The timing of resource development and sustainable competitive advantage

We develop a formal model of the timing of resource development by competing firms. Our aim is to deepen and extend resource-level theorizing about sustainable competitive advantage. Our analysis formalizes the notion of barriers to imitation, particularly those based on time compression diseconomies where the faster a firm develops a resource, the greater the cost. Time compression diseconomies are derived from a micromodel of resource development with diminishing returns to effort. We use a continuous time model of the flows of development costs and market revenues, which allows us to integrate strategic and financial analyses of firm investment problems. We examine two dimensions of sustainability: whether the resources underlying a firm’s competitive advantage are economically imitable and, if so, how long imitation takes. Surprisingly, we show that sustainable competitive advantage does not necessarily lead to superior performance. We find that imitators sometimes benefit from reductions in their absorptive capacity and that innovators should license either all or none of their knowledge. Despite recent criticisms, we reaffirm the usefulness of a resource level of analysis for strategy research, especially when the focus is on resources developed through internal projects with identifiable stopping times.