This chapter introduces the reader to the meaning of competitive advantage and posits that a ﬁrm’s strategy is deﬁned as the managers’ theory about how to gain and sustain competitive advantage. The author demonstrates how a ﬁrm creates its competitive advantage by creating more economic value than its rivals, and explains that proﬁtability depends upon value, price, and costs. The relationship among these factors is explored in the context of high-technology consumer goods-laptop computers and cars. Next, the chapter explains the SWOT [s(trengths) w(eaknesses) o(pportunities) t(hreats)] analysis. Examining the interplay of ﬁrm resources, capabilities, and competencies, the chapter emphasizes that both must be present to possess core competencies essential to gaining and sustaining competitive advantage through strategy. Next, the chapter describes the value chain by which a ﬁrm transforms inputs into outputs, adding value at each stage through the primary activities of research, development, production, marketing and sales, and customer service, which in turn rely upon essential support activities that add value indirectly. After describing the PEST Technological Innovation: Generating Economic Results Advances in the Study of Entrepreneurship, Innovation and Economic Growth, Volume 18, 201–225 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1048-4736/doi:10.1016/S1048-4736(07)00007-0
FRANK T. ROTHAERMEL
[p(olitical) e(conomic) s(ocial) t(echnological)] Model for assessing a ﬁrm’s general external environment, the chapter explains Porter’s Five Forces Model. The chapter then describes the strategic group model and illustrates that model by reference to the pharmaceutical industry. The author notes that opportunities and threats to a company differ based upon the strategic group to which that ﬁrm belongs within an industry. Finally, the chapter explores the importance of strategy in technology intensive industries and emphasizes that sustained competitive advantage can be accomplished only through continued innovation.
1. WHAT IS COMPETITIVE ADVANTAGE?
Gaining and sustaining competitive advantage is the deﬁning question of strategy. Accordingly, strategy research is motivated by attempting to answer fundamental questions like, ‘‘why do some technology start-ups succeed, while others fail?,’’ or ‘‘what determines overall ﬁrm performance?,’’ and ‘‘what can you as an entrepreneur or manager do about it?’’ The unifying element of strategy research is a focus on explaining and predicting interﬁrm-performance differentials. Thus, strategy researchers seek answers to practically relevant questions like ‘‘why is Sony, as a new entrant into the market for home video games dominating the incumbent ﬁrm Sega, who helped create the industry?,’’ or ‘‘why is Dell continuously outperforming Gateway?’’ Strategy researchers believe that the answer to these fundamental questions lies in the differences in ﬁrm strategy. A dictum of strategy, therefore, is that overall ﬁrm performance is explained by a ﬁrm’s strategy. A ﬁrm’s strategy is deﬁned as the managers’ plan about how to gain and sustain competitive advantage (Drucker, 1994). This strategic plan reﬂects the managers’ assumptions about the company’s strengths and weaknesses as well as the competitive dynamics in the external industry environment. A strategic plan is, therefore, expressed in a logical coherent framework based on an internal analysis of the company’s strength and weaknesses [S(trength) W(eaknesses)] as well as of the external (environmental) opportunities and threats [O(pportunities) T(hreats)] it faces, making up the so-called SWOT Analysis. A ﬁrm’s strategy details a set of goal-directed actions that managers intend to take to improve or maintain overall ﬁrm performance. If the managers’ assumptions align...