Competitive advantage, in order to be valuable, needs to be long-lasting. From an economic point of view, a competitive advantage is similar to a monopoly that the company creates for itself and which gives the company a profit advantage (an economic rent). This happens only if this monopoly is not immediately destroyed before imitation.
One can generally distinguish three ways of achieving sustainability:
- Customer loyalty
- Positive feedback’s
- Pre-emption of capabilities.
Customer Loyalty creates sustainability when customers keep coming back to a company by choice, because the product or service provided to them is unique or more valuable than competition. It can also be due to a brand that has imprinted an association of uniqueness to the product or service in the mind of the customer. It can also be due to high switching costs that customers would incur if they changed products or services: in that case the customer is locked-in. An example of uniqueness or superior value is provided by Schlumberger, which commands nearly 70 per cent of the world market for logging, a highly specialized service of control for oil exploration. Coca Cola or Louis Vuitton are among the most characteristic examples of sustainable competitive advantages coming from a strong brand. A high switching costs example is given by Microsoft, whose operating system is so dominant that a customer wishing to shift to a competitive system like Linux or Apple would have tremendous application software adaptation costs.
Positive Feedback’s are advantages that follow the logic of ‘success brings success’ and produce increasing returns. There are two kinds of positive feedback: `network externalises’ and `experience effects’. Network externalises exist when the customer base of a product or service is such that it induces other products or services providers to adopt it in their own value proposition. In turn, the fact that other products or services use the original product increases the value for new customers to buy the original product or service. This virtuous circle creates a positive loop that reinforces the company’s competitive position. The classic example of network externalities has been provided by the battle of standards between VHS and Betamax. Because JVC, the inventor of VHS, opened its licence to many consumer electronic manufacturers, it made VHS more readily available. This, in turn, induced video producers and distributors to put more movies on the VHS standard, inducing more consumers to buy VHS machines, given the large number of VHS movies available. Microsoft DOS and Windows or Microsoft Office followed the same path: more software available with Windows or more users of Microsoft Office attracts more customers to buy Windows personal computers and to become users of Microsoft Office which in turn induces more Windows-based software, thereby attracting more customers. Betamax cassettes disappeared, Macintosh computers were pushed into a small market niche and Lotus 123 or WordPerfect nearly collapsed. In the end, network externalities create a situation in which the `winner takes it all’, meaning that the company which has developed a competitive advantage based on network externalities has reached a quasi-monopolistic situation.
Pre-Emption Of Capabilities is a type of competitive advantage based on the appropriation by one company of key resources or assets that competitors will find difficult to access, or to the development of competencies that are `time incompressible’. Appropriation of resources or assets applies to the privileged access to natural resources such as location or mining concessions. It may apply to access to skills and talents when they are in limited supply, as is the case in many emerging markets such as the Internet-related sectors. It may apply to the right to do business, such as the obtaining of licenses, as in telecommunications, or landing rights in air transport. Patenting is a form of pre-emption since it gives the patent holder a period during which it has the proprietary right to exploit the patent. It applies to distribution networks, partnerships or access to favorable locations, as in the retail or hospitality industries. Time incompressibility is a competitive advantage based on competencies, which are time-consuming to imitate. For instance, Toyota obtained a sustainable advantage by developing the `kanban’ and the `just-in-time’ processes. Those processes have been built up over time, through trial and error. When Western automobile manufacturers discovered the power of such processes in the 1980s they also discovered that they were not so easy to imitate given the complexity of the social relationships involved. They had to take the time to go through the same type of trial and error thatToyota had experienced in the first place.
Credit: Management of International Business-MGU