"Sources of competitive advantage rarely yield added value that can be sustained over time."
The following essay is going to attempt to assess the above proposition and try to find if it is possible to add value continually over a period of time. I will first discuss what competitive advantage is and what it means to a firm. Then I will explain the sources of competitive advantage and how the distinctive capabilities of a firm allow it to sustain added value. The discussion is based on a number of viewpoints from different authors who will be clearly indicated and acknowledged. I begin with explaining what competitive advantage is.
So, what is Competitive Advantage? In a number of industries, the average performance of the industry is usually no better than the average performance of industries' as a whole. However particular firms or groups of firms manage to do considerably better than average. In this case, the high performing firm or sub-group has something special and difficult to imitate to offer which allows it to outperform it's rivals. Porter (1985) refers to such special assets as the firm's competitive advantage. "A firm's competitive advantage are those characteristics that allow it to do well even in the face of mediocre industry wide performance and free entry into the industry as a whole." The firm has certain capabilities which allow it to be different from the other firms in the industry. It has certain distinctive capabilities which cannot be reproduced by competitors. However, it is not enough for that characteristic to be distinctive. It is also necessary for it to be sustainable over a period of time. As Oster (1994) points out, " The key success factors in an industry are those assets that allow a firm to outperform it's rivals for a sustained period of time." Competitive advantages are always relative. For example, Sainsbury's has a very slight competitive advantage over Tesco. These firms serve similar markets and they see themselves as members of the same industry and strategic group. Tesco has a competitive advantage over Argyll. In a paired comparison one firm will have a relative competitive advantage over another. The resource based theory of the firm indicates, " If all firms in a market have the same stock of resources and capabilities, no strategy for value creation is available to one firm that would not also be available to all other firms in the market." The theory is implying that a resource must be scarce in order to sustain profitability in the industry. A firms profitability is a function not only of industry conditions, but also of the amount of value it creates relative to it's competitors. The amount value the firm creates in comparison depends on it's cost and differentiation positions relative to competitors. No business can exist without creating positive value, and to achieve a competitive advantage it must add more value that it's competitors. Added value is the difference between the market value of a firm's output and the value which it's inputs would have in comparable activities undertaken by other firms. Added value can be achieved if customers or suppliers are willing to undertake relationships which they would not make available to other people. The main sources of competitive advantage are architecture, reputation and innovation. It is the ability of the firm in how it utilizes it's distinctive capabilities to add value to it's competitive advantage.
Architecture is the first primary distinctive capability of competitive advantage. It is a network of relational contracts within , or around, the firm. It is a description of relationships held by a firm internally or externally, or with a group of other firms. Architecture can add value and provides competitive advantage by encouraging the formation of organizational knowledge and the development of organizational routines and cooperative ethics. Some firms such as IBM and...