The basic assumption in strategic management is that firms strive to achieve position that will enable them to outperform its competitors and earn higher revenues. When a firm can perform something better than other organization, the firm is said to have a competitive advantage.
Competitive advantage is defined as anything that a firm does exceptionally well compared to its ri¬vals. Competitive advantage allows a firm to outperform its competitors. A firm gains competitive advantage when it is able to perform activities that other companies are unable to duplicate. A company's competitive advantage may be its superior customer service innovative products, strong distribution channels or low pricing—something unique that the firm offers and which sets them apart. Some companies such as Dell and Amazon establish competitive advantages by introducing more ef¬ficient business models. By removing the distributors and avoiding expensive retail showrooms, Dell was able to post high-profit margins while selling its products cheaper than its established competitors. Similarly, Amazon.com's business model of a centralized distribution model allows it to manage inventory much more efficiently than traditional book retailers and has provided Amazon.com a competitive advantage over its rivals. Obtaining and maintaining the firm's competitive advantage is crucial to a firm's survival.
Sustained competitive advantage comes from maintaining higher profits than competitors over long periods of time. Sustained competitive advantage refers to a competitive advantage that firms can maintain for a long period of time. However, a firm can only sustain its competitive advantage for a certain period of time.
However, it can be difficult for a company to develop a sustained competitive advantage because this means that the company must possess value creating resources or capabilities that cannot be imitated by any firms nor made redundant or obsolete by developments in the external environment. The rapid changes in the environment often make it difficult for organizations to develop a com¬petitive advantage that can be sustained for a long period of time. Microsoft, the technology leader in the PC industry for almost a decade, is now facing stiff competition from Google. Its latest version of Windows Vista was a di¬saster and many critics now say that Google is the defining company in the industry today (Levy, 2008).
There are two views that seek to explain why some firms are able to achieve greater advantages over their rivals: resource-based view (RBV) and the industrial/organizational (I/O) view. Both these views are discussed in the following sections.
Resource-based View
The resource-based view (RBV) states that a firm's resources (such as skills, financial resources, human resources and physical resources) are most im¬portant in getting and sustaining a company's competitive advantage.
Resource-based view is a strategic management idea that each firm is unique and possesses resources and capabilities that provide the basis for its competitive advantage.
According to the RBV view, organizational performance will be determined by the skills and resources that it possesses, and these key assets will give the firm a competitive advantage. Since the set of resources and competencies to make use of these resources are unique to each firm, firms with superior resources and capabilities tend to enjoy greater competitive advantage over other firms. Competitive advantage is achieved when a firm is able to devel¬op its competencies successfully from the resources it possesses, and when these competencies are developed especially well, they become the source of the firm's competitive advantages.
Industrial/Organizational View
The industrial/organizational (I/O) view originates from Michael Porter of the Harvard Business School. The I/O view contends that the industry in which the firm chooses to compete has a stronger influence on the firm's performance than the firm's internal resources such as management, mar¬keting or finance. Industrial/ Organizational view explains that a firm': performance is strongly influenced by its external environment. According to this view, the industry which a firm chooses to compete has a stronger influence c the firm's performance than the resources or capabilities that possesses.
Organizations that compete in attractive industries, avoiding weak or faltering industries and having a full understanding of key external factors, their relationships within that attractive industry would be in a more advantageous position. While the resource-based view is internal, the focus of the I/O view is external. Getting and keeping competitive advantage according to the I/O perspective means analysing the external environment forces (such as economies of scale, level of competitiveness, product differ¬entiation and availability of substitute goods) and basing strategic decisions on what is happening out there.
