Competitive Advantage Essay

This essay has a total of 2205 words and 14 pages.

Competitive Advantage

Corporate Strategy

"Sources of competitive advantage rarely yield added value that can be sustained over time."

The following essay is going to attempt to assess the above proposition and try to find if
it is possible to add value continually over a period of time. I will first discuss what
competitive advantage is and what it means to a firm. Then I will explain the sources of
competitive advantage and how the distinctive capabilities of a firm allow it to sustain
added value. The discussion is based on a number of viewpoints from different authors who
will be clearly indicated and acknowledged. I begin with explaining what competitive
advantage is.


So, what is Competitive Advantage? In a number of industries, the average performance of
the industry is usually no better than the average performance of industries' as a whole.
However particular firms or groups of firms manage to do considerably better than average.
In this case, the high performing firm or sub-group has something special and difficult to
imitate to offer which allows it to outperform it's rivals.

Porter (1985) refers to such special assets as the firm's competitive advantage. "A firm's
competitive advantage are those characteristics that allow it to do well even in the face
of mediocre industry wide performance and free entry into the industry as a whole."

The firm has certain capabilities which allow it to be different from the other firms in
the industry. It has certain distinctive capabilities which cannot be reproduced by
competitors. However, it is not enough for that characteristic to be distinctive. It is
also necessary for it to be sustainable over a period of time.

As Oster (1994) points out, " The key success factors in an industry are those assets that
allow a firm to outperform it's rivals for a sustained period of time."

Competitive advantages are always relative. For example, Sainsbury's has a very slight
competitive advantage over Tesco. These firms serve similar markets and they see
themselves as members of the same industry and strategic group. Tesco has a competitive
advantage over Argyll. In a paired comparison one firm will have a relative competitive
advantage over another.

The resource based theory of the firm indicates, " If all firms in a market have the same
stock of resources and capabilities, no strategy for value creation is available to one
firm that would not also be available to all other firms in the market."

The theory is implying that a resource must be scarce in order to sustain profitability in
the industry. A firms profitability is a function not only of industry conditions, but
also of the amount of value it creates relative to it's competitors. The amount value the
firm creates in comparison depends on it's cost and differentiation positions relative to
competitors. No business can exist without creating positive value, and to achieve a
competitive advantage it must add more value that it's competitors.

Added value is the difference between the market value of a firm's output and the value
which it's inputs would have in comparable activities undertaken by other firms. Added
value can be achieved if customers or suppliers are willing to undertake relationships
which they would not make available to other people.

The main sources of competitive advantage are architecture, reputation and innovation. It
is the ability of the firm in how it utilizes it's distinctive capabilities to add value
to it's competitive advantage.


Architecture is the first primary distinctive capability of competitive advantage. It is a
network of relational contracts within , or around, the firm. It is a description of
relationships held by a firm internally or externally, or with a group of other firms.
Architecture can add value and provides competitive advantage by encouraging the formation
of organizational knowledge and the development of organizational routines and cooperative
ethics. Some firms such as IBM and Marks & Spencer have a powerful and identifiable
corporate culture. Each of these companies has created a structure, a certain style, a set
of routines which operates to get the best out of employees.These routines have continued
to produce exceptional results and add value.

Kay (1995) points out, "Architecture depends on the ability of the firm to build and
sustain long term relationships...it is easier to sustain architecture than to set out to
create it."

More than the other sources of competitive advantage, the sustainability of architecture
rests on the level of skills of senior mangers. The first major step for the managers is
to recognize the nature of the firm's architecture and the function it plays in the
markets the firm serves. Kay argues that there are two main types of distinctive
capability based on architecture,. Firstly, the firm's architecture may generate a flow of
innovations which forms a sustainable advantage. Secondly, the architecture of the firm
may allow the firm to successfully adopt new technology sooner and more efficiently than
it's competitors.


The second primary distinctive capability is Reputation. This is the most important
commercial mechanism for conveying information to consumers. The process of building up a
reputation can br accelerated by staking a reputation which has been established in a
related market. Once the firm's reputation has been created, it will have an advantage
competing for new customers and further strengthening it's reputation. However, reputation
is difficult and costly to establish and in order to sustain it a lot of hard work by
management has to be exerted. It is worthwhile investing into building a reputation if two
certain conditions are met. The first condition is that the premium available for
providing high quality is large relative to the cost of providing high quality. The second
condition is the likelihood of repeat purchase. If the firm is unlikely to provide the
service or product again, then there is little point to maintain a reputation. Once
established, though, reputations can yield substantial added value.


Innovation is the third primary distinctive capability. The process of innovation involves
complex interactions between firms. Managing innovation is costly and risky. New products
on the market can fail because of the lack of demand for them. Firm specific innovation
usually is the application of generally available knowledge or technology in advance of,
or more cheaply, than it's competitors. Sometimes, what appear to be the rewards of
innovation are often the products of the firm's architecture. Some firms established an
architecture which stimulates a continuous process of innovations. Others create an
architecture which enables them to implement innovation particularly effectively. There
was EMI who was one of the most effectively innovative companies which pioneered in
television, computers and it's music business. Sir Clive Sinclair created a reputation for
innovation by bringing products such as digital watches, personal computers and battery
operated cars to the market for the first time.

Distinctive capabilities enable firms to produce at lower costs than their competitors or
to enhance the value of their products, which puts them ahead of their rivals. They are
the product of the firm itself in terms of it's architecture, it's reputation and
successful innovation.


Nevertheless, some competitive advantages are not based on the distinctive capability
firms, but instead are based on their market position or dominance. These are know as
‘strategic assets.'

Kay recognizes three main types of strategic assets. The first is that some firms may
benefit from a natural monopoly. Secondly, in other markets, firms have already incurred
many of the costs of supply, but new entrants have not. Thirdly, some firms benefit from
market restrictions which are imposed by government such as licences and regulation. Firms
which hold a licence that is not available to other firms, enjoy an advantage over their
potential competitors.

Kay (1995) states, "Their competitive advantage follows from the structure of the industry
or market, rather than from their own distinctive capability." These firms are said to
hold strategic assets. Large firms may enjoy market positions based on strategic assets
even if they have no distinctive capability. Small firms may achieve modest profits from
local strategic assets.


However, strategic assets are often less secure sources of competitive advantages than
distinctive capabilities. Kay (1995) indicates, "Distinctive capability continue to add
value only if both the capability and the distinctiveness are sustainable." Competitive
advantages begin to alleviate because the distinctive capability may itself decline and
become less distinctive. Or the market may shrink in which that distinctive capability is
applied.

The first most likely distinctive capability to suffer is innovation. Most innovation
advantages are transitory because the successful innovation is quickly adopted by other
firms. Innovation yields a competitive advantage only for a length of time it takes for
innovation to be effective. Innovation advantages are more sustainable where they are
supported by other distinctive capabilities or protected by complementary assets. Kay
recognizes the need for innovation to be used in conjunction with at least one other
distinctive capability in order to ensure success for the firm.


The architecture of the firm may generate a flow of innovations which forms a sustainable
advantage even if individual innovations are unsuccessful. However, as a result of
innovation being costly and difficult to manage, there is a lot of uncertainty surrounding
it. Usually, a great deal of research and development goes into producing innovations
Continues for 7 more pages >>




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