Strategic factor markets and competitive advantage*

Historically, strategic management scholars focused on competitive imperfections in product markets to explain persistent differences in firm performance (Porter 1980). This emphasis on product markets is quite reasonable since most economic logic suggests that when product markets are perfectly competitive, firms in these markets will earn a rate of return just large enough to cover their cost of capital (Foss and Knudsen 2003). Logically, it seems to follow that if product markets are competitively imperfect, then at least some firms in these markets will be able to earn superior levels of firm performance. Work on competitive imperfections in product markets has evolved dramatically over the years. In economics, the number of papers and theories describing the social welfare and other implications of various forms of competitive imperfections in product markets continues to proliferate (Segal 1998; Hsu and Wang 2005; Smythe and Zhao 2006). In strategic management, Porter’s ‘five forces framework’ (Porter 1980) describes competitive imperfections in product markets and how, apparently, these competitive imperfections can be used to create opportunities to earn superior returns. However, that a firm operating in an imperfectly competitive product market may earn superior levels of performance is not the same thing as asserting that a firm that implements strategies to create an imperfectly competitive product market will earn such performance. Whether implementing strategies that create imperfectly competitive product markets ∗ This chapter draws from Barney (1986a).