Sustainable competitive advantage
|Sustainable competitive advantage|
Sustainable competitive advantage is one of the basic goal of strategic management. Achieving long term advantage over competitors on the market is crucial for growth and development of the company. Guarantees stable profits and provides resources needed for R&D work and entering new markets. Main results of sustainable competitive advantage are:
- higher profit margin
- higher market share
- higher barriers to entry on the market
- lower production costs due to effects of scale
Sustainable competitive advantage and entrepreneurship theory
Studies have been conducted to determine a process for creating sustainable competitive advantage. Freiling argues that the entrepreneurship theory is necessary to the establishment of a sustainable competitive advantage. The entrepreneurship theory defines key activities: “(1) to go (mentally) beyond the conventional ways on how do to business and create new ones, (2) to constantly look out for ways to improve one’s own business, (3) to anticipate and recognize up-and-coming developments in the business environment, (4) to identify the consequences of these developments as early and precisely as possible, (5) to take emerging business opportunities comprehensively and earlier than relevant competitors, and (6) shape the business and the business environment according to the company’s vision instead of adapting to the ‘given’ circumstances. There are four key activities that accomplish these objectives: innovation, coordination, arbitrage, and risk management.
- Innovation or system renewal, which comprise product, process, organization, and market-related innovations, to ensure that a company is capable of sensing and sizing new opportunities
- Coordination or management of transactions is a type of internal system exploitation that ensures a company's processes are managed to create a fit between key internal functions (operational effectiveness)
- Arbitrage is a function that promotes an external system exploitation to allow a company to identify new business opportunities
- Risk management is a system protection function that promotes the protection of company's assets and resources from negative consequences of risk taking activities.
Dynamic capabilities and sustainable competitive advantage
Sustainable competitive advantage requires a company to develop unique and difficult to duplicate dynamic capabilities. Teece identifies three dynamic capabilities or managerial competencies that allow a company to achieve competitive advantage and then continuously evolve to maintain it. These three competencies are: (1) sensing opportunities and threats, (2) seizing opportunities, and (3) managing threats and reconfiguration.
- Sensing opportunities and threats capability relies on differential access to information or creation of new information and knowledge. This capability dependents on management's abilities to recognize disequilibrium in markets and to take advantage of them, or on management's ability to upset the equilibrium by introducing innovation. This capability tests management's skill to interpret new events and developments, assess competitors reactions, and decide which ones to pursue.
- Sizing opportunities requires management to establish new products, processes, and services. This capability deals with a company's ability to maintain adequate technologies and assets to ensure its readiness to invest heavily when the right opportunity comes along. This capability requires a company to establish a business model that defines new development strategies and investment priorities.
- Managing threats and reconfiguration is a dynamic capability that allows management to successfully reconfigure and reorganize as the company grows and as markets and technologies change. This capability requires management to be able to recognize that existing processes may be creating obstacles to innovation and therefore need to be changed, or that certain businesses may need to be abandoned to give way to new and better opportunities.
Examples of Sustainable competitive advantage
- Brand Reputation and Loyalty: Developing brand recognition and loyalty is one of the best ways to create a sustainable competitive advantage. Building trust and loyalty with customers is essential for companies to remain successful in the long run. Companies can achieve this by offering quality products and services, as well as providing excellent customer service.
- Innovation: Companies that are constantly innovating and staying ahead of their competitors have an advantage on the market. Companies should focus on R&D to keep their products and services up to date and competitive.
- Cost Advantage: Companies can create a sustainable competitive advantage by reducing costs and increasing efficiency. This could include investing in automation and technology to reduce labor costs, or entering into strategic partnerships and alliances with suppliers to reduce costs.
- Quality of Products and Services: Providing high quality products and services is the most important factor to achieving a sustainable competitive advantage. Companies should focus on delivering exceptional products and services that exceed customer expectations.
- Network Effect: Companies that have products and services that benefit from a network effect have a sustainable competitive advantage. This includes companies such as Uber and Airbnb, who benefit from having a large user base, as more people join the platform, the more valuable it becomes for existing users.
- Customer Service and Support: Providing excellent customer service and support is essential for any company that wants to have a competitive advantage. Companies should focus on providing fast and efficient customer service, and resolving problems quickly and effectively.
- Intellectual Property: Companies that have patented technology, products, or processes have a competitive advantage over their competitors. This can include trademarks, copyrights, patents, and trade secrets.
Limitations of Sustainable competitive advantage
Sustainable competitive advantage is an important goal of strategic management, as it enables companies to gain an edge over their competitors on the market and generate stable profits. However, it is not without its limitations. These can be divided into three main categories: limitations related to resources, limitations related to strategy, and limitations related to external factors.
- Resource limitations - Achieving a sustainable competitive advantage requires a considerable amount of resources such as capital, skilled labor, and technology. These resources may be difficult to procure or retain, making it difficult to maintain a competitive advantage.
- Strategy limitations - Many strategies that can provide a competitive advantage are limited in scope. For example, a company that relies heavily on cost leadership may find itself unable to adapt to changes in the market or to respond to new competitive threats.
- External factors limitations - External factors such as technological change, competition, and regulations can also limit a company’s ability to maintain a competitive advantage. Companies must continually monitor these external factors and adjust their strategies accordingly.
- Strategic Focus: Companies should focus on a specific area of operations, such as a particular product or service, and develop a plan to build a competitive advantage in that area.
- Cost Leadership: Companies should strive to reduce costs, while maintaining quality, in order to provide lower prices than competitors.
- Differentiation: Companies should strive to create a unique product or service offering to differentiate themselves from competitors.
- Innovation: Companies should strive to develop new products and services, as well as new ways of doing business, to gain a competitive advantage.
- Branding: Companies should focus on creating an attractive brand identity and leveraging it to gain a competitive advantage.
Companies that can achieve and maintain a sustainable competitive advantage over their rivals can enjoy long-term success in the marketplace. Strategies such as strategic focus, cost leadership, differentiation, innovation and branding can be used to create a competitive edge. By continually assessing the competitive landscape, companies can ensure they are making the most of their competitive advantages.
- Hall, R. (1993). A framework linking intangible resources and capabiliites to sustainable competitive advantage, Strategic management journal, nr 14(8), s.607-618.
- Oliver, C. (1997). Sustainable competitive advantage: Combining institutional and resource-based views, Strategic management journal, s.697-713.
- Freiling, J. (2008). Management: (What) Can We Learn From Entrepreneurship Theory?, International Journal of Entrepreneurship Education 6. Introduction, Entrepreneurship Theory and SME Management, A Multi-functional Entrepreneurship Approach of SME Management, s. 2, 7, 13-14.
- Teece, D. J. (2007). Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance, Strategic Management Journal, 28: 1319-1350. Introduction, Sensing (and Shaping) Opportunities and Threats, Seizing Opportunities, Managing Threats and Reconfiguration, s.1319, 1322, 1326, 1334-1335.
Author: Urszula Szydłowska