Four Criteria of Firm's Capabilities Have the Potential to Create a Sustainable Competitive Advantage - Literature review Example

FOUR SPECIFIC CRITERIA MANAGERS CAN USE TO DECIDE WHICH OF THEIR FIRM'S CAPABILITIES HAVE THE POTENTIAL TO CREATE A SUSTAINABLE COMPETITIVE ADVANTAGE By Name Course Instructor Institution City/State Date Four Specific Criteria Managers can Use to Decide Which of Their Firm's Capabilities Have the Potential to Create a Sustainable Competitive Advantage Introduction A sustainable competitive advantage (SCA) takes place when the firm develops or gets numerous attributes that enable it to outclass its competitors. Such attributes may include access to highly skilled and trained employees or access to natural resources. The core competencies according to Hitt et al. (2008, p.81) are things that offer competitive advantage to a firm over its competitors. Therefore, core competencies can be defined as capabilities and resources, which act as a source of the firm’s competitive advantage over its competitors. Generally, core competencies are valuable, rare, expensive to imitate as well as non-substitutable. Capabilities can be defined as the capacity of the firm to distribute resources, which are intentionally integrated so as to realise the sought after end state. On the other hand, resources can be described as what the firm’s assets such as employees and its brand name value. Imperatively, the firm‘s capabilities are sourced from the resources. According to resource-based theory (RBT), when the valuable, rare, inimitable and non-substitutable (VRIN) resources of a firm are utilised well, a sustainable competitive advantage can be realised (Mutunga et al., 2014, p.147). A glimpse at the current business environment exhibit that the factors that affect the contemporary business environment are more complex and exceedingly challenging as compared to the past business environment. Technology advancement, new manufacturing techniques, as well as customer power are amongst characteristics of contemporary business environment, and all are related to the complexity and dynamics of the markets. Managers understand that identifying competitive factors, threats as well as opportunities, is not sufficient for a successful strategy. Therefore, they have to determine which sources and competences are accessible in the firm so as to accurately examine the firm’s strategic competences. The essay seeks to critically explain the four specific criteria managers can utilise so as decide which of their firm's capabilities can create a sustainable competitive advantage. Discussion Sustainable competitive advantage as mentioned by Hakkak and Ghodsi (2015, p.300) is associated with the company’s efforts to establish and maintain advantages for an extended period of time. There are a number of factors that influence sustainable competitive advantage such as the ability to access customers and resources, target market size as well as limitations on the competitors’ powers. Normally, sustainable competitive advantage can be created by the firm when the managers utilise strategy that cannot be imitated easily. To create sustainable competitive advantage, Hill and Jones (2007, p.78) suggest that the manager should ensure that the customers recognise differences between the company’s products and those provided by the rivals. Such differences should be generated by the firm's resources that cannot be accessed easily by the competitors. Managers should understand the special skills and resources, which contribute to the generation of sustainable competitive advantage. It is imperative to understand that resources for should have four characteristics: value, rarity, inimitable and non-substitutable. Potential sustainable competitive advantage resources can be grouped into rational, legal, physical, organisational, human, financial as well as informational resources. Essentially, resources’ competitive advantage may turn out to become sustainable competitive advantage within the firm’s marketplace. Firms’ skills and resources should be combined with core competencies for successful creation of SCA in a unique and consistent manner. To achieve SCA, a firm needs, resources, imperfect resource mobility, ex post limits as well as constraints to competition. A number of Studies such as Rose et al. (2010) and Ma (2000) have established that there is a noteworthy relationship between performance and competitive advantage. According to Burton (2011, p.252), sustainable competitive advantage can result in improved performance, normally measured conventionally through profitability or market-share. Based on the argument that performance and competitive advantage are two distinct dimensions and concepts, firm’s managerial strategy must focus on achieving and maintaining a competitive advantage position over the competitors. Consequently, this competitive advantage position can result in improved performance in the firm. Therefore, a performance measurement system that is effective must capture both the business performance financial and non-financial aspect in order to present a broader and clearer dimension and insight of performance. According to resource-based theory (RBT), firm can create sustainable advantage after using valuable, rare, inimitable and non-substitutable resources effectively. Resource has been defined by Mills et al. (2004, p.980) as anything that results in strength or weakness in the firm such as the tangible assets that are semi permanently tied to the firm. According to Ruel (2012, p.80), resources are all organisational processes, capabilities, firm characteristics, knowledge and information, which the firm controls to be able to formulate and implement strategies capable of improving effectiveness and efficiency. Resources can be categorised into three: organisational capital resources, human capital resources as well as physical capital resources. Organisational capital resources involve things such as firm's coordinating, controlling, planning systems and structure, in addition to the informal relations amongst the firm’s groups. On the other hand, physical capital resources are things such as firm's equipment and plant, geographic location as well as technology. Lastly, human capital resources consist of things such as judgement, experience as well as intelligence of the firm’s employees and the individual managers. Such resources according to the resource-based view (RBV) of the firm are basis of competitive advantage. Competitive advantage takes place when a value creating strategy is implemented by the firm, but not implemented concurrently by any potential or current competitors. Competitive advantage according to the RBV of the firm can only take place in circumstances of firm resource immobility as well as firm resource heterogeneity, and such suppositions seek to distinguish the RBT from the conventional strategic management model (Akio, 2005, p.126). Firm resource immobility has been described by Tansky and Heneman (2006, p.27) as inability by competitors to get resources from resource markets or other firms while firm resource heterogeneity is a situation where resources are different across firms. Firm resources can successfully be substitute by firm in the short-term, but this is impossible for knowledge resources. For this reason, knowledge is considered a main source of SCA, is inimitable, and adds value to the firm. A company could relatively have different resources, but rare and inimitable resources offer a sustainable competitive advantage. Deregulation, technical evolution and globalisation have changed the markets’ competitive structure in a manner that the success of traditional sources of the company’s competitive advantage is weakened. Notably, financial, technological or physical assets’ competitive advantages are not more sustainable because such assets can be transferred easily. For this reason, firms must focus on developing imitable capabilities. Employees should develop and use their skills, knowledge and abilities, which are coordinated and organised in distinctive ways. In firms, knowledge signifies a footing whereby the firm’s competitiveness strategy is developed. Correspondingly, knowledge is considered to be a crucial resource for the firm growth and profitability in international as well as domestic markets. Therefore, companies must identify, develop, enhance, and use their knowledge resources to retain or strengthen their competitive advantages as well as to enhance their effectiveness. For this reason, knowledge is considered to be an important resource of incomes. For organisational success as well as creation of sustained competitive advantage depends on the firm’s strategy. As mentioned by Enriquez (2015, p.1), strategy is dynamic; therefore, decisions made by managers from medium to high-level must be accurate. Given that strategies are always formulated by managers, their formulation normally depend on the manager’s assertive decisions. In today’s world of business, it is hard for managers to make good decisions, considering that technology is forcing people to make decisions devoid of having complete information. The manager’s daily work involves sceneries of decision-making, and positive or negative decisions will result in the firm’s performance. The RBV static characteristic fails to explain how successful companies endure over time in a more competitive environment. Still, firms such as Philips and IBM have strictly followed the RBV approach; thus, amassing valuable technological resources with VRIN characteristics. On the other hand, in order for these firms to be able to master change of management capability as well as adapt the required procedures and resources. Being able to create sustainable competitive advantage by means of renovation of based competences and resources are suitable for dynamic capabilities approach. According to Ambrosini and Bowman (2009, p.43), dynamic capabilities are a complement to resource-based view approach. Resources are not the only things that matter in a firm, but also the method through which the firm amass new capabilities and skills, as well as the forces, which limit the process’s direction and rate. In the resource-based view, capabilities are considered to be either the resources or the processes through which the resources are used in firm. Capabilities have been defined by Frynas and Mellahi (2015, p.118) as a form of resource; therefore, a valuable resource base enables a firm to succeed through substantive capabilities or operating. Therefore, dynamic capabilities as mentioned by Ambrosini and Bowman (2009, p.34) are processes, which change the resource base. For a resource to become a source of SCA, Omerzel and Gulev (2011, p.349) assert that the resource have to add value to the company, by being rare, inimitable, and not have sufficient substitutes. In view of this, for human resources to become a source of SCA, they have to offer value to the company. According to Firm Specific Human Capital Theory, when the labour demand and supply are homogeneous, there is no difference in what every person contributes to the firm. In such a case, generating value through human assets investment becomes very challenging. However, when the labour demand is heterogeneous (the company offers different jobs than need different skills) as well as the labour supply is heterogeneous (people vary in level and types of their skills, then the employees’ contribute value to the firm. Therefore, human capital has the ability to generate value for the company, and offers techniques for estimating the created value. Besides that, the resource has to rare for the firm to be able to create a sustained competitive advantage. Some may argue that human resources cannot be rare, because of the existence of unemployment and excess supply of employees. With view to labour supply homogeneity, whereby all potential and current workers possess similar skills, then human capital resources cannot be viewed as rare. Actually, the majority of the scientific management literature has concentrated on the designing jobs in a manner that makes employees skills and capabilities inapt to perform a particular job. Scientific management literature emphasise that jobs should be designed in a way that they need no certain skills. Jobs should be designed to an extent that skills are considered to be somewhat irrelevant so that human resources can be seen as a commodity instead of a rare resource. Nevertheless, managers should look for skills that allow for variance in employee contributions; therefore, under such conditions, getting human resources that are of high quality are very rare. For instance, cognitive ability is one measure of human quality because of its reliable empirical backing as the best, performance predictors in the firms. Considering that cognitive ability is usually distributed within the population, human resources having high levels of capabilities are rare. Therefore, firms that possess high cognitive ability levels as compared with to those of their competitors will certainly possess valuable human capital resources as compared to their competitors. For instance, while exhibiting how application of programmer aptitude test may improve the national economy productivity, Schmidt et al. found that because the entire talent pool is limited, gains because of selection in a particular job are to some extent offset by other jobs losses. For a resource to become a source of SCA, the resources have to be inimitable. In view of this, Wright et al. (1993, p.10) assert that if the competitive advantage created by the firm can be imitated easily, therefore the resources cannot be considered to be a source of sustained competitive advantage. According to Sharma et al. (2014, p.8), to successfully talk about imitability of the firm’s resources, especially the HR resources, the concepts of social complexity, causal ambiguity as well as unique historical conditions have to be addressed. Additionally, the resources potential mobility has to be taken into account, and this is because of the fact that some resources such as human capital resources can eventually be imitated by the competitors in terms of the levels of their capability. For instance, a company could have developed a labour force that has higher cognitive ability level as compared to its rivals, yet the rival firms located in different geographic area can also develop a labour force having similar ability. Still, the manner in which resources serve as a competitive advantage could be defined by unique historical situations, arise from social community or be dependent on causal ambiguity. In order to comprehend this, the difference between behaviours and capabilities is crucial. Even though workers must possess the abilities to show the needed behaviours, possessing the required capabilities is not a guarantee that the sought after behaviours will be shown. Even then, the human capital resources effectiveness could be coupled tightly to the organisational capital or physical resources. Therefore, social complexity, causal ambiguity as well as unique historical circumstances have a strong impact to the inimitability of firm’s resources, especially the human capital resources. Additionally, such similar conditions lead to SCA that originate from immobility of the human resources. Combing unique historical conditions, causal ambiguity and social complexity with imperfect mobility result in value creation by the firm’s resources. Without such conditions, firms have to captures the extra rents related to their resources; still, since employees inputs are normally related to team production, their contribution cannot be exactly measured. As mentioned by Oliver (1997, p.704), for a firm to create sustained competitive advantage, it must ensure that its resource’s cannot be substituted. In view of this, it is worth understanding whether firm resources can offset any competitive advantages brought about by other resources. To a level that other resources can be substituted for benefits related to the focal firm resources, such resources lack the ability to create a sustained competitive advantage. For this issue to be solved, Wright et al. (1993, p.15) assert that it is imperative to understand that some resources such as human capital resources are few resources within the firm with the capability of not becoming obsolete and transferable across different markets, products, as well as technologies. Even though the rapid advancement of technology has led to new technologies that make previous technical skills out-dated, scores of human capital resources can relatively be generalised. With view of cognitive ability as a crucial firm resource, if the company have employed people with high levels of such ability, then training them using advanced technological knowledge helps the firm make sure that the resource is not rendered obsolete. Additionally, general resources like the cognitive ability can be transferred across a wide range of markets, products, and technologies. Actually, Schmidt, Hunter and Pearlman (1981) as cited by Hersen (2004, p.358) established that the cognitive ability validity was consistent even across jobs that were very different. For that reason, Wright et al. (1993, p.16) argues that some resources can be substituted in the short term, and such substitution can hardly lead to sustained competitive advantage. This is because the resource that offset the human resources advantages is not, inimitable, rare, or non-substitutable; thus, making it easily imitated; thus, making the human resources to once more have a competitive advantage. For instance, considering that the firm has employees with highest ability and very committed to the firm, therefore, they constitute a basis for competitive advantage. However, when the competitor use a resource such as a new technology that offers higher productivity as compared to that offered by the firm’s highly committed and skilled workers it can be disastrous. However, if the new technology is imitable, then the firm A can buy the new technology and this will make its human resources able to generate a competitive advantage. Therefore, as mentioned by Talaja (2012, p.51), the only resources with ability to substitute the human resources are those resources which are valuable, rare, inimitable, and non-substitutable. Conclusion In conclusion, the essay has critically explained the four specific criteria managers can utilise so as decide which of their firm's capabilities can generate a sustainable competitive advantage. As mentioned in the essay, resources are the main source of capabilities in the firm. Capabilities, on the other hand, are the source of core competencies in the firm while core competencies are the firm’s source of competitive advantages in the market. As argued in the essay, competitive advantage becomes sustainable when the competitors stop planning how to imitate other firms’ resources or when imitation barriers are very high. Basically, when the competitor’s imitative efforts stop devoid of disrupting the competitive advantage of the firm or when it becomes costly to imitate, the created competitive strategy is believed to be ‘sustainable’. As mentioned in the essay, the search for sustainable competitive advantage should be the main objective of firm’s competitive strategy as well as creation of improved profitability. How companies change, develop and maintain competitive advantage as well as create value has been a concerning issue amongst academics and practitioners, while scores of fields focus on the issues associated with change such as innovation and cognition, only the dynamic capability perspective concentrate on how the firm’s valuable resources can be changed over time. Essentially, examining the firm’s competitive advantage from the resource-based view is certainly important since it can be utilised as conceptual guideline for firms, especially in improving their performance and competitive advantage position through utilisation of recognised internal organisational resources. Moreover, the resource-based theory maintains that firm resources, which are valuable, rare, hard to imitate and non-substitutable when utilised effectively, can enable the firm create sustainable competitive advantage. In recommendation, managers must identify the resources that are important for the firm’s success and also identify resource-capability configurations that offer sustained competitive advantage. Bearing in mind that neither capabilities nor resources in the firm can confer sustained competitive advantage, but exploiting their characteristics like rareness and value can make the firm realise SCA. References Akio, T., 2005. The Critical Assessment of the Resource- Based View of Strategic Management: The Source of Heterogeneity of the Firm. Ritsumeikan international affairs, vol. 3, pp.125-50. Ambrosini, V. & Bowman, C., 2009. What are dynamic capabilities and are they a useful construct in strategic management? International Journal of Management Reviews, vol. 11, no. 1, pp.29–49. Burton, T.T., 2011. Accelerating Lean Six Sigma Results: How to Achieve Improvement Excellence in the New Economy. Florida: J. Ross Publishing. Enriquez, j.f., 2015. 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