point here, that value derives from tight combinations. We can think of NewCore and the alignment we talked about between the various aspects of their system and their capabilities here. In economics we often refer to network externalities. Network externalities are the situations where the value of a good or service increases as others consume that good or service. The classic example is a telephone. The value of being the only owner of a telephone is very very low, and as you could imagine, as others buy a telephone, it's value goes up as I now have someone to call. Think about Facebook in this regard. The value of Facebook goes up as others begin to use that service. And so it's that tight combination that derives from others adopting that technology. Adopting that product, that then creates almost an unassailable advantage that makes it very hard for others to penetrate that market. Last but not least, we wanna think about credible commitment. Something that commits a firm to a course of action. What's interesting about this perspective is, it isn't necessarily that others can't imitate you, but it's that they choose not to because it's disadvantagous for them to do so. So how do we think about this? Well one way to think about this is that it's just simply hard for others to scale up at the same level if you chose a certain course of action. So to give you an example a few years back Boeing and Airbus were debating developing a jumbo, jumbo airline. You might have seen some of these at your local airport where these are literally double decker airplanes, huge airplanes. Now there's a market for these airplanes, but it seemed that there was not sufficient market to have two suppliers in the industry. So for awhile, Boeing and Airbus were jockeying for position to be lead developer and builder of this jumbo, jumbo airline. At the end of the day, Airbus was able to credibly commit that they were going to build this airplane no matter what, no matter what Boeing did. And it was at that point that Boeing decided, we're not gonna do this anymore, we're gonna redirect our attention, and in fact built what is now the Dreamliner, which is an energy efficient airplane, much smaller. And some would argue may be the better strategic choice at the end of the day. But the point, again, was limited market. Airbus was able to commit themselves to the jumbo airliner and then therefore capture that market. And others chose not to imitate them. Another important piece of this is that these capabilities are limited to a specific purpose. If you can repurpose what you do, then it's not a credible commitment because you're not all in on that course of action. So a classic historical example of this is when Cortez came to the New World, at least as the story goes, that he apparently took his troops off the ships, turned around and proceeded to burn the ships. Now why did he do this? Because he reduced one of the courses of action, which was to retreat. And he turned to his troops, and he said, you have two choices. You either fight and win, or you die. Incredible commitment to a course of action. So again, when we think about sustainability of a competitive advantage, we wanna first and foremost think about imitation, and think about ways in which we can create barriers to imitation to allow us to sustain this advantage. For at least some reasonable amount of time.
