IBM/U3 Topic 3 Meaning, Concept and Scope of Distinctive Competitive Advantage
A distinctive competency is a competency unique to a business organization, a competency superior in some aspect than the competencies of other organizations, which enables the production of a unique value proposition in the function of the business. A distinctive competency is the basis for the development of an unassailable competitive advantage. The uniqueness differentiates this competency from all others, whether a core competency or simply a competency.
Sources of Distinctive Competency:
Distinctive competencies, the basis for competitive advantage, can come from technology, industry position, market relations, cost, business processes, manufacturing processes, people, customer satisfaction, or just being first.
The insightful integration of complementary elements of the business model is the strongest form of competitive advantage known. This is because it is so difficult for competitors to understand and even more difficult to replicate, especially when the business model elements of value, purpose, vision, culture, and identity are intertwined in a powerful business solution.
Examples of distinctive competency:
Toyota has a distinctive competency in lean manufacturing. GE has a distinctive competency in management development. These companies also have core competencies, core to their particular lines of business. They also have competencies necessary to operate their business but of not of strategic significance, such as payroll, the processes used to pay their employees. On the other hand, a company like ADP, which provides payroll and benefits services, certainly has payroll processing as a core competency, if not a distinctive competency.
Competency and Advantage
For a business to develop and sustain a competitive advantage, it must have some sort of competitive advantage, based on a distinctive competency, which enables it to produce a unique value proposition. A distinctive competency is a competency that is maintainable in the face of competition. It is not imitable, at least for a while. This can be thought of as an “”unfair advantage””.
In a dynamic environment, ultimately distinctive competencies, or the uniqueness of the value proposition produced using them, becomes less distinct or less unique. Therefore, in order to sustain advantage, competencies must be dynamic, evolving to more favorable forms in order to sustain advantage over the long haul.
Dynamic capability refers to the development of competencies, both in reaction to the environment and deliberately as part of learning and knowledge development. See dynamic capability for a perspective on the development of capability, i.e. competency.
Distinctive competency should be explicitly defined to insure that it is profoundly understood, it should be protected from loss to competitors whether through trade secrets, intellectual property, or simply by making it such an integral component of an overall competitive business model that it cannot be replicated. Leadership must nurture, tune, and renew the distinctive competency in order to have it remain distinctive.
John Kay on distinctive competency — (Kay, 1999)
The success of corporations is based on those of their capabilities that are distinctive. Companies with distinctive capabilities have attributes which others cannot replicate, and which others cannot replicate even after they realise the benefit they offer to the company which originally possesses them.
Distinctive vs. Reproducible capabilities
The opportunity for companies to sustain competitive advantage is determined by their capabilities. The capabilities of a company are of many kinds. For the purposes of strategy the key distinction is between distinctive capabilities and reproducible capabilities. Distinctive capabilities are those characteristics of a firm which cannot be replicated by competitors, or can only be replicated with great difficulty, even after these competitors realise the benefits which they yield for the originating company.
Distinctive capabilities can be of many kinds. Government licences, statutory monopolies, or effective patents and copyrights, are particularly stark examples of distinctive capabilities. But equally powerful idiosyncratic characteristics have been built by companies in competitive markets. These include strong brands, patterns of supplier or customer relationships, and skills, knowledge and routines which are embedded in teams.
Reproducible capabilities can be bought or created by any firm with reasonable management skills, diligence and financial resources. Most technical capabilities are of this kind. Marketing capabilities are sometimes distinctive, sometimes reproducible.
The importance of the distinction for strategy is this. Only distinctive capabilities can be the basis of sustainable competitive advantage. Collections of reproducible capabilities can and will be established by others and therefore cannot generate rents in a competitive or contestable market.
Matching Capabilities to Markets
So the strategist must first look inward. The strategist must identify the distinctive capabilities of the organisation and seek to surround these with a collection of reproducible capabilities, or complementary assets, which enable the firm to sell its distinctive capabilities in the market in which it operates.
While this is easier said than done, it defines a structure in which the processes of strategy formulation and its implementation are bound together. The resource based view of strategy – which emphasises rent creation through distinctive capabilities – has found its most widely accepted popularisation in the core competences approach of C. K. Prahalad and Gary Hamel. But that application has been made problematic by the absence of sharp criteria for distinguishing core and other competencies, which allows the wishful thinking characteristic of vision and mission- based strategising. Core competencies become pretty much what the senior management of the corporation wants them to be.
The perspective of economic rent – which forces the question ‘why can’t competitors do that?’ into every discussion – cuts through much of this haziness.
Characteristics such as size, strategic vision, market share and market positioning – all commonly seen as sources of competitive advantage, but all ultimately reproducible by firms with competitive advantages of their own – can be seen clearly as the result, rather than the origin, of competitive advantage.
Strategic analysis then turns outward, to identify those markets in which the company’s capabilities can yield competitive advantage. The emphasis here is again on distinctive capabilities, since only these can be a source of economic rent, but distinctive capabilities need to be supported by an appropriate set of complementary reproducible capabilities.
Markets have product geographic dimensions, and different capabilities each have their own implications for the boundaries of the appropriate market. Reputations and brands are typically effective in relation to a specific customer group, and may be valuable in selling other related products to that group. Innovation based competitive advantages will typically have a narrower product focus but may transcend national boundaries in ways that reputations cannot. Distinctive capabilities may dictate market position as well as market choice. Those based on supplier relationships, may be most appropriately deployed at the top of the market, while the effectiveness of brands is defined by the customer group which identifies with the brand.
Since distinctive capabilities are at the heart of competitive advantage, every firm asks how it can create distinctive capabilities. Yet the question contains an inherent contradiction. If irreproducible characteristics could be created, they would cease to be irreproducible. What is truly irreproducible has three primary sources: market structure which limits entry; firm history which by its very nature requires extended time to replicate; tacitness in relationships – routines and behaviour of “”uncertain imitability”” which cannot be replicated because no-one, not even the participants themselves, fully comprehend their nature.
So companies do well to begin by looking at the distinctive capabilities they have rather than at those they would like to have. And established, successful companies will not usually enjoy that position if they do not enjoy some distinctive capability. Again, it is easy to overestimate the effect of conscious design in the development of firms and market structures.
The evolution of capabilities and environment
Strategy, with its emphasis on the fit between characteristics and environment links naturally to an evolutionary perspective on organisation. Processes which provide favourable feedback for characteristics which are well adapted to their environment – and these include both biological evolution and competitive market economies – produce organisms, or companies, which have capabilities matched to their requirement.
Recent understanding of evolutionary processes emphasises how little intentionality is required to produce that result. Successful companies are not necessarily there because (except with hindsight) anyone had superior insight in organisational design or strategic fit. Rather there were many different views of the firm capabilities a particular activity required: and it was the market, rather than the visionary executive, which chose the match that was most effective. Distinctive capabilities were established , rather than designed.
This view is supported by detached business history. Andrew Pettigrew’s description of ICI shows an organisation whose path was largely fixed – both for good and for bad – by its own past. The scope and opportunity for effective management strategic choice – both for good and bad – was necessarily limited by the past. This is not to be pessimistic about the potential for strategic direction or the ability of executives to make important differences, but to reiterate the absurdity and irrelevance of using the blank sheet of paper approach to corporate strategy.
The resource based view of strategy has a coherence and integrative role that places it well ahead of other mechanisms of strategic decision making. I have little doubt that for the foreseeable future major contributions to ways of strategic thinking will either form part of that framework or represent development of that framework. After thirty years or so, the subject of strategy is genuinely acquiring what can be described as a paradigm – to use the most overworked and abused term in the study of management.