In the last two decades, one of the most fundamental questions emerging in strategic management is how firms achieve and sustain competitive advantage. In a simplified world, understanding how firms achieve and maintain superior or abnormal returns means comprehending how firms position themselves in a certain market, what they produce and how they use resources at their disposal to do so. In this sense we may distinguish between the positional perspective, developed by Michael Porter, according to which achieving competitive advantage is the result of exploitation of imperfections in the market, the resource based perspective, which states that competitive advantage lies in the ownership of valuable resources, and the dynamic capabilities view, which follows the resource based view but also adds the dimension of time in the equation. In this essay, I will compare and contrast these three views after having described them, and will end by illustrating how they can all be brought together.
According to Michael Porter, operational efficiency (OE) as measured for example by financial management tools is necessary but not sufficient for firms to sustain viable superior returns. Firms that compete on OE can quickly imitate new technologies and management techniques of rivals, and feasibly reorient themselves when competition shifts the productivity frontier outwards. As Porter notes: "Although such competition produces absolute improvement in OE, it leads to relative improvement for no one." (Porter 1996, HBR, p.63) The dominant idea emerging from Porter's competitive forces approach developed in the 1980's is that superior returns are achieved when a company positions itself within its environment in way that creates a quasi-monopoly. By "environment" we refer to the industry in which the firm chooses to compete and by "position" we mean how the firm decides to compete in this industry. This framework provides a systematic way of thinking about how competitive forces determine the profitability of different industry segments. In the pursuit of a viable competitive advantage, a firm is confronted with a two dimensional consideration: it must identify an attractive industry and additionally it has to make a trade-off between alternative generic strategies in order to assume a clear position in the market. (Porter, 1980)
Industry attractiveness is determined by Porter's five industry-level competitive forces, namely the power of suppliers and buyers, the rivalry amongst existing firms, the entrance of new competitors and the development of substitute products. The way value is appropriated among suppliers, existing rivals and buyers is determined by their bargaining power. Other constraints on profitability include the threat posed by new entrants, which partly depends on the expected retaliation by existing firms, and the threat of substitute products. When many firms compete in the industry core, there is little product differentiation and no dominant players, excess capacity and low growth increase rivalry and dissipate profitability to others. To defend itself, a firm can raise appropriate barriers to entry or create unique competencies, which often represent different sides of the same coin. (Porter, 1980) Once an attractive industry is identified, the firm must create a competitive advantage by assuming a unique and valuable position within it. This is sometimes called the "loose brick" strategy, because it refers to a section of the market that is somewhat neglected. Strategic positions mainly emerge from two distinct sources, which are not mutually exclusive and often overlap. Positioning may be variety-based, resting on the choice of products or services that the company will choose to offer rather than the customer segment, or it may be needs-based, resting on the choice to serve a particular segment of customers with differing needs. (access-based is also a third source of positioning that segments customers...
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