Factors of Sustainable Competitive Advantage - Coursework Example

Factors of Sustainable Competitive Advantage Name Institution Course Date Factors of Sustainable Competitive Advantage With the advancement of organisations as a result of the hypersensitivity of markets, the need to innovate becomes a challenge and thereby there is a continuous need to implement generic strategies in order for organisations to reach the potential customers and gain competitive advantage (Clarke and Clegg, 2000). No competitive advantage is sustainable since it is easy for it to be copied by the competing organisations. Even when the competitive advantage is not imitated, the prolonged changes in technology tend to shorten technological know-how and resources (Clarke and Clegg, 2000). Therefore, in order to create and sustain competitive leverage, there ought to be sustenance in assets of the current companies. Works on the subject of competition have ignited the interest on the aspect of Sustainable Competitive Advantage. Competitive advantage offers an organisation many benefits (Cool, Costa and Derrick, 2002). For instance, boost of competitive advantage creates customer loyalty through branding, positioning as well as loyalty programs. Other benefits of competitive advantage include vendor relations, customer care and multiple source advantage to name a few. From a business viewpoint, companies can only succeed when they establish some advantage over the competing companies (Cool, Costa and Derrick, 2002). Business is established in a competitive environment where winners are the ones with some sort of advantages. The question as to what makes an organisation success is very relevant in today’s business environment and every organisation is looking for ways to answer it (Cool, Costa and Derrick, 2002). This paper will detail out four criteria that managers can utilize in order to decide which capabilities in the organisations have are likely to develop a sustainable competitive leverage. In addition, the essay will define resources, sustainable competitive advantage, capabilities as well as core competencies. The concept of sustainable competitive advantage has dominated business environment in many years now. Competitive advantage can be described as the advantage an organisation has over the competing organisations (Cool, Costa and Derrick, 2002). It is also the position an organisation occupies in relation to its competitors and the resources and structures of a firm that assist it to be better that their competitors. Competitive advantage therefore is the features that an organisation can deliver over the competing companies in regard to tangible and intangible assets (Christos, 2009). It can take the form of a product, service, innovation or any other thing that tend to differentiate a given company from the rest of the market competitors. The concept of competitive advantage is static and does not have time component associated with it. Organisations function in a rather dynamic environment as opposed to one that is static due to the unpredictability and instability of the business environment in which companies operate in (Oliver, 2000). Thus, it is essential to bring in the element of time to the term competitive advantage. On the other hand, the word “sustainable” has the ability to introduce the element of time to the theory of competitive advantage. Introducing the term “sustainable” to competitive advantage describes a company’s lasting success in business environment (Cool, Costa and Derrick, 2002). Sustainable competitive advantage does not only focus on a product or a service. A product or service which made a company successful in the past is incapable of doing the same thing today due to the variation of the business environment. The term “sustainable” entails the protection of resources and features of an organisation in order to offer a long-term competitiveness. Perhaps the simplest concept of sustainable competitive advantage is resources. Resources are classified into two: tangible and intangible resources (Christensen and Kaufman, 2006). Tangible resources represent the physical assists of a given company including people, finance and pant. On the other hand, intangible resources represent the non-physical assets utilized by companies such as information and knowledge. Resources in an organisation are grouped into four sets; Physical, financial, human as well as intellectual capital. Examples of physical resources include machines, buildings and production capacity while examples of financial resources include capital, suppliers and cash. Examples of human resources include skills and knowledge and those of intellectual capital resources include patents, business systems and brands (Christensen and Kaufman, 2006). These resources are very important. However, how a company employs these resources matter a lot. The effectiveness of physical as well as financial resources in an organisation depends highly on how they are managed, adaptability, experience and their innovatory capacity (Barney, 2001). A core competency can be defined as an organisation’s unique feature or ability that boosts competitive advantage in a given market, contribute to organisational growth and expansion and deliver value to consumers (Johnson and Johnson, 2002). Core competencies normally entails the fundamental knowledge, expertise and know-how in a given subject area that allow an organisation to reach a wider market and that cannot be replicated easily by other companies. For instance, organisations with particular strengths in the market including development of accounting or storage of information are said to possess the core competencies in those areas (King and Zeitham, 2001). In other words, core competencies can be referred to as the skills and expertise by which assets are organised effectively and efficiently via a company’s activities. In addition, a distinction should be established between core competencies and capabilities. Capabilities are the abilities that are required to perform or attain a given outcome trough as number of measurable features, services and processes (Zollo and Winter, 2002). Threshold skills are the abilities required for a company to meet the needs of a certain market. Threshold capacities can be either threshold resources or threshold competencies. Threshold resources are required to meet thresholds of the customers while the threshold competencies are required to deploy necessary resources so as to meet the requirements of the customers. Though threshold capabilities are very significant, they do not participate in the design of a competitive advantage (Zollo and Winter, 2002). They are solemnly dependant on a company having distinctive capabilities that competing companies will find it difficult to imitate. If the proficiencies of a give company do not meet the needs of the consumers, it is very difficult for the company to survive (Zollo and Winter, 2002). Nevertheless, if the aim of any company is to achieve sustainable competitive advantage then what strategic capabilities might offer competitive advantage in a sustainable manner? In order for this to be achieved, there are other important criteria to be involved. In order to achieve sustainable competitive advantage and at the same time gain returns revenues which are above average, companies’ core competencies and capabilities should be effectively acquired, bundled and leveraged (Wang and Ahmed, 2007). Otherwise, over time, the advantages of any given value-creating strategy can easily be duplicated by the competing companies. The key elements of a sustainable competitive advantage include the internal and external environment. By analysing the external environment, companies can identify the best way to go in boost their competitive advantage. In order to effectively analyse the internal environment, companies are required to foster an organisational setting that supports experimentation and learning. They should also perceive the company as a bundle of heterogeneous resources; core competencies and capabilities that that be utilized to design an exclusive market position (Mathews, 2003). The key components of the internal environment are core competencies, capabilities and resources. The four major criteria that managers can utilize in order to decide whether their company’s capabilities can create sustainable competitive advantage include valuable, rare, costly to imitate and non-substitutable. It is very important to assess the value of strategic capabilities (Carneiro, 2008). It is essential to emphasize that if a firm need to create sustainable competitive advantage it should possess the capabilities that can add value to the customers. Value of capabilities may be seen as an obvious point to illustrate but in practice, it is usually ignored and poorly or completely not understood. Managers may say that a number of distinctive capabilities of their companies are of value because they are simply distinctive. Possess capabilities that are entirely different from other companies is not on its own a basis for creating sustainable competitive advantage. Therefore, every manager should consider very carefully which of their company’s activities and processes are important in offering such value (Stamm, 2009). In addition, managers should consider which of their companies’ activities or processes are less valued. In order to do this, chain analysis and activity mapping may be used. The value chain is used to establish the categories of process and activities within a company, which create or develop a product of service. Primary activities are linked to the creation or delivery of commodities and services (Stamm, 2009). For instance, for a manufacturing process, the primary activities include inbound logistics, outbound logistics, marketing and sales among others. Managers should thus establish the valuable and invaluable activities of their organisations. Also, it is important for a manager to consider the rarity of strategic capabilities. Competitive advantage can be achieved if a company’s processes have a unique or rare capability. It can acquire the form of a unique resource (Peteraf and Bergen, 2003). For instance, a company may have a strong brand or retailers may have prime locations. In addition, some companies have patented their brand that can give them advantage. In terms of resources, companies offering unique resources may be those having intellectual capital in form of talented individuals (Peteraf and Bergen, 2003). In addition, sustainable competitive advantage may be grounded on rare competencies such as unique skills and expertise developed overtime (Peteraf and Bergen, 2003). There are three significant factors to be considered about the degree to which rarity of strategic competences might create sustainable competitive advantage. First, rarity may be contingent on the person owning the competence and the ease of transferability. For instance, the competitive advantage of a number of professional service organisations is founded upon the competence of an individual such as a manager of a sports team or a doctor practicing medicine (Baker and Nelson, 2005). Since there is a possibility of these professionals to leave and join competitor’s business, they are a fragile foundation of advantage. Durable advantages are found in competences of motivating, recruiting of individuals or development of a culture that attract individuals and sustain them from the competitors. Second, it is very dangerous to assume that rarity is sustainable (Baker and Nelson, 2005). But in real sense, rarity may be temporary. When an organisation is successful, the competitors may copy the set of competences in order to also succeed. It is therefore necessary to take into account other bases of sustainability. Third, rare capabilities may come to be core rigidities. This means that they might be difficult to change and might end up demanding the organisation (Baker and Nelson, 2005). Another criterion to be used by managers in deciding the capabilities with higher potential to boosting sustainable competitive advantage is inimitable strategic capabilities (Bowman and Collier, 2006). It should be vivid that the plight for strategic capacity that offers sustainable competitive advantage is complex. It entails recognizing the capabilities that have the potential to be durable and those that competing companies would find it hard to imitate or adopt. Due to the risks that accompany oversimplification, it is unlikely that competitive leverage would be interpretable by variations in the tangible assets of a company (Bowman and Collier, 2006). This is because, in the long run, these can be easily imitated or obtained. Competitive advantage can easily be determined by how assets are projected so as to create competencies within the organization’s activities. As mentioned earlier, capabilities cannot by themselves lead to competitive advantage; how it is used is what matters more. What will truly make the difference is how it is used to satisfy the needs of the customers with knowledge coupled with activities within an organisation. In order to attain competitive advantage, the core competences must fulfil a number of criteria. For instance, they must relate to a process that fortifies the value in commodity features. Also, core competences must result to a degree of performance that is better than all the competitors in the market (Bowman and Collier, 2006). They must also be very rigid for competitors to acquire and imitate. A core competency may be inimitable due to their complexity. For instance, Tesco, Sainbury’s and Asda Corporations are competitors who compete in the same business environment. However, Tesco is considered the market leader with superior performance. The environment does not necessarily differentiate these competitors but their internal core competencies and capabilities (King and Zeitham, 2001). From this example we can establish the fact that organisations are not identical and have different capabilities. It is also difficult for one company to imitate the capabilities of another company as seen from the difficulty of Tesco competitors in imitating its capabilities. Sainsbury’s does not have the capability to imitate Tesco’s retail expertise, management as well as its experience. In order for a company to attain sustainable competitive advantage, it would do so in regard to the capabilities that are unavailable within the competitors or is difficult for them to do so (King and Zeitham, 2001). This explains why some companies have the ability to have a superior performance compared to others. Managers can also decide the potential of its capabilities by measuring the non-substitutability of strategic capabilities (Acquaah, 2003). Offering value to the customers and having core competences that are very complex, casually ambiguous and greatly culturally embedded may make it very difficult for companies to imitate them. Nevertheless, companies can still be potentially at risk from substitution. Normally, substitution may take different forms. First is the product or service replacement. According to Porter’s five forces model, a product or service might be potentially at risk of substitution. For instance, the email system that is highly used today is used as a substitution for postal systems. Regardless of the complexity and causally ambiguity of the competences of the postal systems, it could not evade its substitution with the email system (Carneiro, 2008). Second is the competence substitution. Substitution may not involve service or product, but competence substitution. For instance, service –based industries have over the years suffers as a result of the over-dependence on the fundamental competences of skills workmanship that may have been substituted for by mechanised systems as a result of technological advancement. Generally, managers should take into account whether their companies have strategic capabilities that will enable them achieve sustainable competitive advantage (Wang and Ahmed, 2007). In order to do this, managers need to take into consideration how and to what degree it possess capabilities that are rare, inimitable as well as non-commutable. If these capabilities needed for sustainable competitive advantage are absent, managers should consider developing them. Apart from using the value chain and value network in understanding which capabilities are important in creating value, activity maps can also be utilized (Helfat and Petaraf, 2003). Managers may be faced with challenges in identifying clarity of the strategic capability. Often, they tend to establish capabilities that are less valued by the customers but valued within the company. This is not surprising since strategic capabilities are likely to be founded upon complex and causally ambiguous linked activities (Foster and Kaplan, 2001). In order to manage capabilities proactively, looking for a way to understand capabilities and the connections that characterize competences is paramount. This can be done using activity map that highlights how activities of a company are linked together. Another method of understanding which capability is important is using benchmarking technique. This strategy compares the strategic capability of an organisation with those of others. One benchmarking approach is historical benchmarking that considers an organisation performance in comparison with its previous years with the aim of identifying any change occurrence (Helfat and Petaraf, 2003). Industry benchmarking involves observing the performance of other companies operating in the same industry against a number of performance indicators. However, one danger of this strategy is that the whole industry may be performing poorly which may lead to loss of competitiveness. Also, the boundaries of industries may be blurring through industry convergence. SWOT Analysis may also be used to establish importance of capability (Johnson and Johnson, 2002). SWOT Analysis highlights the key factors from the business environment and the capabilities that are likely to have an effects on strategy develop. The purpose of SWOT is to recognize the degree to which strength and weaknesses of organisations are capable of coping with variations in the business environment. In order for the capability of a company to be understood, it should be established that it is not absolute but relative to competing companies. In the realization of strategic skills, the most valued form of tactical capability may be in aspects of a company that are almost impossible to discern. So, how is it likely to manage what is not easy to be clear about? There are various methods in which managers can develop skills (Wenger, 2000). They can add or change capabilities in order to be more reinforcing and extend capabilities in the business units. In addition, they can build capabilities by exploiting skills and resources that have been underutilized. Also, developing capabilities can be done through looking externally. Managers may endeavour to develop and design new capabilities by merger and acquisitions or strategic alliance with other companies. As seen earlier, strategic capabilities can potentially create sustainable competitive advantage (Acquaah, 2003). However, in hypercompetitive conditions which have been brought about by technological advancement, such capabilities are unstable. In order to sustain competitive advantage in such a dynamic situation, capabilities may be developed which may take up important strategic moves such as alliances and partnership where new skills and knowledge can be learned by companies (Acquaah, 2003). In conclusion, an organisation can achieve sustainable competitive advantage by studying the business environment and establishing effective assets, capabilities and fundamental competencies. Strategic capability involves the adequacy and appropriateness of resources and core competencies for a firm to succeed. In order for an organization to attain sustainable competitive advantage, they need to have resources and core competencies that are valuable and almost impossible for the competitors to imitate. The property of competitive advantage in any organisation is dependent on strategic capabilities to achieve value to customers, rarity, non-substitutable as well as inimitable. In order to diagnose organisational capabilities some tools are required such as value chain, benchmarking technique, SWOT Analysis and activity mapping. Managers are required to come with ways to manage the designing of capabilities by adding to these capabilities and managing employees in their organisations. In dynamic condition, capabilities can hardly remain stable. Therefore, dynamic capabilities are essential. This entails changing organisational capabilities continuously. References A.W. 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Clegg, 2000, Changing Paradigms: The transformation of management knowledge for the 21st century, p. 342 Read More