Competitive advantage
Morgan P. Miles
Competitive advantage is the foundation on which a firm competes. When a firm gains competitive advantage, it holds a favorable market position based upon its ability to create superior customer value through product differ entiation, lower cost alternatives, more rapidly satisfying its customers, or through a symbiotic combination of these factors. Competitive advantage pertains to the ability of a firm to strategically deploy its set of resources and distinctive competencies to create a unique value creating strategy that outperforms its competitors in the market (see Barney, 1991, 2001).
In markets where customers enjoy the free dom to select from a marketplace of goods and entrepreneurs enjoy the freedom to exploit at tractive economic opportunities, firms compete for the opportunity to engage in profitable trans actions with customers. Exchange is based on the customer’s perception of value. Those cus tomer segments that demand need satisfying products enter into exchange relationships with firms that offer superior value solutions for these specific needs. In market based economies, firms that most efficiently create the highest need satisfying value offering will prosper (Hunt, 2000). Firms must constantly seek out opportunities to create additional value for cus tomers through ongoing radical and incremental innovation initiatives, thereby gaining and sus taining competitive advantage.
The capability of some firms to outperform their peers has been a topic of great interest to academics and executives. Since Ricardo, scholars have considered the topic of ‘‘rent’’ to understand why some firms enjoy superior eco nomic performance over their competitors (see Lewin and Phelan, 2000). Those firms that are able to leverage proactive, radical customer centered innovation and exploit reactive com petitor focused innovation to generate superior economic returns (rent), enhance customer satisfaction, establish market leadership, and strengthen customer loyalty, are considered to possess a competitive advantage (Day and Wens ley, 1988; Hunt, 2000).
Entrepreneurship involves a firm leveraging innovation to exploit new opportunities, renew its current position, or create new product market domains, and is an antecedent required to gain and sustain a competitive advantage (see Covin and Miles, 1999; Miles, Paul, and Wilhite, 2003). However, for a firm to sustain a competi tive advantage, it must also be both effective and efficient in continuing to exploit innovation. Competitive advantage is based on the assump tion that firms possess unique strategic resources and competencies that are valuable, scarce, im perfectly imitable, and largely immutable (Barney, 1991). In a market economy, firms face demand that is dynamic and heterogeneous across and within industries (Hunt, 2000). While firms may leverage resources to create a com petitive advantage based on economies of scale or scope, or the ability to develop unique business models, all competitive advantages are dynamic and based on a specific set of market and en vironmental conditions (Christensen, 2001). When other entrepreneurs perceive that a firm is enjoying superior financial performance (or rent), they enter the market with innovative or lower cost products and rents are dissipated, making any competitive advantage transitory. For a firm to sustain competitive advantage, it must constantly renew its ability to more effect ively and more efficiently exploit resources by proactive, radical, industry altering, market cre ating, Schumpeterian innovation (Schumpeter, 1934; Hunt, 2000). Figure 1 illustrates how firms may leverage corporate entrepreneurship strategically to gain and sustain competitive ad vantage.
The three major tenets of competitive advan tage include (1) the firm’s resources (Barney, 1991), (2) the firm’s ability to establish an advan tageous market position (Porter, 1985), and (3) the firm’s decision rules and processes that drive the pursuit of opportunities (Eisenhardt and Sull, 2001). Competitive advantage re quires that resources are more effectively and
Figure 1 Innovation, Corporate Entrepreneurship, and the Path to Competitive Advantage Renewal
In summary, why customers choose to pur chase from Firm A over Firm B rests on the firm’s transitory ability to harness entrepreneur ship to create superior value for its customers through product differentiation, cost leadership, quick response, or some combination of these bases for competitive advantage (see Porter, 1985; Bhide, 1986; Prahalad and Hamel, 1990). Firms wishing to gain and sustain a competitive advantage must consistently employ entrepre neurship to rejuvenate, renew, and redefine the firm, its markets, its strategies, or its industries (Covin and Miles, 1999). While a firm may be entrepreneurial and, thus, leverage innovation to gain a competitive advantage, it must continually be entrepreneurial in order to sustain that com petitive advantage.
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