The four specific criteria managers can use to decide which of their firm’s capabilities have the potential to create a sustainable competitive advantage Essay Example
14CRITERIA FOR DECIDING FIRM’S CAPABILITIES FOR SUSTAINABLE COMPETITIVE ADVANTAGE
Criteria for Deciding Firm’s Capabilities for Sustainable Competitive Advantage
Criteria for Deciding Firm’s Capabilities for Sustainable Competitive Advantage
Today’s firms have to manage and operate under dynamic and complex business environment (Baker and Nelson, 2005). A complex business environment is very hard to predict due to many uncertainties. For organisations to succeed in such an environment, firm s must think strategically. This involves understanding of the changing competitive environment, exploiting opportunities and seeks improvement in every sector of business (Ma, 2003). Organisations must respond very quickly to opportunities and threats. In order to succeed and improve performance, firms must compete in a way that they outperform their competitors in the business environment. In over to be more competitive organisations should endeavour to satisfy their customers more appropriately and proficient compered to their competitors (Ma, 2003). Generally, an organisation must strive to add value in order to succeed. Adding value leads to competitive advantage. This paper will extensively highlight the four factors that managers can use to decide whether their firm have capability of sustaining competitive advantages. These factors include rarity, valuable, non-substitutability and imitability. The essay also defines resources, capabilities, core competencies, and concept of sustainable competitive advantage.
It is important to note that no advantage can remain in the long run since the competitors will eventually imitate the source of the advantage either a product or a service. In addition, technological advancement often shortens the life of competitive advantage (Baker and Nelson, 2005). Sustainable competitive advantage may result from the dynamic interconnectedness between an organisation and the external environment. Appropriate identification and development of tangible and intangible resources combined with capabilities has the potential to enable an organisation survive and be a market leader in the long run (Baker and Nelson, 2005). According to resource-based framework, competitive advantage of a business is dependent on an organisation’s internal characteristics. If an organisation retains and takes advantage of valuable, rare, inimitable as well as non-substitutable core competencies and capabilities, there is a high chance of attaining competitive advantage and thereby long-term success.
Core competencies can be termed as the enabler of competitive advantages of an organisation (Chmielewski and Paladino, 2007). Core competencies can be defined as the skills and expertise that allow an organisation to be competitive. Core competencies allow an organisation exploit new markets and satisfy the needs of the customers. Core competencies are considered hard to imitate and forms a basis of the success of any organisation. Overall, core competencies offer the best opportunity for an organisation’s sustainable growth and survival that differentiate an organisation from the competitors (Peteraf and Barney, 2003). More generally, core competencies entails competitive advantages couples with dynamic capabilities that come up over time and forms a primary element of an organisation’s overall strategy (Peteraf and Barney, 2003). For instance, one of the Intel Corporation’s core competencies is the ability to create the fastest chip globally known. The company has developed its strategy around this competency which has contributed to its success. Business organisations develop their strategies around core competency that enable them successful execute their business.
Capability on the other hand can be defined as the collection of people, process as well as technology brought together for a specific purpose. Organisations capabilities may include accountability, collaboration and capacity management (Makadok, 2001). Capabilities are the combination of resources and competences of an organisation. Capabilities should meet the needs of the customers.it they don’t even to a threshold level, a firm cannot survive. Some capabilities have the ability to produce customer value proposition and higher financial results. Reduced capabilities of an organisation therefore lead to low customer impact as well as lower efficiencies (Makadok, 2001). Threshold capabilities are inadequate to boosting sustainable competitive advantage. An organisation needs to have distinctive capabilities in order to prevent competitors from imitating or copying it (Makadok, 2001).
In addition, resources can be termed as the physical and mental assets used by organisations (Wu, 2010). They are classified to tangible and intangible resources. Tangible resources can be seen, touched and quantified and they include financial resources, organisational resources, technological resources and physical resources. On the other hand, the intangible resources are rooted in an organisation history and include human resources, innovation resources and reputational resources (Wu, 2010). Resources are considered sources of an organisation capability and are broad in scope. However, resources alone do not have the ability to yield competitive advantage. Companies seek resources in order to create value for their customers and business process.
Competitive advantage implies that a specific company is capable of satisfying the needs and wants of the customers more functional that the competing companies. Competitive advantage is achieved when real value is included to the needs of customers (Wu, 2010). The term competitive advantage was introduced by Michael Porter. A company can attain Competitive advantage when it established a value creating strategy that is better than the competitors. There are several ways in which a company can create competitive advantage. This means that in order to attain it, an organisation does not have to succeed in all business dimensions, but it must be a leader in creating value (Drnevich and Kriauciunas, 2011). Although a competitive advantage can be easily sustained, it is not always the case.
For instance, a company can enter the industry market with capabilities and resources that are capable of creative competitive advantage. However, over time, these capabilities and resources can easily be duplicated and imitated by the competing firms due to advancement of technology (Wu, 2010). Therefore, sustainability with regard to competitive advantage is not totally dependent on the time frame. A competitive advantage can be termed as sustainable when it proves to be difficult or impossible for the competitors to copy it. When a business process, a product or a service produced by a particular organisation has evolved without disrupting the competitive advantage they bring, an organisation is termed as having a sustainable competitive advantage (Wu, 2010).
Sustainability of a given competitive advantage is said to dependent on the rate of core competence obsolescence brought about by the environmental changes such as the advancement of technology (Menguc and Auh, 2006). In addition, it is a function of the availability of substitutes and imitability of capabilities and whether an organisation is organised well in capturing value. Competitive advantage can be determined by studying the external and internal business environment. By analysing the external environment, companies can establish what they should do through the study of opportunities and threats presented (Menguc and Auh, 2006). On the other hand, by analysing the internal business environment, companies can establish what they can accomplish over time. Internal environment entails tangible and intangible resources, capabilities as well as core competences.
There are a number of factors that affects the decisions about a company’s tangible and intangible resources, capabilities and competences (Hitt, Ireland and Hoskisson, 2001). One factor includes uncertainty. Uncertainty in relation to future and current features of the business environment may affect the decisions about resources and competencies. Managers face uncertainty related to changes in the economic and sociocultural trends and proprietary technologies (Hitt, Ireland and Hoskisson, 2001). In addition, complexity in terms of the interconnectedness of factors that determines the nature of a company’s environment coupled with the management perception of the environment may have an impact on the core competencies and resources allocation. Complexity may also come from the interrelationships of conditions of an organisation. Intra-organisational conflict between employees may also influence resource allocation decisions (Talaja, 2012). Inter-organisational conflict among managers who are involved in decision making may also affect managerial decisions concerning capabilities.
One of the fundamental strategic decisions that managers are confronted with is the ability to decide what resources and core competences to acquire and convert to competitive advantage (Hitt, Ireland and Hoskisson, 2001). Managers often spend a substantial amount of time analysing, evaluating and acquiring the proper resources and core competencies in order to be competitive. The competitive advantages created should be frequently upgraded and changed in order to enable an organisation acquire sustainability in relation to competitive advantage (Hitt, Ireland and Hoskisson, 2001). The criteria that managers utilize in deciding which capabilities result to competitive advantage include rarity durability, valuable and imitability of a capability.
Managers must determine the value of a strategic capability in order to establish its viability in attaining competitive advantage (Newbert, 2008). The value of capabilities is founded upon their ability to avert threats and take advantage of the opportunities that are presented in the business environment. For instance, capabilities are considered valuable if they can enable an organisation develop and implement business strategies and initiatives that have the capacity to enhance their effectiveness (Newbert, 2008). The value of the capabilities of a firm should be projected in the perspective of a business strategy and the environment in which an organisation operates. Therefore, if a company strive to attain competitive advantage, it should focus on the capabilities that create value to the customers. It is important to note that a company can have distinctive capabilities and not attain competitive advantage. This means that distinctiveness of a capability is not enough. Distinctiveness should be coupled with value creating ability of capabilities in order for competitive advantage to be attained (Newbert, 2008). This means that companies should focus on acquiring valuable capabilities and eliminating less valuable capabilities for them to have a competitive edge in the market.
On the other hand, capabilities and resources rareness establishes that competing companies cannot access a particular resource or core competence. It can also mean that a competitor has only limited access to a given resource or core competence (Newbert, 2008). Valuable capabilities that are not rare in character cannot offer competitive advantage to an organisation. In order for a business entity to develop a competitive advantage, resources as well as core competencies should be both valuable and rare (Newbert, 2008). Still, it does not mean that capabilities that are valuable but not rare are inapt to a firm. Valuable capabilities bring about the survival of a business and can contribute to its competitive advantage to a certain extent. If a business enterprise does not exploit valuable resources, it may not achieve competitive advantage. On the other hand, if a resource is not valuable, it may prevent a company in developing and implementing strategies that neutralize threats and at the same time take advantage of opportunities (Newbert, 2008). Even though a resource is not rare but valuable, it is considered strength to organisations.
Rarity may be contingent to who owns the capability and the ease of its transferability (Newbert, 2008). For instance, core competencies in some professions such as management can easily be transferred to the competitors therefore they are considered fragile basis of competitive advantage. Others are embedded into the culture and history of an organisation such that they cannot be transferred easily to the competitors. In addition, rarity may also depend on sustainability (Newbert, 2008). It is not correct to perceive all rare competences as sustainable. When an organisation develops a unique set of core competencies, competitors will strive to imitate it. As a result, companies are therefore urged to consider other options for sustainability of rare core competencies. Rare capabilities can be very difficult to change and this can have a damaging effect on companies (Newbert, 2008). Managers sometimes may push for rigid rare capabilities perceiving them as strengths and develop customer values around them.
Capabilities are considered imitable if the competing companies find it hard to imitate or copy (Dess et al., 2004). If there lacks another capability that can be utilized as a substitute of the existing capability, resources are not substitutable. Capabilities should be durable in that competitors encounter challenged when trying to imitate them. For instance, elements such as tangible resources can easily be copied by competitors (Dess et al., 2004). One reason why resources and core competencies cannot easily be imitated is its complexity. Complexity can be as a result of the internal linkages of processes and activities. The complexity of processes and activities makes it difficult for competitors to replicate.
In addition, a company can make it hard for competitors to imitate their source of competitive advantage by coming up with activities that customers depend on (Dess et al., 2004). For example, a lubricant manufacturer shifted from just selling its commodities to customers by forming an agreement with customers to take care of the applications of lubricants in the customers’ locates against the cost saving agreement. This means that as the lubricants are used efficiently, both parties benefited (Dess et al., 2004). On the same page, software companies can attain competitive advantage by designing computer programs that characteristically benefit specific customer needs. Such sources of competitive advantage can be difficult to imitate or copy.
Imitability may be in the context of core competencies being embedded within an organisation culture and history (Dess et al., 2004). Linked to cultural and historical embeddedness is the probability that such capabilities have developed over long period of time. When such capabilities are deeply embedded in the culture and history of a company, it will be very difficult for competitors to copy or replicate. Another reason that may make it hard for a resource or competence to be imitated is the difficulty in discerning because it is founded upon tacit knowledge (Dess et al., 2004). This can be termed as causal ambiguity.
Another factor of sustainable competitive advantage is substitutability. For a capability to add value to an organisation, it should not be substitutability (Taraja, 2012). Non-substitutability of a core competency can be brought about by its complexity, cultural embeddedness as well as characteristic ambiguity. This makes it difficult to copy or replicate it (Taraja, 2012). Even though it may prove to be difficult to imitate a core competency, competitors can come up with ways of substitution the source of sustainable competitive advantage. The source of competitive advantage may be a product or a service. Therefore a product or a service may be at risk of being substitutes by competitors (Taraja, 2012). Source of competitive advantage may be competence which can also be substituted over time due to the advancement of technology. For instance, companies that rely too much on the competencies of expertise may be disadvantaged since they can be substituted by technological mechanisation.
Plasco Company is a manufacturer of plastic commodities that has gained competitive edge over its competitors (Priem and Butler, 2001). In the company, managers understand the importance of strategic capabilities of the company. Plasco has outperformed its competitors through distinctive delivery, product and services. The company had essential competencies and resources that were not unique from the competitors (Priem and Butler, 2001). But they still had a competitive edge over their competitors due to other explanations. The managers had knowledge and skills to “work the system” and solve problems. Such features of the company were not a matter of proper training or business policy, but culture and activities that had been designed over a long period of time (Priem and Butler, 2001). Effective logistics, customer service and quality products are vital for the company, but the core competencies was the main reason for their success since they were embedded in their culture and were developed over the years. This has made it difficult for their competitors to imitate (Priem and Butler, 2001). Plasco Company is an example of a business entity that has attained a sustainable competitive advantage by making sure that its competencies and resources are not imitated by the competitors.
One fundamental approach for determining competitive advantage in an organisation is value-chain analysis (Montgometry and Porter, 2009). A value-chain is the route followed by products and services as value is added before getting to the customers. Companies strive to attain competitive advantage by enhancing the value to consumers as compared to the competitors. Managers are expected to increase the value of products by lowering their prices and increasing their features. The analytical tool entails the analysis of firm’s industry value as well as its competitive position (Montgometry and Porter, 2009). Another tool that is used to understand how capabilities may result to competitive advantage is benchmarking. Benchmarking involves the comparison of organisation’s capabilities with other organisations. Organisations may determine the ability of their capabilities to yield effective performance in comparison with the previous years or within an industry sector. Industry benchmarking compares the performance of an organisation with performance of other organisations found within the same industry (Montgometry and Porter, 2009). Nevertheless, benchmarking can have a number of disadvantages such as measurement distortion and surface comparisons whereby it does not give reasons for either good or bad performance.
From the four factors of sustainable competitive advantage, it can be argued that sustainable competitive advantage only exist when competing organisations find it impossible or difficult to duplicate an organisational strategy or the competitors lack the resources needed to carry out imitation (Zollo and Winter, 2002). In addition, sustainable competitive advantage exists only until the competing companies successfully copy and replicate the source of competitive edge. Also, when the four mentioned criteria are satisfied, sustainable competitive advantage last for a longer time. The four criteria of competitive advantage are based on resources-based value approach of strategic management. From this approach, when resources and core competencies are said to be valuable, rare, imitable or non-substitutable, sustainable competitive advantage is attained (Zollo and Winter, 2002). This suggest that specific resources and core competencies can assist an organisation attain sustainable competitive advantages but do not substantiate the impact of resource characteristics. The four criteria of sustainable competitive advantage suggest that if capabilities of a company do not lead to the satisfaction of customer needs, the company cannot survive. Therefore, companies should strive to develop rare, non-substitutable, imitable as well as valuable core competences and resources in order to attain a sustainable competitive advantage and remain market leaders in a given industry (Newbert, 2008).
To sum up, as a result of the changing and complex business environment, business entities are faced with the challenge of increasing performance and productivity. A competitive advantage is very important in business environment. However, it is difficult for advantages to be sustainable as the competitors constantly strive to imitate and replace them. Capabilities can be defined as the resources and core competencies that are needed in order for an organisation to survive while core competencies are the skills and expertise that make organisation competitive. Resources are divided into tangible (financial, technological etc.) and intangible (human, innovation, reputational etc.). The four core criteria for sustainable competitive advantage include rarity, valuable, imitability and non-substitutability. For a firm to attain competitive advantages, it should ensure that its resources and core competencies are valuable to customers and prove to be difficult to be imitated by the competitors. The core competencies and resources must also be rare for the competitors to access and non-substitutable with other capabilities. In order to diagnose the organisational capabilities, companies can use the value chain analysis technique in order to understand how values are created and developed. Benchmarking can also be used in diagnosing capabilities.
Baker and R.E. Nelson 2005, ‘Creating something from nothing: resource construction through entrepreneurial bricolage’, Administrative Science Quarterly, pp. 329–366.
Chmielewski, D. A. & Paladino, A. 2007, Driving a resource orientation: reviewing the role of resource and capability characteristics, Management Decision, 45(3), pp. 462-483.
Drnevich, P. L & Kriauciunas, A. P. 2011, Clarifying the conditions and limits of the contributions of ordinary and dynamic capabilities to relative firm performance, Strategic Management Journal, 32, pp. 254-279.
G.G. Dess, G.T. Lumpkin, M.L. Taylor, A.A. Thompson, and A.J. Strickland III 2004, Strategic Management, Boston, McGraw Hill, pp. 141-148.
M.A. Hitt, R.D. Ireland, and R.E. Hoskisson, 2001, Strategic Management: Competitiveness and Globalization, 4th ed., Cincinnati, OH: South-Western College Publishing.
Ma, H 2003, To win without fighting: an integrative framework, Management Decision, 41(1), 72-84. http://dx.doi.org/10.1108/00251740310452925
Makadok, R 2001, Toward a synthesis of the resource-base and dynamic capability view of rent creation, Strategic Management Journal, 22, pp. 387-401.
Mathews, J 2003, “Strategizing by firms in the presence of markets for resources”, Industrial and Corporate Change, pp. 1157-1193.
Menguc, B & Auh, S 2006, Creating a firm-level dynamic capability through capitalizing on market orientation and innovativeness, Journal of the Academy of Marketing Science, 34(1), 63-73. http://dx.doi.org/10.1177/0092070305281090
Montgomery, C. A & Porter, M 2009, Strategy: Seeking and Securing Competitive Advantage, The Harvard Business Review, Boston, M. A.
Newbert, S 2008, Value, rareness, competitive advantage, and performance: A conceptual-level empirical investigation of the resource-based view of the firm, Strategic Management Journal, 29, pp. 745-768.
Peteraf, M. A.; Barney, J 2003, Unravelling The Resource-Based Tangle, Managerial and Decision Economics, 24, pp. 309-323.
Priem, R. L.; Butler, J 2001, Is the resource-based ‘view’ a useful perspective for strategic management research?, Academy of Review, 26(1), pp. 22-40.
Talaja, A 2012, Linking resource value to sustainable competitive advantage: investigation of medium and large Croatian companies, Global Business Conference 2012 Proceedings, pp. 387-395.
Wu, L 2010, Applicability of the resource-based and dynamic capability views under environmental volatility, Journal of Business Research, 63, pp. 27-31.
Zollo, M., & Winter, S 2002, Deliberate Learning and the Evolution of Dynamic Capabilities, Organization Science, 13(3), 339-351. http://dx.doi.org/10.1287/orsc.13.3.339.2780
More Important Things