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Looking Inside for Competitive Advantage

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What do we look for in order to attain competitive advantage? Where will we look? How will we find it? Well, there are a lot of questions that could be asked so that we can source out a firm’s competitive advantage. Several things are needs to be assessed, evaluated and decided on in order to formulate a firm’s competitive advantage. For Jay Barney, the author of Looking inside for competitive advantage, a company’s competitive advantage can be source out from its external opportunities and threats and its internal strengths and weaknesses. From these environmental factors, we can now pick up the strengths, weaknesses, opportunities and threats of the company.

Along with these strengths, weaknesses, opportunities and threats, are resources and capabilities that either utilize the opportunities and strengths or counteract with threats and weaknesses of the firm. Resources and capabilities have the potential to be the basis for competitive advantage when they are valuable, rare, costly to imitate, and non-substitutable. When these criteria are met, resources and capabilities become core competencies which where we can get our competitive advantage. After identifying the resources and capabilities of the company, we now have to consider evaluating each resource and capability by applying Barney’s cross-examination of the value, rareness, imitability and organization of each factor.

First is the question of value, the resources and capabilities is significant when it facilitate the employment of opportunities and/or the disengagement of threats. Also, a dynamic resource or capability is needed because even though they have been remarkable before in giving value, we still live in a world where change is present. Being dynamic allows the company to be flexible and able to respond quickly to unpredicted and unexpected changes in the environment. According to Jay Barney, some environmental changes are so evident that few, if any, of a firm’s resources remain valuable in any environmental framework. Such changes may even increase the value of those resources in those other uses. In addition, numerous firms have weathered these environmental shifts by finding new ways to apply their traditional strengths. By answering the question of value, managers link the analysis of internal resources and capabilities with the analysis of environmental opportunities and threats. Thus, the resources and capabilities of different firms can be valuable in different ways.

Second is the question of rareness. If a particular resource and capability is controlled by numerous competing firms, then that resource is unlikely to be a source of competitive advantage for any one of them. Valuable but common resources and capabilities are sources of competitive parity. Rareness means that resources and capabilities must be different among a firm’s current and potential competition. The question Barney stated is “How many competing firms already possess these valuable resources and capabilities? “, should guide a firm in obtaining accurately the firm’s rare resources and capabilities. If they are not rare, they cannot–by themselves–be sources of competitive advantage. While resources and capabilities must be rare among competing firms in order to be a source of competitive advantage, this does not mean that common, but valuable, resources are not important.

The third is the question of immitability. A firm that possesses valuable and rare resources and capabilities can gain, at least, a temporary competitive advantage. If competing firms face a cost disadvantage in imitating these resources and capabilities, firms with these special abilities can obtain a sustained competitive advantage. Imitation can occur in at least two ways: duplication and substitution. Duplication occurs when an imitating firm builds the same kinds of resources as the firm it is imitating. Firms may be able to substitute some resources for other resources. Reasons why some of these internal attributes may be costly to imitate can be grouped into three categories. Imperfectly inimitable either as a result of unique historical conditions, causal ambiguity or social complexity

And last is the question of organization. Competitive advantage potential depends on the value, rareness, and immutability of its resources and capabilities. Firm must be organized to exploit its resources and capabilities. Moreover, numerous components are relevant: formal reporting structure, its explicit management control systems, and its compensation policies. In combination with other resources and capabilities, they can enable a firm to realize its full competitive advantage.

Competitive advantage is not only seen on firms and organizations. It can also be associated to nations. In the competitive advantage of Nations (Porter 1998), we can directly link competitive advantage to a specific country. According to Porter, a nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against world’s best competitors because of the competitive pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers. Since the basis of competition has shifted more and more to the creation and assimilation of knowledge, nowadays competitive advantage is created and sustained through a highly localized process. Still, no nation can or will be very competitive in every, or even most industries.

Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic and challenging. The only meaningful concept of competitiveness at the national level is productivity. The principal goal of a nation is to produce a high and rising standard of living for its citizens. The ability to do so depends on the productivity with which a nation’s labor and capital are employed. It depends on both the quality and features of products (which determine the prices that they can command) and the efficiency with which they are produced. Productivity is the prime determinant of nation’s long-run standard of living and it is the root cause of national per capita income. The productivity of human resources determines employee wages, the productivity with which capital is employed determines the return it earns for its shareholders.

For example, Japan has enjoyed numerous competitive advantages over other countries particularly the United States and other European nations. They have successfully utilized their resources and capabilities to prevail over the rapid changes in their environment. Notwithstanding the effects of the Second World War, Japan rose to the challenges of time and in the long run became one of the world’s dominant forces in the business world. How did they do it? For what I know, they possess certain capabilities that other nation do not. They have achieved a sustained competitive advantage because other nations have tried to imitate them without success, duplicate the benefits of their strategy and simply because other nation lacks the confidence to attempt imitating. They have created a sustained competitive advantage by means of several criteria or resource “attributes”.

Having a valuable, rare, imperfectly imitable, and non-substitutable resource and capability made them prevail in business. One trait of the Japanese that is a valuable, rare, imperfectly imitable and non-substitutable capability is “Bushido”. “Bushido” is a system of codes and traditions followed by the warrior class of Japan. The code placed particular emphasis on Justice, Courage, Benevolence, Politeness, Truthfulness, Honor, Loyalty, and Self-control. Having all of these traits made them stronger and astute in dealing with their business partners as well as their enemies. Another trait that is a basis for their competitive advantage is what they call kuntou, shugyou, shitsuke, kun’iku, or choubatsu which means discipline.

Their discipline is a very valuable trait which others find it hard to imitate. Since they possess these traits they have overcome their weakness and threats and have fully utilized their strength and opportunities which led them be competent in their field and eventually directed them to their competitive advantage. Another peculiarity that I have observed is their organization, which is one of the four attributes of Jay Barney in evaluating a resource and a capability. In Japan, if you are thinking of exporting something you cannot go straight to retailers and buyers. You will have to offer your product to the chamber of commerce which will then present your products to potential buyers. This system prevents bureaucracy and efficiently manages what comes in to their country. This also minimizes “red tapes” and other forms of corruptions that destroy any business. And because of these traits, Japan successfully focused on their businesses that led to the inventions and innovations of products that made peoples lives even better.

To close, in order to attain competitive advantage we must look for certain resources and capabilities in our firm. We must look around our environment particularly assessing our opportunities, threats, strengths and weakness to associate it with our resources and capabilities. Then we will find our competitive advantage when these resources and capabilities have passed the VIRO or VIRN test. However, we would not stop there. After knowing our competitive advantages we must know how to sustain it. Sustained competitive advantage cannot be created simply by evaluating environmental opportunities and threats, and then conducting business only in high-opportunity, low-threat environments. It depends on the unique resources and capabilities that a firm brings to competition in its environment.

It must be flexible to times and must try to innovate and upgrade itself to become fit to the existing environment. A sustained competitive advantage is achieved only when competitors have tried without success, to duplicate the benefits of the firm’s strategy or when competitors lack the confidence to attempt imitation. Thus by carefully weighing each resource and capability to which is more suitable as a competence for the company and by innovating it to become valuable, rare, hard to imitate, non-substitutable and a formation of a well structured organization, we will not only attain competitive advantages but a well sustained competitive advantage that will endure to the generations to come.

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