Article01 - Academy of Management Executive 2005 Vol 19 No...

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Producing sustainable competitive advantage through the effective management of people* Jeffrey Pfeffer Executive Overview Achieving competitive success through people involves fundamentally altering how we think about the workforce and the employment relationship. It means achieving success by working with people, not by replacing them or limiting the scope of their activities. It entails seeing the workforce as a source of strategic advantage, not just as a cost to be minimized or avoided. Firms that take this different perspective are often able to successfully outmaneuver and outperform their rivals. ........................................................................................................................................................................ Suppose that in 1972, someone asked you to pick the five companies that would provide the greatest return to stockholders over the next 20 years. And suppose that you had access to books on compet- itive success that were not even written. How would you approach your assignment? In order to earn tremendous economic returns, the companies you picked should have some sustainable compet- itive advantage, something that 1) distinguishes them from their competitors, 2) provides positive economic benefits, and 3) is not readily duplicated. Conventional wisdom then (and even now) would have you begin by selecting the right indus- tries. After all, “not all industries offer equal op- portunity for sustained profitability, and the inher- ent profitability of its industry is one essential ingredient in determining the profitability of a firm.” 1 According to Michael Porter’s now famous framework, the five fundamental competitive forces that determine the ability of firms in an industry to earn above-normal returns are “the en- try of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among existing com- petitors.” 2 You should find industries with barriers to entry, low supplier and buyer bargaining power, few ready substitutes, and a limited threat of new entrants to compete away economic returns. Within such industries, other conventional analy- ses would urge you to select firms with the largest market share, which can realize the cost benefits of economies of scale. In short you would probably look to industries in which patent protection of important product or service technology could be achieved and select the dominant firms in those industries. You would have been very successful in select- ing the five top performing firms from 1972 to 1992 if you took this conventional wisdom and turned it on its head. The top five stocks, and their percent- age returns, were (in reverse order): Plenum Pub- lishing (with a return of 15,689%), Circuit City (a video and appliance retailer; 16,410%), Tyson Foods (a poultry producer; 18,118%), Wal-Mart (a discount chain; 19,807%), and Southwest Airlines (21,775%).
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