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The Four Criteria Managers Can Use To Decide Which of Their Firms Capabilities Have the Potential to Create a Sustainable Competitive Advantage Essay Example

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The Four Criteria Managers Can Use To Decide Which of Their Firm’s Capabilities Have the Potential to Create a Sustainable Competitive Advantage

The Four Criteria Managers Can Use To Decide Which of Their Firm’s Capabilities Have the Potential to Create a Sustainable Competitive Advantage

Introduction

The business environment is fast becoming more competitive. The increased competition is triggered by globalization and technological advancements. Unlike in the past where domestic companies used to compete among themselves, globalization and technological advancements has resulted in a situation where domestic companies now not only compete among themselves, but also with foreign companies (Barney and Hesterly 2005, p. 5). Take for example the Australian airline industry that has become more competitive than ever before because domestic airlines, such as Qantas now faces stiff competition from foreign airline firms, such as British Airways and Virgin Atlantic among others. Therefore, for firms to succeed in the present day business environment, managers must ensure that companies pursue strategies that enables them maintain a sustainable competitive advantage. To achieve this, a firm must utilize its resources, capabilities and core competencies (Sellani 2007, p. 7). This paper begins by discussing the concept of sustainable advantage. The second part describes the importance of the use of resources, capabilities and core competence for competitiveness. Finally, the essay will discuss the four criteria that managers can use in choosing which of their capabilities create sustainable advantage using Qantas as case study.

The Concept of Sustainable Competitive Advantage

The concept of sustainable competitive advantage has become an area of increased focus by academicians and business analysts. As competition gets stiffer in all business industries, it is believed that only businesses that are capable of maintaining sustainable competitive advantage are capable of surviving. Sustainable competitive advantage happens when a firm develops attributes that enables it to outperform its rivals in the industry in the long term (Barney and Hesterly 2005, p. 15). This implies that, to create a sustainable competitive advantage, an organization must ensure that it pursues strategies that are unique, imitable or surpassable by competitors in the industry. Some of the attributes that a company can use to gain a sustainable competitive advantage in an industry include among other things highly skilled and trained personnel.

Sustainable competitive advantage is critical to the success of a company because it ensures superior performance as it ensures the provision of quality products and services to customers (Sellani 2007, p. 17). It is also an advantage in the sense that it gives company strength for survival. As competition becomes stiffer, only companies that are capable of achieving sustainable competitive advantage would survive because it enables a firm to use its unique attributes to outperform rivals. This has been proved over the years by companies that have failed and wound up because of their inability to compete effectively with rivals in the industry (Barney and Clifford 2013, p. 44). Jaguar, which was once a global brand, is a good example of a firm that wound up and had to be taken over by Land Rover because it lacked sustainable competitive advantage. Additionally, sustainable competitive advantage is advantageous to a company as ensures market leadership.

Resources, Capabilities and Core Competencies

A firm’s sustainable competitive advantage arises from a company’s resources, capabilities and core competencies. Resources are the first major sources of sustainable competitive advantage. Resources are a source of sustainable competitive advantage because availability of the right resources enables a firm provides value to customers as resources ensures the provision of quality products and services to customers (Helfat, and Peteraf 2003, p. 999). At the same times, resources help a firm achieve sustainable competitive advantage as they enable a company gain a competitive edge over rivals as it enables a firm be able to effectively exploit core competencies in the product markets. Resources of a company can be tangible or intangible. Tangible resources that a firm can use to gain a sustainable competitive advantage include buildings, land, cash and equipment among others. Intangible resources include among other things market share, brand name, technological knowhow, patents, and trademark (Stix 2012, p. 11). Therefore, for a firm to acquire a sustainable competitive advantage, it is very important for a manager to ensure that resources are taken into consider when formulating and implementing strategy. In this respect, strong resources must be used to augment a successful strategy. Additionally, when developing a strategy, managers must determine the kind of resources that are necessary for the strategy being developed by the firm and how best to acquire resources overtime (Barney and Clark 2007, p. 12).

Qantas is a good example that seeks to build a sustainable competitive advantage by focusing on its resource base. As part of its resource strategy, Qantas has bought many fleets of airplanes, and enhanced the quality of its interior facilities and infrastructures. Presently, Qantas owns more than twenty A380 planes and more than one hundred Boeing airplanes. The airline also has about 33,000 employees that act as a critical resource for the company (Eames 2015, p. 15). Further, the firm has been making huge profits that are also important tangle resources for the firm. Regarding intangible resources, Qantas has built a strong brand image in Australia and other parts of the where it operates. The company also builds its image through corporate social responsibility that involves giving back to the society. Additionally, the company has invested heavily in R&D that has enabled the firm acquire good technological know-how that its exploits as a source of its competitive advantage.

A company’s sustainable competitive advantage also evolves from capabilities. Capabilities denote the actions that a firm takes in exploiting the core competencies to gain a competitive advantage in an industry. Examples of capabilities that a company might have include learning proficiencies, quick delivery of products and services, effective product development process and effective management (Helfat, and Peteraf 2003, p. 1001). Capabilities might also step from having peculiar skills and knowledge or functional expertise that enables a firm to perform its activities better than rivals in an industry.

Barney (1991, p. 109), noted that, for a company to succeed and compete effectively, it must recognize its capabilities and utilize them effectively and efficiently in exploitive the competencies to ensure competitiveness and success. Qantas is an example of an Australian company that utilizes its capabilities in exploiting its core competencies to ensure that the airline compete effectively in the Australian aviation that is highly competitive (Eames 2015, p. 26). Capabilities of Qantas include strong brand image, high innovation, high safety standards and ability to fly in many destinations across the globe.

Other than resources and capabilities, a company’s sustainable competitive advantage also evolves from core competencies. A firm’s core competencies denote the superior capabilities and resources that a company utilizes to gain a competitive edge over competitors. In other words, core competencies are the competitive advantages that a firm’s strategy is based upon. Barney and Clark (2007, p. 18) observed that in all the industries that companies compete mainly on the basis of their core competencies. As such, it has been seen that most companies build their strategies around their core competencies to gain a competitive advantage over rivals in the industry. For instance, Intel is one of the most successful technology companies in the world today. However, the success of Intel is attributed mainly to its ability to exploit its core competency which entails its being able to manufacture the fastest child globally. In this respect, Intel has ensured that its strategy is build around this core competency that differentiate it from rivals in the industry (Warner 2010, p. 41). Just recently, Intel started emphasizing on efficiency in the design and manufacture of chips because the technology firm noticed that doing so is important as it would become a vital strategic factor in the future as the technology industry matures. Multination companies also develop their businesses around core competencies as this gives business the opportunity to execute strategies effectively and efficiently in all areas of business. A good example of a company that illustrates this is Bombardier that has created its strategy around relationship building capabilities (Barney and Clark 2007, p. 22). Developing a strategy around this core competency has enabled Bombardier be able to market itself to customers, integrate acquisitions skillfully, receive financial support from the government, as well as have easy access to technology development.

The Four Criteria of Sustainable Strategic Capabilities

In a competitive business environment, just having a competitive edge over rivals is not sufficient. As such, firms must strive to ensure that their competitive advantage is sustainable. To achieve a sustainable competitive advantage in an industry, a company not only have to be in control of its resources (tangible and intangible), but must also be rare and imitable. In this respect, Jay Barney (1991, p. 99) came up with four criteria that managers can use in deciding to which of their company’s capabilities have the potential of creating a sustainable competitive advantage. According to Barney, a company’s capabilities must satisfy the following criteria before they can be taken as sources of sustainable competitive advantage: valuable, rare, costly-to-imitate and non-substitutable.

Valuable is a capability that maintains that the resources owned by a firm must be of value for them to enable a company achieve a sustainable competitive advantage. This is because not all the resources that a company owns provide a company with a competitive advantage. In this regard, Grant (1991, p. 116), just having resources that competitors do not own, but of no value is just meaningless. Therefore, to gain a competitive advantage, the resources owned by a company must not only be unique but also rare as this enables a firm to gain a competitive edge over rivals in the industry as they find it hard to acquire such resources. Other features of a valuable resource include being able to give value to customers, provide competitive advantage and at a cost that allows a firm be able to achieve acceptable rates of return. Additionally, the resources must be able to help a company deal with threats while maximizing the exploitation of the opportunities available in a market.

The second criterion is that the capabilities must be rare. To achieve a sustainable competitive advantage, the resources and capabilities of a company must be unique and rare. Rarity in this case means that nobody or just a few competitors might have the capabilities (Barney 1991, p. 101). However, in the event that the capabilities are owned by many firms in an industry, these result in a situation, where similar value-creating strategies are pursued. In the end, none of the companies would be able to realize sustainable competitive advantage. In this respect, a sustainable competitive advantage is only achieved by companies that take advantage of their capabilities that are distinct from those of rival firms in an industry (Teece, Pisano, and Shuen 1997, p. 510). An example of rarity capability is where a company might have patented products or supremely innovative and skillful people or a powerful brand. The uniqueness of capability ensures sustainable competitive advantage because it is only a single firm that possess those capabilities or just a few firms.

The third criteria that managers must use when deciding whether or not a company’s capabilities can create a sustainable competitive advantage is by looking at how easy or difficult it is to imitate the capabilities or resources. According to Barney (1999, p. 106), for a company to achieve sustainable competitive advantage, its capabilities must be difficult to imitate. If the capabilities are easy to imitate, then the resources and capabilities cannot help a company achieve a competitive advantage as it can be copied by other firms. In the end, many firms might end up having it for use for strategic planning.

There are various attributes that capabilities require for them to be inimitable. Firstly, for the capabilities of a firm to inimitable, then both the internal and external linkages need to be complex enough. Complexity is important because it make the capabilities difficult for the competitors to copy or imitate (Teece, Pisano, and Shuen 1997, p. 511). At the sometime, when the internal linkages are complex, then it becomes costly for the rivals in the industry to imitate. Secondly, capabilities become costly and difficult to imitate when there is casual ambiguity. In this respect, there must be both characteristic and linkage ambiguity. As such, a manager must look at the characteristic ambiguity when deciding if the capabilities of a company can result in sustainable competitive advantage.

The last criteria that managers must look up to when deciding is the capabilities of a company are capable of enabling a company achieve sustainable competitive advantage is the non-substitutability of capabilities. Studies have shown that no company can achieve a sustainable competitive advantage using capabilities that have threat of competition. Whenever the capabilities of a firm are easily substitutable, this implies that competitors can easily adopt substitute to mount a strong competition with a firm (Grant 1991, p. 119). For instance, a company might have high quality products and services to customers. However, the high quality of the services and products is not enough to give a company a competitive advantage if the products or services have close substitutes that customers can turn to easily (Henry 2011, p. 85). For instance, former giant companies that provided postal services collapsed or had to change their strategy following the technological advancements that brought about email services, which are a close substitute for postal services. British Telecom is a good example of a firm that depended on fast and efficient delivery of postal services. However, because of the emergence of the internet, BT could no longer depend on efficient and faster delivery of mail services as its core competence. Instead, to remain relevant and competitive in the industry, BT had to diversify its product portfolio by venturing into internet service, such as sports. Non-substitutability is another area that managers must focus on when deciding whether or not the capabilities can enable a firm achieve a sustainable competitive advantage (Barney and Clifford 2013, p. 67). For instance, if the skills that a company has can easily be substituted by IT solutions of expert systems, then this implies that the skills cannot help a company achieve a sustainable competitive advantage. Therefore, when deciding if the capabilities of a firm have the potential of creating a sustainable competitive advantage, then a manager must look at the non-substitutability of capabilities. If the capabilities are non-substitutable, this implies that the capabilities are capable of creating a sustainable competitive advantage; otherwise the capabilities cannot create the sustainable competitive advantage that a company might desire to remain relevant and to register superior performance. These four criteria can be illustrated using Qantas as highlighted hereunder.

Case: Qantas

Valuable: Qantas has a number of capabilities and resources that are valuable to it, thus has the potential of giving it a sustainable competitive advantage in the airline industry. The most valuable resources that Qantas has at its disposal that are capable of giving it a sustainable competitive advantage include experienced and skilled employees, strong brand, diversified business portfolio and top-notch management (Eames 2015, p. 32). These resources add great value to Qantas reputation, services and products.

Rare: Qantas has a number of capabilities and resources that are unique to it. These include luxury cabins, multi-tier domestic lounge and state-of-the-art international lounges. These resources can only be found in Qantas in the entire airline industry. Additionally, there are also complementary brands, which come in the form of Jestar and Qantas that are unique and rare (Eames 2015, p. 41). Further, Qantas being the oldest airline in Australia makes the experience not just unique, but also rare. Moreover, Qantas has introduce many rare products and services, including ipads for entertainment. The rarity of these resources and capabilities has the potential of giving Qantas a sustainable competitive advantage over rivals in the industry.

Inimitable: Qantas has various capabilities that are either inimitable or costly to imitate by rivals, such as Ryanair or British Airways. As much as the lounges and the fleets that Qantas operate can easily be imitated by rivals, such as Ryanair, complementary airline and the fact that Qantas has diversified its business portfolio is not just difficult to imitate, but is also costly to rivals. Similarly, Qantas has top-notch management cannot be imitated by rival airlines to a great extent (Eames 2015, p. 45). Additionally, the fact that Qantas has been in business for close to a century is something that is inimitable.

Non-substitutability: Qantas has quite a number of resources and capabilities that are unique to it and are non-substitutable. They include diversified business portfolio, many years of experience, technology innovation, and complementary airline strategy.

Conclusion

Competition is one of the major threats that companies face today. In today’s world, no company enjoys absolute monopoly. Instead, all companies, small and large are facing the threat of competition from domestic or international firms. Therefore, to remain relevant and compete effectively in an industry, firms have to adopt effective strategies that are capable of giving a competitive advantage over rivals. This includes providing quality products and services that meet the needs of customers in the market. Nevertheless, as competition becomes stiffer in industries, firms have become more concerned about sustainable competitive advantage. Sustainable competitive advantage occurs when a firm develops attributes that enables it to outperform its rivals in the industry in the long term. This is achievable through effective and efficient exploitation of resources (tangible and intangibles), capabilities and core competencies. However, to understand whether or not a company’s capabilities are capable of making a company achieves a sustainable competitive advantage, managers can use four critical criteria, including looking at whether or not the capabilities are valuable, rare, imitable, or non-substitutable. This has been demonstrated using Qantas that has resources and capabilities that meet the criteria for deciding if capabilities have the potential of helping a company achieve a sustainable competitive advantage. In case the capabilities meet all the four criteria, then the manager can conclude that the capabilities are indeed capable of making a company achieve a sustainable competitive advantage.

References

Barney, J. B., & Hesterly, W. S 2005, Strategic management and competitive advantage: concepts. Pearson/Prentice Hall, London.

Barney, J 1991, “Firm resources and sustained competitive advantage.” Journal of Management, vol. 17, no. 1, pp. 99-120.

Barney, J. B., Clark, D. N 2007, Resource-Based Theory: Creating and Sustaining Competitive Advantage. Oxford University Press, London.

Barney, J., & Clifford, T. G 2013, What I didn’t learn in business school: how strategy works in the real world. Harvard Business Press, New York.

Eames, J 2015, The flying kangaroo: great untold stories of Qantas…the heroic, the hilarious and the sometimes just plain strange. Allen & Unwin, Sidney.

Grant, R.M. 1991, ‘The resource based theory of competitive advantage: implications for strategy formulation’, California Management Review, vol. 33 (Spring), pp. 114-135

Helfat, C.E. and Peteraf, M.A. 2003, ‘The dynamic resource-based view: Capability lifecycles’, Strategic Management Journal, vol. 24, pp. 997-1010.

Henry, A.E. 2011, The internal environment: a resource-based view of strategy, viewed 21 March 2016 http://fba.aiub.edu/Files/Uploads/MGT110043.pdf

Sellani, S 2007, What’s your BQ?: Learn how 35 companies add customers, subtract competitors, and multiply profits with brand quotient. Academic Learning Company LLC, Sidney.

Stix, M 2012, How control fosters learning: the association between control mechanisms and firm capabilities. GRIN Verlag, Berlin.

Teece, D.J., Pisano, G. and Shuen, A. 1997, ‘Dynamic capabilities and strategic management’, Strategic Management Journal, vol. 18, no. 7 (Jun, 1992), pp. 509-533.

Warner, A. G 2010, Strategic analysis and choice: a structured approach. Business Expert Press, London.