Sustaining advantage

The sustainability of competitive advantage depends on three conditions. The first is the particular source of the advantage. There is a hierarchy of sources of competitive advantage in terms of sustainability. Lower-order advantages, such as low labor costs or cheap raw materials, are relatively easy to imitate. Competitors can often readily duplicate such advantages by finding another low-cost location or source of supply, or nullify them by producing or sourcing in the same place. In consumer electronics, for

example, Japan's labor cost advantage has long since been lost to Korea and Hong Kong. Firms based in these nations, in turn, are already being threatened by even lower-cost labor in Malaysia and Thailand. Japanese consumer electronics producers have established overseas production that follows this progression. Also at the lower end of the hierarchy of advantage are cost advantages due solely to economies of scale using technology, equipment, or methods sourced from or also available to competitors. Such economies of scale are nullified when new technology or methods make the old ones obsolete, or new product designs have the same effect.

Higher-order advantages, such as proprietary process technology, product differentiation based on unique products or services, brand reputation based on cumulative marketing efforts, and customer relationships protected by high customer costs of switching vendors, are more durable. Higher-order advantages are marked by a number of characteristics. The first is that achieving them requires more advanced skills and capabilities such as specialized and highly trained personnel, internal technical capability, and, often, close relationships with leading customers.

Second, higher-order advantages usually depend on a history of sustained and cumulative investment in physical facilities and specialized and often risky learning, research and development, or marketing.¹⁴ Performing some activities such as advertising, selling, and R& D creates tangible and intangible assets in the form of a reputation, customer relationships, and a pool of specialized knowledge. Frequently, moving early means that the firm has invested longer in building them than competitors. Competitors must invest as much or more to replicate such advantages, or find ways to invent around them. Finally, the most durable advantages combine larger cumulative investment with superiority in performing the activities involved, that gives the advantages a dynamic character. Ongoing rapid investment in process technology, marketing, global service networks, or rapid new product introduction often makes it even more difficult for competitors to respond.¹⁵ Higher-order competitive advantages are not only more sustainable but are associated with higher levels of productivity.

Pure cost advantages are frequently less sustainable than differentiation. One reason is that any new source of lower cost, even one less sophisticated, can nullify a firm's cost advantage. If labor is cheap enough, for example, even much higher efficiency can be nullified, unlike the case with differentiation advantages which normally must be matched to be exceeded. In addition, pure cost advantages are more vulnerable because new product designs or other forms of differentiation can eliminate a cost advantage in delivering old ones.

The second determinant of sustainability is the number of distinct sources of advantage a firm possesses. If a firm rests on only one advantage, such as an inherently less costly product design or access to a cheap raw material,

competitors will concentrate on nullifying or overcoming this advantage. Firms with histories of sustained leadership tend to proliferate advantages throughout the value chain. Japanese small copier producers, for example, have advanced features, low manufacturing costs because of flexible automation, extensive dealer networks providing wider sales coverage than the traditional direct sale approach, and high levels of reliability that reduce after-sale service costs. Numerous advantages raise the ante for competitors who seek to imitate.

The third, and most important, reason competitive advantage is sustained is constant improvement and upgrading. Virtually any advantage can be replicated sooner or later if a leader rests on its laurels. In order to sustain advantage a firm must become a moving target, creating new advantages at least as fast as competitors can replicate old ones.

The first task is to improve relentlessly the firm's performance against its existing advantages-for example, more efficient operation of its production facilities or more responsiveness in terms of customer service. This makes it more difficult for competitors to nullify them without extraordinary rates of improvement.

In the long run, however, sustaining advantage demands that its sources be expanded and upgraded, by moving up the hierarchy to more sustainable types. This is precisely what Japanese automakers have done. They initially penetrated foreign markets with inexpensive compact cars of adequate quality, and competed on the basis of lower labor costs. Even while their labor- cost advantage persisted, however, the Japanese companies were upgrading. They invested aggressively to build large modern plants to reap economies of scale. Then they became innovators in process technology, pioneering just-in-time production and a host of other quality and productivity practices. This led to better product quality, repair records, and customer satisfaction ratings than foreign rivals. Most recently, Japanese automakers have advanced to the vanguard of product technology and are introducing new, premium brand names.

Sustaining advantage requires change. It demands that a company exploit, rather than ignore, industry trends. It also demands that a company invest to close off the avenues along which competitors could attack. If biotechnology threatens to change the nature of pharmaceutical research, for example, a pharmaceutical company seeking to sustain advantage must move early to develop superior biotechnology capability. Sure signs of waning competitive advantage are hoping that a new technology will disappear, dismissing a new buyer segment, or ignoring a new distribution channel-responses that are all too common.

To sustain its position, a firm may have to destroy old advantages to create new, higher-order ones. For example, Korean shipbuilding firms did not become international leaders until they aggressively expanded the scale

of their shipyards, moved to adopt new building techniques that substantially boosted productivity by reducing labor content, and developed the technical capabilities to build more sophisticated vessels. All these steps reduced the importance of labor costs at a time when Korean firms still enjoyed a labor cost advantage. The apparent paradox involved in nullifying old advantages often deters firms from upgrading. If firms fail to take the painful and seemingly counterintuitive step of doing so, however, competitors will do it for them. How a firm's national environment influences the likelihood of this sort of behavior is a subject that will occupy us later.

The reason so few firms sustain their position is that change is extraordinarily painful and difficult for any successful organization. Complacency is much more natural. The past strategy becomes ingrained in organizational routines. Information that would modify or challenge it is not sought or filtered out. The past strategy takes on an aura of invincibility and becomes rooted in company culture. Suggesting change is tantamount to disloyalty.¹⁶ Successful companies often seek predictability and stability. They become preoccupied with defending what they have, and any change is tempered by the concern that there is much to lose. Supplanting or superseding old advantages to create new ones is not considered until the old advantages are long gone. The past strategy becomes ossified, and structural change in the industry then leads to shifting market leadership. Smaller firms or those new to the industry, not bound by history and past investments, become the innovators and the new leaders.

The ability to modify strategy is also blocked by the fact that a company's past strategy becomes embodied in skills, organizational arrangements, specialized facilities, and a reputation that may be inconsistent with a new one. Indeed, such specialization is integral to gaining advantage in the first place. Reconfiguring the value chain is difficult and costly. In large firms, sheer scale also makes altering the strategy difficult. The process of modifying strategy frequently involves a sacrifice in financial performance and unsettling, sometimes wrenching, organizational adjustments. Firms without the legacy of a past strategy and past investments may well face lower costs of adopting a new strategy, not to mention fewer organizational difficulties. This is one reason why " outsiders, " as I have defined them, are often the innovators.¹⁷

The behavior required to sustain advantage, then, is in many respects an unnatural act for established firms. Companies that manage to overcome inertia and the barriers to changing and upgrading advantage are most often those that have been stimulated by competitive pressure, buyer demands, or technical threats. Few companies make significant improvements and strategy changes voluntarily; most are forced to. The pressure to change is more often environmental than internal.

The managements of companies that sustain competitive advantage always

run a little scared. They acutely sense external threats to competitive position and respond to them. How such behavior is catalyzed by circumstances within a nation is an important theme in subsequent chapters.