The following literature review aims to explore the role of competitive advantage at every stage of the business life cycle and determine its value for organizations and the economy in general.
Pre-competitive Advantage Stage
Competitive advantage must be established during the initial stage of the business cycle. At this point, it is important to identify and evaluate both the resources at the company’s disposal and the capabilities it possesses. According to Rothwell and Kazanas (2003), a thorough understanding of the internal factors pertinent to the organization is necessary to conceive a viable strategic development plan. This concept can be traced to the theory suggested by Penrose, who implied that the setting created by the industry influences competitive advantage to a lesser degree than the specific resources employed by the firm (Montgomery 2011). Considering this, competitive advantage at the pre-competitive stage can be described as a set of assets and resources which are tied semi-permanently to the organization (Foss 1997). In accordance with this definition, Hamel and Prahalad (2013) suggest core competencies as the main source of competitive advantage. According to these researchers, competencies possess a unique set of features, such as lack of physical wear (although, importantly, this also introduces the possibility for devaluation over time) (Hamel & Prahalad 2013).
Other authors expand upon the list of competitive advantages to cover the positioning of production relative to the location of raw materials, exclusive conditions determined by successful partnerships, and customer preferences (Heene & Sanchez 2010). Importantly, none of these factors fall into the category of core competencies but rather stay within the list of resources pertinent to a specific company. The most popular classification system of these resources divides them into three categories: human, monetary, and physical, with core competencies residing within the first category (Khanka 2007). Other authors expand on the classification suggested by Ansoff. For instance, Hofer and Schendel describe human resources as a primary source of competitive advantage in the areas of technology (e.g., technical proficiency) and organizational capacity (e.g., managerial knowledge and skills) (Wang 2007). Alternatively, Sparrow, Brewster, and Harris (2004) have emphasized the role of technological resources and pointed to the relatively minor role of monetary funds.
There is also a visible tendency in academic literature to identify the role of competitive advantage based on the physical properties of resources. For instance, Finkelstein, Hambrick, and Cannella (2009) categorize resources as either knowledge-based or property-based. Such a classification system visibly aligns with the tangibility of the resources, where knowledge is intangible while the property is primarily tangible (Wilson 2005). The identified characteristics allow researchers to determine the role of competitive advantage as necessary for the development of a firm’s performance strategy. According to Løwendahl (2005), such preliminary action makes it possible for the organization to develop a strategy that not only accounts for known competitors currently present on the market but also potential ones expected to enter the segment in the future. This latter possibility is especially valuable at the pre-competitive stage, where no conclusive data exists regarding the specific characteristics of competitors, and the strategy must include the possibility of gaining competitive advantage and the estimated capacity of the company’s resources, which allow it.
In addition to the resource-centered approach, several theorists emphasize the importance of analyzing the possibilities presented by the conditions of the industry. Most prominently, this approach is present in the works of Porter (2008), with the five forces model being the main tool of analysis. This model offers an opportunity to evaluate the possible company advantages by assessing the power of suppliers, the power of buyers, the existing Competition in the industry, the threat of substitutes, and the ease of entry (Porter 2008). Of these factors, the latter is especially significant for the pre-competition stage of the business life cycle, as it offers an opportunity to predict the emergence of future competitors and incorporate the results of the analysis in the company strategy. However, such an approach is not universally accepted. Some scholars point out that the current market is a complex entity which does not allow for the successful application of the five forces model (Harrison 2016; Runge 2013; Turban, Strauss, & Lai 2015). According to Kling et al. (2015), a large number of factors at play in any given industry prevents reliable results and leads to inaccurate conclusions. This problem is reflected in strategic studies, with a visible shift from a focus on industry analysis to resource analysis (Moser 2007). Therefore, while important for the assessment of competitive advantage, the analysis of the industry is of secondary value at the pre-competitive stage.
Gaining Competitive Advantage
After the initial strategy formation, companies move to the implementation phase, during which the competitive advantage is gained. This stage illustrates the important role of competitive advantage as an indicator of company performance and, by extension, success (Fuchs & Shapira 2005). Even more importantly, from a broader perspective, a competitive advantage can be considered a driving force behind the overall rate of development. For instance, innovation is often considered a crucial component of gaining an advantage (Arora & McIntyre 2014). According to the academic consensus, there is an established positive relationship between the level of innovation exhibited by a company in its operations and the competitive advantage it gains on the market (Betz 2003). At the same time, innovation, in its economic sense, offers a capacity for improvement beyond its individual benefits for the company.
As a result, the process of gaining competitive advantage often results in the creation of new value. Importantly, the company responsible for the innovation often gets only a certain share of the value in question, with the rest being distributed among its immediate environment (Betz 2003). In this way, the process of gaining competitive advantage indirectly contributes to increasing the well-being of the local community and, to a lesser degree, the world. Some scholars suggest that the average level of innovation of any given society is a sum of the innovative capacities of its inbound companies; in other words, the country which has more innovative companies also has a higher national competitive advantage (Betz 2003; Fuchs & Shapira 2005).
Another aspect that strengthens the role of competitive advantage during the gaining stage is human resources. Unlike financial and natural resources, these are harder to obtain and replicate (Shuler & Jackson 2006). However, to facilitate the necessary competitive advantage, companies need to employ several strategies to achieve a high quality of human resources, which may include employee training, adjustments of reward systems, and various improvements of workplace conditions (Shuler & Jackson 2006). While these practices have been established as positive for the companies’ resulting performance, the overall impact can usually be observed on a larger scale and can impact the social and psychological climate of the community at large (Shuler & Jackson 2006). This outcome further broadens the role of competitive advantage beyond its immediate benefits for organizations.
Finally, the process of gaining competitive advantage determines the organizational structure of the firms. According to Hill and Jones (2011), the latest trends displayed in the process include a shift towards a multi-divisional structure. In addition, Jackson et al. (2016) point out the tendency of contemporary businesses to form decentralized structures and redistribute decision-making across the organization. Unlike the strategies described above, these structural changes have a less significant influence on values beyond those which directly impact the companies’ well-being. Nevertheless, within this domain, the role of competitive advantage can be considered as primary in determining the structural component of organizations.
Retaining and Sustaining Competitive Advantage
Most sources emphasize the necessity for companies to maintain a competitive advantage once it is gained during the previous stage of the cycle. The general consensus is that once the advantage is gained by one business entity, others will likely replicate the necessary steps to regain the lost position (Wang 2007). The traditional approach proposed by Porter suggests two primary strategies to minimize this risk and sustain the gained advantage. First, it is possible by determining customer expectations and differentiating the product to meet these expectations (Porter 1986). Such results are traditionally achieved through the approaches detailed above and, therefore, require additional expenses. Thus, premium prices are usually introduced to account for the increased value (Hill & Jones 2011). The second option, known as cost leadership, suggests sustaining competitive advantage by lowering the cost of the products, preferably below the market average (Hill & Jones 2011). It is important to understand that while both strategies require significant technological and organizational capacity, the latter also demands a comparatively larger physical and financial resource base, which in turn decreases the ease of entry for new entities (Porter 2008).
Notably, while Porter’s strategies are consistent with the resource-based model described above, other scholars argue that certain elements play more important roles in sustaining a competitive advantage. Gottschalk (2005) suggests that knowledge and know-how have a leading role in the process, with operational improvements being its logical outcome. This view is supported by Bahrami and Evans (2014), who point out that knowledge is a unique resource; instead of being depleted upon its usage, it is increased as an asset.
Similarly, Grant centers his attention on capabilities and ascribes organizational performance to their successful facilitation (Burke & Cooper 2006). Hill and Jones (2011) claim that capabilities determine the availability of resources in the company and that their proper implementation is sufficient for sustaining or retaining competitive advantage.
Finally, these assertions are challenged by the critics who point out that competitive advantage cannot be determined by assessing the resources of each organization in isolation. Instead, the connections between companies indicate their ability to sustain it. In this regard, the role of competitive advantage is determined by partnerships, collaborations, knowledge exchange, and other links between organizations (Bathelt & Glückler 2011; Chaminade & Catasús 2007). According to this theory, the pursuit of competitive advantage by one entity necessarily involves approximately equal improvement across the network (Fonfara 2012).
A review of the existing literature suggests that at every stage of the business life cycle, competitive advantage plays a definitive role. Specifically, it influences the development of business strategy at the pre-competitive stage; drives the innovation, technological advancements, and organisational structure during the gaining stage; and initiates diversification and pricing policies during the sustaining stage. Even more importantly, the benefits of pursuing competitive advantage are not limited to the organisation that conducts it, making it an essential component of the greater economic and social environment.
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