Sustainable Competitive Advantage

Abstract

This article will focus on the origin, purpose and advantages of sustaining competitive advantage. Because of its importance to the long-term success of firms, sustainable competitive advantage (SCA) has emerged as a hot area to research. Porter's Five Force model will be discussed as well as the concepts of market orientation and business networks. In order to sustain a competitive advantage, organizations must complete a SWOT analysis on its strengths, weaknesses, opportunities and threats to its competitive position. This assessment will assist the organization in developing offensive and defensive strategies to minimize the attacks from competitors.

Origin

The importance of sustainable competitive advantage (SCA) to the future success of firms has made it a hot area of research (Hoffman, 2000). SCA evolved as a result of competition. Alderson (1965) was one of the first to acknowledge that an organization should strive to create unique attributes in order to differentiate itself from its competitors so that it has a competitive advantage with consumers. Other pioneers (Hamel & Prahalad, 1989; Dickson, 1992) built on Alderson's work by acknowledging that organizations surpass the performance of their competition by developing new ideas that will keep them a step ahead. Also, during this time period, other researchers (Hall, 1980; Henderson, 1993) argued that the uniqueness of a firm is what will allow it to thrive in a competitive environment. The work of these gurus is what led to the concept of sustainable competitive advantage.

Definition

The idea for the SCA concept was first introduced in 1984 by George Day. In one of Day's writings, he implied that there were certain types of strategies that could help an organization "sustain the competitive advantage." Porter (1985) moved the idea to a concept by describing the types of competitive strategies an organization should possess in order to achieve long term SCA. One of Porter's major contributions to this area is the Five Force Analysis model.

This model lists five key areas that marketers and strategic planners should evaluate when analyzing the competitive environment. The five forces are threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. Each force has a list of questions to be answered such as:

1. Threat of Entry
2. Are there any benefits associated with bulk purchasing?
3. How much will the latest technology cost?
4. Do the competitors have a stronghold on most of the distribution channels?
5. Are there any cost advantages not associated with the size of the company?
6. Will competitors retaliate?
7. Will new laws weaken the company's competitive position?
8. How important is differentiation?
9. The Power of Buyers
10. Are there any large players in the market (e.g., chain restaurants)?
11. Will the large players have the support of small suppliers (e.g., companies such as Home Depot receiving flowers from local nurseries)?
12. Is the cost of switching between suppliers low (e.g., a conference coordinator switching from Hertz to Avis)?
13. The Power of Suppliers
14. Are the costs high for switching suppliers?
15. Is the brand powerful (e.g. Cisco)?
16. Is there a possibility of the supplier integrating (e.g., banks offering insurance)?
17. Are the customers fragmented so that they have limited bargaining power?
18. The Threat of Substitutes
19. Is there a product-for-product substitution (e.g., cell phones instead of land lines)?
20. Is there substitution of need (e.g., lighter textbooks reduce the need for chiropractic care)?
21. Is there a generic substitution (e.g., for insurance purposes, getting a generic prescription versus a brand prescription)?
22. Can we do without the product (e.g., fast food because it can lead to obesity)?
23. Competitive Rivalry
24. If there is a strong chance of entry, competitive rivalry will be high. There is a threat of substitute products as well as suppliers and buyers attempting to take control of the market.

The formal definition of SCA did not surface until 1991. Barney (1991) defined sustainable competitive advantage as when an organization is implementing a value creating strategy that is not being implemented by any current or potential competitors and when the competitors are unable to duplicate the process" . Coyne (1986) expanded on the formal concept by adding that consumers must be able to perceive a difference between competitors' products in order for SCA to be present. If an organization can predict what will occur in its industry over time, a competitive advantage is created. The competitive advantages are sustainable if the competitors decide not to compete for the market share.

SCA is discussed in the marketing and strategic management disciplines. Both fields of study reference the approach as a concept focusing on how one firm has an advantage over other firms. The sources of the advantage are known as core competencies. Core competencies imply that the organization has an advantage that is distinct and unique to that particular firm. The organization usually has a brand or patent which separates them from the competition. For example, Pepsi is a known brand and recognized as one of the top cola companies. Through media and conversation, society has participated in the ongoing battle between Coca Cola and Pepsi. There are certain attributes for each product, which is why each product has developed a loyal customer base.

Core competencies consist of the characteristics which allow a business to recognize competitive advantage. Organizations have found that obtaining competence mastery is as important as securing market position and achieving market power. Since there are many tasks and activities in a business and competencies associated with the tasks, many businesses have focused on competencies that primarily affect their competitive advantage. It is impossible to attempt to work on all of the activities. There isn't enough time and resources.

Core competencies are not constant. They tend to change as the organization changes. Therefore, it's important that the competencies are flexible and not etched in stone. As a business changes so will the core competencies. Hamel and Prahalad (1989) identified three factors which are necessary to developing a business's core competencies. The factors focus on the specified achievements of the core competencies and any business. The factors are:

• Provide potential access to a wide variety of markets —the core competencies support the creation of new products and services.
• Focus on the perceived value with which a customer measures a product —the core competencies allow a business to deliver products based on customer preference.
• Makes it difficult for competitors to duplicate —the core competencies create something within a company that other competitors cannot imitate. There is a sense of uniqueness.

Relationship

The concepts of market orientation and business networks have been linked to the process of creating and maintaining SCA. Market orientation refers to the intangible focus on customers and competitors as well as the formation of business networks that foster relationships and strengthen strategic planning (Hoffman, 2000). These networks allow for information exchange and core competencies to be strengthened.

• Market Orientation Many researchers have different and similar definitions of what market orientation is. Kohli and Jaworski (1990) define market orientation as "the implementation of a marketing concept by activities such as analyzing the changes in customer needs and wants, sharing information with all departments in the organization, and responding to customer needs." Day (1994) believed that market orientation was a balance between being customer-centered and competitor-centered. In addition, organizations could use technology in order to act on available information faster than the competitor. Narver and Slater (1990) viewed market orientation as "an organizational culture that contained three behavioral components." These three components are:
• Customer orientation —understanding the target market.
• Competitor orientation —understanding the strengths, weaknesses, capabilities, and strategies of key competitors.
• Interfunctional coordination —using resources of every unit in the organization in order to create a desirable product/service for the target market.

Market orientation has an external focus on customers and competitors. Organizations can survey their customers in order to determine what they value. The feedback can be used to create innovative ideas for the organization to pursue. Interfunctional coordination allows the organization to gain buy-in from its employees and empower them to create the necessary processes to meet customer needs.

• Business Networks Networks are a consortium of many units that have formed relationships in order to secure resources that will build core competencies, which leads to the attainment of SCA. An example would be an organization adopting the open book management concept and sharing the company's SWOT analysis with the employees. As the employees gain an understanding and appreciation for the challenges and obstacles to organizational success, various departments may bond in order to streamline processes so that the organization remains competitive. Porter (1985) refers to this process as the formation of coalitions and adoption of a "value chain" approach. Basically, employees come together in order to share activities that will give their organization a competitive advantage. Jarillo (1988) viewed trust and perceived goal congruence as two factors that were essential in developing business networks. Trust was seen as the key to preserving effectiveness and efficiency in a relationship among the organizations/departments in the business network.

Applications

Competitive Position

There are three types of assets that help build a sustainable competitive advantage, and they are:

1. Organizational and managerial process
2. Coordination and integration —Organizations are successful when they can secure organizational commitment from the employees, and empower the employees to be a part of the improvement processes for the company. Team effort and interdepartmental partnerships are crucial to the successful and effective implementation of process improvement plans.
3. Learning —The workforce must be conscious of what is going on in the world and how internal and external actions affect the well-being of the organization. Organizations have to effectively collect data about their business lines so that they stay abreast and current on factors affecting their products.
4. Reconfiguring and transformation —As the environment is in constant flux, and continuous process improvement is necessary to reach sustainable competitive advantage. Double loop learning is essential to producing new products. Innovation will determine how an organization reacts and learns from the market.
5. Positions

Market positions are the assets of the organization. There are four different types that analysts constantly research. They are:

1. Technological assets
2. Financial assets
3. Reputational assets

• Structured assets (i.e. organizational chart, corporate culture)
• Paths
• Path dependencies: Organizations acquire a set of values at the inception of the business. These values tend to stay with the company as it grows and develops. The path the organization takes will determine the development of its competencies.
• Technological opportunities —Technological developments may allow an organization to exploit opportunities to form an SCA.

In order to sustain a competitive advantage, organizations will need to periodically assess their portfolios to make sure that they are on target. Companies should evaluate recent initiatives to see if they have improved their competitive position and performance. Assessing an organization involves an appraisal of its strengths, weaknesses, and external opportunities and threats, which is referenced as a SWOT analysis. A SWOT analysis allows the organization to evaluate whether it is in a good position or if changes need to be made. This information will allow the organization to identify key rivals and determine if it is ahead of the competitors that it benchmarks itself against.

SWOT Analysis

The SWOT process focuses on the internal strengths and weaknesses of an organization's employees, products and processes. In addition, it looks at the external opportunities and threats that may have an impact on the business. The main purpose of completing a SWOT analysis is to highlight the organization's core activities as well as identify what the organization does well. Going through this process will assist the organization with developing and implementing a continuous process improvement plan. The traditional approach to completing a SWOT analysis is to create a grid of four boxes for each of the areas—strengths, weaknesses, opportunities and threats. In each column, there should be a list of factors for each area. It should be noted that a factor could appear in two or more boxes. For example, new competitors can be seen as a threat. However, it could be considered an opportunity because there may be a potential to have new customers come to the business.

Figure 2 shows an example of what a SWOT analysis grid would look like.

Issues

Beyond Competitive Strategy

Most organizations achieve competitive advantage through offensive strategies and defend their competitive advantage through defensive strategies. Thompson, Strickland, and Gamble (2005) explored the different types of offensive and defensive strategies that an organization can take in order to sustain its competitive advantage over rivals; they are as follows:

Offensive Strategies

1. Initiatives to match or exceed competitor strengths —There are two situations in which it makes sense to mount an offensive attack. They are when an organization's back is up against the wall and there is no choice but to attack the rival's competitive advantage, and when there is an opportunity to make a profit at the expense of the rival. Attacking the rival may be necessary if the rival's strengths include a superior product or superior organizational resources and capabilities. For example, Honda may elect to attack Nissan. Other strategies include using technology in order to make rival's products obsolete, implementing products that appeal to the rival's customers, and running comparison advertisements.

2. Initiatives to capitalize on competitor weaknesses —In order to capitalize on a competitor's weakness, an organization may launch a campaign which exploits the competitor's weaknesses. This is an excellent approach if the rival is caught off guard by the attack or if the campaign exposes the rival's vulnerabilities. Options for attacking the rival's weaknesses include:

• Going after the customers of rivals who have products that are lacking in quality, features, and product performance. For example, Southwest Airlines could launch a campaign for US Airways' customers.
• Making a sales pitch to the customers of rivals who provide poor quality service. For example, Acme Markets may launch a campaign against Shoprite markets based on the perceived quality and service of the chain supermarkets.
• Trying to win customers away from rivals with weak brand recognition. For example, Amazon may send out a mailing to AbeBooks customers because Amazon has a broader audience for books and other products. Their portfolio may include focusing on the fact that they can be one stop shopping for various needs, not just books.
• Emphasizing sales to buyers in geographic regions where a rival has a weak market share or is displaying a less competitive effort. For example, Herrs could emphasize the quality of its potato chips in the Southwest region, such as the Texas market, where there isn't a strong presence of Utz's potato chips.
• Paying attention to buyer segments that a rival is neglecting or is weakly equipped to serve.

3. Simultaneous initiatives on many fronts —There may be a time where an organization may launch an attack that includes multiple attacks on rivals. For example, the campaign may include price cuts, increased advertising, new models and styles, and special promotions. This practice is often seen in the car industry. A special line, such as Acura, may decide to change the body of a model in order to gain market share. Acura may offer lower prices, special financing and extended warranties in order to entice potential customers.

4. End-run offensives —This is a maneuver where the organization works around the competitors, captures unoccupied or less contested market territory, and changes the rules of the competitive game so that it is favored. Examples include introducing new products that redefine the market and the terms of the competition; launching initiatives to build strong positions in geographic markets where rivals have little or no market presence; creating new segments by introducing products with different attributes and performance features to better meet the needs of selected buyers; and using next generation technologies to minimize the popularity of existing technologies, products and/or services.

5. Guerrilla offensives —Guerrilla offensives are popular for the underdogs in a market. Small companies may launch a "hit and run" campaign where they grab sales and market shares when the top dogs are not paying attention to what is going on. It's an attempt to lure loyal customers away from an industry favorite.

6. Preemptive strikes —Preemptive strategies occur when the organization is the first to make a move in order to secure market advantage and the rivals are prevented or discouraged from duplicating the effort.

Defensive Strategies

Since all companies are subject to offensive challenges from rivals, the purpose of defensive strategies is to lower the risk of being attacked, weaken the impact of an attack, and present a front that would encourage the attacker to go after other rivals. Although defensive strategies do not add to a company's competitive advantage, they do fortify the competitive position, protect assets, and defend its competitive advantage. Two forms of defensive strategy are blocking and signaling.

1. Blocking —occurs when a firm defends its position by restricting a challenger's options for initiating an attack. The firm can discourage buyers, reduce prices, and challenge the quality of the rival.

2. Signaling —occurs when a firm discourages a challenger from attacking or diverts the challenger to less threatening options. The firm can announce a counter campaign by offering to match the competitors' terms or prices.

Conclusion

As the field continues to evolve, followers in this area will strive to perfect the definition of the concept. Sustainable competitive advantage is a concept that will benefit from researchers continuing to build on the foundation in order to perfect the approach. Hoffman's study (2000) presented four propositions as a start in this direction. The four propositions are:

• Network identity is an antecedent of trust. Organizations must possess qualities that will make them attractive to other firms so that their inclusion in the network is welcomed.
• Communication is the vehicle by which trust and organizational learning are recognized. Effective communication allows organizations an opportunity to learn from one another. The value of networks lies in their ability to generate and integrate knowledge and relationships in such a way that eclipses the abilities of a single organization.
• Commitment is realized through trust and organizational learning. Trust is a result of "each member's confidence in its partners' sincerity, reliability, loyalty and willingness to refrain from behaviors that will threaten the relationship" (Arcrol, 1997).
• Both trust and commitment result in sustainable competitive advantage. Trust will allow the organization to function at a high level because the units have committed themselves to the success of the goals. Trust will allow everyone to share more freely because barriers to communication will cease to exist.

A SWOT analysis will allow an organization to determine offensive and defensive strategies in order to minimize the threat of rivals and attacks. There are a couple of basic rules an organization should follow when choosing a rival to attack and the type of attack to launch. Some of the best targets are market leaders that are vulnerable, second place firms with weaknesses where the challenger is strong, competitors that are vulnerable and about to go under, and small, local and regional companies with limited capabilities.

An organization's strategic offense should be tied to what it does best, which includes its core competencies, strengths, and competitive capabilities. Otherwise, they may not be successful in their attempt to attack the rival.

Terms & Concepts

Benchmark: A standard by which something can be measured or judged.

Business Networks: A group of people that have some kind of commercial relationship.

Competition: Situation in which two or more groups are striving against each other to attain a reward or goal.

Competitive Advantage: Situation in which a firm's offerings or processes make it more profitable than its competitors; often a result of focus on improving competitor processes and meeting consumer wants.

Core Competencies: The characteristics which allow a business to recognize competitive advantage.

Double Loop Learning: Situation in which the organization investigates and amends its current practices and objectives so as to continually improve and evolve.

Industry: Refers to a market that consists of firms which produce products that are related or close substitutes of one another; a grouping of businesses that share a common method of generating profits.

Market Orientation: An organization's focus which allows it to meet current and future customer needs.

Sustainable Competitive Advantage: Competitive advantage that is long-term and stable due to the creation of processes and products that cannot be easily duplicated or imitated by other firms.

Strategic Planning: The development of goals and strategies to meet them; often involves a SWOT analysis and results in a long term view of the organization.

SWOT Analysis: A strategic planning tool used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project, business venture or in any other situation of an organization requiring a decision in pursuit of an objective. It involves monitoring the marketing environment internal and external to the organization. See Figure 2.

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Suggested Reading

Adner, R., & Zemsky, P. (2006). A demand-based perspective on sustainable competitive advantage. Strategic Management Journal, 27(3), 215–239. Retrieved April 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19564639&site=ehost-live

Creamer, W. P., & Amaria, P. (2012). The effect of business transformation and innovation economics on sustainable corporate competitive advantage. Research in Business & Economics Journal, 61–34. Retrieved November 25, 2013 from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=e6h&AN=83536073&site=bsi-live

Gattschalg, O., & Zollo, M. (2007). Interest alignment and competitive advantage. Academy of Management Review, 32(2), 418–437. Retrieved April 20, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24351356&site=ehost-live

Kumar, V., Jones, E., Venkatesan, R., & Leone, R. (2011). Is market orientation a source of sustainable competitive advantage or simply the cost of competing? Journal of Marketing, 75(1), 16–30. Retrieved November 25, 2013 from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=56476199

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McGrath, R. G. (2013). The end of competitive advantage: How to keep your strategy moving as fast as your business. Boston, MA: Harvard Business Review Press.