Oliver Thylmann

(Originally published on the OUBS Blog)

Competitive Advantage is defined by Grant as follows:
When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit.

Competitive advantage emerges from internal sources where companies have greater creative or innovative capabilities and from external sources arround changing customer demands, prices and technological change.

Any change in the external environment brings with it an opportunity for profit and entrepreneurship is the ability to identify and respond to that opporunity. With markets becoming increasingly turbulent, this ability to respond can be said to be a competitive advantage in itself, if it is a better ability in relation to other companies that is. It also means that you anticipate future changes and hence you need information (resource) and flexibility to respond (capability). This moves organizational structure, decision-making systems, job design, and culture to the center of an organizations capabilities. The faster you can respond, the less you need to rely on forecasts. The example of Dell fits well here, as they have less than 14 days of inventory and can respond to changes quickly.

Innovation is not only a competitive advantage but also a capability that allows to overturn the competitive advantage of other firms. Gary Hamel argues that business concept innovation is the foundation for value creation in the new economy. These new business concepts will, as of McKinsey and Co., often involve a reconfiguration of the value chain of the industry in question. Dell for example does not deliver Sony monitors bought via their online store. Sony does. They never become inventory for Dell.

Sustaining Competitive Advantage

The greatest threat here is imitation, hence barriers of imitation must be established. To successfully imitate a firm needs to identify the advantage and have an incentive to imitate it. Then it needs to be able to diagnose the advantage and acquire the resources needed.

A company trying to set-up barriers can use limit pricing to have such low prices as to not attract new entrants. Against incentives, deterrence (threat of retaliation) can be used but must be credible (see Microsoft). If your threat is aggressive price cuts you need to have excess capacity or inventories. Preemption is another option, meaning that a company takes up all existing and potential niches, helped with capacity build up in advance of growth or patents for example. Preemption depends on a small number of viable competitors and a first mover advantage in the market.

The more facets or dimension your competitive advantage has, the more difficult the diagnosis will be (casual ambiguity). This leads to uncertain imitability.

Where capabilities are based on organizational routines, acquiring these capabilities will take a lot of time. Resources are best if they are not mobile and take a lot of time to acquire. A first-mover advantage is linked to the adage “success breads success”. Here economies of learning, reputation, standard setting and scarce resources are important.

Competitive Advatange in Different Market Settings

In efficient markets, competitive advantage is absent. Here prices reflect all available information and information flows freely. Beating the market consistently is not possible.

In trading markets competitive advantage can come from:
- Imperfect availability of information
- Transaction costs
- Systematic behavioral trends and those that best diagnose them
- Overshooting … which often means that acting in the opposite direction to market swings is a potential for more profit

In production markets,the greater the heterogenity in the endowments of resources and capability of differnet firms the greater the potential for a competitive advantage.
- if there is a lot of change in your industry, the potential for new competitive advantage is great.
- The greater the choice criteria of your customers, the more likely a niche can be found
- for sustainability you need: imperfection of information, opportuinities for deterrence and preemption, difficulties of resource acquisition

Types of Competitive Advantage

Here you have cost advantages or differentiation advantages. See Table 7.2 for more information and examples.

Michael Porter has defined three generic strategies: cost leadership, differentiation and focus. In most industires, market leadership is held by a firm that has merged differentiation with low cost. Nokia might be a good example here. Also, sometimes, in the existence of scale economies, market share leaders can improve their relative cost position.

(Originally posted on the OUBS Blog)
Superior performance over time comes from a distinctive and hard to imitate competitive advantage. Opportunities emerge from a firms unique capabilities. Grant (1991, pp. 118-9) argues: While resources are the source of a firm’s capabilities, capabilities are the main source of its competitive advantage.
This resource based view moves strategy more to the level of the organisation and will help to understand ones organisation and its uniques bundles of capabilities that can or need to be grown and used/exploited. It is still unresolved whether this view complements or substitutes the market-positioning view of Porter. Both likely have more or less importance in different industries, depending on how competitive the environment is for example.
There are two methods to find resources and capabilities of a company. Ones looks at functional areas and the other uses Porter’s value cahin methodology. Then you cna find the (potential) sources of advantage, sources of improvements, linkages, costs drivers and more.
Why do organisations differ?
Different organisations cluster resources and capabilties differently and some then work more efficiently, have better access to scarce resources or a better capability to learn and build new or exisiting capabilities. Especially the last point is important because internal and external environments change. Otherwiese, sets of resources might make prisons out of existing recipies. Now please read Grant’s article on resources and capabilities.
To be remembered here is that your resources and capabilities need to fit the environment your are working in and organisations differ in their ability to secure an advantage from the resources and capabilities, which is what it is ultimately about. We now live in a world of uncertainty, complexity and conflict and exactly this also brings with it multiple opportunities.
It is also critical that the rare resources that a better performance is based on, need to remain scarce/rare for a long time. You need to try to make sure that the competitor thinks it cannot immitate what you do. The thought is what counts here. Sometimes resources need to be built up a certain way and over a long time, which is something that is hard to imitate. Heterogenity is necessary but not sufficient for a long-term sustainable advantage.
Know-How, tacit knowledge and human resources
Here the mini case on Saatchi & Saatchi is a great read. In general, the fact that a lot of knowledge is mostly embodied and internalised inside human beings means that acquireing an investment bank, financial services company or software house carries a high risk because the humans that carry a lot of the knowledge that makes the company work might leave. Accenture tries to internalise as much of the knowledge inside the company in routines and recipies as possible to be able to leverage economies of scope and to reduce the risk of loosing that knowledge. Consider team play in tennis here though. You can’t just copy a good team or take one member and put her into another team.
Resources and capabilities
By the 2nd half of the 20th century, resources have gone global and become more mobile, like technology, information, brands and financial instruments. These days, all that is needed is sufficient access to the resource. This could be developers for a european company sitting far away in India or doctors diagnosing patients hundres of miles away.

Framework for analysis of resources and capabilities by Grant (more here)
Markets and hierarchies
Oliver Williamson (1975) argued that to choose markets (outsourcing an activity to them) or the hierarchy (doing it yourself), you need to look at the total transaction costs of what you are doing. EDS is growing tremendously by taking up facilities management and often take up the staff of the company they sign a contract with under their wings too. This is central to thinking about your own capabilities, those that you need to secure your customers and those that you can more efficiently outsource. But, you need to think about what outsourcing a function might do to your company in the future as it might drain crucial knowledge and expertise.
Economies of scope are also important here, which are derived from using a resource more than once, with little or even no extra costs. You could also call this synergy. You also need to build up routines to learn and transfer capabilities long-term. The resource based view suggests that to find a competitive advantage you need to look at the processes of capability building, capability management and capability retention. These processes as such can be a competitive advantage. Some, who have been in place for a long time might even need to be broken up to enable new processes to form (see the Novotel case here).
Also important is to not outsource things that might build tacit knowledge needed for later innovative capabilities.
Innovation
An important capability is that to innovate. This gradually moved from the entrepreneurial skills to bigger R&D labs, especially where critical mass is needed. The problem here is that R&D needs to be closely linked to the factory, market and sales, as to develop products or services that the company can build. At the same time you need to watch out that your R&D lab does not become something that only researches per order but can freely experiment and find truely new products. (I suggest reading The Innovators Dilemma by …… here.) Remember that R&D is not only about innovating from within but also about understanding innovations coming from the outside. Everything arround you changes and so does your strategy and so need your capabilities.
The boundaries
You do not need to own all your resources though. Your capabilities should stay internal though. The question then becomes where an organisation should draw the boundaries. These boundaries are often changing based on mergers, divestitures and other things.
Quasi-integration is now more popular because it allows (through contract or agreement) the same control without the need for one single company. An example is cited with Marks and Spencer and its suppliers. They almost form a virtual organisation, being dependant on each others activities. This collaboration among firms common to the virtual firm concept is getting more widely used, partly due to the increasing complexity to have all resources and even capabilities in house.
You also need to build organistaion capability to learn and transfer knowledge. This includes tranfering the long-term routines that hold organisation’s forman, informal, codified and tacit knowledge.
To understand the boundaries a value chain is essential.