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A competency-based model of sustainable competitive advantage: toward a conceptual integration

A competency-based model of sustainable competitive advantage: toward a conceptual integration

Augustine A. Lado

This article the concept of sustainable competive advantage in the context of two theoretical frameworks: environmental determinism (which encompasses microeconomic and industrial organization traditions) and “strategic selection” (which incorporates Schumpeterian economic and strategic choice perspectives). It is argued that by ascribing competetive advantage to industry/markey imperatives, the 1/0-based model apparently overlooks the idiosyncratic competencies that potentially generate a sustainable competitive advantage for the firm. An alternative conceptualization of sustainable competitive advantage from a resource-based perspective is offered. Specifically, a systems model that integrally links four components of a firm’s “distinctive competencies” (managerial competencies and strategic focus, resource-based, transformation-based, and output-based competencies) is proposed.

The concept of competitive advantage drives business strategy and has recieved considerable treatment in the literature. Within the strategic management literature, we have two copmeting models of sustainable competitive advantage. One is grounded in neoclassical economics (Chamberlin, 1993; Friedman, 1953) and more explicitly dealt with in the industrial organization literature (Bain, 1956; Hill, 1988; Porter, 1980, 1981, 1985). The other is rooted in a resource-based view of the firm (Barney, 1986c, 1988; Dierickx & Cool, 1989; Lippman & Rumlet, 1982; Reed & DeFillipi, 1990).

The 1/0 model views competetive advantage as a position of superior performance that a firm achieves through offering no-frills products at low prices or offering differentiated products for which customers are willing to pay a price premium (e.g. Porter, 1980, 1985). The underlying premise is that the market or industry imposes selective pressures to which the firm must respond. Firms that can successfully adapt to those industry/market requirements will survive and grow, where as those that fail to adapt are doomed to failure and exit from the industry/market.

Thus, in the neoclassical economic and industrial organization traditions, competitive advantage is ascribed to external characteristics rather than to the firm’s idiosyncratic compitencies and resource-based deployments.

In the resource-based model, competitive advantage is viewed from the perspective of the “distinctive competencies” that give a firm an edge over its rivals (Barney, 1986a, 1986b; Day & Wensley, 1988; Fahey, 1989; Ghemawat, 1986; Hitt & Ireland, 1985; Lippman & Rumlet, 1982; Reed & DeFillippi, 1990). These studies have entertained the view of an organization as a nexus or bundle of specialized resources that are deployed to create a privileged market position (see e.g., Barney, 1986c, 1988; Dierickx & Cool, 1989; Rumlet, 1984, 1987; Wernerfelt, 1984). Unequivocally, these works have enriched our understanding of the concept of sustainable competitive. Perhaps their greatest contribution has been in generating alternative concepts that may serve as building blocks for developing a “strategic theory of the firm” (Rumlet, 1984). In this article, the concept of sustainable competitive advantage is extended in the context of resource-based competencies. Our discussion of the concept os sustainable competitive advantage is based on the premise that firm-specific competencies are potential rent-yielding strategic assets (Barney, 1986c, 1988; Dierickx & Cool, 1989; Itami, 1987; Rumlet, 1987; Winter, 1987).

Our analysis assumes that these competencies do not merely “accrue” to the firm (from a good “fit” with industry/environmental requirements), but may consciously and systematically be developed by the willful choices and actions of the firm’s strategic leaders (see e,g., Bourgeois, 1984; Child, 1972; Smicich & Stubbart, 1985; Weick, 1979). Thus, a voluntaristic (as opposed to a deterministic) philosophical stance is adopted in our discussion of the concept of sustainable competitive advantage. An overview of the theoretical perspectives of neoclassical economics and industrial organization economics is first presented under the rubric “environmental determinism.” Then, the topic of strategic selection is discussed. The concept of sustainable competitive advantage is examined within each of these perspectives. Subsequently, a competency-based model of sustainable competitive advantage is proposed.

Environmental Determinism and Competitive Advantage

Deterministic models depiciting the relationship of firms to their environments may be found throughout the strategy-related literature. These models are influenced by theoratical frameworks supplied by such disciplines as neoclassical economics and industrial organization economics.

Neoclassical economic theory is predicted on the logic of economic efficiency as a selective force that determines the long run survival of a firm (e.g., Friedman, 1953). In this view, firms are assumed to be rational with an overriding objective of allocating scarces resources to alternative ends in such a way as to maximize profits. These profits would be partly reinvested to expand productive capacity and increase the volumes of goods and services produced. Managerial competencies are implicitly reduced to elements of labor input wwhose value is realizable only in combination with the other factors of production. Managerial proactiveness based on competencies (or limitations) are not given any serious consideration. The neoclassical theory fails to provide a basis for understanding firm-level strategic behavior, as it assumes away such phenomena as transaction costs, limits on rationality, technological uncertainty, constraints on factor mobility, informational asymmetries, consumer and producer learning, and dishonest or foolish behavior of the firms’ key actors (Rumlet, 1984).

Similary, classical industrial organization scholars have typically assumed that the firm can neither infuence industry conditions nor its own performance. This view, reflected by such works as Bain (1956) and Mason (1939), maintains that “because [industry] structure determines performance, we could ignore conduct and look directly at industry structure in trying to explain performance” (Porter, 1981: 611). In this context, competitive advantage is industry driven (i.e., determined by industry characteristics such as concentration ratio and costs structure) rather than proactively created by firms through accumulation of unique, valuable, and imperfectly imitable resources.

The modified framework advanced by a new group of 1/0 theorists recognizes the role firm conduct in influencing the relationship between industry structure and firm performance. According to Porter (1981), “there are some fundamental parameterers of industry dictated by the basic product characteristics and technology, but … within those parameters, industry evolution can take many paths,… depending [among other things] on the strategic choices firms actually make that follow from their [strategic goals]” (p616). The normative implications of the I/O-based model for strategic management are that a firm should carefully analyze the industry in terms of its structural parameters (power of buyers, power of suppliers, entry barriers, etc.) to assess its profitable potential (Porter, 1980). Once this is acheived, a strategy can effectively align the firm to the industry and generate superior performance should be selected and implemented. Again, the contention here is that competitive advantage is largely determined by the idustry’s structural characteristics that infuence firm performance (Porter,1980).

In Porter’s view, competitive advantage can be sustained by erecting barriers to entry by potentail competitors, such as scale and scope economies, experience or learning curve effects, product differenation, capital requirements, and buyer switching costs. Accordingly, firm should continue raise these barriers through reinvesment of earnings if they are to successfully deter entry by potential competitors and mobility by existing competitors across the industry strategic groups (Caves & Porter, 1977; Porter, 1980, 1985). Porter’s framework also recognizes the threat of sustitute products as well as the bargaining power of buyers and suppliers as potentail moderators in achieving competitive advantage. However, emphasis should be made that, in the context of industry structure, firm reinvesment may prove disadvantageous beyond a certain point when diseconomies of scale begin to set in or when product differentiation reaches a point of saturation.

In summary, the neoclassical and industrial organization theories tend to offer little understanding to the proactive structuring of sustainable competitive advantage. By consigning competitive advantage to the imperatives of industry/market structure, these theories apparently overlook the idiosyncratic firm competencies elicited from managerial volition, organizational routines, reputation, and culture that are potential sources of sustainable competitive advantage. In the modified I/O version, the concept of competitive advantage is recognized by and discussed with respect to creating barriers to entry by potential competitors as well as creating mobility barriers (Caves, 1984; Caves & Porter, 1977; Porter, 1980). The issue of how unique firm competencies that generate quasi-rents can be protected from imitation by competitors has not been closely examined. Unique firm competencies have been examined by other scholars as detailed next.

Strategic Selection and Competitive Advantage

An alternative view of competitive advantage has been provided by a strategic selection perspective. The term strategic selection is used in contradistinction to the natural selection view to emphasize the fact that it is the pattern of strategic decisions and actions that determines organizational survival and renewal. Although “luck” may play a role in generating earnings for the firm (Barney, 1986c; Manckle, 1974), we argue that what constitutes good fortune or luck may alternatively be conceived as the point at witch stochastic opportunity and acquired/cultivated firm-specific resources meet.

The strategic selection view is consistent with Schumpeterian economies of innovation and entreprenureship (Barney, 1986b; Rumlet, 1984, 1987) and with select views in strategic management (Jauch & Kraft, 1986; Mintzberg & Waters, 1985; Smircich & Stubbart, 1985; Yvette & Mintzberg, 1988). It is also consistent with interpretive sociology (Morgan, 1993, 1986; Morgan & Ramirez, 1984), cognitive psychology (Argyris & Shon, 1978; Dutton & Jackson, 1987; Hurst, Rush, & White, 1989; Weick, 1979), and behavioral economics (Penrose, 1952; Simon, 1947, 1984).

Emphasis should be made that the concept of strategic selection is more proactive than “strategic choice.” That is, the notion of strategic choice (Child, 1972; Hrebiniak & Joyce, 1985) is limiting in that it implies choosing from given alternatives. Strategic selection, on the other hand, embraces a broader perspective to include the capacity to create and grasp opportunities internal and external to the firm. Moreover, strategic selection focses attention on organizational variables that are important for creating and sustaining competitive advantage. This approach to firm analysis explicitly recognizes manageral proactiveness in influencing business performance.

The Schumpeterian premise of entrepreneurially driven “creative destruction” (Schumpeter, 1934, 1950) has provided impetus to the resource-based model of strategy and competitive advantage. For example, Rumelt (1984: 560) has stated: “corporate entrepreneurship is intimately connected with the appearance and adjustment of unique and idiosyncratic resources.” He has further argued: “Entrepreneurs are seen to posses special information, to be unique, to create pure profit, and act as the essential indivisibilities governing the size distribution of firms” (1984: 561). Similiarly, Leibenstein (1968, 1987) has observed that entrepreneurs performs special roles of “gap filling” and “imput completion”; the former refers to identfying unmet customer needs and responding to them with a unique product offering, and the latter to the special talents (or unique competencies) of organizing, leading, and motivating people to accomplish desired ends. Additionally, Barney (1986b: 796) has stated that:

certain firms in an industry may have the unique skills required to be the source of revoluntary changes in industry….Other firms may have the unique ability to rapidly adapt to whatever revolutionary changes might occur….Firms that posses either of these organizational capabilities may have a greater likelihood of survival in industries threatened by revolutionary Schumpeterian changes than firms without these capabilities.

In summary, the strategic selection view provides a compelling theoretical framework for substainable competitive advantage. The recognition by this frame-work that idiosyncratic competencies are created and developed by a firm’s agents (or entrepreneurs) suggest the need to focus on organizational phernomena (such as informational asymmetries, organizational routines, histories, and reputation) that go beyond techno-economic considerations in assessing competitive advantage. Put in other words, implicit in the strategic selection philosophy is the concept of distinctive competencies and its relationship to sustainable competitive advantage is presented in the following section. This information provides the backgroung upon which our proposed model of sustainable competitive advantage is structured.

Distinctive competencies and Cmpetitive Advantage

Selznick (1957) first coined the term distinctive competencies to describe the leadership capabilities that were responsible for transforming a public organization into a successful operation. The concept was incorporated into the Learned, Christensen, Andrews, and Guth (1969) business policy framework, which placed emphasis on assessing internal organizational capabilities (strengths and weakness) and matching these with environmental opportunities and threats. Additionally, Ansoff (1965, 1976) discussed the concept as an integral component of corporate strategy and subsequently argued that an organization’s distinctive competencies are essential to identifying and responding to weak environmental signals. Hofer and Schendel (1978) have defined distinctive competencies as the unique competitive position that a firm achieve through its resource deployment. They have also viewed competencies as an integral part of organizational strategy.

Reed and DeFillippi (1990) have further developed the concept of distinctive competencies by relating it to sustainable competitive advantage and casual ambiguity. Casual ambiguity is defined as the “basic ambiguity concerning the nature of the casual connections between avtions and results” (Lippman & Rumelt, 1982: 420). It describes the firm-specific resources and competencies (or vulnerabilities) that have the potential to generate superior (or inferior) performance. Reed and DeFillippi have argued that achieving a suatainable competitive advantage requires reinvestment in casually ambigious organizational competencies that are characterized by tacitness, complexity, and speciiificity. Tacit knowledge describes information and competencies that are non-codifiable and non-explicitly replicable (Polanyi, 1967). Complexity describes the range of interrelationships among skills and other knowledge-based competencies (Winter, 1987). Specificity describes the extent to which resources and skills are idiosyncraticto the firm (i.e.,not easily transferrable to alternative use without substaintial cost) and can be advantageously channeled toward particular customers (Reed & DeFillippi, 1990; Williamson, 1985). Thus, the conceptualization of distinctive competencies encompassing these and other attributes provides a rational for viewing firm-specific competencies as sources of sustainable competitive advantage.

A competency-Based Model of sustainable competitive Advantage

Figure 1 presents a systems model which integrally links four sources of competencies: managerial competencies and strategic focus, input-based, transformation-based, and output-based competencies. These competencies may be valuable to the firm and their interlinkage may lead to a unique competitive advantage that is not subjected to limitation. The basic premise of the model is that managerial competencies and strategic focus are largely responsible for attracting specialized resources that are synergistically combined, transformed, and channeled to select clients in such ways as to generate a sustainable competitive advantage to the firm. Although the components of the model are discussed individually for elucidation purposes, a holistic construal of the concept of competitive advantage is presumed.

Managerial Competencies and Strategic Focus

Ultimately, managerial values and competencies delineate the strategic focus of the organization (Guth & Tagiuri, 19645; Hambrick & Mason, 1984). For example, Westley and Mintzberg (1989) argue that leaders create a strategic vision, communicate it throughout the organization, and empower employees to realize that vision. In their view, strategic vision is achieved through repition (or experimentation and improvisation representation (or articulation of core values), and assistance (or acceptance and legitimation of the vision by key stakeholders). Thus, the articulated strategic vision becomes the fulcrum arund which the firm’s unique competencies may be developed.

Effective implementation of such vision will depend crucially on the extent to which a firm’s managers acquire and mobilize specialized strategic resources

that may yield superior returns relative to competitors. Barney (1986c) argues that firms may obtain above normal returns from the acquisition of strategic resources by exploiting informational and expectational asymmetries in the strategic factor markets. Thus, it takes unique managerial competencies to evaluate the expected earnings streams accruing from strategic resources that are vital to implementa tion of a firm’s strategy. Hence the arrow in Figure 1 that connects managerial competencies and strategic focus with resource-based competencies portrays managerial effects on specialized strategic resource acquisition amd mobilization.

The influence of strategic leadership on specific outcomes such as organizational performance has been the subject of controversy. For example, the results of a longitudinal study conducted by Lieberson and O’connor (1972) indicate that environmental factors account for more variance in organizational performance than leadership factors. On the other hand, a subsequent replication of this study found that the amount of variation in performance attributed to leadership factors substantially increased when the order in which the independent variables were entered into the analysis was changed (Weiner & Mahoney, 1981). Our model suggests that strategic leadership (through managerial competencies) will have a significant impact on organizational strategy and performance and be a source of sustainable competitive advantage insofar as such leadership exhibits characteristics of uniqueness in exploiting firm-specific competencies.

The contention that strategy and performance are ultimately a reflection of

top managers or the dominant coalition (Cyert & March, 1963; Hambrick, 1987, 1989; Hambrick & Mason, 1984) underscores the importance of managerial competencies as a source of unsustainable competitive advantage. Managers are responsible for developing “an overall sense of purpose and direction that guide [s] integrated strategy formulation and implementation in organization” (Shirvastava & Nachman, 1989: 51). As is evicent, managerial volition is assumed in this context. The deterministic alternative view (not adopted in this article) argues for the need to match, align, or “fit” managers to strategy (Kerr & Jackosfy, 1989; Szilafyi & Schweiger, 1984).

As indicated in Figure 1, managerial competencies and strategic focus assume a central position in creating resource-based, trancformation-based, and output-based competencies. In other words, organizational distinctive competencies may be generated by the decisions and actions of top managers. Thus, managerial competencies may be viewed as influencing the interaction among resource-based transformation-based, and output-based components of the system.

Furthermore, top managers are viewed as capable of imposing order on the environment through the selective identification of strategic issues (Dutton & Jackson, 1987; Miles & Snow, 1978). That is, top managers may generate unique information that enables them to effectively interpret the firm’s environment with respect to opportunities and threats. Hence, in Figure 1, the linkages between managerial competencies and the environment are depicted by two arrows. One denotes the potential managerial influence on the environment and the other indicates the feedback flow of information (from the environment) that is necessary to further develop managerial competencies and strategic focus. Managerial competencies are developed via cognitive and behavioral characteristics that are unique to each decision m aker or to the top management team of a particular firm (Hambrick, 1989). Schoemaker (1990) has offered persuasive arguments suggesting how “behavioral friction forces” can, when properly exploited, yield quasirents and provide a source of sustainable competitive advantage. Specifically, these managerial competencies may be generated through the gathering of informa tion, framing of problems, reaching conclusions, and learning from experience (See Russo & Schoemaker, 1989; and Schoemaker, 1990 for a detailed treatment of this line of thought.

Resource-Based Competencies

Wernerfelt (1984) broadly defines resource as “anything which could be thought of as a strength or weakness of a given firm” (p172). More specifically, resource-based competencies consist of core human and nonhuman assets, both tangible and intangible, that allow a firm to outperform rival firms over a sustained period of time (Oster, 1990; Wernerfelt, 1984).

In Figure 1, resource-based competencies are linked to transformation-based competencies and to output-based competencies to suggest the synergistic interactions amont them. for example, a firm’s innovative capabilities are dependent upon its unique competencies for acquiring and mobilizing specialized resources. Innovative outputs require investments in idiosyncratic transformation processes. Subsequently, the Firm’s technological breakthroughs may generate desirable outcomes that may reinforce its resource-based, transformation-based, and output-based competencies and elicit further internal and external support for the firm’s volition (e.g. Wernerfelt, 1984). If and when an industry’s structural barriers break down as a result of Schumpeterian revolutions, those firms that have acquired, mobilized, and nurtured unique and idiosyncratic skills and capabilities may survive and grow. These resource-based competencies potentially influence the ability of the firms to develop transformation-based and output-based competencies (Irvin & Michaels, 1989).

In order for resource-based competencies to generate quasi-rents and be a source of sustainable competitive advantage, they must be causually ambiguous (Lippman & Rumelt, 1982; Reed & DeFillipi, 1990). That is, they would exhibit complex relationships with other firm-specific resources and capabilities. The tacitness of intangible input/skill-based competencies would also enhance the difficulty of competitor imitation.

The acquisition and mobilization on resource-based competencies that potentially generate a sustainable competitive advantage not only require managerial competencies in information gathering, but also accurate expectations about the future earning streams from these resources. This may be linked to what Barney (1986c) has considered to be imperfections in strategic factor markets that occur due to informational and expectational asymmetries among buyers and sellers of strategic resources. Thus, a firm that has unique skills and capabilities and/or that is lucky may earn above normal returns by buying resources that are undervalued in the market and using these resoruces to implement its strategy, or by not buying resources that are overvalued in the market. Hence, in Figure 1, the flow of inputs from the environment to the firm is depicted by the arrow connecting the envrironment to the resource-based competencies. These inputs are subsequently synergistically combined with other firm-specific competencies to generate a sustainable competitive advantage.

Transformation-Based Competencies

Transformaton-based competencies may be conceived as those organizational capabilities that are required to advantageously convert inputs into outputs (Day & Wensley, 1988). The notion of transformation-based competencies is also closely linked to the “value chain” concept first developed by McKinsey and Co. and subsequently adopted as an analytical tool for strategic management by Porter (1985). Essentially, an organization’s value chain embraces discrete but related sets of activities concerned with designing, developing, producing, and marketing outputs to customers. These activities may be divergently related to each other, depending on the interlinkage of the organization’s idiosyncratic competencies (Gluck, 1980; Porter, 1985). As shown in Figure 1, tranfsformation-based competencies are interrelated with managerial competencies and strategic focus, resource-based competencies, and out-put based competencies.

Transformation-based competencies may encompass both innovation and organizational culture. innovation (including technological, marketing, and managerial, among others) provides an organization with the capability to generate new products/processes faster than competitors (Iwai, 1984; Nelson & Winter, 1982; Winter; 1984). Organizational culture may enhance the capacity for organizational learning and adaptation (Fiol & Lyles, 1985).

The I/O based model suggests that a firm can achieve a low-cost competitive advantage primarily through learning effects, economies of scale, economies of scope, and capital/labor substitution (BCG,m 1976; Hill, 1988; Porter, 1980, 1985). Learning effects are usually viewed as the operations economies resulting from repetition of activities that lead to greater learning and efficiency in production (Hayes & Wheelwright, 1984). Scale economies are expected decreases in longrun average costs due to capacity expansion and factor intensity. Economies of scope result from sharing of resources among organizational units (Teece, 1980). Capital/Labor substituton involves substituting capital for labor or vice versa in order to enhance efficiencies.

However, it has been argued that any low-cost position gained through learning effects, scale/scope economies, and capital/labor substitution might not necessarily constitute a sustainable competitive advantage (Alberts, 1989; Amit & Fershtman, 1989). Such efficiency gains may be imitable and consequently are likely to be eroded over time (Amit & Fershtman, 1989; Hill, 1988; Reed & Defillippi, 1990). Furthermore, cost economies do not merely accrue from such factors as learning effects and scale/scope economies, but also from behavioral considerations that make low-cost operations possible. In a rebuttal of the “experience curve doctrine,” it has been argued that a cost advantage due to experience-curve effects is realizable only when three behavioral traits are present in an organization or unit: (a) volition, or the will to innovate; (b) imaginativeness, or creative intelligence; and (c) drive, or the ability to vigorously pursue a desired goal (Alberts, 1989: 41). In other words, cost economies do not just accrue from techno-economic factors; they are driven down through managerial, group, and operator volitions. This argument implies that sustainability of a low-cost position maybe achieved through managerial and personnel efforts directed at “harnessing volition, imaginativeness and drive” to push production and operations costs below those of competitors (Alberts, 1989: 47). Transformation-based competencies, however, must be idiosyncratic to the firm in order for the firm to achieve a sustainable competitive advantage.

Similarly, the I/O-based analysis of competitive advantage with respect to differentiation efforts has concentrated on techno-economic variables (Buzzell & Gale, 1987; Hill, 1988; Porter, 1985). For example, Porter (1985) lists an array of factors that are likely to generate competitive advantage through differentiation. These include investment in product development, facility design and layout, increased advertising and promotional efforts, and customized service. Again there is no reason to suggest that these activities cannot be imitated by competitors.As argued previously, reinvestment in differentiation efforts, though necessary, isnot sufficient ot insure sustainability of a firm’s competitive advantage.

Thus, the I/O-based analysis of competitive advantage has not heavily emphasized the managerial and organizational components of competition that may play crucial roles in creating and sustaining competitive advantage. It has been empirically shown that economic factors account for only about 15-40% of firm performance (Hansen & Wernerfelt, 1988); the rest of the variance may be explained by such factors as managerial competencies and organizational culture or climate. Although the role of organizational culture in achieving a superior level performance has long been recognized in the organizational behavior literature (Smircich, 1983; Tichy, 1983; Wilkins & Ouchi, 1983), strategy researchers have paid relatively little attention to this important factor until recently (Barney, 1986a; Weigelt & Camerer, 1988).

It has been recognized that for an organizational culture to provide a sustainable competitive advantage, it must be valuable, rare, and difficult to imitate by competitors (Barney, 1986a). A strong organizational culture unleashes human creative potential to generate a continous stream of ideas that may be translated into new products and processes. At the same time it permits realization of scale economies and incremental learnig by encouraging rewarding “volition, imaginativeness and drive” in the implementation of efficiency-and innovation-enhancing strategies (Alberts, 1989).

Output-Based Competencies

Output-based competencies not only refer to a firm’s physical outputs that deliver value to customers, but also the the “invisible” outputs (Itami, 1987), such as reputation for product and service quality, brand name, and dealer networks that provide value to customers. A firm’s long-run survival and growth largely depends on how well value is delivered to its most important constituents–the customers (Anderson, 1983; Day & Wenslye, 1988). The link between output-based competencies and the environment, as depicted in Figure 1, reflects the unique competencies that are advantageously channeled toward creating value for customers and that subsequently may generate a sustainable competitive advantage for the firm.

The I/O paradigm has conventionally focused on market share or relative market share and profitability as measures of a firm’s performance and as indicators of strategic advantage (Gale & Buzzell, 1990). A large market share, it is argued, indicates market power, which provides a barrier to entry for the firm. For example, Schmalensee (1985) has empirically shown that industry or market factors account for almost all the explained variance in firm performance, suggesting that a larger market share is indicative of the extent to which the firm adapts to industry forces. Accordingly, a high market share enables a firm to appropriate superior returns from its investments relative to competitors (BCG, 1976; Buzzell, Gale, & Sultan, 1976). However, in order for market share to be a source of competitive advantage, it must be gained in such way that it is not easily imitated by competitors, and it must have stable, definable boundaries (Day & Wensley, 1988).

In order to achieve a sustainable competitive advantage, firms may need to deliver value via service, quality, reliability, among others. For example, concern with customer service as a competitive thrust has received much attention in academia (Buzzell & Gale, 1987) and in the popular press (Phillips, Dunkin, & Treece, 1990). Companies such as American Express, American Airlines, and 3M have had an enduring reputation for superior customer service that has earned them higher returns than competitors (Phillip et al.,1990). These companies have built unique competencies for producing and delivering quality products and services that effectively meet customer tastes and preferences relative to competitors. Thus, they earn above-normal profits in the short run and an image for reliability and dependability in dealing with customers and other clients that promote their long-run prosperity. The reputation so earned takes time to cultivate and replicate and so becomes a source of sustainable competitive advantage (Ghemawat, 1986; Milgrom & Roberts, 1982; Weigelt & Cramer, 1988).

Concern for customers also promotes close relationships between the firm and its clients (Peters & Waterman, 1982). These relationships benefit the firm in gaining timely market information and brand loyalty that will generate high sales and returns relative to competitors. Thus, the firm earns its present reputation through its previous relationships with customers, dealers, suppliers, and other stakeholders. Additionally, the present quality of the firm’s relationships with its stakeholders provides the basis for its future reputation.

Reputation building is achieved through specification of consistent product quality and customer service requirements, provision of unconditional service guarantees, and empowerment of employees to solve customer problems as they arise (Hart, 1989; Irvin & Michaels, 1989). But reputation building must be a priority of top management it is to earn a sustainable competitive advantage. Top management contributes to the ongoing delivery of value by specifying standards of performance, communicating these clearly and unambiguously to employees, establishing appropriate hiring, training, motivation, and reward systems for developing core skills, and boosting employee morale (Irvin & Michaels, 1989).

Conclusion

In this article the concept of sustainable competitive advantage has been examined. Contrary to the I/O-based propositions that ascribe competitive advantage to market/industry imperatives, this study has extended the resource-based research that places emphasis on distinctive competencies as sources of sustain able competitive advantage. These competencies are proactively created and nurtured through the pattern of strategic decisions and actions of the firm’s agents.

This article has proposed a systems model within which the concept of sustain able competitive advantage can be examined. The importance of an integrative framework for strategy research has been previously recognized (Jemison, 1981; Mitroff & Mason, 1982). This article has incorporated such resource-based propositions as the importance of organizational culture (Barney, 1986a; Hansen & Wernerfelt, 1989), reputation (Weigelt & Camerer, 1988), entrepreneurship (e.g. Rumlet, 1987), and managerial cognitive and behavioral characteristics (Schoemaker, 1990). The presentation of sustainable competitive advantage with respect to four sources of firm-specific distinctive competencies (managerial, resorse-based, transformation-based, and output-based), that are synergistically related, allows for a holistic resource-based theoretical development. The extent to which these four theoretical sources of distinctive competencies generate a sustainable competitive advantage for a firm is, of course, an empirical question.

The message conveyed here is that achieving and sustaining a competitive advantage position requuire that managers focus on developing and nurturing their firm’s idiosyncaratic competencies that inhibit imitability. Thus firms should continually invest in skills and capabilities that are causally ambiguous (Lippman & Rumlet, 1982; Reed & DeFillippi, 1990), are not easily tradeable in the market for strategic factors (Dierickx & Cool, 1989), or when acquired from such a market, have the potential to generate above normal returns (Barney, 1986c).

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