Creating advantage

Firms create competitive advantage by perceiving or discovering new and better ways to compete in an industry and bringing them to market, ¹¹ which is ultimately an act of innovation. Innovation here is defined broadly, to include both improvements in technology and better methods or ways of doing things. It can be manifested in product changes, process changes, new approaches to marketing, new forms of distribution, and new conceptions of scope.¹² Innovators not only respond to possibilities for change, but force it to proceed faster. Much innovation, in practice, is rather mundane and incremental rather than radical. It depends more on a cumulation of small insights and advances than on major technological breakthroughs. It often involves ideas that are not " new" but have never been vigorously pursued. It results from organizational learning as much as from formal R& D. It always involves investment in developing skills and knowledge, and usually in physical assets and marketing effort.

Innovations shift competitive advantage when rivals either fail to perceive the new way of competing or are unwilling or unable to respond. This can be the result of many causes, among them complacency, inertia, inflexible or specialized assets, or mixed motives. For example, Swiss watch producers had mixed motives in responding to Timex's (United States) inexpensive, disposable watch, for fear of undermining the Swiss image of quality and precision. They also had production facilities totally unsuited to mass-producing low-priced watches. Without a new approach to competing, however, the challenger will rarely succeed. Unless the innovator alters the nature of competition, retaliation by established leaders will usually be vigorous and effective.

In international markets, innovations that yield competitive advantage anticipate both domestic and foreign needs. For example, as international concern for product safety has grown, Swedish companies like Volvo, Atlas Copco,, and AGA have succeeded by being early to anticipate the market opportunity in this area. On the other hand, innovations that respond to concerns or circumstances that are peculiar to the home market can actually retard international competitive success.

The possibilities for new ways of competing usually grow out of some discontinuity or change in industry structure. Sometimes, such changes have long presented an opportunity that has gone unnoticed. The most typical causes of innovations that shift competitive advantage are the following:

1. New technologies. Technological change can create new possibilities for the design of a product, the way it is marketed, produced, or delivered, and the ancillary services provided. It is the most common precursor of

strategic innovation. Industries are born when technological change makes a new product feasible. Germany first became the leader in medical imaging products, for example, after the discovery of X-rays in Germany. Leadership is most likely to change in industries when a nonincremental technological change makes obsolete or nullifies the knowledge and assets of existing leaders. For example, Japanese firms have gained a position in medical imaging (vis-á -vis German and American firms) due to the emergence of new electronics-based technologies that substitute for traditional X-rays in some applications.

It is hard for firms steeped in an old technological paradigm to perceive the significance of a new one. It is often even harder for them to respond to it. The leading American vacuum tube competitors (RCA, General Electric, GTE-Sylvania) all entered the semiconductor industry, for example, but none succeeded. Newly started competitors in semiconductors such as Texas Instruments were more committed to the new technology and had organizations with people, attitudes, and management systems better able to develop it.

2. New or shifting buyer needs. Competitive advantage is often created or shifts when buyers develop new needs or their priorities change significantly. Established competitors may fail to perceive the new needs or be unable to respond because meeting them demands a new value chain. American fast-food firms gained advantage internationally, for example, as buyers in many nations came to value convenience and consistency, and local restaurants were slow to adapt. The operation of a fast-food chain is radically different from that of a traditional restaurant.

3. The emergence of a new industry segment. The opportunity for creating advantage arises when a new distinct segment of an industry emerges or a new way is conceived to regroup existing segments. The possibilities encompass not only new customer segments but also new ways of producing particular items in the product line or new ways to reach a particular group of customers. A good example is the lift truck industry, where Japanese firms perceived an underserved segment in small lift trucks for general-purpose applications. By focusing on this segment, they were able to standardize designs and transform the manufacturing process into one employing much higher levels of automation. This example illustrates how serving a new segment frequently creates the potential to substantially reconfigure the value chain, something established competitors may find difficult.

4. Shifting input costs or availability. Competitive advantage frequently changes when a significant change occurs in the absolute or relative costs of inputs such as labor, raw materials, energy, transportation, communications, media, or machinery. This may reflect new conditions in supplier industries, or perhaps the possibility of using a new or different type or quality of input. A firm gains competitive advantage by optimizing based

on the new conditions while competitors are saddled with assets and approaches tailored to the old ones.

A classic example is the shift in relative labor cost among nations. Korea and now other Asian nations have become competitive in relatively simple international construction projects as wages in more industrialized countries have risen. More recently, a steep fall in the cost of transportation and communications is allowing new ways of organizing and managing firms that lead to competitive advantage, such as the ability to rely more on specialist outside suppliers and the ability to operate a truly global production system.

5. Changes in government regulations. Adjustments in the nature of government regulation, in areas such as product standards, environmental controls, restrictions on entry, and trade barriers, are another common stimulus to innovations which result in competitive advantage. Existing industry leaders have tailored their activities to one regulatory regime, and a shift in that regime may find them unable to respond. American securities firms are benefiting from a reduction in financial market regulation around the world, for example, because American regulators pioneered this trend and U.S. firms have already learned to deal with it.