The Four Factors of Sustainable Competitive Advantage - Literature review Example

Sustainable Competitive Advantage: Name: Course: Tutor: Date: Topic: Critically explain the four specific criteria managers can use to decide which of their firm's capabilities have the potential to create a sustainable competitive advantage. INTRODUCTION Competitive advantage refers to resources and capabilities that strengthen each other. The resources and capabilities must strategically fit into each other in order to generate synergy which is difficult to imitate. According to Passemard (2000), when an organization acquires characteristics that enable it to perform at a higher level compared to other firms in the same field, competitive advantage is achieved. Organizations that need to develop a sustainable, competitive advantage must ensure that they select appropriate business location, maintain customer loyalty, stock unique merchandise, set up good vendor relations and maintain proper distribution channels. Similarly in resource-based view, an organization must have resources and capabilities greater than those of the competitors for it to develop a sustainable, competitive advantage. Organizations need to analyze their external and internal environments in order to understand their sources of competitive advantages. VRIO analysis tool is one of the tools that can be used to analyze organisations’s internal resources. This is a tool originally developed by Barney. According to Barney (1991) in his work on ‘Firm Resources and Sustained Competitive Advantage’ organizations’ resources must have four characteristics if at all they are to be considered to be a source of sustainable competitive advantage. According to him, resources must be rare, valuable, non-substitutable and imperfectly imitable. VRIO Framework tests whether a firm is organized to capture value from resource or capability, whether a resource or capability is rare, valuable and costly to imitate. Therefore a resource or capability that will bring sustained competitive advantage to the organization must definitely meet the given four requirements. DEFINITION Sustainable: This refers to market maintenance over a longer term and not just today. Competitive advantage: Competitive advantage is the aptitude acquired by an organization through its resources and attributes enabling to perform better than other firms in the same industry. It is a business concept describing the unique attributes of an organisation which enables it to surpass other competitors in the same industry. These attributes may include highly skilled personnel or used of new technologies. Sustainable competitive advantage: Sustainable, competitive advantages refer to advantages which are unique, cannot be copies easily and hence can be sustained longer. This is based on a numbers of resources and capabilities unique to an organisation and enables it capture value better than its competitors. People within an organization are the most sustainable competitive advantage, great people creates value to the organization due to their great knowledge and skills. They are also rare and very costly for other firms to imitate. Corporate culture is another sustainable competitive advantage for an organization. Corporate culture has value to the organization; it is rare and can never be replicated Resources: These are unique organizational assets used to create differentiation or cost advantage where a few or even none of the organizations in the same industry can easily obtain. Examples of firm-specific resources are Brand equity, Patents and trademarks, Reputation of the firm, proprietary know-how and Installed customer base. Organizational resources are the operational inputs that drive its business activities. They can either be tangible or intangible. Tangible resources refers to the physical resources like property and equipment whereas intangible resources refers to the resources that are non-physical like trademarks, brand equity and company reputation. Resources are generally categorized in to three i.e. organizational capita, physical assets and human resources. Capabilities: This refers to the capacity of an organization to effectively and efficiently utilize resources. Examples of capabilities include ability to effectively distribute products to the market faster than other competing firms. As competencies become stronger, organizations enhance its expertise in a given business function or area of operation hence mastering it. It is this expertise that enables an organization to differentiate itself from competitors. The capabilities cannot be imitated and the competitors find it hard to master and replicate. Core competencies: These are capabilities or resource giving an organization a competitive advantage. Core competencies refer to the operations or functions that an organization does best. Core competencies are therefore formed by a combination of both organizational resources and capabilities. These core competencies bring about efficiency, quality, innovation and customer responsiveness; these can be pulled together to create a differentiation or cost advantage. Core competencies are actually what differentiate an organization from other competitors in the industry. They are the resources or capabilities that enable an organization achieve profitability.. Resources or capabilities are core competencies if they are rare, valuable, non-substitutable and costly to imitate. It is therefore the responsibility of organizational managers to ensure that strategies are put in place in order to exploit resources and capabilities that form its core competencies. The concept of sustainable competitive advantage According to Barney (1991), an organization has a competitive advantage if it is executing a value creating strategy that is not concurrently implemented by its current or potential competitors. Competitive advantage is therefore that attribute that an organization has over its competitors. Competitive advantage is sustainable if it has the following four attributes:- Rare Valuable Costly to imitate Non-substitutable THE FOUR FACTORS OF SUSTAINABLE COMPETITIVE ADVANTAGE Rarity This is a situation where an organizations’ valuable resource or capability is completely distinctive among the existing and potential competitors. Resources or capabilities are rare if few or no other competitors in the same industry possess it. This therefore means that resources or capabilities are controlled by relatively few organizations. Rare resources and capabilities can enable an organization achieve competitive advantage in the market. Organizational resources and capabilities that are limited and persist over time are considered as a source of sustained competitive advantage. Valuable Valuable organizational resources or capabilities facilitate exploitation of opportunities and security against external threats. Managers need to find out whether a resource or capability adds value to the organizational strive to exploit opportunities and neutralize an external threat. Valuable organizational resources and capabilities have also been identified as a catalyst to improve perceived customer value. The managers should regularly review the value of resources or capabilities because there is a constant change in the internal and external environment, this change renders valuable resources or capabilities less valuable or even useless at times. Opportunities that organizations strive to exploit include but not limited to technological change, political conditions, cultural change, economic climate, legal and specific international events. On the other hand, external threats that organizations strive to mitigate include rivalry threat, buyers and suppliers’ threats, threat of entry and threat of substitutes. The organizational threat mitigation and opportunity exploitation can result in decrease in cost or increase revenue or even both. Resource and capabilities that facilitate opportunity exploitation and threat mitigation are considered as organizational strengths whereas resources and capabilities that does none of the two are considered a weakness to the organization. Resources and capabilities are perceived differently in various organizations. A resource or capability can be considered as strength in one organization and a weakness in another (Barney, 1991). The value of resources and capabilities constantly change and therefore it is the responsibility of the managers to regularly review to ensure resources and capabilities remain as valuable as they have been. Cost of imitation Organizations gain competitive advantages by simply having resources and capabilities that are rare, valuable and competitors finds it costly to imitate. Costly to imitate resources and capabilities are those which competitors have to incur heavy cost trying to replicate. The resource or capability can also be completely inimitable. This therefore means that competing organizations that do not have the resource or capability cannot substitute or imitate it at a convenient cost. Organizations may exploit external opportunities or neutralize external threats by creating valuable resources that are costly to imitate. According to Hill and Jones(1998), organizations that are innovative can ensure their valuable resources and capabilities gain sustainable competitive advantage by executing their strategies based on costly-to-imitate. This strategy can also bring long-term sustained success for the organization. Sustained competitive advantage is maintained when resources and capabilities are not only rare and valuable but also inimitable. Managers should therefore ensure that their organizations have resources and capabilities that are rare, valuable and costly to imitate if they indeed desire to achieve a sustained competitive advantage. To ensure that organizational resources are costly to imitate, managers must confirm whether resources of the organization are easily bought in the market by rivals. They should critically evaluate whether the rivals are able to get the resource in the near future. The following are reasons for the emergence of costly-to-imitate capabilities: Social complexity Historical conditions Causal ambiguity For example due to market monopoly, De Beers has achieved a sustainable competitive advantage in the diamond industry. De Beers have enjoyed this monopoly from the past where they had 85% market share and control of distribution and mines. This therefore means that it would have been costly for other competitors to jump in. Non-substitutable Non-substitutable resource or capability is that resource or capability that has no equal alternative that can be effectively utilized to accomplish a task. Imitation can occur either by duplication or substituting by providing comparable product/service. Managers must ensure their organizational resources and capabilities are difficult to imitate, and if a competitor tries to imitate their resources or capabilities then significant cost must be incurred to develop, obtain or duplicate the resource/capability. HOW THE FOUR CRITERIA WORK AS THE FULCRUM OF STRATEGIC MANAGEMENT. According to Rothaermel (2012), strategic management process is a dynamic process involving the full set of commitments, decisions, and actions related to the firm. Competitive advantage on the other hand differentiates an organization from its competitor in the eyes of the customer. It is the role of managers to develop robust competitive strategy in order to achieve a lasting competitive advantage for the organization. These strategies if well implemented can lift the organizational performance hence enabling it outperform its current and potential competitors (Passemard and Calantone 2000). According to the resource-based model, rare, valuable, non- substitutable and costly to imitate resources form the organizational core competencies. Managers can exploit organizational resources in order to produce products or services that are lower in cost compared to their competitors. The ability to produce quality products sold at a lower cost in the market gives an organization a competitive advantage over its competitors in the same industry. Organizations can achieve sustained competitive advantage when managers organize the organizational policies, procedures, processes, culture, structures and systems. This should be done strategically in order to fully exploit the potential of its rare, valuable and costly to imitate resources or capabilities. Competitive advantage is categorized in to two: Differentiation advantage and Cost advantage. The two are achieved by creating competitive advantage using capabilities and resources. Therefore, through choice of low cost and differentiation, an organization strategically positions itself in the industry through competitive strategy. The managers need to identify activities that reduce production cost without reducing the perceived customer value. They should also identify activities that can assist in raising the service or product differentiation as well as raising perceived customer value. Managers need to strategically manipulate organizational resources which they have full control in order to generate competitive advantage. Competitive advantage will then be reflected by high organizational performance and high productivity. The management needs to put in place an effective competitive strategy. For example, Amazon.com has core competitive strategy which is highly centered on improving customer experience. Amazon.com endeavors to fast order delivery, continuously innovate and provide shopping convenience. This is what has made Amazon.com customers to keep on going back form more products. Employees need to be well rewarded to ensure they exploit their potential at work place. Management must ensure there is an effective motivation and reward systems in place. Employees that work well and continuously discover new ideas should be well rewarded. The management should develop a culture that rewards innovative ideas. For example, having both cost and differentiation advantages, Google has a valuable capability on people management; This capability allows Google to make correct decisions on the best way to effectively manage its people, hire the best staff and make good use of their skills and knowledge. Through this strategy, Google has been able to engage people that are highly innovative and performs optimally to produce desired results. This is therefore a rare, valuable, non-substitutable and costly to imitate capability since no other organization has extensively used data based employee management like Google. Similarly, Google system is a highly sophisticated program that will be very costly to imitate. Resources are a source of organizational sustainable competitive advantage hence they must be well protected. The management must be fully aware of the organizational valuable resources and capabilities. According to Barney and Hesterly (2011), organizations that have their objectives and strategies transparent throughout the entire system and employees are free to interact both horizontally and vertically have a competitive advantage over their competitors whose top tier management are the only people to implement policies and strategies in closed doors. Managers can adopt differential business strategy where organizational products or services are different as compared to other competitors in the same industry. They can make their products attractive and stand out from other competing products in the market. To achieve this differential strategy, research innovation and continuous improvement of product or service is highly recommended. Organizations must be able to exploit opportunities and mitigate threats by strategically organizing its resources and capabilities in order to successfully enjoy a sustainable competitive advantage. Barney and Hesterly (2011) observed that there is need for correct planning if organizations want to realize sustainable competitive advantage. Without proper planning, firms with rare, valuable, non-substitutable and costly to imitate resources or capabilities may still realize competitive disadvantage. Correct planning can be achieved if manager’s decisions are aligned with organizational strategies in the management control system. The top management must be fully informed of all the decisions made by lower carder employees. Employees should also develop a culture to monitor each other as an organizational culture. Employee’s compensation policies must also be well considered. This independently may not provide much value as expected since it is a complementary resource, however, this can achieve sustainable competitive advantage if combined with other organizational resources and capabilities. COMPETITIVE PERFORMANCE ISSUES Core competencies are very important in any organization that has a clear vision to achieve a sustainable competitive advantage over its competitors. Once the core competencies are identified, managers should strictly focus on the core competencies and outsource the services that are not core to the organization. The non-core services should be assigned to companies whose area of specialization is in the non-core services. This will greatly improve performance issues. To further improve on performance, since the organization has employees with unique skills and capabilities, the organization can do benchmarking in order to learn on new skills that the other organization in the same industry does better. The managers must constantly evaluate whether their capabilities and resources can be easily replicated or substituted by their market competitors. Using the ability to access scarce raw materials and other resources that are hard to get in distribution channels, the management should focus on building strong customer relationship and ensure quality service / product is effectively delivered. Unlimited access to valuable resources is another source of sustainable competitive advantage. China for instance currently provides about ninety nine percent of the rare earth metals in the world. The management should also ensure there is patent in place to protect the organizational property rights such as trademarks, company name and symbols. For example, biotech and pharmaceutical companies patent their products. These patents are basically a provisional control established by the governments to inspire uncertain research and development. Managers should establish brand loyalty because clients all over the world have a tendency to stick to the brand they have loyalty towards even if the organizations do not provide effective or cheaper products. Coca-Cola Brand for instance is well known product that has achieved sustainable competitive advantage over other soft drinks offered in the market. This is because Coca-Cola Brand has taken a long time to establish customer loyalty and a successful brand. Product distribution can be extremely expensive, however, using Information Systems can ensure timely delivery of valuable products to the customers, Walmart for instance has greatly capitalized on this strategy and the results has been enormous. CONCLUSION The resources and capabilities must be rare valuable, non-substitutable and costly to imitate. Organizational resources and capabilities are valuable when they enable the organization to fight external threats and exploit on available opportunities. Rarity in resources and capabilities is achieved when only a few or none of the competitors in the market has it or is currently executing it. Resource or capability are costly to imitate if they are either imitable or other players in the same industry must incur heavy cost to replicate the product. Lastly, a resource or capability is non-substitutable if no other player in the same industry can develop utilize a resource or capability that is equivalent or similar. Managers should not only focus their strategies on price for effective market competition, they should adopt multiple competitive strategies that will generate a sustainable competitive advantage; with the help of continuous improvement, innovation research and use of modern technology, they can raise above their market competitors. Therefore, to achieve a sustainable competitive advantage, managers must put in place competitive strategies that effectively organize resources and capabilities. REFERENCES Barney, J. 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