Print this pageFactors Forming Competitive Advantage
The factors that produce a competitive advantage are those that result in the deployment of a unique value proposition for the customer of the business. This unique value proposition takes the firm out of the realm of competing solely on price. Unless a firm as a unique and defensible resource advantage, competing on price will not achieve superior performance results. Factors producing a unique value proposition include innovation, uniqueness, focus, learning, adaptability, and synergy.
Innovation
Innovation is a necessary capability required by all businesses hoping to achieve and sustain a competitive advantage. Innovation produces the initial competitive advantage. Competitive advantages only last for a while. Over time, any advantage will eventually be subject to commoditization or the creation of a higher value proposition. Thus, innovation is an ongoing activity creating new and better value propositions to replace the existing ones. This is creative destruction. It is a necessary condition and process for a business to sustain an advantage.
Innovation vs. Invention
Innovation goes beyond invention. Invention is far more prevalent than innovation. Invention is the creation of new and novel products, processes, and forth. Innovation is putting creativity and inventiveness to use in the business. The difference between inventive discovery and realizing economic benefit from that invention via innovation is huge. If invention is hard, innovation is tremendously more difficult. Innovation requires a culture which embraces change and the creative destruction which accompanies innovation.
Forms of Innovation
Innovation can take many forms. New to the world offerings, meet latent customer desires. Offerings can be customized to meet more specific customer needs. Process innovation reduces costs, improves quality, and improves service. Innovating how and where products are sold can extend their reach. All of these types of innovation are for a portion of the business model. Many times they are often relatively easy to copy, providing only a short competitive advantage. A sustainable competitive advantage requires innovation of the business model or management itself. In order to sustain a competitive advantage, the business must be innovated at least as fast as the industry is innovating.
Business Model Innovation
The business model itself becomes a primary competitive tool of innovative business leaders. Products are easily imitated and have short lives. Business models are the product of the historical path the company has taken made increasingly competitive through the ongoing innovation of the synergy of the elements of the model. The unique configuration and integration of all aspects of a business form a synergistic whole which is both unique and complex. A business model is very difficult to imitate or replicate. It is a key to a sustainable advantage.
Management Innovation
According to Hamel, management innovation is the source of more wealth creation than any other type of innovation, whether product or process related, because it unleashes human potential in new and dramatically improved ways.
Management innovation can be defined as a marked departure from traditional management principles, processes, and practices or, a departure from customary organizational forms that significantly alters the way the work of management is performed. – (Hamel, Gary, The Why, What, and How of Management Innovation, HBR, Feb, 2006, pp 72-84)
Management innovations are rarely thought about and nearly unrecognized because they are so infrequent but then become common place. But the organization which originates a management innovation has a significant competitive advantage until its competitors realize the advantage exists and then figure out how to decode it in order to use it themselves. Cost accounting and variance analysis was once such an innovation. Brand management brought phenomenal wealth to Proctor and Gamble, its originator. General Electric has clearly had a competitive advantage with its innovative leadership development competency. And think of how few have imitated it!
Other Innovations
Other types of innovations are important but rarely, by themselves, provide the basis for a competitive advantage, at least not a sustainable one. For example, product innovation can certainly excite the market but rarely in and of itself provides an advantage that lasts for more than a year or so. There have been many examples of those in the technology industry. The innovations that are easy to copy, design around, or simply "leap beyond" are not a basis for an advantage.
Uniqueness
Whether pursuing a commoditization or differentiation strategy, uniqueness is required for a competitive advantage. Thus, the phrase "unique competitive advantage" is redundant. To have a competitive advantage, business leaders must develop a unique insight, from a unique perspective, and develop a unique solution. Andrews (1987) stated that the most important characteristic of strategy is uniqueness. This uniqueness comes from, "A creative reconciliation of alternatives for future development… made unique by the special characteristics of an organization, its central competence, history, financial and technical resources, and the aspirations and sense of responsibility of its leaders." The root of this uniqueness lies in the competence, distinctive capabilities of the organization. The cumulative strategic decisions shape this competency over time and its deployment towards a purpose and offerings to satisfy that purpose. If a business solution is not unique, there is typically cutthroat competition between similar businesses resulting in no clear winner.
Strategic Focus
Strategic focus is the intersection and integration of a business's 1) purpose and guiding vision, 2) distinctive competencies, and 3) a unique value proposition. The synergistic integration of these three elements forms a strategic focus. When management has a passion for the purpose, in pursuit of a vision, they unleash creativity and energy, building their distinctive competencies, used to enhance the value of their offerings, which are in pursuit of the purpose. This self-reinforcing loop builds the energy, momentum, and confidence needed to maintain the discipline necessary for effectively pursuing a competitive advantage. The strategic focus is analogous to what Drucker describes as the theory of business (Drucker, 1994), Hamel calls a strategic intent (Hamel and Prahalad, 1989), Porter (1996) calls fit and position, and Collins calls the Hedgehog Concept (Collins, 2001).
Drucker's specifications for a valid theory of business are:
- The assumptions about environment (which define what the organization gets paid for), mission, and core competencies must fit reality.
- The assumptions in all three areas have to fit one another.
- The theory of business must be known and understood throughout the organization.
- The theory of the business has to be tested constantly.
Learning and Adaptability
Learning linked to adaptation is essential for an organization to maintain its competitive edge. Learning organizations develop distinctive competencies, provide continuous innovation of those competencies, and have the fundamental ability to renew and revitalize themselves.
Synergy
Synergy is implicit in producing competitive advantage. New products don't, by themselves, produce an advantage -- at least not for long. Business model advantages are produced by the synergy of its elements. The whole becomes more than the sum of the parts. Management innovations are made advantageous with their integration into the fabric of the organization. Systems and complexity theory offer insights for producing synergy from complex systems.
