2010/22 LEM Working Paper Series

The Dynamics of Wealth, Profit and Sustainable Advantage

Michael G. Jacobides, Sidney G. Winter, Stefan M. Kassberger
Competitive advantage; sustainability; heterogeneity, industry evolution, rent appropriation.

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This paper shows how idiosyncratic resources can be the basis of sustained profitability and persistent heterogeneity under competitive conditions: Generic inputs purchased in the market become idiosyncratic resources by investments in customization. Analytically, we show how heterogeneous firms co-exist in equilibrium. Computationally, we show that sustainable profits can emerge without "monopolistic" imperfections. We consider how capability heterogeneity, resource customization cost and ease of expansion interact to drive short-run and sustainable profits. Results illustrate that, in an industry evolution context, sustainable profits may represent a small part of total wealth creation, and that changes in factors shaping a sectors' evolutionary trajectory may be more important than changes in factors that determine profits? ultimate sustainability, thus calling into question the familiar emphasis on "sustainable advantage".

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