Class Lecture | 2008 (Revised from original 2005 version)

Strategy: Building and Sustaining Competitive Advantage

by Bharat N. Anand, Stephen P. Bradley, Pankaj Ghemawat, Tarun Khanna, Cynthia A. Montgomery, Michael E. Porter, Jan W. Rivkin, Michael G. Rukstad, John R. Wells and David B. Yoffie

Abstract

It's great to have a blockbuster quarter or a revolutionary product or service, but true business excellence demands sustainability. Maintaining your competitive advantage requires a strategy that makes your business unique and carries you forward as the world around you changes. What makes a winning, sustainable strategy? Strategy: Building and Sustaining Competitive Advantage is a multimedia resource developed by ten faculty members in the Strategy Department at Harvard Business School. Included in this resource are faculty presentation, animated frameworks, print- and video-based case studies, and workbooks to help business leaders formulate action plans specific to their own companies.

Keywords: Competitive Advantage;

Format: Multimedia

32400 length of video

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Citation:

Anand, Bharat N., Stephen P. Bradley, Pankaj Ghemawat, Tarun Khanna, Cynthia A. Montgomery, Michael E. Porter, Jan W. Rivkin, Michael G. Rukstad, John R. Wells, and David B. Yoffie. "Strategy: Building and Sustaining Competitive Advantage." Harvard Business School Class Lecture 705-509, September 2008. (Revised from original June 2005 version.)

The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

In this paper, we examine the circumstances under which so-called “independent” directors voice their independent views on public boards in a sample of Chinese firms. First, we ask why independent directors dissent, i.e. how they justify such dissent to public investors. We find that when independent directors dissent, they tend to offer mild, subjective justifications. Overt criticism of the management team is rare. Next, we ask when an independent director is more likely to dissent and who is more likely to dissent. Controlling for firm and board characteristics, we find that independent directors’ dissent is associated with breakdown of social ties between the independent director and the board chairperson, who is at the center of the board bureaucracy in China. Dissent is more likely to occur when the chairperson who appointed the independent director has left the board. Dissent also tends to occur at the end of board “games”, defined as a 60-day window prior to departure of the board chairperson or departure of the independent director herself. The endgame effect is particularly strong, seeing 27% of the dissent issued at board “endgames” which represents only 4% of independent directors’ average tenure. While directors with foreign experience are more likely to dissent, we do not find that academics, accountants and lawyers are significantly more active in dissenting. Lastly, we show that dissent is consequential to the director and the firm. For directors, we show that dissent is significantly associated with the likelihood of exiting the director labor market. For firms, we document an economically and statistically significant cumulative abnormal return of -0.97% around announcement of dissent. Although the literature has suggested that dissent might be reflective of diverse viewpoints, and perhaps beneficial in and of itself through reduction of firm variability, we do not find this offsetting beneficial effect to be strong.