Building Sustainable Competitive Advantage

By Manish Shah , President & CEO, Cover-All

Manish Shah , President & CEO, Cover-All

Competitive Advantage is often thought to be an innovative product, visionary founder, loyal customer base, network effect or secret formula. Indeed, they are all competitive advantages, but are they truly sustainable? All these things could be unique at one point in time, but can they be replicated or improvised by others? In order to get answers to those questions it is necessary to examine history.

There are many examples in history ranging from political superiority to business monopoly attained through uniqueness which were eventually duplicated and even commoditized - completely eliminating such competitive advantages. Henry Ford, who laid the foundations for modern-day mass production techniques, based it on the inter-changeability of components and the use of the moving assembly line. It helped Ford become a market leader but over time lost its competitive advantages as innovative techniques got duplicated and improvised by GM. Ford is still a significant company and a key player in the automotive industry, but it could not sustain the competitive advantage that it built through the genius of Henry Ford. A recent example that we all are familiar with is Blackberry, a device without which most of us found it impossible to get through our busy days. Blackberry certainly had the best smart phone with robust security which helped build a network of loyal customers across the world. Network effect is often cited as sustainable competitive advantage, but even that did not stand the test of time as loyal customers eventually flocked to alternatives and customer loyalty rating dropped to 48 percent, much lower when compared to the 84 percent current loyalty rating of Apple iPhone users and 60 percent of Google Android users.

There are many examples of firms that have obtained a competitive advantage by implementing rare, valuable, and unique strategies, but in most cases they eventually lost that advantage to competitors who copied and added additional value, eventually commoditizing to compete on the best price. This is because competitive advantage lies in the making of the capabilities, not the capabilities themselves. It leads one to wonder if it is even possible to attain sustainable competitive advantage.

There is no definitive answer, but it is certainly possible to sustain competitive advantage for a longer period of time, if not forever. Assume that an organization has performed coordinated and results-oriented tasks which have led to rate capabilities in the form of innovative products, customer loyalties or secret formulas and that they have built momentum in the market place which will be noticed by its competitors. This begins to establish a competitive advantage for an organization. To adapt to changing environments and emergence of competition, organizations need to make incremental improvements in order to maintain their competitive advantage through process innovations, cost optimizations, and additional values to customers while still maintaining a tight anchor to original innovation. Usually organizations are quite adept at making incremental improvements. Apple has made incremental improvements to its iPhone since its introduction in 2007, but it has stayed close to the original design and has been able to defend its competitive advantage through its loyal customer base – at least for the time being. Research shows that such incremental improvement in capabilities cannot be sustained for much longer unless the organization’s actual, but not visible, competitive advantage is its transformational capabilities.

This is a very abstract and obscure characteristic of an organization that ensures imitability and substitution is limited. Such an organizational characteristic provides the opportunity to build new capabilities and facilitates learning and behavioral changes to undergo a transformation for maintaining or replacing its competitive advantage. This key characteristic to build a sustainable competitive advantage is so ingrained in the DNA of an organization that it will be difficult for organizations to pinpoint what specifics are helping them to have a sustainable competitive advantage.

This means that if there is a product or service that provides a competitive advantage to an organization, building a sustainable advantage does not mean that the same product or service would continue to provide advantages over the competition. Sustainable competitive advantage requires having organizational characteristics that will continue to generate new, rare, and differentiated capabilities to maintain the organization’s lead over its competitors.

It will be very interesting to take a snapshot at the present time and monitor future developments of a few organizations to review whether the theory regarding sustainable competitive advantage holds up. Apple went through a significant transformation during the first decade of the 21st century. It appears to be defending its leadership and competitive advantage through incremental improvement, but its moat seems to be diminishing against rivals who have done a great job at imitating and substituting its smart phone and tablets. Apple will only be able to sustain its competitive advantage and generate high profits if it goes through another transformation that establishes a new product category rather than continued iteration of is existing categories. If Apple can prove this in a post-Steve-Jobs era, then it may be that its DNA is well set to avoid inertia and complacency while fostering transformative behaviors.

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