The creation and importance of Competitive Advantage for Businesses

This article is about one of the greatest elements which help businesses meet their goals. It includes an overview of the Competitive Advantage before defined the key theories for gaining it. The key theories are coming from the Market-Based View (MBV) (the external market orientation), the Resource-Based View (RBV) (the internal environment) and the Knowledge-Based View (KBV) (the knowledge of the organisational environment). These theories are the sources to reach a sustained competitive advantage within the industry the company is in. You can understand some basics and the great importance of the Competitive Advantage to businesses by Unique competitive advantage in a nutshell (linkedin.com) (a great course for those who want some basic knowledge about). But this article is identified as a study to help everyone understand in-depth the influence that the sustained Competitive Advantage has in every industry with all the factors included. As a result, it will also include tools that help businesses like the PESTEL and SWOT analyses.

There are several definitions for the Competitive Advantage from key scholars and can be identified below. It can be created by both Internal and External factors and can give the company plenty of ways to deliver profitability. First of all, Porter (1985) pointed out that is the attribute that allows an organisation to perform at a higher level than its competitors in the same industry. Moreover, Peteraf and Barney (2003) defined it as the degree to which a firm creates more economic value, rareness, and imitability than the competitors. Additionally, Makadok (2010) defined it as creating more value than any other direct, indirect, or potential competitor. Furthermore, Costa, Cool, and Dierickx (2012) analysed the impact of unique resources when it creates more economic value, where it means the benefits from the consumption of the product and the cost of production. Last but not least, Hesterly and Barney (2015) included a performance in their definition as the measurement of profits and loss a company has for leading to greater profit margins. Its importance is that it distinguishes a company from its competitors because it contributes to higher prices, more customers, and brand loyalty. So, establishing such an advantage is one of the supreme goals of any company. Nowadays, it is essential to business success and survival in the industry and depends on the business model that it has developed to relate itself to its business environment. It can be achieved only if a business model creates superior value for buyers.

A. Market Based View (MBV)        

The Market-Based view of strategy argues that industry factors and external market orientation are the primary determinants of firm performance. Bain’s (1958) Structure-Conduct-Performance (SCP) framework and Porter’s (1980) Five Forces model are two of the best-known theories in this category.

According to Bain (1958), the main predictions of the structure-conduct-performance paradigm are: (1) that concentration will facilitate collusion, whether tacit or explicit and (2) that as the barriers to entry rise, the optimal price-cost margin of the leading firm or firms likewise will increase. Structure refers to industry structure, measured by factors as the number of competitors in an industry, the heterogeneity of products and the entry and exit costs. Besides, Conduct is all the actions firms take in industry, including price taking, product differentiation and exploitation of market power. Lastly, Performance includes firms individually and the economy as a whole. Thus, the usage of the model is a way to describe the attributes of an industry that make it less than perfectly competitive and thus help firms find ways to obtain sustained competitive advantages. This paradigm is the base for Michael Porter’s Five Forces as he used it to make his theory.

The Five Forces Framework is a model that indicates the Structural Analysis of Industries, a domestic or an international one. It is the main theory for competitive advantage. For companies, competitiveness means the ability to compete in world markets with a global strategy. The Five Forces are the threat of new entrants, the supplier bargaining power, the rivalry, the threat of substitutes and the customer bargaining power. The results after using this theory are different as the profitability varies from industry to industry. This is because the pressures from the forces are massive and can rapidly transform the industry to change and?influence the prices, costs, and required investment of a firm which affects the industry’s profit potential and capital flow. According to the above, all the organisations are facing several threats from their competitors. These are the potential entrants in the industry, the suppliers, the buyers, and the substitutes. In addition, an organisation also has a threat with the existing incumbents in the industry or, as called the competitive rivals, organisations aiming at the same customer groups with similar products or services. Lastly, the relative simplicity of the framework and the wide range of issues it addressed made it instantly appealing to government institutions worldwide.?

A PESTEL Analysis is a strategic tool used to identify the macro external forces (demographic, economic, natural/physical, technological, political and legal, social and cultural) facing an organisation. The letters stand for Political, Economic, Social, Technological, Environmental and Legal.

Political Factors are: about how and to what degree a government intervenes in the economy or a specific industry. This can include government policy, political stability or instability in overseas markets, foreign trade policy, tax policy, labour law, environmental law, trade restrictions, etc.

Economic Factors include the economic environment and how a company can be profitable within the industry. Factors include economic growth, interest rates, exchange rates, inflation, disposable income of consumers and businesses, etc. These factors can be further broken down into macro-economical and micro-economical factors. Macro-economical?factors deal with the management of demand in any given economy. Micro-economical factors are all about the way people spend their incomes.

Social Factors include the impact the products and services your organisations bring to the market on society must be considered. Any elements of the production process or products/services harmful to society should be eliminated to show that your organisation takes social responsibility.

Technological Factors are all the skills and knowledge applied to the production, and the technology and materials needed to produce products and services can also impact the smooth running of the business. Therefore, it must be considered and affect management in three ways: 1. new ways of producing goods and services, 2. new ways of distributing goods and services, 3. new ways of communicating with target markets.

Environmental Factors have become important due to the increasing scarcity of raw materials, pollution targets, doing business as an ethical and sustainable company, carbon footprint targets set by governments.

Legal Factors are health and safety, equal opportunities, advertising standards, consumer rights and laws, product labelling and product safety. Companies need to know what is and what is not legal to trade successfully.?

A PESTEL analysis helps an organisation identify the external forces that could impact their market and analyse how they could directly impact their business. When undertaking such an analysis, the factors affecting the organisation mustn't be identified and assessed. The outcomes of a PESTEL analysis can then be used to populate the opportunities and threats in a?SWOT analysis and begin a plan of action to reduce risks.

SWOT Analysis stands for Strengths, Weaknesses, Opportunities, and Threats. It is a technique for strategic business analysis and is useful to make the most of what you have (resources) to your organisation's best advantage (competitive advantage). A good application of the SWOT Analysis can reduce the chances of failure by understanding what the company lacks and eliminating hazards that would otherwise catch them. Furthermore, It is used as a framework for organizing and using data and information gained from situation analysis of the internal and the external environment.

Strengths are: - Characteristics of the business or team that give it an advantage over others in the industry. - Positive, tangible and intangible attributes, internal to an organization. Beneficial aspects of the organisation or the capabilities of an organisation include human competencies, process capabilities, financial resources, products and services, customer goodwill, and brand loyalty.

Weaknesses are: - Characteristics that place the organisation at a disadvantage relative to others. - Detract the organisation from its ability to attain the core goal and influence its growth. - Factors that do not meet the standards set in the organization

Opportunities are: - Chances to make greater profits in the environment. - External attractive factors represent the reason for an organisation to exist and develop. - Condition of the environment that benefits the organization in planning and executing strategies that enable it to become more profitable. An organisation should be careful and recognise the opportunities and grasp them whenever they arise. Opportunities may arise from the market, competition, industry/government and technology.

Threats are: - External elements in the environment that could cause trouble for the business. External factors beyond an organisation’s control could place the organisation’s mission or operation at risk. - Conditions in the external environment that jeopardize the reliability and profitability of the organisation’s business. Threats compound the vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a threat comes, stability and survival can be at stake.

SWOT analysis is useful and is not limited to only profit-seeking organizations. It may be used in any decision-making situation when a desired end-state (objective) has been defined. Hence, it can also be used for decision-making in non-profit organizations, governmental units and individuals.

B. Resource Based View (RBV)        

The RBV is an approach to achieving?a competitive advantage?from the firm’s internal environment. It emphasizes the resources developed to compete, which emerged after the major works from Penrose (1959), who suggested that the resources possessed, deployed and used by the organisation are more important than the industry structure. After publishes from B. Wernerfelt (1984), J. Barney (1991), and others shaped the term “resource-based view”, which enables the firm to gain and sustain competitive advantage.?Birger Wernerfelt (1985) stated that resources and products are two sides of the same coin as most products require the services of several resources, and most resources can be used in several products. Besides, J. Barney (1991) believed that a good strategy aims to help it create more economic value than the marginal competitor in its product market. But later, Eisenhardt, Martin and Teece (2000) evolved this theory to dynamic capabilities, which transformed the state view in a dynamic context: the business environment.?All the resources/capabilities must be vital and satisfied by the criteria Barney (1991) defined as to be at the same time Valuable (bring value to the firm), Rare (deliver a unique strategy as compared to the competitors), Imitate (resources to be copied by competitors hardly) and Non-substitutable (resources should not be able to be replaced by any other) (VRIN) to create the sustained competitive advantage. All the resources must be valuable to have a sustained competitive advantage. Later, Barney combined the I and N into one attribute and added the O as extra criteria Organised-wide supported (the company is organised to exploit these resources and capture their value). Inimitability in the VRIO framework, therefore, means that resources are hard to imitate because competitors cannot duplicate and/or substitute them and examine the link between a company’s internal characteristics and its performance.

According to Teece D. et al. (1997), a dynamic capability is the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments. Additionally, it is an organisation's capacity to purpose, create, extend, or modify its resource base. A company needs to learn to grow and adapt to changing threats and opportunities in its surrounding competitive environment. This includes an ability to sense external changes that present new threats or opportunities and, of course, the organizational flexibility to adapt to these. The Dynamic Capabilities framework is an important tool for enterprises because they enable them to create, deploy, and protect intangible assets that support superior long-run business performance. The two main components are resources and strategies. The great importance of this concept is its connection with dynamic markets, where the competitive environment is rapidly changing, and the technology improvement is slight.?It includes the sensing capabilities (opportunities for new strategic assets), seizing capabilities (the actual filling of capability gaps, the generation of new products, and the innovation/updating and implementation of business models). Lastly, it includes the transforming ones (they are responsible for keeping all the lower-level elements while ensuring their mutual alignment and overall coherence of the organisational system) needed to design and implement a business model because they are unique for each company as they based on the culture or the history and works as the figure above shows. The basic assumption of the framework is that those core competencies should be used to modify short-term competitive positions that can be used to build sustained competitive advantage. Later, Teece D., in 2019, noted that success for any particular company would require strength in all the dynamic capabilities. These include foundational dynamic capabilities for business model design, mergers and acquisition, product development, price setting, and organizational design to maintain the fit with the external business environment.

To conclude, although companies have to find their unique strength against competitors to survive in the industry, everyone has to understand that realising it is just the first step. After that, they move forward, see the opportunity, evaluate the landscape, position themselves in a better position than their competitors and make profits. Furthermore, the unique sustained competitive advantage?gives customers the reason to buy from an organisation?rather than its competitors. As a result, if a company wants to survive, it must have?a powerful, unique competitive advantage to compete in the industry.