- Architecture refers to a network of relationships or implicit contracts within or around the firm. It adds value by helping to create organizational knowledge and routines, which enable the company to respond flexibly to changing circumstances and allow easy exchanges of information.
- Reputation is the main commercial mechanism for conveying information to consumers.
- By protecting and exploiting innovation, the company can derive competitive advantage, if it can appropriate the gains associated with it.
- A final potential source of competitive advantage not based on the distinctive capabilities of firms is a strategic asset that includes government-mandated monopolies or other features of market structure, which restrict market access by competitors.
Firms that enjoy distinctive capabilities must seek to transform them into competitive advantages. To achieve this, distinctive capabilities must be sustainable and their benefits must be appropriated through corporate and competitive strategies. Corporate strategy is concerned with the businesses the firm is in, competitive strategy with its relationship with other firms in the businesses it chooses. In each case, the key measure of corporate success is the ability of the firm to add value to the resources it uses.
Corporate success
The structure of strategy
There is a fundamental difference between wish-driven strategies and strategies based on the effective match between external relationships of the firm and its own distinctive characteristics. The case for the latter is made through the contrast of three stories of business success and three stories of business failure. Business success requires an adaptive and opportunistic strategy, which nevertheless remains rational, analytic, and calculated.
Adding value
Using the example of six British supermarket chains, different measures of corporate performance are evaluated while their strengths and weaknesses are discussed. Added value is identified as the main driver of success, and consequently, as the most appropriate measure of corporate performance.
Business relationships
Co-operation and Co-ordination
A firm is viewed as a set of relationships among its stakeholders and between itself and other firms. Game theory is used as a stylized way of discussing issues of cooperation through the ‘Prisoner's Dilemma’, of coordination through the ‘Battle of the Sexes’, and of differentiation through the game of ‘Chicken’. Strategic commitment is seen as a means of gaining by limiting one's own options.
Relationships and Contracts
Following an understanding of the relationships that form a firm, two main types of commercial relationships are recognized. Spot contracts refer to agreements for immediate exchanges, whereas relational contracts occur in cases in which the companies involved face a ‘repeated game’. The appropriateness of each depends on the specific circumstances of the exchange.
Distinctive capabilities
Architecture
‘Architecture’ is introduced as the first of the three primary sources of distinctive capabilities and it refers to a network of relationship contracts within, or around, the firm. It can be subdivided into internal architecture (relationships with employees), external architecture (relationships with their suppliers and customers) and networks (relationships among a group of firms engaged in related activities). It adds value by helping create organizational knowledge and routines that enable the company to respond flexibly to changing circumstances and allows easy exchange of information. Note that such capabilities can only add value in a long-term context, which penalizes opportunistic behaviour.
Reputation
The second primary distinctive capability is ‘Reputation’, as it is the most important commercial mechanism for conveying information. Reputation can be costly to build, yet once established, it can yield substantial added value, particularly in markets where the quality of the product is immediately observable.
Innovation
The final primary distinctive capability is ‘Innovation’. However, firms may often fail to secure the returns from innovation for themselves. In this context, the chapter analyses the problems of achieving competitive advantage that is both sustainable and appropriable.
Strategic Assets
Certain competitive advantages are based not on the distinctive capabilities of firms but on their dominance or market position. These are the ‘Strategic Assets’ of the company and can broadly be separated into three main types. Natural Monopolies occur in markets that cannot accommodate more than one firm, Sunk Costs can prevent entry by resulting in a different cost structure between the incumbent and potential entrants, while Market Restrictions such as licences and regulation can further deter entry. These are different from distinctive capabilities in that they could be acquired by any company facing similar circumstances.
From distinctive capabilities to competitive advantage
Markets
For firms to turn their distinctive capabilities to competitive advantage, they must choose the appropriate markets in terms of both product and geographic dimensions. The choice of markets must make the best use of the distinctive capabilities that a company may have.
Mergers
Mergers can add value when they enable distinctive capabilities to be exploited more widely or more effectively. However, as it is most often the case, mergers and alliances are the result of financial objectives and typically fall short of the hopes of their promoters.
Sustainability
Case studies and statistical evidence are used in order to show that many companies are successful in building sustainable competitive advantage using their distinctive capabilities. However, distinctive capabilities continue to add value, only if both the capability and the distinctiveness are sustainable. Of the primary distinctive capabilities, reputation is easiest to maintain, innovation is usually the most difficult, whereas for strategic assets, handling public policy is crucial.
Appropriability
If a competitive advantage is to form the basis of corporate success, it must also be appropriable. Appropriability is the capacity of the firm to retain the added value it creates for its own benefit. However, who benefits from this added value depends on the decisions of the firm, the structure of the market in which it operates, and the sources of the added value itself.
The Value of Competitive Advantage
Using examples from supermarket chains, car manufacturers, and banks, this chapter explains how competitive advantage can be quantified in the form of added value or economic rent. It is then demonstrated how added value underpins all the principal measures of corporate performance, including cash flows, accounting profitability, and shareholder value.
Competitive strategies
Pricing and Positioning
The type of the competitive market in which firms operate will depend on the implicit rules that govern the behaviour of the companies. When there are long-term relational contracts, there is the opportunity for prices to reflect the value of products to the customers as well as the cost of the product. Accordingly, the less stable the competitive environment, the greater the degree to which prices will be determined by cost rather than value.
Successful companies must strive for stable competitive environments that can be the result of factors such as product homogeneity, stability of cost/demand conditions and limited number of sellers. In this context, product/company positioning ought to be the result of not only the distinctive capabilities of the company but also that of the competitive dynamics.
Advertising and Branding
Advertising and branding are recognized as important tools of competitive strategy. The main value of advertising rests on its demonstration of the suppliers’ continued commitment to the market. Brands are used to reassure customers about the attributes of a product, as well as to convey information about them.
Vertical Relationships
This chapter discusses vertical relationships and the allocation of added value among stakeholders. This allocation will depend on the design of the contract, which will also influence the risk allocation and the incentive structure of the relationship. The nature of the relationships that will emerge will in turn influence the market structure.
The strategic audit
The Industry
This chapter introduces the concept of the strategic audit. It begins with the identification of the customers’ needs and characteristics, while, by understanding the value chain, costs, returns, and the opportunity to add value are explored. The chapter undertakes this exercise for four European industries—Italian knitwear, airlines, retail banking, and champagne.
The Firm
Following the understanding of the market, the strategic audit focuses on the firm itself. Using the examples of British Airways and Benetton, this chapter illustrates how a deep understanding of the firm's distinctive capabilities and strategic assets defines its corporate strategy and describes the business it should be in.
The Nation
Explains the relation between competitive advantage in the firm and competitive advantage in the national economy. In the context of a free market system, the former can lead to the other, given that inequality of information, externalities, and the existence of natural or strategic monopolies are absent. The basic sources of competitive advantage of nations are similar to the sources of competitive advantage for firms, i.e. sustainable and appropriate distinctive capabilities of architecture reputation and innovation.
The future of strategy
A Brief History of Business Strategy
This chapter describes the evolution of business strategy. It begins with the 1960s perspective in which strategy was largely equated with corporate planning; the 1970s see an emphasis on diversification and portfolio planning. The 1980s and 1990s are characterized by a focus on core competencies and the development of less analytic, more people-oriented approaches to management. The still dominant rational approach to strategy is explained and its criticisms discussed. However, it is argued that these criticisms are based on a wish-driven view of strategy and is not as relevant to a strategy rooted in the distinctive capabilities of the individual firm.
Conclusions
This concluding chapter discusses how the military analogy wrongly continues to exercise such a powerful hold on thinking about corporate strategy, and how it has lead to two of the most widespread fallacies in the interpretation of business behaviour and economic performance. The first one is the overestimation of the importance of size and scale, while the second is the excessive emphasis on leadership vision and determination as a determinant of corporate success. The central theme of this book is that competitive advantage and corporate success are generally based on stability, continuity in relationships and on the identification and exploitation of distinctive capabilities.
Bron: Kay, J. (1993). Foundations of Corporate Success - How business strategies add value. Oxford: Oxford University Press. Samenvatting beschikbaar via Oxford University.
