Old ways of thinking about competitive advantage

To be effective in times of change, strategy must look to an industry’s fu-ture. It must provide an understanding of possible moves and counter-moves of rivals and offer a map of where the interactions between compet, itors might be headed. This requires a dynamic view of strategy.

Static models of strategy provide an invaluable set of tools for analyzing the competitive environment and position of a firm at any point in its evolution. They identify some of the key sources of advantage at a given point in time. As firms maneuver to create these advantages and erode the advantages of competitors, these static models provide important insights. However, they fail to recognize competitive advantage as a fluid and dy, namic process. Advantages that worked in an industry’s past only con, tinue to work in a relatively static environment.

Static Views of Competitive Advantage

Static views of strategy attribute competitive advantage to success in four key arenas of competition. These are price and quality, timing and know, how, strongholds, and deep pockets. These arenas form the starting point for our discussion of dynamic strategic interactions and success in hypercompetitive markets.


The simplest view of competitive advantage is that firms compete on effi, ciency (affecting costs and reducing price) or on product characteristics desired by customers (affecting quality and increasing price). Profits are derived from two sources: ( 1) minimizing costs or increasing price to in, crease margins or (2) increasing sales volume to improve capacity utiliza, tion and spread fixed costs over greater volume. This is a very simple ac, counting,based view of where profits come from.

Porter outlines three generic strategies for creating advantage that are consistent with the accountants’ view of the sources of profits. 25 The first is overall cost leadership. Under this strategy, the firm stresses efficiency and reduces its costs so it can underprice and outsell competitors. This is a low,margin, high,volume strategy. The second strategy, differentiation, is to create a product with distinctive qualities that are perceived as being unique. This added quality allows the firm to sell at a premium price to customers who desire such quality and who will pay for it. The third strat, egy, focus, relies on segmentation of the marketplace. By concentrating on a small part of the market, the firm carves out a niche that no direct com, petitors serve as well, allowing the firm to sell a premium,priced product with high quality to a small but appreciative number of customers. The focus strategy is a high-margin, low-volume approach.

A more dynamic model of price-quality advantages would consider how competitors will react and maneuver around the price-quality positions that rivals stake out. It will ask, how do firms change their price-quality ratio (value to customer) or their relative positions over time to create advantage? Companies move from one position to the next and competi­tors respond to their moves.

In his more recent work Porter himself recognizes the instability of these generic strategies and the need for more dynamic models to explain the competitive dynamics of price and quality. In The Competitive Advan­tage of Nations, he notes that sources of price-quality advantage are con­stantly evolving. “The firm competing with a differentiation strategy, for example, must find a stream of new ways to add to its differentiation, or, minimally, improve its effectiveness in differentiating in old ways.”26 The creation and destruction of cost-quality advantages will be examined in Chapter 1.


Another model suggests that competitive advantage is based on the unique assets and knowledge of the firm, which can be. used to earn “rents,” or abnormal profits, by charging customers for the use of those assets and knowledge.27 The timing (duration and growth) of these “rents” determines the value created by a firm for its shareholders.

Under this model the firm gains advantage by creating unique assets or knowledge of value to customers. The uniqueness of the resource allows the firm to increase its prices. If customers want its know-how or if they need its assets, they have nowhere else to go. To be unique, the firm has to be the first to develop knowledge or assets that no one else has.

This model doesn’t describe how these rents decline as competitors rep­licate the advantage, nor does it provide an understanding of how compet­itors will compete and what they will do to replicate the uniqueness of an opponent’s assets or knowledge. A more dynamic view recognizes that there is a big distinction between the value created for shareholders by an investment that creates a “home run” (one shot that is a very profitable effort over a long duration) versus the value created by a multiple “base hit” approach (several shots, each with its own small impact, that add up to the same stream of returns that a home run would generate), even if the net present value of the two are the same. Both the home run and the base hit approaches could produce the same overall return for shareholders. But they are very different approaches to strategy and have different effects on the firm, on competitive rivalry, and on society. The home run approach may set the company up for future failure if it is riskier and harder to exe­cute than the base hit approach.

This dynamic process of innovation and imitation of unique assets will be examined in Chapter 2, where it will become clear that it is much harder to create a home run than a series of base hits.


Another view of competitive advantage asserts that firms earn profits if they can restrict the number of competitors through creating a stronghold surrounded by entry barriers that block competitors out of a marketplace, industry, segment, or geographic region. Free entry leads to pure competi­tion and lower profits. Advantage is created by raising entry barriers that exclude potential players or limit buyers and suppliers who might enter the industry through vertical integration. Porter identifies six major barriers to entry: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, and cost disadvantages (other than scale).28 The firm’s advantage derives largely from monopoliz­ing protected strongholds with high entry barriers.

A more dynamic view of advantage considers how strongholds are cre­ated and eroded over time. Rivals can maneuver to circumvent or over­come entry barriers. Then the incumbent firm is forced to respond to this new entrant. Porter’s model provides a valuable framework for competitor analysis, but it does not lay out any view of what specific actions are likely to be undertaken. For example, if the firm increases its power over suppli­ers too much, what will the suppliers do? If the firm increases its power over dealers, what does the dealer alienation mean to the firm’s long-run future?

While Porter’s approach relies heavily on the strength of entry barriers, traditional entry barriers have become much more vulnerable to attack because of severe changes in the business environment, as will be de­scribed in Chapter 3. Trade barriers can be shifted by agreements and trad­ing zones. Barriers such as high-tech investments can be minimized through research consortia or alliances. Economies of scale can be under­mined by advances in the production process; product differentiation bar­riers can be undermined by rapid design cycles. A dynamic view looks at why strongholds fall or fail, and it looks at the series of moves and counter­moves that result from building and breaking them, as examined in Chap­ter 3.


In its simplest form the military model of competition analogizes compet­ing firms to warring armies. It asserts that competitive advantage is de­rived from a larger resource base and the superior concentration of force inherent in this large resource base against a smaller foe. The larger firm can crush the smaller one by brute force since it can sustain greater losses and invest more resources in the battle for customers. This model is based on common sense and centuries of experience in fighting wars, especially wars of attrition, which are fought until the last man is left standing.

The view that bigger is better is simplistic. Every company that has deep pockets today started out as a small company. Companies change their resource levels. A relatively small company such as Honda rapidly became a giant with deep pockets. A small company may also unseat a giant through clever tactics, as PepsiCo was able to grow from a small player to rival Coca-Cola.

Bigger firms do enjoy some advantages over smaller companies, but they must use their additional resources effectively or lose them. A com­pany with deep pockets may have more options in developing strategic interactions, but more options do not guarantee success. The building and erosion of the deep-pocket advantage will be examined in Chapter 4.

Source: D’aveni Richard A. (1994), Hypercompetition, Free Press.

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