Sustainable competitive advantage in the 21st century

Sustainable competitive advantage in the 21st century

Kotze, Jan

STRATEGIC MANAGEMENT

The new competitive paradigm

To be competitive in the global marketplace, an organisation needs to know what is changing. To remain competitive over the long term, the organisation needs to know how and why change is occurring. The combined competitive effects of globalisation, information technology and biotechnology developments, and the work force revolution have produced an atmosphere of continuous change that has come to be viewed as a normal part of economic life.

Within this business setting, the emerging competitive paradigm now emphasises the following:

Value – Though organisations are often viewed and described in terms of the products and services they sell, those products and services are really only purchased for the value they provide. Customers worldwide are demanding better quality at lower prices.

Time and mobility – The ability to arrive at decisions quickly is critical. Using customer value as a focal point for action, organisations now increasingly stress swift response to customer demands. This requires shorter design and product/service life cycles. The emphasis is not just on shorter time cycles but also on correct timing.

Knowledge and intellectual capital– Ideas and information are the driving forces of the new economy. In successful organisations, core and distinctive competencies cut across divisional boundaries, allowing them to compete, perhaps in vastly different competitive arenas, on the basis of their distinct skills.

Flexibility – In a hyper-competitive world, winning requires an organisation to seize the initiative, to win the business by being light and fast on its feet. Being world-class is not enough. An organisation also has to have the capacity to switch gears – from, for example, rapid product development to a strategic focus on cost management – relatively quickly and with minimal resource consumption.

Innovation – Reinvention is the goal. Continuous improvement of products and services, business operations, and organisational processes has become the basis for creating greater value for the customer, while also increasing organisational productivity. Only organisations with the ability to adapt timeously and pro-actively to new market challenges, will be able to sustain their competitiveness.

Business size – In the new competitive paradigm, it is not so important to be big; it is much more important to be fast and innovative.

Business strategy

An effectively formulated and implemented business strategy for the single business (industry) organisation, or for the individual business unit within a multi-business organisation, should ultimately lean towards sustainable competitive advantage. In this quest, the typical business strategy formulation process links relevant internal factors in the form of strengths, weaknesses, executive ambitions, values and objectives, with relevant external factors in the form of macro-environmental trends, industry– driving forces, anticipated competitive actions, opportunities and threats. Out of these linkages, a number of strategic action plans are developed and implemented. The objective of this exercise is to position the organisation as optimally as possible for the anticipated future, and to work towards a sustainable competitive advantage.

Against the evolving requirements and challenges of the 21st century competitive paradigm identified in the previous section, three major shortcomings of this process can be identified.

* Not nearly enough emphasis on the intellectual capital, in the form of core and distinctive competencies, of the organisation. In addition, the strategic potential of the learning organisation is overlooked.

* A passive approach to strategy formulation. The focus is on the maintenance and future development of existing internal resource capabilities, strengths and skills while waiting for the appearance and realisation of anticipated opportunities, favourable driving forces, and opportunistic competitive developments. This approach obviously has severe limitations against a backdrop of continuous and turbulent change.

* Typically, a mixture of the three generic competitive strategies of cost leadership, differentiation, and a focus on niche markets is utilised in the attempt to secure sustainable competitive advantage. Unfortunately, these strategic initiatives, if successful, may allow the organisation to stay in the industry, but will rarely lead to a leadership position within the dictates of the new competitive paradigm. Low prices, high quality, good service, and other traditional competitive strategies are nowadays market entry and market maintenance requirements and they do not confer sustainable competitive advantage.

Formulating strategies

Winning organisations of the future will assume leadership positions within the structure of the new competitive paradigm, by being fast, friendly, focused, and flexible. In pursuing these desirable characteristics, they will formulate winning business strategies, which

* are well suited/appropriate to the future demands and characteristics of the macro, as well as the operating environment of the organisation;

* contribute towards sustainable competitive advantage; and

* lead to superior financial results.

To achieve this, the business strategies of winning organisations will incorporate the following processes, strategic action steps, and philosophies:

Strategic architecture

During the strategy formulation process, a significant portion of the strategic team’s time should be devoted to the development of the strategic architecture of the organisation. Such architecture consists of the present core competencies, potential core competencies, and the required core competencies of the organisation.

Core competencies are the specific collective competencies (skills) of the organisation in the form of intellectual capacities, collective experience and skills and specialised knowledge, which integrate diverse production and service rendering skills and multiple technology streams.

This results in products/services that supply demonstrable client value in a unique fashion, and achieves sustainable competitive advantage in a particular segment of one or more industries.

To achieve the full potential of core competencies, an organisation requires effective management systems to integrate seamlessly across organisational boundaries.

The strategic conversation and the strategic audit

Strategy development needs to involve managers widely. The idea that a few individuals, or small groups, can direct the strategy of the organisation, with others simply following, has been discredited. It has been replaced by a concern to develop across the organisation, a capacity to work together to question, debate, and innovate.

Managers at all levels must be indoctrinated in the art of the strategic conversation. Of the more effective ways to start the strategic conversation is the strategic audit. In conducting a strategic audit of the present strategic situation, the groups of managers think strategically by asking the right questions about their department, division, or the entire organisation.

A culture of strategic thinking

It should become a habit within the organisation to think and talk about different aspects related to strategy on an ongoing day-by-day-basis. Strategic thinking is not about establishing right or optimal solutions, but about understanding complex relationships, ongoing change, and uncertain futures.

Notions of strategic stability have been replaced by an emphasis on strategic change and correspondingly, the notion of the search for the optimal strategy has been overtaken by the concern for a strategy that will work and that can be implemented.

A culture of organisational learning

Strategic thinking is closely linked to notions of organisational learning. The concept of the `learning organisation’ refers to the creation of circumstances, climates, or conditions in organisations that encourage, provide support, and reward the development and learning of its people. Organisational learning is strengthened by a culture that tolerates and encourages ‘new mistakes’ and through competition. As organisational members learn to overcome specific competitive challenges, they develop potentially valuable resources and capabilities.

Collaborative arrangements

Closely tied to the strategic architecture of the organisation is the management and nurturing of its network. It does not have to incur the prohibitive expenses associated with the maintenance of a complete inventory of resource capabilities and core competencies. It can focus on the `core business’ and source the remaining required competencies, capabilities, and support services from its national and international network partners.

In this manner, collaboration agreements are used to leverage internal resources, skills, capabilities, and competencies.

Management of linkages

A contribution to sustainable competitive advantage in the new competitive paradigm, may be found by means of the improved management of linkages internally in the organisation or externally in the industry value chain. The combined strategic focus on network and linkage management views industry structure not as a given, but as a variable that can be exploited and managed in the quest for sustainable competitive advantage.

Sustainable competitive advantage

The elusive but desirable, end-result of a winning business strategy has always been, and is still today, that of sustainable competitive advantage. The only difference is that it is even more elusive in the 21st century. What really matters is that this advantage must consist of

* advantages over competitors that cannot easily be imitated,

* advantages that are sustainable over time by becoming deeply embedded in the organisation; in its resources, skills, culture, and its long-term investments.

The essence of 21st century strategy lies in the creation of tomorrow’s competitive advantage faster than competitors can copy the ones the organisation possesses today. Investing aggressively in creating sustainable competitive advantage is an organisation’s single most dependable contribution to above– average profitability.

Jan Kotze, DCom BCompt ACIS, is Professor in Strategic Management at the Potchefstroom Business School, Potchefstroom University for Christian Higher Education.

Copyright South African Institute of Chartered Accountants Feb 2002

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