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competitive advantage and its purpose

Transcript of Competitive Advantage - Copy

competitive advantage See Also sustainable competitive advantage comparative advantage pluralism market economy value proposition distinctive competency economic rent economic value economic value

added wealth creation capability dynamic capability resource view of strategy positional view of strategystrategic thinking firm theory of advantage thinking competitive advantage factors advantage thinking strategic factor market enterprise

value capability ability resource VRIN Framework Definition Competitive advantage is what enables a business organization to thrive. It is the objective of strategy. It is the combination of elements in the business model which enables a business to better satisfy the needs in its environment, earning economic rents in the process. Resource-based vs. positional view of advantage --

In the realm of strategy, there are roughly two views of the basic source of competitive advantage, the resource-based view and the positional view. The first sees the capabilities of the firm as its primary source of advantage while the latter contends that position within an industry is the source of advantage. Michael Porter is associated with the positional view. Gary Hamel and C. K. Prahalad are associated with the resource view. The resource based view has tended to dominate strategy since the late 1980s with the attention placed on capabilities, core competencies, distinctive competencies, dynamic capabilities, and organization evolution. As dominant companies also shape industries, there is the possibility that resources shape position as well. See positional view of strategy and resource view of strategy.




advantage (Barney,



A firm has a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors. A firm has a sustained advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy. A firm enjoying a sustained competitive advantage may experience these major shifts in the structure of competition, and may see its

competitive advantages nullified by such changes. However, a sustained competitive advantage is not nullified through competing firms duplicating the benefits of that competitive advantage. To have the potential of sustained competitive advantage, a firm resource must have four attributes -

it must be valuable, in the sense that it exploit opportunities and/or neutralizes threats in a firm's environment

it must be rare among a firm's current and potential competition it must be imperfectly imitable. This can be due to three reasons: 1) the ability of a firm to obtain a resource is dependent upon unique historical conditions, 2) the link between the resources possessed by a firme and a firm's sustained competitive advantage is causally ambiguous, or 3) the resource generating a firm's advantage is socially complex, such as cultural factors that enable a unique synergy amongst managers.

there cannot be strategically equivalent substitutes for this resource that are valuable but neither rare but neither rare or imperfectly imitable.

These attributes of firm resources can be thought of as empirical indicators of how heterogeneous and immobile a firm's resources are and thus how useful these resources are for generating sustained competitive advantages. Note that physical resources are not on the list. Physical technology, even complex physical technology, is generally imitable. Finally, sustainable advantage most likely cannot arise from a formal planning process, but is due to emergent strategy.





advantage --

Adner and Zemsky (2007) present an analysis of sustainable competitive advantage emphasizing the demand-side factors. In particular, the effects of decreasing marginal utility and consumer heterogeneity across market segments is shown to affect the sustainability of competitive advantage through shifts in consumer willingness to pay. Competitive advantage definition -- The authors define competitive advantage as superior value creation -- with the firm's ability to sustain competitive advantage equivalent to its ability to sustain added value.

The demand-side drivers are 1) marginal utility from performance improvements, 2) consumer taste for quality, and 3) the extent of consumer heterogeneity. At the level of firm resources, competitive advantage erodes not only because imitation undermines the uniqueness of resources, but also because consumer valuation of firm differences declines due to effects of decreasing marginal utility. At the level of firm positions, strategic heterogeneity is shown to be rooted not only in differences between firms' internal resources but also in the extent of consumer heterogeneity in the firms' demand environment.





Advantage --

Success is based on inventing an offering that addresses a real scarcity in the world, charging a price for it, and inventing a way of making it available that is cheap enough to leave a high margin. -- Kees van der Heijden, Back to basics: exploring the business idea, Strategy & Leadership, 29.3, 2001




Advantage --

Differentiation that commands an attractive price or a structurally lower cost to produce a non-differentiated -- Porter product.

Specialization and capabilities (Kay, 2004) -

Specialization -- Specialization, with its division of labor, produces economies of scale. Specialization can overrun its usefulness, such as when seeking further scale becomes a disadvantage, as was the case for Ford in the first half of the 20th century. As firms have often reached and exceeded the limits of specialization in providing value, they have shifted to capabilities.

Capabilities -- Capabilities, intrinsic capabilities, or distinctive capabilities include secrets of value, established business networks, brands, general management skills, engineering competency, innovation which is not easily copied or ongoing innovation which is not easily caught up with. Unique capabilities provide an opportunity to provide unique value and receive the gains from providing that value.




Advantage --

A business organization with a competitive advantage is more profitable than its rivals while this profitability exceeds its cost of capital. Profits in excess of the cost of capital are called economic rent. Sustained economic rents are prima facie evidence of a competitive advantage.

Elements of Competitive Advantage -

Uniqueness - finding unique opportunities and solutions is about imagination, insight, foresight, and the courage to pursue it. Unique is new, different, but most important of all, untested and unproven. By the time a unique solution is validated as profitable, it is no longer unique for the next company. Also, if it is a unique business model or business capability, it is likely unapproachable, in the short-term, by competitors.

Strategic Focus - Strategic focus comes about from marrying distinctive competency and purpose to form a superior value proposition. Strategic focus is about developing a longer view of competitive advantage with a combination of purpose, competency, and value proposition. This creates an internal environment that has the confidence and implicit support to continue to perfect and develop that focus through creating stronger competencies and further perfecting the value proposition.

Strategic Intent/Vision/BHAGs - Strategic intent challenges and guides the organization to achieve the unachievable by having a clear focus on outlandish objectives which require the development of new capabilities to achieve.

Innovation - Innovation is inventiveness put into profitable practice. In an evolving economy, the business organization must innovate at a rate that meets or exceeds its environment in order to sustain a competitive advantage.

Continual Innovation - Making innovation as an ongoing process on all fronts. Democratic Principles - Democratic principles are needed to fully engage the active participation of diverse thinkers from across the organization. Broad and diverse participation improves innovation.

Strategic Management as a self-improving learning process - Strategic management must become, amongst other things, a learning and self-improvement process for the organization.

Dynamic Capabilities - Sustainable competitive advantage is ultimately based on dynamic capabilities, the capability to produce and utilize new capabilities on a continuous basis.






advantage --

Competitive advantage is an absolute advantage of a business organization to offer greater value to its customers. Businesses should seek to find their competitive advantage, as opposed to their comparative advantage. They should focus on what they can do better than any other business. This may be something different than what they are best at doing. This maximizes the value of a business's economic function.

Porter's Environmental

framework determinants

for of

competitive advantage (Porter,

advantage 1991) --

Firms create and sustain competitive advantage because of the capacity to continuously improve, innovate, and upgrade their competitive advantages over time. Upgrading is the process of shifting advantages throughout the value cha