Article: Competitive advantage

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“According to Peteraf, "Competitive advantage is a sustained above normal returns. She defines imperfectly mobile resources as those that are specialized to the firm and notes that such resources “can be a source of competitive advantage” because “any Ricardian or monopoly rents generated by the asset will not be offset entirely by accounting for the asset’s opportunity cost”.”

Source: Peteraf1993 [1]

Competitive advantage

Contents


A firm achieves superior performance if it can create value, that is provide customers the products or services that they will pay more for than it costs the firm to provide. Value creation is an important element of a successful Strategy. Creating value and capturing the value it creates needs a sustainable competitive advantage. Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support.

Definition of Competitive advantage

There are various schools of thought regarding definition of competitive advantage. Some of the well known ones are discussed below:

  • According to Porter, “Competitive advantage is at the heart of a firm’s performance in competitive markets”. Competitive advantage means having low costs, differentiation advantage, or a successful focus Strategy. In addition, Porter argues that “competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it.”
  • According to Peteraf, "Competitive advantage is a sustained above normal returns. She defines imperfectly mobile resources as those that are specialized to the firm and notes that such resources “can be a source of competitive advantage” because “any Ricardian or monopoly rents generated by the asset will not be offset entirely by accounting for the asset’s opportunity cost”.
  • According to Barney, “a firm experiences competitive advantages when its actions in an industry or market create economic value and when few competing firms are engaging similar actions". Barney relates competitive advantage to performance of a firm.

Types of Competitive advantage

  • Advantages based on the firm's position
  • Advantages based on the firm's capabilities

Sustainable Competitive advantage

Competitive advantage is not necessarily enduring. A firm's competitive advantage may erode over time. When the sources of competitive advantage resist competition, the competitive advantage is said to be sustainable. [2]

According to Barney, sustainable competitive advantage is derived from sources that are:

  • Valuable (when they enable a firm to conceive or implement strategies that improve its efficiency or effectiveness)
  • Rare (valuable firm resources possessed by large numbers of competing firms cannot be sources of either a competitive advantage or a sustainable competitive advantage)
  • Imperfectly Imitable (because of a combination of three reasons: unique historical conditions, causally ambiguous, social complex)
  • Non-Substitutable (there must not be strategically equivalent valuable resources that are themselves either not rare or imitable).

Cornerstones of Competitive advantage

According to Peteraf, there are four cornerstones of competitive advantage (from a more resource based perspective):

  • Resource heterogeneity: implies that firms of varying capabilities are able to compete in the market place and, at least, breakeven. Firms with marginal resources can only expect to breakeven and the firms with superior resources will earn rents. Resource heterogeneity creates Ricardian or monopoly rents.
  • Ex post limits to competition: necessary to sustain the rents.
  • Ex Ante limits to competition: prevents costs from offsetting the rents.
  • Imperfect(resource) mobility: ensures that the rents are bound to the firm and shared by it.

Relevance to Software Business

For a software business to sustain and remain profitable, it has to identify its competitive advantage and capitalize on it. In the highly competitive software industry, some of the sources of competitive advantage could be the Technical IT skills, capital requirements, proprietary technology used and the managerial IT skills.

Links

Related readings

  • PORTER, M.E., 1998. Competitive advantage. Free Press New York.
  • PORTER, M.E., 1998. Competitive Advantage: Creating and Sustaining Superior Performance. Free Press.
  • GRANT, R.M., 1999. The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation. Knowledge and Strategy.
  • MCGRATH, R.G., TSAI, M.H., VENKATARAMAN, S. and MACMILLAN, I., 1996. Innovation, competitive advantage and rent: a model and test. Management Science, 42(3), pp. 389-403

References

  1. ↑ PETERAF, M.A., 1993. The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal, 14(3), pp. 179-191.
  2. ↑ Pankaj Ghemawat, Sustainable advantage, Harvard Business Review, 1986,pp. 53-58.
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