In this blog post
Sustaining Competitive Advantage
A firm is said to sustain competitive advantage if it has achieved above industry average long-run profitability. As it is an average, it is relative to peer performance within the industry and the average is derived from the five forces that exist within the industry. For instance, the average in the case of pharmaceutical industry is higher compared to airline industry because the competition is weak in former making it attractive than the latter. To understand the five forces, there is a need to analyze the environment. Moreover the firm should align itself with the environment which holds the key to determine the firm’s competitive advantage.
The external environment consists of forces outside the traditional organizational boundary which form the context within which the organization exists (Wheelan & Hunger). The key environmental forces impact an organization’s ability to achieve its aim and therefore requires a framework that systematically identifies the possible constraints and a methodology to identify the key forces and prioritize it. According to Porter (1990), the industry structure framework helps to rapidly identify the structural features that determine the nature of competition in an industry.
Hence, industry structure framework suggests five forces (threat of new entrants, bargaining power of suppliers and buyers, rivalry among competitors, threat of substitutes) of competition which determine the attractiveness of industry. This industry structure determines strategic competitors who compete on profit rather than products. Therefore, the firm’s ROI is dependent on these forces. According to Porter, the strategic analysis includes
- Understand industry structure through five forces and identify key forces
- Identify the drivers for change like PLC or PEST (Political, Economic, Social, Technological)
- Carry out new five forces to identify threats and opportunities
From the above discussion it can be understood that the firm should align itself with the environment to achieve strategic fit which helps in achieving the competitive advantage. Hence, “a strategy that achieves fit outweighs all other strategies”. As per Porter (1996) sustainable advantage comes from a system of activities that are integrated and complementary to each other and these complementarities become difficult to copy or duplicate as the competitor has to match not only one activity but the entire system. This is in resonance with Barney (1991) who stated competitive advantage persists when the competitors are unable to neutralise or duplicate it.
So, one of the approaches for sustaining competitive advantage that emphasize on how best to achieve consonance with the five forces is Porter’s positioning approach. According to Porter, firms can gain competitive advantage if they follow generic business strategies like Low cost, Differentiation or Focus. Low cost strategy mainly focuses on efficiency which helps to invent new processes which tends to lower the unit prices. Differentiation strategy helps firm to concentrate on customer responsiveness which drives innovation of new products rather than new processes while keeping high prices for the product. Focus strategy is defined by the scope, whether the firm is concentrating on wide range of customers or narrow range of target customers. A company which pursues more than one of the above strategies is said to be stuck in the middle and the firm earns lower than average profits. Therefore, firms which make consistent trade-offs and pursue one strategy can achieve sustainable competitive advantage.
The above discussion mainly focused on analyzing external environment and achieving fit to attain sustainable competitive advantage. However as per Barney companies like Dell, Southwest Airlines and Walmart are able to be more profitable in their industry even though it is not attractive. This shows that environment is not only the determinant of firm’s profit potential and this can be explained by Research Based View (RBV). According to RBV, firms sustain competitive advantage due to their resources and capabilities. Deriving competitive advantage from resources depends on its characteristics and the organizational ability to leverage it. Firms that develop unique capabilities sustain competitive advantage. Therefore, the long-term strategy for any firm is to apply and develop resources because these provide stable basis for formulation of strategy in ever changing market.
Another perspective of sustaining competitive advantage is through value innovation proposed by Kim and Mauborgne which create profits by delivering superior customer value at profitable cost. In contrast to 5 forces approach which emphasize on strategy responding to the environment, in this approach strategy creates the environment for the firms to be profitable by looking outside the industry boundaries, strategic groups and redefining buyers and identifying a blue ocean instead to compete.
To conclude, to sustain competitive advantage analyzing the industry environment is needed, and firms may respond by formulating their strategy based on the environment. However, if there is intense competition that may make the industry unattractive. Firms may sustain competitive advantage by RBV and value innovation approach. Therefore, porter five forces may be relevant in helping firms sustain competitive advantage if industry is attractive and can be used as a starting point in other situations, but more likely not to be taken as the only way to achieve sustainable competitive advantage.
- Wheelan and Hunger – Strategic Management and Business Policy
- Porter, M.E. (1990), “New global strategies for competitive advantage”
- Porter, M.E. (1996), “What is Strategy”
- Barney, J (1991), Firm Resources and Sustained Competitive Advantage