Introduction
Competitive advantage is the ability of a firm that it develops in relation to its competitors that allows it to outperform them (Peteraf, 1993). If a firm can outperform competitors consistently, then it is called sustainable competitive advantage (Rodrigues and Dorrego, 2008). For example, Apple created groundbreaking products like iPhone, MacBook and iPad better in quality and features than others and its continued success and the never declining popularity of its products provides the company with a competitive advantage over its competitors. Sustainable competitive advantage cannot be developed overnight; rather it is built slowly over a period of time based upon unique competencies. These unique competencies can be based on knowledge, know-how, innovation, unique information, and experience advantage (Rodrigues and Dorrego, 2008). This essay will critically discuss how firms can gain competitive advantage through internal resources and strategic management theories.
Competitive Advantage
Definition
Competitive advantage refers to the superiority an organization gains over its competitors by providing the same product at a lower price or a product at a higher price because of differentiation (Barney, 1991).A firm gets competitive advantage when it is able to match its core competencies with the opportunities at hand (Khandwalla, 1987).
The success of a business depends on a firm’s ability to determine its competitive advantage. Competitive advantage provides the very basis for a customer to choose buying the product or service of a particular organization (Naman and Slevin, 1993). Depending on the competitive advantage, a firm formulates its marketing strategy and growth strategy (Reitzig, 2004).
Factors of Competitive Advantage
Wernerfelt, Barney and Peteraf are the main three pioneers of the competitive advantage theory. According to Barney, a firm can gain competitive advantage by exploiting its internal strengths, neutralizing its external weaknesses, avoiding internal weaknesses and grabbing external opportunities (Barney, 1991). Internal strengths can be gained by utilizing the strategic resources in a way that creates differentiation. A company may have several resources, but not all the resources are important to it (Wernerfelt, 1984).
The human resource capital is a major resource for the consulting and service based companies like McKinsey, BCG, Accenture, and TCS. McKinsey has created value by creating a pool of resources that delivers high quality work (Reitzig, 2004).On the other hand, TCS has created an employee pool that delivers value at a low cost (Grunert, K.G. and Ellegaard, 2010). Both the companies have created a competitive advantage over others by using their human resources effectively.
Physical capital resources also create sustainable advantage (Reitzig, 2004). For example, Exxon Mobil holds almost 70 Billion barrels equivalent of oil more than any other oil company. This huge future oil reserve provides a competitive advantage to Exxon Mobil over other oil companies (Covin, J. G., and Miles, 1999). Similarly, competitive advantage can be achieved by holding patents, trademarks, corporate entrepreneurship, organizational brand value and organizational practices (Schiemann, 2006).
How Can A Firm Acquire Competitive Advantage Through Internal Activities?
Factors of Competitive Advantage
Resource Based View is the major theory that dominates the concept of competitive advantage. This theory was developed over 20 years through the works of Wernerfelt, Barney and Peteraf. Before delving deep into the details as to how competitive advantage can be achieved using internal resources, we ought to understand the resources that are important for a firm and the resources that are not (Reitzig, 2004). Resources can be of two types; 1) Tangible and 2) Intangible. Tangible assets are visible and have physical attributes. The examples include capital, land, buildings, plant, equipment and supplies. Intangible resources have no physical attributes and are invisible. Examples include organizational culture, knowledge, brand equity, reputation, patents, copyrights and trademarks (Barney, 1991). As per the Resource Based View (RBV) theory, there are two factors determining whether a resource is strategic or not. Resources that are not easily imitable can provide uniqueness to the company, and hence, they are strategic resources (Lippman and Rumelt, 1982). For example, the technology used by GE for its GE9X engine is unique and not easily imitable by other engine manufacturers. The lightweight and fuel efficient design patent of the engine of GE not being easily imitable creates a strategic advantage for the company (Vinayan, Jayashree, and Marthandan, 2012). The imperfect mobility is another criterion that helps determine strategic resources (Barney, 1991). For example, a chef cooks outstanding food in a Mediterranean restaurant chain in an upscale New York suburb. The main competitor in the same area is an Italian restaurant. However, if the Italian restaurant hires the chef from the other restaurant at the offer of a lucrative remuneration to gain competitive advantage, then that strategy may not work as the chef may be an expert only in cooking Mediterranean food and not Italian (Naman and Slevin, 1993).
Once the strategic resources are identified using the imitability and imperfect mobility criteria, the following four things must be in place for a firm to gain sustainable competitive advantage.
- Value: A resource that provides a higher return than the cost associated with it, and it helps create value for the firm by helping it outperform its competitors and/or reduce its weaknesses. GE’s competency in designing and producing superlative airplane engines increases the firm’s value in the eyes of the customers (Vinayan, Jayashree, and Marthandan, 2012). Therefore, GE’s ability to design and build engines is a valuable resource (Barney, 1991).
- Rare: A resource is said to be rare if only one or very few firms own the resources or can perform the resource capability in the same way. If all firms have common resource or capability, then it results in perfect competition. For example, Toyota through its lean manufacturing process (Rare resource) was able to lower the production cost and maintain high quality cars (Tao, Daniele, Hummel, Goldheim and Slowinski, 2005). However, as other car manufacturers also implemented similar processes in their production system, the competitive advantage of the lean manufacturing process evaporated (Barney, 1991).
- Inimitable: A resource is said to be inimitable if competitors cannot buy or acquire the resource at a reasonable price (Barney, 1991). Tiffany and Company has developed a core competency of jewelry craftsmanship through its multi-generational craftsmen (Rumelt, 2003).
- Non-substitutable: Even if a resource is rare, inimitable, and value-creating, still that resource may not create a competitive advantage if that resource is easily substitutable. If competitors are able to counter a company’s value-creating resource with a substitute, then no competitive advantage can be gained from that resource. Non-substitutability, therefore, is a critical criterion in creating a competitive advantage using a resource (Barney, 1991).
Critic of Resource Based View and Other Approaches
There are many criticisms of the Resource Based View as a theory for gaining competitive advantage using internal resources of a firm. In 2001, after 10 years of Barney’s article on the Resource Based View, Priem and Butler (2001) in their paper identified many limitations of RBV (Priem and Butler, 2001). They raised a concern about the very definition of a resource. They also said that the competitive advantage as a value creating strategy using resources makes the RBV theory tautological. Therefore, the reasoning is circular, and operationally, invalid. Furthermore, Priem and Butler (2001) said that there is no mention of the management as a critical resource in the RBV (Priem and Butler, 2001). For instance, General Electric (GE) had a CEO (Jack Welch), who made the company competitively superior than others in the same industry because of his superior vision. He was able to identify the talented resources capable of creating a competitive advantage for the company (Lumpkin and Dess, 1996). Priem and Butler further stated in their paper that RBV has a limited focus on resource capabilities, the role of product markets, different resource configurations, and limited perspective on the implications (Priem and Butler, 2001).
Barney immediately came up with an explanation for the criticism. He pointed out that many of the management theories are tautological, and therefore, on the basis of that logic, his theory cannot be scrapped. Barney, however, admitted that RBV is applied to a static environment and cannot be extrapolated to dynamic business environment (Lawson, 2002). In reality, the business conditions are dynamic in nature (Hofer and Schendel, 1978). Therefore, it is difficult to fully apply the RBV theory in the real world. However, the theory provides a very good way for the senior management to understand a firm’s resource base. In 2001, Barney came up with a new definition of value for the resources and rephrased competitive advantage as a strategic advantage (Lawson, 2002). There are some real good criticisms in Priem and Butler’s paper, but we have to understand that RBV as a theory is mainly developed for the senior management of a company and not for operational purposes (Makadok, 2001). The senior management is often not interested in the real world. Rather, they show more interest in achieving competitive survival and strategic advantage, which RBV is able to do fantastically (Lawson, 2002). For instance, if the Apple CEO decides to use the VRIN (value, rare, inimitability and non-substantiality), he will immediately understand that the biggest competitive advantage for Apple comes from its ability to innovate continuously and Apple’s huge brand value.
There are several other criticisms of RBV that came into light in the last decade only. Some of the most talked about criticisms of RBV are insufficient focus on depreciating resource value, difficulty in finding resources that satisfy the VRIN criteria, and the ignorance of external factors (Tao, Hummel & Slowinski, 2005). In order to gain competitive advantage, apart from creating value through internal resources, Porter suggested that a firm should also look outside to understand where it can exploit its resources to the maximum. Porter’s 5 forces parameters like suppliers, substitutes, competitors, new entrants, and buyers should be analyzed thoroughly to understand which of these forces should be exploited by the firm using its internal resources to gain maximum profitability (Tao, Hummel & Slowinski, 2005).
Conclusion
It has been about more than 20 years that the theory of RBV of a firm is in existence. During this time, RBV as a theory of gaining competitive advantage using the internal resources of a firm faced severe criticism. There is no doubt that more research needs to be done on RBV before it can fully be used by a firm to understand and implement measures for competitive advantage. However, RBV in its current form can also be used successfully by the top management to not only identify the strategic resources of the firm efficiently, but it can also be used to utilize a resource to improve upon the efficiency and effectiveness of a firm in most cases.
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