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Sustainability Of Competitive Advantage

3000 words (12 pages) Essay in Marketing

27/04/17 Marketing Reference this

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Globalization, technical progress and the economic growth are just a few reasons for the fast-growing competitive pressure on the international business markets. For companies that strive to be successful it is therefore essential to find a solution to the questions which specific strategy they have to implement in order to outperform the market competitors in the long run. In the terminology of strategy researchers, this means that it is a crucial factor for enterprises to create and sustain competitive advantage. [1] 

To apply this principle in practice, the necessity for companies in the first instance is to understand what a competitive advantage is. Several scientists describe it as the ability of a firm to generate a superior value for its customers through the implementation of a unique strategy. [2] The strategy is based on a specific combination of internal resources and capabilities which can also be intangible ones like a brand name. The outcome is a distinction of the firm from its competitors. [3] In this context it is recommend either following a cost leadership or a differentiation strategy. [4] 

What makes the competitive advantage sustainable is explained by Barney who set up a first formal definition for the actual term “Sustainability of competitive advantage” in 1991. According to his idea a company retains its competitive advantage due to the incapability of competitors to duplicate the benefits of the firm’s strategy. He also argues that other authors, like Jacobsen, were introducing another definition that is simply dependent on the period of calendar time during which the firm enjoys an outstanding performance since of the uniqueness of its strategy. The reason is that this definition creates the question, what exactly a long period of calendar time is and is consequently often not seen as sufficient. [5] 

Beyond his definition, Barney also describes a framework model that is used for obtaining a sustainable competitive advantage and enjoys a high practical relevance since it is used in strategy implementation for companies: the SWOT Analysis. While researchers were basically concentrating either on the analysis of internal company resources or on the external analysis exclusively, this model integrates both approaches and seeks to combine the internal analysis (so called Resource Based View Model (RBV)) and the external analysis (so called Market Based View Model (MBV)). Figure 1. embodies the whole framework model, showing that the strengths and weaknesses of a company are covered by the RBV and the opportunities and threats by the MBV. In this way, the two analyses are not seen separately but complement each other. [6] 

2. Competitive Advantage – Resource-based view

To transform a short-run competitive advantage into a sustained competitive advantage the RBV requires a firm’s resources to be neither homogenous in nature nor perfectly mobile. If these conditions are satisfied, then the firm is able to obtain a sustained competitive advantage.

The assumption that the resources must be heterogeneous and imperfectly mobile is pre-requisite. Firstly, if it is supposed that all companies have the same resources then it cannot be assumed that it is possible for one company to achieve sustained competitive advantage because then the rest of the companies will be able to imitate. Secondly, if it is supposed that the resources can move easily a company will not be able to implement and sustain competitive advantage because the resource can be acquired by the competition and imitated.

The VRIN model constitutes a part of the RBV and describes the four characteristics a firm resource must posses to be a source of sustained competitive advantage. Each letter represents one of these characteristics. Before presenting these attributes, the firm resources must be defined: “firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness” In the following lines some main characteristics are explained.

Value

Resources are valuable when they enable a firm to conceive of or implement a strategy that will increase the efficiency and effectiveness of the firm. This is true when a resource exploits opportunities or when it prevents threats.

Rareness

The resource must be rare in the way that not many current or potential competitors can implement the strategy simultaneously. If this it is not true then most of competitors have the potential to exploit the same resource. Accordingly, it cannot be expected that a company will obtain a sustained competitive advantage by doing the same as the others.

Imperfect imitability

There are three reasons to explain why one resource can be imperfectly imitable:

• Unique historical conditions:

This way to obtain imperfectly imitable resource rests on the idea that the past actions of the company can influence current competitive advantage. For instance, one company could have some scientists that are uniquely positioned to create a significant breakthrough.

• Causal ambiguity:

This takes place when the link between the resource and the sustained competitive advantage is not understood or only partially understood by the firm’s owner. When the link is not understandable, then the competitors cannot imitate because they do not know what to copy to obtain the sustained competitive advantage.

• Social complexity:

Social complexity refers to a firm’s ability to systematically manage and influence the relationship with its stakeholders (.e.g. customers, suppliers).

Non-substitutability

Last but not least it is a requirement that the firm’s resources are not strategically equivalent to other valuable resource. Two valuable firm resources are strategically equivalent when each can be exploited separately to implement the same strategies.

3. Competitive Advantage – Market-based view

The following section is based on the approach to competitive advantage introduced by Michael Porter in his book “Competitive Advantage” in 1985.

Market-based approach to achieving and sustaining competitive advantage represents an external approach – the competition on the market determines which companies will have a competitive advantage. In this way, the competitive advantage is a reflection of a company’s better performance in the industry relative to competition. According to this approach, the company needs to understand well the market structure and the consumer behavior in order to choose appropriate strategy which will enable it to achieve and sustain the competitive advantage. [7] 

Market-based view differentiates between two types of competitive advantage: low cost and differentiation. Based on this, it introduces generic strategies that lead to competitive advantage: cost leadership, differentiation and focus. The strategies can be identified along two dimensions: the type of competitive advantage (low cost or differentiation) and the competitive scope (broad industry or thin segment). [8] 

The companies pursuing cost leadership strategy effectively aim to be “the low-cost producer” [9] on the market. Due to their low costs, they perform better than their competition.

On the other hand, companies pursuing a differentiation strategy aim to distinguish themselves from competition by offering added value that the competition does not have and consumers highly appreciate. Based on this unique added value, the differentiating companies will also charge a higher price for their products. [10] 

Whereas cost leadership and differentiation strategies aspire to achieve advantage on a broad market, focus strategies seek the same types of competitive advantage (low cost or differentiation) on a very thin market segment. [11] The different generic strategies are depicted in Table 1.

It is also important to note that the market-based approach acknowledges the interrelation between the internal strengths of the company and its market performance – company’s strengths will influence the choice of the cost or differentiation strategy that will ultimately result in achieving competitive advantage. [12] 

Once the company achieves the competitive advantage it needs to sustain it over time. As the competition will always try to imitate the better performing company and “steal away” the advantage, the company needs to set barriers to imitation. In this respect, market-based view proposes that leading companies should persistently develop, to continually invest and constantly improve their competitive position and in this way make imitation more difficult. [13] 

4. Sustainable Competitive Advantage – Cost Leadership Strategy

As mentioned in the above lines the cost leadership strategy will be sustainable only if the organization is able to make it hard for competitors to imitate the sources that give this valued position in the market. The drivers of cost leadership are specific to each industry although there are some that can be generalized. Porter suggests a couple of these general ones: the scale, the interrelationships between sister business units, the linkages with suppliers or the patents and secrecy which protect product or process innovation. [14] 

Moreover it is important to mention that “sustainability stems not only from the sources of competitive advantage, but also from their number” [15] .

One company that provides an example for this type of strategy that is sustained for some time is IKEA. The important drivers in this case are the scale operations (35 countries with over 300 stores) with products that are the same in each store; the good management of suppliers; and the good connection that exists between different departments in order to ensure the final achievement of the price established at the beginning of the development process of each product. In addition, cost advantage is drawn from the reconfigured value chain. The customers have to play the role of producers bringing the final value. Nevertheless, IKEA works closely with its suppliers. The company uses its bargain power to buy most of the raw materials for them and also provides support to ensure a standardized quality. Competitors would find it now even more difficult to replicate the reconfigured value chain and therefore IKEA has added another barrier against imitation.

5. Sustainable Competitive Advantage – Differentiation Strategy

When pursuing a differentiation strategy, the company will try to distinguish itself from competition in a way that features differentiating its products are clearly recognizable and valued by consumers so that they consider them important. [16] 

For differentiation advantage to be sustainable, two essential conditions need to be met:

The consumers need to appreciate the distinctive features and to consider them sufficiently valuable in order to pay higher price for products/services.

Imitation has to be avoided, i.e. there cannot be other company on the market offering identical products/services. [17] 

There are a number of drivers that can influence and strengthen the sustainability of differentiation advantage. Porter suggests the following: barriers that prevent the imitation of differentiation sources; having many sources of differentiation; cost advantage in differentiation; etc. [18] 

In the case of Mercedes Benz one can see how differentiation strategy is sustainable over time. Being unique as the world’s second most famous brand, and at the same time perceived as a provider of luxury, “status symbol” cars, Mercedes has a clear differentiation advantage. By utilizing various sources of differentiation, e.g. first mover advantage, linkages, interrelationships, broad product range, etc. Mercedes reinforces its advantage, at the same time making imitation difficult. [19] In this way Mercedes succeeds to sustain its competitive advantage over a longer period of time.

6. Sustainable Competitive Advantage – Focus strategy

This is not an individual strategy; it only describes the size of the market in which a company operates. The strategies are the same as the ones for the mass market: cost leadership and differentiation. The firm will choose one of these strategies depending on the needs of its customers. Typically the firm will gain a sustained competitive advantage through product innovation (differentiation-focus) or brand marketing (cost-focus) rather than efficiency.

Two good examples for these types of strategies are Ferrari and TATA Nano. The former focuses on exigent customers that demand higher performance, luxury, exclusive design, etc. for their cars and are not price-sensitive. However, the second strategy focuses on a market where customers rather look at the basic functions of a car and therefore demand low prices.

The idea is that if the company focuses on a narrow market it will cover the needs of its customers better than the competitors because the firm will know customers’ needs better than the rest.

7. Alternative Approach – The “Blue Ocean Strategy”

Chan Kim and Renée Mauborgne were the first ones who introduced the “Blue Ocean Strategy” in an article which was first published at Harvard Business Review and then further developed the concept in a book with the same title. The problem that the authors tackle refers to the possibility of achieving low cost and differentiation in the same time, two key aspects that previous management theories reject.

To begin with, the authors argue that strategy is seen so far as a way to confront the competitors which are perceived as the opponents. The term “red ocean” is used to define “all industries in existence today”. [20] So basically what happens in this known market space is that companies try to obtain a bigger share out of a given demand. The result is a type of “war” in which wealth is trying to be redistributed. Furthermore, “as the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.” [21] 

The solution suggested is that managers think outside the boundaries imposed by today’s markets. They need to ask themselves and understand the factors that are taken for granted in their industry and are unnecessary or need to be reduced as well as factors that need to be created or increased in order to generate blue oceans. [22] For example, customers may receive products or services that they do not actually value anymore but because the companies are so focused on benchmarking one another this shift in customers’ preferences is not perceived.

“Blue oceans” [23] in contrast to the above mentioned “red oceans” represent uncontested market space where new demand is created. The companies situated here have no real competitors and achieve what the authors call value innovation. [24] The concept of value innovation refers to the fact that there would not be any trade-off between differentiation and low cost and no fight for limited resources or the distribution of profits. As a result, “blue oceans” bring new wealth as a whole.

Yet, for managers to put “blue oceans” into practice is not simple and is actually “seen as to risky to pursue as strategy” [25] . Nonetheless, some practical frameworks were suggested based on the researches done in different industries where organization managed to create these types of new market spaces.

8. Conclusion

In terms of strategic planning for companies the sustainability of competitive advantage delivers a helpful long-term-oriented concept that is not difficult to understand. By knowing what a competitive advantage is, how to create it and finally maintain it, businesses have an efficient tool with which they can set up market barriers against competitors. Additionally, it can be used for a clear positioning on the market. Being aware and applying the RBV and MBV models makes it even easier to employ this principle in practice. The optimal approach is to combine these two models as they support each other.

Nonetheless, it has to be mentioned that there are still measurement problems, meaning that there is a lack of understanding on how the explained strategies influence the performance of an enterprise. [26] Due to that there has to be done some more research on that topic in the future.

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