3094244

WILEY
Constructing Competitive Advantage: The Role of Firm-Constituent Interactions

Author(s): Violina P. Rindova and Charles J. Fombrun
Source: Strategic Management Journal, Vol. 20, No. 8 (Aug., 1999), pp. 691-710
Published by: Wiley
Stable URL: http://www.jstor.org/stable/3094244
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Strategic Management Journal
. .
Strat Mgmt. J , 20: 691-710 ( 1999 )
CONSTRUCTING COMPETITIVE ADVANTAGE: THE

-
ROLE OF FIRM CONSTITUENT INTERACTIONS
VIOLINA P. RINDOVA1 and CHARLES J. FOMBRUN2*
1
School of Business Administration, University of Washington, Seattle, Wash-
ington, U.S.A.
2
Leonard N. Stern School of Business, New York University, New York, New
York, U.S.A.
Current models of competitive advantage emphasize economic factors as explanations for a

firm' s success but ignore sociocognitive factors. This paper integrates economic and cognitive
perspectives, and shows how firms and constituents jointly construct the environments in which
firms compete. We argue that competitive advantage is a systemic outcome that develops as
firms and constituents participate in six processes that entail, not only use and exchange of
resources, but also communication about and interpretations of those exchanges. The interpre-
tations that firms and constituents make of competitive interactions affect decisions about how
to exchange and use resources. As interpretations and evaluations of a given firm fluctuate, so
do the resources the firm has access to and its competitive advantage in the marketplace. The
actions and interpretations of constituents and rivals produce the shifting terrain on which
competition unfolds. We illustrate these dynamics with a discussion of IBM' s changing competi-
tive advantage in the computer industry in the 1980s. Copyright 1999 John Wiley & Sons, Ltd.
INTRODUCTION ney, 1986a, 1986b ) was clearly the source of its

much-envied competitive advantage.
For most of this century, IBM has inspired awe In recent years, a second view has gained
among managers and researchers alike for the
market power it achieved. Over the years, the

prominence in strategy research the resource-
based theory of the firm. It points instead to the
company erected formidable entry barriers in the unique bundle of resources that IBM commanded
mainframe market from extensive research, pro- and to the spectrum of economic rents associated
prietary product design, scale economies, and the with those resources ( Penrose, 1959; Barney,
internalization of large network externalities 1991; Peteraf, 1993 ). Working from this perspec-
achieved through standard-setting and customer tive, researchers would draw attention to the
service ( Garud and Kumaraswamy, 1993 ). Strat- Nobel prizewinners on IBMs R&D staff or to
egy researchers working from the structure- its superbly trained sales force in order to demon-
conduct-performance paradigm would argue that strate that scarce resources have generated Ricard-
the structure of the computer industry and IBMs ian rents, whereas superior use of resources has
near-monopoly position in it ( Porter, 1980; Bar- generated Pareto rents for IBM. The company
itself recognized the importance of its resource
base in its 1982 annual report:
Key words: competitive advantage, industry para-

digms, corporate image and reputation, resource flows, Investments in research and development are pro-
competitive dynamics viding a stream of new products ... Investments
* Correspondence
to: Charles Fombrun, Leonard N. Stem in plant and equipment are providing the capacity
School of Business, New York University, 44 West 4th Street, to manufacture those products in unprecedented
New York, NY 10012, U.S.A.

volumes on a scale that gives us a competitive
CCC 0143-2095/ 99/080691-20 $17.50 Received 23 February 1996

Copyright 1999 John Wiley & Sons, Ltd. Final revision received 29 January 1999
692 V. P. Rindova and C. J. Fombrun
edge in the industry . ( IBM Annual Report, addition, two of these approaches focus on
1982: 2 ) sources of competitive advantage that reside
within a single firm, whereas the other two focus
IBMs renowned CEO Thomas Watson Jr. has on sources that originate in the company s indus-
offered yet another explanation of the firm s com- try or organizational field. We suggest that these
petitive advantage: perspectives are complementary, rather than alter-
native accounts of competitive advantage. We
[a corporation like IBM ] . . . owes its resiliency
not to its form of organization or administrative
develop a framework that shows interconnections
skills, but to the power of what we call beliefs among the different domains of action that can
and the appeal those beliefs have for its people advance our understanding of the dynamics of
. . . In other words the basic philosophy , spirit building competitive advantage.
and drive of an organization have far more to This paper describes the competitive terrain in
do with its relative achievements than do techno-
logical and economic resources, organizational terms of four action domains where competitive
structure, innovation and timing. ( Mercer, 1987: advantage is built and sustained. The framework
48 ) connects the material and interpretational con-
ditions in a single focal firm, as well as in its
Researchers who relate organizational culture organizational field. We first describe the frag-
to competitive advantage would readily agree mented focus of existing theories on a single
with him: The beliefs of organizational members domain of action. We then discuss six processes
and their identification with a firm affect how that link the four domains. For analytical purposes
they make decisions and take actions and, as we begin by examining the unique role of each
such, they affect every aspect of a firm s oper- process in building advantage. In reality these
ations ( Schein, 1985; Fiol, 1991; Hatch, 1993; processes mutually determine each other, so in
Ginsberg, 1994 ). the final section we show the interconnectedness
Industry observers have argued in yet another of these processes.
vein. They suggest that a web of favorable
interpretations surrounding IBM enabled its suc-
cess: THE COMPETITIVE TERRAIN
During the past twenty years or so, IBM has Competitive advantage derives from activities that
built an awe-inspiring image. Many customers span the four domains of action described in
view IBM as a technological leader, an unbeat-
able competitor, an innovative supercompany . No Figure 1. These four domains of the competitive
matter that these perceptions are largely inaccur- terrain derive from two dimensions.
ate: customers believe them. People who make The first dimension distinguishes the material
their living observing , analyzing , and writing and interpretational domains. It contrasts the
about the computer industry re-enforce this emphasis by traditional strategy research on the
image. When IBM makes an announcement,
industry experts discount the chances of every role of material resources with the burgeoning
competitor in IBM s shadow . . . . ( McKenna, literature that highlights how individual, group,
1989: 2 ) and industry-level interpretational processes affect
strategic interactions ( Porac, Thomas, and Baden-
Are these alternative explanations of competi- Fuller, 1989; Walsh, 1995 ). Cognitive simplifi-
tive advantage or do they reflect an evolving cation ( Schwenk, 1984 ), competitive blindspots
and improving explanation of the phenomenon of ( Zajac and Bazerman, 1991 ), competitive
interest? In this paper we argue that these categorization ( Porac and Thomas, 1990; Reger
approaches focus on different domains of action and Huff, 1993; Lant and Baum, 1995 ), industry
in which competitive advantage is actually cre- recipes ( Spender, 1989 ), industry mindsets
ated. The first two perspectives emphasize the ( Phillips, 1994 ) are known to bias, constrain,
material content of economic exchanges, includ- channel, and otherwise influence how managers
ing resources and other valued objects. The other perceive their environments and make strategic
two perspectives emphasize the interpretational choices. In this view, the competitive terrain is
aspect of exchanges, that is, interpretations about defined, not only by the resource conditions in
exchange partners and what they offer. In various markets and potential rents associated
Copyright 1999 John Wiley & Sons, Ltd. .
Strat Mgmt. J ., 20: 691-710 ( 1999 )
Constructing Competitive Advantage 693
The Organizational Field The Firm
Markets Resources
Material Barriers to Entry Physical

Resources Concentration Assets
Product Differentiation
Human Reputations Knowledge

Interpretations Cognitive Categories Beliefs
Success Measures Identity
-
Macro Culture -
Micro Culture
Figure 1. Sources of competitive advantage
with them ( Scherer and Ross, 1990; Barney, domains and creating options for constituents.
1986b ), but also by the knowledge, expectations, Rivalry manifests itself in the variety of options
and sensemaking of firms managers and of con- made available to constituents. The choices that
stituents that interact with firms in an industry. constituents make among competitive offerings
Sensemaking ( Weick, 1995 ) in industries com- measure the relative success of a firms strategies
prises comprehending, understanding, explaining, and the degree to which it has gained advantage.
attributing, extrapolating, predicting ( Starbuck Insofar as firms interact with the same constitu-
and Milliken, 1988: 51 ) and ultimately
deciding to engage in exchanges and to allocate
ents and vie for their attention, approval, and
resources, they are each others competitors
resources. ( Freeman and Hannan, 1983 ). Thus, the bound-
The second dimension divides the competitive aries of an industry and a market are determined
terrain into domains of action that fall either not only by how firms define their businesses
outside or inside a focal firm. Resource-based ( Abell, 1980 ) but also by how constituents under-
theories, for instance, emphasize the importance stand and choose among these businesses. There-

of the internal domain firm-specific capabilities, fore, the external domain is better described not

knowledge, and assets in creating competitive
advantage ( Penrose, 1959 ). Industrial economists
as an industry but as an organizational field con-
sisting of actors who interact repeatedly, exchange
point to external factors predominantly in a firms information, form coalitions, and are aware of
product market, such as product differentiation or each other ( DiMaggio and Powell, 1984 ).
market concentration (Scherer and Ross, 1990 ). The two dimensions describe four domains of
In our view, the external domain includes all action in which firms and constituents interact.
constituents, who engage in exchanges in product, The external-material domain consists of various
factor, labor, and capital markets. It also includes
institutional intermediaries that transmit and mag-

markets principally the product, labor, factor,

and capital markets in which firms and constitu-
nify information about firms and constituents. ents exchange resources. In the internal-material
Competitors affect the construction of competi- domain a firm' s resources are deployed in the
tive advantage by taking actions in the four production of goods and services. In the intemal-
Strat Mgmt. J.t 20: 691-710 ( 1999 )
694 V . P . Rindova and C. J . Fombrun
interpretational domain knowledge, values, and members and observers may carry competitive
beliefs mold the firms micro-culture. In the benefits similar to those derived from possessing
extemal-interpretational domain expectations, valuable resources, they differ from material
performance standards, and evaluations of firms resources in the way they are developed, sus-
evolve and form the industrys macro-culture. tained, and managed.
Markets Micro-culture
The structure-conduct-performance paradigm In contrast to market and resource models that
calls attention to external market conditions, such advance an economic rationale for the existence
as the number of buyers and sellers, entry bar- of competitive advantage, cognitive research
riers, scale economies, and other cost structures, emphasizes the importance of a firm s strategic
as well as the extent of firms diversification, decision-makers and their interpretations of eco-
vertical integration, and product differentiation as nomic conditions ( Daft and Weick, 1984; Porac
determinants of market power ( Bain, 1956; and Thomas, 1990; Zajac and Bazerman, 1991 ).
Mason, 1957; Porter, 1980 ). In this view, com- Managers interpretations are deductions from
petitive advantage is a result of differential market the world legitimated within the organization
power, which enables dominant firms to control ( Weick, 1979a: 42 ), whether from its culture
prices and earn monopoly rents. ( Schein, 1985 ), knowledge base ( Spender, 1989 ),
or identity ( Albert and Whetten, 1985; Fiol,
1991 ). We use the term micro-culture to refer
Resources
to the knowledge, values, and identity beliefs in
Resource-based theory Penrose 1959 Barney a firm consistent with a broad definition of culture
( , ; ,
1991 ) attributes advantage in an industry to a as the pattern of shared beliefs and values that
firm s control over bundles of unique material, give the members of an institution meaning and
human, organizational, and locational resources provide them with rules for behavior ... ( Davis,
and skills that enable unique value-creating strate- 1984: 1 ).
gies ( Barney, 1991 ). Heterogeneous resources Knowledge, values, and beliefs are resources
create distinct strategic options for a firm that, that create sustainable competitive advantage
over time, enable its managers to exploit different insofar as they are valuable, rare, and difficult to
levels of economic rent ( Peteraf, 1993 ). A firms imitate (Spender, 1993; Barney, 1986a; Fiol,
resources are said to be a source of competitive 1991 ). In addition, knowledge, values, and beliefs
advantage to the degree that they are scarce, create an advantage for a firm through their
specialized, appropriable ( Amit and Schoemaker, influence on information processing and behavior
1993), valuable, rare, difficult to imitate or substi- ( Ginsberg, 1994 ). As cognitive structures unique
tute ( Barney, 1991 ). to a firm ( Weick, 1979a ), they enable its strate-
Although resource-based theories routinely use gists to make superior evaluations of the rent-
the term resources to refer to both material and earning potential of the firms resources relative
cognitive resources such as knowledge, culture, to outsiders ( Penrose, 1959; Barney, 1986b ).
and reputation ( Conner, 1991 ), we include in the They also guide the actions of all members of a

resource domain solely material resources the firm and enable it to enact a systematic strategic
physical and financial assets that firms and con- direction ( Meyer, 1982; Reger et al., 1994 ).
stituents deploy. We do so because drawing a
distinction between these resources can enhance
our understanding of how each type of resource Macro-cultures
contributes to rents. As Conner ( 1991: 145 ) puts Researchers have also called attention to the
it: Recognizing such levels [of resources ] importance of interpretations external to a firm
appears especially important in preventing to the macro-culture of its industry and the

resource-based theory from becoming tautologi- transactional network from which it derives ( Huff,
cal: at some level, everything in the firm becomes 1982; Spender, 1989; Abrahamson and Fombrun,
a resource and hence resources lose explanatory 1992, 1994 ). A macro-culture arises from the
power. Although knowledge and beliefs of firms interactions between firms and their constituents,
Copyright 1999 John Wiley & Sons, Ltd. Strut. Mgmt. J., 20: 691-710 ( 1999 )
mediated by institutional intermediaries, such as mutually produce each other. For analytic pur-
the media and various specialized organizations poses, we begin by examining each process sepa-
( Hill and Jones, 1992; Fombrun, 1996 ). As con- rately; in the subsequent sections we show their
stituents and firms interact and exchange infor- dynamic interconnectedness.
mation, they construct a web of interpretations
characterized by: ( 1 ) a widespread exchange of
How firms build competitive advantage
information and interpretations among firms and
constituents; ( 2 ) varying degrees of knowledge Firms construct their distinctive strategic positions
and understanding about the industry and the through three generic processes: ( 1 ) they pick
firms inside it; ( 3) a multiplicity of interpre- strategic investments, ( 2 ) they make strategic
tations; many of which are of a persuasive, self- projections, and ( 3 ) they develop a strategic plot.
serving nature; ( 4 ) some degree of agreement We describe these processes from the perspective
about standards of performance in an industry; of a single focal firm. However, they represent
and ( 5 ) evaluations of firms relative to these the strategic behavior of all competing firms in
standards and their rivals that give content to an industry. To what degree and in what form
their reputations. Insofar as the interpretations of different competitors engage in any of them is an
constituents create preferences for some firms empirical question. The similarity of competitors
( and their products, stocks, and the like ) over actions in an industry varies with the degree
others, favorable interpretations are a source of of instability ( Lippman and Rumelt, 1982 ) and
advantage. isomorphism ( DiMaggio and Powell, 1984 ). In
We use the example of computer-maker IBM

turn, the conditions of instability and isomor-
a company renowned for its successes as well as phism are created through processes that are

its changing fortunes to examine actions in the initiated by constituents, and which we elaborate
four domains. Although IBM s uniqueness limits later in the paper. Figure 2 shows how the proc-
generalizability, the dramatic changes that have esses initiated by firms span markets, firms
taken place in the firms competitive position in resources and micro-cultures, and industry
the last 20 years make the company a revelatory macro-cultures.
case ( Yin, 1994 ) in terms of file dynamic proc-
esses that underlie the construction of competitive
Strategic investments
advantage. In the last section, we trace the cycle
of interactions that led to the shifting fortunes of A firms strategic investments create value for
IBM in the computer industry in the 1980s. constituents by providing them with options that
satisfy their interests. Constituents exchange
resources with firms whose options they perceive
THE PROCESSES OF COMPETITIVE to be of superior value. A given firm regularly
ADVANTAGE makes investments to build competitive advan-
tage, whether by developing new products, aug-
Each of the four domains described in the pre- menting its distribution channels, or enhancing its
vious section is associated with a more or less production capability. The fundamental purpose
developed body of research. However, observing of strategic investments is to create and exploit
and researching firms and constituents activities opportunities for positive economic rents ( Rumelt,
in any single domain is not sufficient to explain Schendel, and Teece, 1991 ). Through investments
how a firm, like IBM, gained and sustained its firms secure more favorable configurations of
competitive advantage. As Astley and Van de industry factors ( Porter, 1980 ) and protect those
Ven, ( 1983: 267 ) argued: To say that A causes favorable positions from rivals ( Caves and Porter,
B and B causes A may be predictive, but intellec- 1977; Bogner, Mahoney , and Thomas, 1994 ).
tually sterile until one can explain the processes What drives strategic investments are the
by which the reciprocal relationship unfolds over resources available to the firm and the productive
time. We contend that competitive advantage is uses its top managers envision for them ( Penrose,
a systemic outcome of six processes that connect 1959 ). Thus, strategic investments originate si-
these domains. Furthermore, through these con- multaneously in a firms resource base and in
necting processes the four domains constitute and its culture. Traditional approaches to competitive
Strat. Mgmt. J , 20: 691-710 ( 1999 )
696 V. P. Rindova and C. J . Fombrun
Markets Resources
Material 4 Strategic
Resources Investments ^
Strategic
Plot
14
Human Strategic
Interpretations Projections
^
-
Macro Culture -
Micro Culture
Figure 2. How firms build competitive advantage
advantage emphasize how resources are used to needs. Otherwise, firms tend to overinvest in
gain positions better than those of competitors existing customers and to ignore customers in
( Porter, 1980 ). In our view, investments build emergent markets ( Christensen and Bower, 1996 ).
competitive advantage when they create value for By making investment choices about customer
specific resource-holders. Kim and Mauborgne groups, product functions, and the resources and
( 1997 ), for example, found that high growth com- technologies necessary to serve them, a firm satis-
panies did not focus on competitors but on cus- fies its constituents, as well as defines its business

tomer needs an approach they termed the logic
of value innovation. By not focusing on competi-
and its competitors ( Abell, 1980 ). Thus, a firm s
targeted investments to particular resource-holders
tors, value-innovators better distinguish the factors also affect the competitive conditions of its rivals.
that deliver value from the factors the industry Rivals, in turn, make strategic investments to
competes on. They concentrate resources on protect their positions and relationships with
investments that have the highest impact on cus- resource-holders, be it through innovations, acqui-
tomer evaluations. They do so by eliminating sitions, or other strategic actions.
product features that the industry takes for granted Take the computer industry. The erosion of
or adding features that the industry has ignored. IBM s formidable competitive advantage in the
Similarly , a focus on suppliers value may require industry can be traced partly to the strategic
strategic investments in developing cooperative investments made by Apple when it introduced
relationships, in contrast to a competitor focus the personal computer ( PC ). Although Apple did
that may require bidding down suppliers prices not invent the PC, it was the first company to
to outperform rivals on costs of inputs. Kim develop a customer-friendly product. As Langlois
and Mauborgne ( 1997: 106 ) observed that ... ( 1992: 16 ) points out: What made Apple II so
ironically, value innovators do not set out to build successful was its compromise between tech-
advantages over the competition, but they end up nology and marketing ... Compared with earlier
achieving the greatest advantages. hobbyist machines like the Altair or the IMSAI,
Strategic investments create value for constitu- the Apple II was an integrated and understandable
ents both by satisfying needs and by creating product ...
Copyright 1999 John Wiley & Sons, Ltd. . -
Strat Mgmt. J., 20: 691 710 ( 1999 )
Through its strategic investments, Apple not
only offered a new product to the market, but it
and presented different images of the company
as an investment opportunity, as an employer, as

also changed our collective understanding of the a member of a community, and as a citizen of
computer. IBM quickly responded by investing the world.
in the development of a comparable product with In general, through strategic projections firms:
off-the-shelf components and a licensed ( 1 ) provide more information about their strategic
operating system ( DOS ). However, as we demon-
strate later in the paper, it failed to sustain the

investments information which constituents may
use in making their decisions; ( 2 ) offer to con-
level and type of investments necessary to com- stituents ready-made interpretations of their
pete in the market it helped create. investments; and ( 3) impress desirable symbols
Strategic investments can undermine the com- in constituents minds. In addition to influencing
petitive advantage of a firm when they are insuf- interpretations, strategic projections contribute to
ficient, misdirected, or their value is not under- the formation of firm-related schemata, such as
stood by constituents. Inadequate investments not corporate reputations ( Fombrun, 1996; Rindova,
only fail to attract resources in the material 1997 ). Specific interpretations and reputational
domain but also raise doubts about the strategic schemata affect how constituents evaluate a firm
direction of the firm and taint its overall repu- and how they choose to allocate the resources
tation in the interpretational domain. they control. Strategic projections, therefore,
affect both the interpretational domain and the
material domain.
Strategic projections
Like inadequate strategic investments, inad-
Even well-targeted investments may not contrib- equate strategic projections may undermine a
ute to competitive advantage if their value is not firms competitive advantage. Strategic pro-
apparent to constituents. To stimulate and jections that misrepresent a firms investments
enhance favorable interpretations of their invest- may have legal consequences ( as in the case of
ments firms engage in strategic projections. Stra- false advertising ) or may destroy a firm s credi-
tegic projections are controlled images projected bility and trustworthiness ( Fombrun, 1996 ).
in social interaction through communication to Further, because strategic projections come in a
secure favorable evaluations by others (Schlenker, variety of forms, they can easily convey disparate
1980 ). As such, they resemble the impression images of a firm. The more consistent strategic
management tactics of individuals ( Goffman, projections are with one another and with a firm s
1959; Tedeschi, 1981 ). strategic investments, the more useful they are to
Whereas strategic investments also may serve constituents in making interpretations and the
as signals and indirectly convey information about more they contribute to the construction of com-
a firm (Shapiro, 1983 ), strategic projections are petitive advantage.
explicit communications about characteristics of IBM carefully controlled its strategic pro-
the firm. They appear in a wide range of forms jections. Every commercial and every advertise-
including advertising, logo development, financial ment we did had to be submitted to Tom Watson
reports, and press releases ( Salancik and Meindl, and his brother, Dick, at the top. It was all done
1984 ). For example, IBM s 1981 annual report at the top level. I think thats just as it should
listed a number of information sources available be ( David Ogilvy, quoted in Gregory, 1993 ). In
to stockholders. Sources included: A Report of terms of content, they projected an image that
the Annual Meeting, 10-K and 10-Q Reports to complemented IBMs dominant position in the
the Securities Exchange Commission, The IBM mainframe market. According to McKenna
Dividend Reinvestment Plan Booklet, IBM ( 1989: 112 ):
Equal Opportunity Programs, IBM Business
Conduct Guidelines, IBM US Retirement Plan IBM s image is unlike that of any other company.
IBM is very much concerned with being per-
Information, IBM support programs (for edu- ceived not only as a company , but as a national
cation, community service, etc. ), and IBM Oper- resource. It has tried to position its products as
ations in South Africa. These documents essential ingredients for national economic
addressed aspects of IBMs operations that are growth.
likely to be of concern to different constituents
Copyright 1999 John Wiley & Sons, Ltd. -
Strat. Mgmt. J., 20: 691 710 ( 1999 )
698 V. P. Rindova and C. J. Fombrun
order to reach its new customer base directly.

Strategic plot
The 1981 Annual Report explains the rationale:
The process that accounts for the consistency ... we are dealing with larger numbers of cus-
between a firm s material resources and its micro- tomers and prospective customers. In response to
culture, as well as between its strategic invest- that, we are introducing new marketing
ments and projections, is the formation of a stra- approaches to make our products more readily
tegic plot. A firms strategic plot reflects some available.
continuity in its activities. It contributes to com- Thus, IBM changed its investments toward
petitive advantage by providing a long-term con- standardized, off-the-shelf components but did
text, within which constituents can attribute mean- not change its micro-cultural beliefs about what
ing to specific investments and projections. It it takes to compete in an industry. Instead of

reflects the firm s intended strategy its business
definition ( Abell, 1980 ) and generic type ( Porter,
upgrading its PC models, it opted to sell substan-
dard products and chose to rely on its established
1980; Miles and Snow, 1978 ), as well as emer- reputation to attract customers. Its existing stra-

gent strategy resulting from the co-evolution of
material resources and organizational culture. On
tegic plot also affected the design of its stores
to their detriment:

one hand, the development of strategic plots
depends on managers understandings of the To keep its stores classy, IBM eschewed the
resources the firm controls and the potential com- usual tacky trappings of computer retailing
flashy in-store displays, brochures, and racks of
binations of these resources in productive services impulse items near the cash registers . . . Accord-
( Penrose, 1959 ). A belief system, such as a firms ing to a competitor IBM s inhibitions make the
dominant logic ( Prahalad and Bettis, 1986 ), Product Centers a delight to compete with.
guides a firm s strategic choices, and through ( Petre, 1984: 80)
them, the resources it seeks to acquire and com-
bine. On the other hand, the dominant logic of a Thus, the firm s micro-culture bounded its stra-
firm grows out of managerial experience with tegic projections and undermined the effectiveness
existing resources and reflects them ( Mahoney of its strategic investments in developing and
and Pandian, 1992). Micro-cultural elements marketing the PC.
develop to support current uses of resources. Consistency among the three processes initiated
Leonard-Barton ( 1992 ) found that high-tech by a firm enhances its competitive advantage;
organizations are culturally biased toward their inconsistencies can cause one of the domains
engineering staff and often give them privilege ( either resources or culture) to lag behind and
in decision-making. For instance, although IBM misfire. Strategic projections not supported by
systematically invested in R&D, it exhibited a investments can lead to loss of credibility; invest-
cultural bias toward its marketing and sales func- ments not supported by strategic projections may
tion. This bias contributed to some of the inad- fall short of realizing their value-creating poten-
equate strategic investments it made in the PC tial; and if both processes are not supported by
market in the 1980s. Both a firm s micro-culture the strategic plot of the firm, they will lack
and its resource commitments determine the stra- the continuity to feed into a virtuous cycle that
tegic plot from which its investments and pro- constructs competitive advantage. However, the
jections originate. processes initiated by a firm are only one side
Throughout most of its existence until the of the coin: The construction of competitive
1980s IBM followed a strategic plot to produce advantage also depends on how external constitu-
proprietary technology and to market it to Blue ents in the organizational field respond to and
Chip companies through close client contact. revise competitive conditions.
IBMs entry in the microcomputer market was a
radical departure from this plot. The PC was
How the actions of constituents influence
developed by a small team working separately
from the .firms bureaucratic headquarters a sep-
aration which was key to the PCs success
competitive advantage
Constituents alter competitive conditions and con-
( Business Week, 1983 ). True to its focus on tribute to the construction of competitive advan-
marketing, IBM opened its own retail arm in tage through three processes: ( 1 ) resource allo-
Strat. Mgmt. J., 20: 691 710 ( 1999 )
cations among firms; ( 2) definitions of success; made interpretations in the ambient macro-culture
and ( 3) development of industry paradigms
shared understandings among constituents about
of the industry ( Abrahamson and Fombrun, 1992,
1994 ). Just as the strategic investments of firms
how firms in an industry create value. Figure originate both in their resource bases and their
3 depicts these processes and shows how they micro-cultures, so are the resource allocations of
interrelate the four domains of action. constituents informed by the macro-culture of the
organizational field.
Macro-cultures facilitate constituents sense-
Resource allocations
making. They do so by providing constituents
Constituents engage in interactions with firms to with industry paradigms and by supplying them
further their own objectives: They allocate the with definitions of success. For example, repu-
resources that they control by making buying tational ratings are an element of a companys
and selling decisions, investment decisions, and macro-culture that help reduce uncertainty about
employment decisions. Each decision shifts firms likely behaviors or future levels of per-
resources to alternative uses and contributes to formance ( Weigelt and Camerer, 1988; Rao,
determining which firms enjoy competitive advan- 1994; Fombrun, 1996). Much as individual
tage. schemata encourage automatic information-
Assessments of better value depend partly on processing and foster schema-consistent behavior
constituents own objectives, and partly on the ( Fiske and Taylor, 1990; Gioia, 1986 ), so do
strategic investments and strategic projections that reputational schemata encourage constituents to
competing firms have made. Assessing the value make resource allocations and to sustain their
that firms offer is a complex task performed with allocations in reputation-consistent directions
incomplete information. Cognitive limitations in ( Wartick, 1992). IBM is a case in point. As the
perception and interpretation prevent constituents Economist ( 1993: 24) points out: IBM s share
from making accurate assessments ( Schwenk, price reached its historic peak in 1987, well after
1984 ). Given limitations in evaluating firms and it was clear to Mr. Akers and his team that
industries, constituents routinely rely on ready- the company would never hit the inflated targets
publicized two years before.
Markets Resources
Material Resource
Resources
^ Allocations f
Industry
Paradigm
Human Definitions
Interpretations of Success f
-
Macro Culture -
Micro Culture
Figure 3. How constituents affect a firm s competitive advantage

Copyright 1999 John Wiley & Sons, Ltd. Strat. Mgmt. J., 20: 691-710 ( 1999)
700 V . P . Rindova and C . J . Fombrun
By individually channeling resources to favored Some firms come to represent the industry more
firms, constituents create in aggregate the various than others and some firms are more stable mem-
markets for firms products and services. As con- bers of a group ( Porac and Thomas, 1990 ). Over
stituents shift their resource allocations, they time, the prototypical firm is equated with success
change market conditions and, through them, the and becomes the benchmark against which all
resources a firm has access to. Constituents others are evaluated. For example, until the early
choices gradually build the resource and structural 1980s IBM seemed to be the industry itself
conditions of an industry. These choices support ( McClellan, 1984: 58), whereas its mainframe
some firms and reject others, convert some prod- competitors were commonly described as the

ucts and stocks into fads and fashions, and render Bunch an unflattering acronym for Burroughs,
others obsolete. From the choices of constituents, Univac, NCR, Control Data, and Honeywell.
a restructured industry, and the relative competi- Reputational rankings are another manifestation
tive positions of firms in the industry, emerge. of constituents differential perceptions of firms
that affect competitive advantage. Whereas com-
petitive categorizations reflect the map of the
Definitions of success
industry that constituents have constructed, repu-
Constituents express their judgments of firms, not tational rankings reflect an ordering, a status hier-
only through their resource allocations, but also archy with implications about the superiority and
through direct statements about the relative suc- inferiority of its members. Reputational rankings
cess of firms in meeting their expectations. Defi- assess firms performances on different criteria
nitions of success contribute to a firms competi- and directly compare firms with one another
tive advantage by affecting the firm s overall ( Fombrun and Rindova, forthcoming ). Repu-
position in the interpretational domain that sur- tational rankings incorporate the demands of
rounds an industry. As constituents observe, inter- resource-holders, which may differ significantly
pret, and make sense of firms and their actions, and, as such, may generate contradictory rankings.
they also exchange information, organize, and For instance, some companies top the lists of
even take collective action to influence firms ( Hill best places to work; others are ranked most
and Jones, 1992). Constituents compare their environmentally responsible; and others yet are
direct evaluations of firms against institutionally ranked as most admired companies overall.
transmitted information emanating from other These lists regularly constructed by institutional
constituents and the media ( Hill and Jones, 1992; intermediaries define multiple success measures
Fombrun and Shanley, 1990 ), and use this infor- in an industry.
mation to categorize firms and judge their ability By placing firms at different levels in repu-
to deliver value. Categorizing rivaling firms into tational rankings, constituents not only create
strategic groups, rank-ordering them in repu- exemplars and role models for competing firms
tational rankings, and featuring them as exemplars to follow, but also collectively define the success
are common ways through which constituents criteria that firms seek to include in their micro-
provide firms with direct definitions of success. cultures ( Fombrun, 1996). Business school deans
Cognitive strategic groups result when report that they live and die by the highly
observers perceive competing firms to be more popular rankings of business schools published
or less similar on important strategic dimensions by Business Week and U.S. News and World
( Porac and Thomas, 1990; Lant and Baum, 1995; Report ( Martins, 1998: 295 ). Hall ( 1992) reports
Reger and Huff, 1993 ). Cognitive simplification that the managers he surveyed considered com-
and elaboration lead constituents to develop cate- pany reputation and product reputation to be the
gories to which they assign firms; interaction and two most important intangible assets contributing
exchange of information among constituents lead to their firms success. Although research on the
them to share categorizations of firms ( Reger and effects of reputational rankings on firms cultural
Huff, 1993). practices is limited, social identity theory suggests
Differential perceptions about firms act as that the definitions of success used by external
mobility barriers that surround strategic groups constituents influence a firms identity. Repu-
( Fombrun and Zajac, 1987; Reger and Huff, tational rankings act like institutional mirrors: As
1993). Category membership itself is graded: firms observe their reflections in those insti-
Copyright 1999 John Wiley & Sons, Ltd. Strat. Mgmt. J., 20: 691-710 ( 1999 )
tutional mirrors, they adjust their micro-cultures by authorizing flows of financial capital to per-
and material resources to conform better to the ceived winners and denying funds to perceived
definitions of success set by constituents ( Dutton losers. New ventures that attempted to compete
and Dukerich, 1991 ). These mirrors, however, with IBM in its heyday invariably ran into lack
often reflect the cumulative interpretations of of venture capital to support their ideas
observers rather than the current state of the firm. ( McKenna, 1989 ). In similar ways, customers
IBM topped Fortune' s survey of the most affect the development of the industry paradigm
admired companies throughout most of the 1980s. by purchasing the products of winners and ignor-
This position of the firm in the interpretational ing those of losers. Their resource allocations
domain served as a confirmation of its strategies broadcast signals about the relative success of
and did not urge a company-wide overhaul of its competing firms.
micro-culture and resources.
Industry paradigms
COMPETITIVE ADVANTAGE AS A
SYSTEMIC OUTCOME
In order to allocate resources among firms in an
industry, constituents try to understand the prod- Competitive advantage develops as firms and con-
ucts, prospects, and dynamics of the industry. stituents strategically target each other in the
They rely not only on information about firms material and interpretational domains. It results
actions, but also on interpretative frameworks that both from actions initiated by firms and those
explain what those actions mean ( Weick, 1995 ). taken by constituents in response. These actions
Dosi ( 1982 ) suggests that industry members are multidimensional in that they affect outcomes
develop technological paradigms that guide the in all four domains; they are also interconnected
problems they work on and the kinds of solutions in that they form multiple cycles of activities
they propose to address those problems. In similar through which the four domains are continuously
ways, constituents in an organizational field constructed and reproduced. For these reasons,
develop shared understandings about such critical competitive advantage is a systemic outcome,
assessments as what constitutes efficient allo- rather than an outcome of isolated activities
cation of resources in the industry ; which prod- ( Porter, 1985 ). Figure 4 diagrams the inter-
ucts are better; and how to assess risk/retum relatedness of the six processes of which competi-
trade-offs in the industry. These shared under- tive advantage is a systemic outcome.
standings, along with the preferences of constitu- Although we divided competitive interactions
ents they guide and the advantageous positions into material and interpretational domains for ana-
of firms they confer, constitute key elements of lytical purposes, these levels reciprocally deter-
industry paradigms. mine each other: Material cues originate in
Shared understandings arise both from the stra- resource exchanges and affect interpretations;
tegic projections of firms and from the interpre- interpretations in turn affect choice and execution
tations provided by institutional intermediaries, of material activities ( Porac et al., 1989.) For
such as buy-sell recommendations of financial example, constituents definitions of success pro-
analysts or product evaluations by consumer vide firms with an interpretational context for
organizations. In the computer industry, for understanding the resource allocations of constitu-
instance, an article appeared in Forbes magazine ents across firms, as well as with input for
in 1979 which told of the growing use of personal adjusting their micro-cultural world-views. In
computers and showed a half -page photo of Ben addition, they directly construct the material
Rosen, one of the most respected electronic ana-
lysts on Wall Street, using an Apple computer as

domain by guiding exchange related choices.
As Porac et al. ( 1989: 399-400 ) observed:
an analysts tool. Key constituents and insti-
tutional intermediaries affect the development of material and cognitive aspects of business rivalry
the industry paradigm through their own interpre- are thickly interwoven . . . Technical transactions
along the value chain provide an ongoing stream
tations and resource allocations. As they interpret of cues that must be noticed and interpreted by
industry conditions, investors, bankers, and ana- organizational decision-makers . . . Transactions
lysts, for instance, confirm an industry paradigm are themselves partially determined by the cogni-
Strut. Mgmt J ., 20: 691-710 ( 1999 )
702 V. P . Rindova and C. J . Fombrun
Resource Strategic
Allocations Investments
Material
Resources
Industry
COMPETITIVE
Strategic
Paradigm ADVANTAGE Plot
Human
Interpretations
Definitions Strategic
of Success Projections
Figure 4. A systematic model of competitive advantage
tive constructions of organizational decision- provided by firms in their own enactment cycle
makers. Beliefs about the identity of competitors, of resource allocations and communications. They
suppliers, and customers focus die limited atten- extract cues
tional resources of decision-makers on some
transactional partners to the exclusion of others
in the sense that others see these enacted changes
and extract them as cues of larger trends. Thus,
others come to use the same cues for their stra-
Although material and interpretational con- tegic choices, as does the firm that first enacted
ditions produce each other, the development of those cues and made them available for extrac-
competitive advantage is not an automatic proc- tion.
ess. Both firms and constituents selectively invest
and allocate resources, project and reflect images. In turn, firms read into constituents allocations
Weick ( 1995: 81) describes the processes of se- and definitions of success signals about market
lective perception and action as enactment and trends that guide their subsequent investments and
extraction of cues: projections. Industry features, such as dominant
designs, industry concentration, mobility barriers,
Cues are enacted in the sense that each competi- isolation mechanisms, reputational orderings,
tor makes strategic choices on the basis of its exemplars, winners and losers, emerge and crys-
beliefs, and these choices put things out there tallize from these processes. Thus, firms and con-
that constrain the information that the firms get
back. What the firm gets back affects the next stituents externalize their strategic choices in the
round of choices. material and interpretational domains through the
processes of investments, projections, allocations
In the model presented in Figure 4, firms put of resources, and definitions of success. They
out there technologies, products, investments, also objectify and internalize the resulting pattern
and communications. Constituents use the cues of interactions by forming strategic plots and
Strat Mgmt. J., 20: 691 710 ( 1999)
industry paradigms through which they adjust The PC quickly became a preferred tool for
beliefs and behaviors in ways that reflect the data-processing by thousands of executives. IBM
objectified reality. Along the way, therefore, firms became the dominant supplier of PCs, with 35
and constituents jointly construct the competitive percent of the market in 1984. In tandem, inves-
reality that they come to inhabit. tors flocked to the firms shares, and IBMs stock
price moved steadily upwards from $57 in 1981
to $96 in 1982, $122 in 1983, and $123 in 1984,
IBM UNDER FIRE at a time when the stocks of many of its smaller
rivals fell. To many observers, it appeared that
In this section we use the framework presented IBM had done it again: Despite the firm s late
in Figure 4 to show how the combined actions entry, it had come to control, not only the market-
of firms and constituents shifted the competitive place, but also the minds of constituents. In those
terrain on which IBM ultimately floundered. years between 1982 and 1986 the company
Apple created a new market in 1977 through topped Fortune' s reputational rankings of most
carefully targeted strategic investments and pro- admired companies and its market value reached
jections that developed the personal computer and a record $97 billion in 1986.
positioned it as a customer-friendly machine. IBM By the mid-1980s, however, IBM s dominance
acted as a venture capitalist and allowed a small in PCs was actually beginning to dissipate. New
task force to develop as a start-up company and companies made more strategic investments in
to create IBMs version of the PC with off-the- cost reduction and product innovation. A new
shelf components and Microsofts DOS operating industry paradigm with a high premium on inno-
system ( Business Week , 1983: 76). In so doing,
the firm accelerated its entry into the PC market
vation, flexibility, and adaptability all IBM
weaknesses ... emerged. Many elements of

but radically departed from its strategic plot as an IBM s corporate culture, such as emphasis on
integrated manufacturer of proprietary mainframe fighting for market share rather than opening
technology. Most observers evaluated the move new markets, are not well suited to todays fast
positively and applauded IBM for the speed with changing markets.
which it countered Apple s radical innovation and The new industry paradigm in the computer
described it as a ... stunning coup in personal industry included a different set of success meas-
computers ... a telling sign of the company s ures than the one IBM had mastered. They
ability to adapt to the new computer marketplace included: open architecture, continuous inno-
( McClellan, 1984: 57 ). Others attributed its suc- vation, commodity prices, lower switching costs
cess to its well-established reputation in the for consumers and declining brand loyalty. Thus,
macro-culture of the organizational field. Business a new industry paradigm, a different pattern of
Week ( 1986: 62 ) wrote: ... the PC symbolized resource allocations, and a changing macro-
the overwhelming power of the IBM name. culture of the organizational field characterized
Although the machine incorporated few inno- IBM s competitive environment in the late 1980s.
vations and no distinctive technology, by mid-83 At IBM, however, the changes were few. It
the IBM logo had made it the dominant personal entered a new market with a set of investments,
computer sold to businesses. which departed from its traditional resource base
IBMs investment in the PC and its reputation and micro-culture. However, when the market
gave impetus to the development of a new indus- picked up, it folded the PC group back into its
try paradigm, which encouraged constituents to operations and applied its traditional competitive
shift resources to PC-compatible producers and tactics rooted as they were in its micro-culture
their suppliers. IBM s entry into the personal and resource strengths. According to a competitor:
computers legitimized the small new machines
( Economist, 1993 ) and made them attractive, In the first eight years of that product [ the per-
particularly to business clients. Faced with hun- sonal computer], what did IBM do to it? . . .
dreds of brands of unknown personal computers They did no operating system enhancements; they
did no graphics enhancements; they did no net-
to choose from, business customers suffered working enhancements . . . They laid the biggest
computer shock and turned to the computer goose egg for a golden goose opportunity. They
giant for relief ( Business Week , 1983: 76 ). did nothing to that product, no engineering . . .
Strat. Mgmt. J , 20: 691 710 ( 1999 )
It s all sales and distribution and marketing and some of the most sophisticated strategic pro-
advertising and Charlie Chaplin running around jections in the industry, including a famous ad
with a flower. ( A computer industry executive,
quoted in McKenna, 1989: 71 -72 ) alluding to IBM as The Big Brother ( Orwell,
1982 ).
IBM was locked into a mainframe mentality Indeed, for a long time IBM continued to
bom of the old industry paradigm: It confidently behave as if the combined actions of thousands
assumed that it was going to sell to its PC of entrepreneurial rivals, sophisticated users, and
customers the products that it produced rather savvy investors had not changed industry con-
than the products that they wanted. The result ditions. Barr, Stimpert, and Huff ( 1992 ) provide
was a lack of strategic investments and pro- evidence of a similar process in the railroad
jections that could successfully differentiate industry. In their study, one firm failed to adapt
IBM s machines from clones. Lack of added to the changing conditions in the industry, not
value encouraged constituents to shift their because it failed to notice the changes, but

resource allocations to rivals to lower-cost pro-
ducers of clones and to firms that were more
because it failed to change its interpretations of
how those changes would affect its performance.
responsive to their increasingly complex data- In remarkably similar ways, lack of change in
processing needs. As one information systems the internal interpretational domain of IBM led
manager of a large bank put it: If we can put to lack of actions that would have enabled it to
two machines for the price of one, it s a blessing sustain its advantage.
and a much better utilization of corporate assets Most analysts, however, attributed IBM s loss
( Harris et al , 1986: 152 ). of competitive advantage to its loss of control
At IBM, it took over seven quarters of slowing over the technological standard and the market.
revenue growth, a 27 percent drop in profits, and As the Economist ( 1993: 23 ) put it:
declining earnings estimates by analysts before
the company announced a long-overdue change IBM could not sensibly have decided to stay out
in its strategic plot. The business press reported of the personal computer market. But the way it
plunged in was a historic blunder . . . Standardiza-
it as IBM undergoing its toughest self-scrutiny tion has opened the industry to thousands of new
in years ( Harris et al., 1986: 152 ). entrants . . . The market exploded and IBM
However, in the process of reevaluating its became the world s biggest PC maker. But it had
strategic plot, IBM took actions consistent with lost control . . .
its extant resource base and micro-culture, rather
than with the changes in the industry. In an This explanation suggests that IBM lost its
industry driven by innovation IBM chose to cut advantage when it lost its quasi-monopolistic
costs by ( 1 ) redeploying employees from admin- dominance in the market. Our theoretical perspec-
istration into its sales force instead of laying them tive suggests instead that IBM lost its advantage
off; ( 2 ) slashing R&D budgets; and ( 3) freezing because it could not reinvent the strategic plot
new hiring. In doing so, it crippled two key that aligned its resources and micro-culture, and
sources of renewal that further undercut its ability so could not respond to the new definitions of
to create value for customers. This strategy was success and resource allocations of constituents.
based on deeply ingrained cultural beliefs about Overall, IBM s loss of competitive advantage in
the importance of the marketing function and the PC market reflected the firm s failure to
about loyalty to employees. IBM s long-standing see how competitive advantage emerges from the
cultural and resource biases continued to affect combined actions of firms and constituents in
its strategic choices throughout the decade. They both material and interpretational domains.
limited IBM s ability to create value in ways
consistent with the expectations formed in the
new industry macro-culture. CONCLUSION
In contrast, rival Apple invested heavily
throughout the decade in new product develop- We began by presenting multiple answers that
ment, producing in quick succession a series of researchers and practicing managers give to the
innovative PCs that climaxed with the introduc-
tion of the Macintosh in 1988. It also produced
fundamental question of strategy why some
firms are more successful than others ( Porter,

Copyright 1999 John Wiley & Sons, Ltd. ..
Strat. Mgmt. J 20: 691-710 ( 1999 )
1991 ). The four approaches we identified rep- researchers and managers to the fact that actions
resent both prominent and emerging views of in one domain produce consequences in another;
competition and competitive advantage. Our dis- that each domain exists through its links to the
satisfaction with those approaches derived from others; and that actions of various constituents
several limitations. and competitors affect how these domains change.
Economic theories of competitive advantage Thus, the framework advances several funda-
ignore the interpretations on which various actors mental principles for building competitive advan-
base their actions and through which they con- tage: ( 1 ) competition takes place, not only over
struct industry positions and resource distri- material resources, but over the interpretations of
butions. Competition unfolds within a complex multiple constituents about how firms create value
network of transactions among producers, sup- in an industry; ( 2) firms develop superior industry

pliers and customers a network that functions
at two levels of analysis: material and inter-
positions from instrumental actions that are
intended, not only to defeat competitors, but to
pretational. A growing body of research in strat- influence the perceptions and actions of constitu -
egy has begun to address the interpretations of ents; ( 3) firms and constituents enact the competi -
decision-makers and to develop a cognitive per- tive terrain on which competition in industries
spective which rather than being an alternative unfolds.
to more traditional accounts of rivalry ... com- These principles suggest several important
plements and fills in the gaps of previous theoriz- implications for strategy research and practice.
ing ( Porac et al., 1989: 401 ). In similar ways, we
suggest that a cognitive perspective complements
First, our framework suggests that the develop
ment of competitive advantage is an interactive
-
economic theories of competitive advantage by process. Whereas traditional strategy research has
accounting explicitly for the cognitive processes focused on existing industry structures and estab-
that underlie resource shifts. lished conditions, the systemic model we propose
Second, theories of competitive advantage tend enriches structural analysis by pointing to the
to focus on competitive interactions among rivals fluidity of industry conditions themselves. Our
and to ignore the role of resource-holders. Both focus on interactions derives from a voluntaristic
resource-dependence theory (Pfeffer and Salancik, perspective which views social structures as con-
1978 ) and stakeholder theory ( Freeman, 1984 ), tinuously constructed, sustained, and changed by
however, have argued that resource-holders have
a powerful effect on a firm s success. Consistent

actors definitions of the situation the subjective
meanings and interpretations that actors impute
with these theories, we argued that competitive to their worlds as they negotiate and enact their
advantage depends, not only on the material organizational surroundings ( Astley and Van de
resources that firms possess and deploy, but also Ven, 1983: 249 ). In this way, we seek to over-
on firms ability to win favorable interpretations come the structuralist bias of extent theorizing
from the field of constituents and inter- about strategy in which ... features of social
mediaries. existence denominated as structures tend to be
Third, these approaches tend to leave unex- reified and treated as primary , hard and immu-
plained how the strategic actions of both firms table, like the girders of a building, while the
and resource-holders actually create the industry events or social processes they structure tend
conditions within which rents are generated to be seen as secondary or superficial (Sewell,
( Stimpert, Huff, and Huff , 1994 ). Whereas the 1992: 1 ).
implications for competitive advantage of each of Our framework shows various processes

the four domains markets, firm resources,
micro-cultures, and macro-cultures have been
through which interactions between firms and
constituents take place. The framework suggests
explored by various theoretical perspectives on that researchers and managers should study activi-
their own, they cannot explain the creation of ties more traditionally included in the domain of
structural conditions in these domains. These strategy, such as value-chain activities, as well
structures emerge from the constitutive effect of as activities related to presenting the firm to
various processes that connect the four domains. outside observers. In many cases, strategic
Our framework emphasizes the inter- responses consist of explanations or statements
connectedness of these domains and the systemic of position and identity (Elasbach, 1994; Fiol and
nature of competitive advantage. It alerts Kovoor-Misra, 1997 ).
Strat. Mgmt. J ., 20: 691 710 ( 1999 )
Second, our framework also suggests that com- Third, our framework emphasizes that competi -
petitive advantage is built through a social influ- tive advantage is built on relationships. In neo-
ence process . Through what mechanisms is social classical economics, on which most strategy
influence exercised? Research on organizational research has drawn, markets as institutional set-
culture has amassed evidence on how firms shape tings are epitomized by impersonal, arms-length,
the values and beliefs of organizational members spot transactions. Firms, in contrast, provide many
( Schein, 1985; Kunda, 1992; Hatch, 1993 ). This opportunities for sustained interaction, conver-
research today, however, has not examined the sation and sociability ... ( Nahapiet and Ghoshal,
impact of a firm s micro-culture on its positioning 1998: 258 ). Our framework suggests that con-
in the marketplace. Recent work in the area of stituents form interpretations about a firm or an
organizational identity and reputation shows that industry based on their cumulative experiences
organizational culture and identity are closely with it. They also form interpretations about vari-
coupled with organizational image and reputation ous dimensions of a firm, rather than the content
( Gioia and Thomas, 1996 ) and that they foster of a specific transaction ( Rindova, 1997 ). From
both processes of identification internally and of a relationship point of view, a firm develops
differentiation externally ( Rindova and Schultz, strategies mindful of the consequences of its
1998 ). Thus, strategy researchers can benefit from actions for various actors. It also takes into con-
investigating how firms imprint their identity on sideration how its relationship with one constitu-
the environment; how they socialize suppliers, ent group may be used by other constituent
distributors, consumers, and other constituents; groups to infer its moral principles ( Jones, 1995 ).
and how they construct larger communities Therefore, relational strategies should be under-
around their own micro-cultures. For instance, the stood not only in the context of exchange dyads
computer industry has created vivid examples of but in the context of transactional networks and
companies, such as Apple, Intel, and Microsoft, organizational fields.
that have successfully extended their cultural Relationships with constituents, we argue, are
beliefs outward to a broader community of users, not just exchanges but sustained social inter-
suppliers, and distributors. Apple s iconoclastic actions in which past impressions affect future
culture became a part of its users identity, which behaviors. Furthermore, once formed favorable
they upheld in the face of the overwhelming impressions become intangible assets, because
dominance of the IBM standard. Our framework they generate competitive benefits for a firm
demonstrates both how organizational culture is ( Fombrun, 1996; Dierickx and Cool, 1989 ). The
externalized through projections and how these nascent research on intangibles has recognized
projections affect the macro-culture of the organi- that they are embodied in people ( Hall, 1993 ).
zational field. In doing so, they shape the inter- A critical step in the development of this research
pretational context within which observers come will be to recognize that many intangible assets
to understand the various behaviors of a firm. are also relational and to identify relationship-
Research on industry-level cognitive phenom- building strategies, which enable firms to develop
ena has emphasized primarily the taken-for- such assets.
granted, and therefore real effect of cognitive Finally, we suggest that building competitive
factors but has ignored the active construction of advantage is a learning process. Whereas tra-
cognitive structures ( Walsh, 1995 ). One exception ditional theories of competitive advantage empha-
is Abrahamson and Fombrun ( 1992 ), who pointed size the protection of industries and resources
to the role of media, government agencies, and from entry and imitation, we emphasize the grad-
educational institutions in the creation of macro- ual, as well as more discontinuous, changes in
cultures. The systemic model we propose offers
insight about how firms actively manage their

the four domains of action changes that enable
firms to restructure industries and create new
industry cultures through strategic projections and rent-related opportunities. Therefore, rather than
how constituents interpret resource shifts to focusing on the protection of asset stocks, we
deduce trends. Future research might examine the emphasize how firms create robust flows which
competing influences of rivals, intermediaries and
constituents and their relative impact on macro-

renew their valuable assets both tangible and
intangible. Our framework echoes the criticism
cultural content ( Abrahamson and Fombrun, of Moran and Ghoshal ( 1996 ) that strategy
1994; Rao, 1994 ). research has paid too much attention to rent
Copyright 1999 John Wiley & Sons, Ltd. Strat. Mgmt. J., 20: 691-710 ( 1999 )
protection and exploitation to the neglect of When the industry paradigm changes it under-
rent creation. mines the legitimacy of established firms. There-
Our framework charts one such path to rent fore, the acquisition of legitimacy may be a stra-
creation, which involves close contact with vari- tegic activity that occurs, not only at the
ous constituents. Through this contact, we argued beginning of a firms life, but every time its
that firms change, influence, and build relation- competitive terrain shifts.
ships. They also learn by observing the moves Finally, interpretational variables introduce a
and the signals that multiple constituents and new set of time lags into models of competitive
rivals undertake. From a learning point of view, interaction. Since interpretations such as corporate
firms use these cues to anticipate inevitable shiftsreputations are inertial, a firm may be able to
in the competitive terrain continue to attract resources for a period of time
even when its strategy is no longer viable, as the
case of IBM shows. Such a firm may be misled
Implications for practice
into believing that it enjoys actual advantage
To strategists, the systemic framework we pro- when it is using up accumulated goodwill. When
pose shows that competitive advantage does not constituents find out that their reputation-based

derive from any single source be it industry expectations are not met, they may have extreme
conditions or corporate culture. Rather, advantage negative reactions. Projecting an image leads to
is an outcome of a cycle of processes. Weick social expectations that amount to obligations to
( 1979b: 52 ) warned that managers get into behave in ways consistent with the image
trouble because they forget to think in circles. (Schlenker, 1980). Violating these obligations can
In part it is because organizational structures have grave social consequences. At the firm level
inhibit thinking in cyclical terms: Each process these social consequences have profound impli-
in the cycle is typically managed by a separate cations for the firms economic performance.
function and level in the organization. Moreover, Ultimately, the systemic model that we propose
different professionals normally manage the makes it very clear why control over resources
knowledge base associated with each domain. For alone is not enough to reproduce competitive
example, economists are generally charged with success. Even firms with exceptional resource
forecasting market behaviors; line managers with bases can fall with astonishing speed when they
developing investment proposals; human resource lose the confidence of resource-holders. There-
specialists with managing die systems that support fore, firms need to audit their reputational base
the firms micro-culture; and marketing and pub- as well as their market positions, their cultural
lic relations staffs with monitoring and main- compatibility with constituents as well as their
taining the macro-culture. Differentiation along resource adequacy.
these lines makes cyclical thinking difficult to
achieve. A firm s strategists should recognize the
disparity created by their internal structures and ACKNOWLEDGEMENTS
actively exploit the interdependencies according
to the systemic logic of competitive advantage. We thank Frank den Hond, Ari Ginsberg, Bill
To attain and sustain competitive advantage, strat- Guth, Gideon Kunda, Luis Martins, Zur Shapira,
egies in one domain must be consistent with Ed Zajac, and various anonymous reviewers for
strategies developed in another; and strategies their insightful comments on earlier versions of
coordinated across domains will achieve better the paper.
results.
Many researchers have suggested that interpre-
tations about firms are more actively constructed
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WILEY

Constructing Competitive Advantage: The Role of Firm-Constituent Interactions

CONSTRUCTING COMPETITIVE ADVANTAGE: THE

Current models of competitive advantage emphasize economic factors as explanations for a

INTRODUCTION ney, 1986a, 1986b ) was clearly the source of its

Key words: competitive advantage, industry para-

CCC 0143-2095/ 99/080691-20 $17.50 Received 23 February 1996

Material Barriers to Entry Physical

Human Reputations Knowledge

Figure 1. Sources of competitive advantage

Figure 2. How firms build competitive advantage

order to reach its new customer base directly.

The Organizational Field The Firm

Figure 3. How constituents affect a firm s competitive advantage

Figure 4. A systematic model of competitive advantage

Copyright 1999 John Wiley & Sons, Ltd. .

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