Sustainability of Privileged Asset Positions

Dierickx and Cool (1989) explored a sustainability of a firm’s privileged asset position hinges on how easily it can be replicated. Dierickx and Cool (1989) also explored sustainability by accumulating similar asset stocks of their own or they may try to substitute them by other asset such as:

Imitation of Asset Stocks – whereby imitation of asset will be time consuming, costly, or both depends on the relative ease, which rival firms, are able to accumulate a similar asset stock of their own. In general, the following characteristic can be identified:

time compression diseconomies –  whereby the notion of “strictly convex adjustment cost” in the theory of capital investment to which they are related express the same fundamental mechanism: the “law of disminishing returns” when one input, viz. time is held constant.

Asset Mas Efficiencies – whereby sustainability will be enhanced to the extend that adding increments to an existing asset stock is facilitated by possessing high levels of that stock.

Interconnectedness of Asset Stocks – whereby accumulating increments in an existing stock may depend not just on the level of that stock, but also on the level of other stocks.

Asset Erosian – Whereby, physical plant and equipment, all asset stocks “decay” in the absence of adequate “maintenance” expenditures.

Casual Ambiquity – whereby the process of accumulation of asset stocks in both deterministic and continuous as reasonable simplifications for some industries, but not for others.

Substitution of Asset Stocks

Dierickx and Cool (1989) argue that imitation is not a major threat, asset stocks may still be vulnerable to substitution by different asset stocks. The fundamental danger list in the fact that successful substitution threatens to render the original asset stocks obsolete, typically because they no longer create values to the buyer

Conclusion

As Barney (1986) correctly points out, firms need to be analyzed from the resource side as well as from the product side: if a privileged product market position is achieved or protected by the deployment of scarce assets, it is necessary to account for the opportunity cost of those assets.

Dierickx and Cool (1989) justify that many inputs required to implement a strategy may be acquired in corresponding input market. Sustainability of a firm’s asset position hinges on how easily it can be replicated.

Dierickx and Cool (1989) framework that presented in this paper, a firm’s current strategy involves choosing optimal time paths of flows, whereas its competitive position and hence its potential profitability is determined by the levels of its stocks.

References

Dierickx, I. & Cool, K. (1989), Asset Stock Accumulation and Sustainability of Competitive Advantage, Management Science, Vol. 35, No. 12, December.