The ability of some firms to sustain longer term competitive advantage relates to their capabilities according to the resource based theory of the firm. Summarise this approach to explain why some firms perform better than others in an industry.
Sustainable Competitive Advantage
Within all economies there have always been firms that are destined for success and firms that are doomed to failure... or have there? Is this an inevitable outcome predestined by exterior market forces or are there generalizations we can make about the fundamental nature of business performance that will help allow managers and entrepreneurs to shape their firms to make economic profits even into the long run? It is obvious that some firms sustain longer term competitive advantage than others and economists have different theories that purport their opinions on this subject. As is suggested by the well known Harvard economist Michael Porter, the objective of a firm is to search for, exploit, and protect opportunities to add value. Its ability to do this is dependent on its ability to keep its costs as low as possible and its ability to limit actual and potential competition. Porter believes that the fundamental factors of success are what he calls the industry attractiveness and the firm’s ability to manage its cost drivers and discusses these ideas in his successful texts, Competitive strategy(1980) and Competitive advantage(1985). These ideas however began to come under fire in the 1990’s in a Harvard business review article with the idea of competitive advantage being held with the use of core competencies “an area of specialised expertise that is the result of harmonizing complex streams of technology and work activity” (Prahalad and Hamel, 1990) and with the emergence of what became known as the Capabilities approach to firm performance or Resource Based Theory. Porter’s explanation of firm performance was questioned and economists have tried to delve deeper and look at more specific sources of individual firm success as compared to Porters generalised statements of conventional economic wisdom. It is in these more recent years that economists have attempted to pin down more specifically what gives a firm its competitive edge over its rivals. They believe that understanding these things, while they will not lead to a sure-fire list to succeed will allow for a more focused management approach. The concept held in this new theory is that the fundamental source of competitive advantage is to be found within the businesses core competencies or capabilities. “A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers” (Mascarenhas et al, 1998) and the essence of success is choosing the right capabilities to build, managing them carefully and exploiting them fully. The key aspect that must be realised when discussing these capabilities is that they cannot be purchased overnight, they do not come pre-made and will not fit equally in all firms. These capabilities must be constructed over long periods of time. It is this difficulty of acquisition that makes them so crucial, for due to the way they develop they are difficult to identify let alone duplicate, by a competitor. An important milestone in the development of this theory was “Foundations of Corporate Success” (John Kay, 1993), in which Kay explores and classifies ‘distinctive capabilities’. Kay espouses the idea of three distinctive capabilities: architecture, innovation and reputation, and uses them to determine the long run value of a firm’s capabilities.
• Architecture relates to the contractual nature of the firm and its value lays in an organizations ability to create and store organizational knowledge. It involves promoting effective co-operation between the members of the firm, suppliers and customers so that they can respond dynamically and...
Bibliography: - Mctaggart, Findlay and Parkin(2007) Microeconomics 5th edition, Pearson Education, NSW
- R Perman and J Scouller (1999) Business Economics, Oxford university press, New York
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