Business-Science-Government Partnership: Fostering Country competitiveness
New results in building company's sustainable competitive advantage
Dr. Vladimir Kuryakov
Management Systems Consulting Corporation (Los Angeles, USA)
Email: vk@mgtsystems.com
Abstract
There is a lot of well-developed and valued literature on competitive advantage and related
strategies. Competitive advantage model of Porter (1985) is at the heart of a firm’s performance
in competitive markets and defining competitive strategy as offensive or defensive action to
create a defendable position in an industry or market, in order to cope successfully in this
position with competitive forces and generate a superior return on investment by creating and
delivering superior value to target customers.
Two dimensions were mentioned for corporate value creation: first - by performance relatively to
competitors (Value Chain framework and Porter's Competitive Advantage model); second – by
gaining Industry/Market Attractiveness (Competetive Force model). Some scholars are defining
competitive advantage as superior differentiation and/or lower costs by comparison with the
marginal (breakeven) competitor in the product market (Peteraf and Barney, 2003). But
differentiation does not enough to imply a competitive advantage: it is only a necessary but not
sufficient condition for competitive advantage, because superior value should be delivered to
target customers.
The current paper deals with general review of approaches for sustainable competitive advantage
and demonstrates application for new resource-based approach, developed by Prof. Eric
Flamholtz, that deals with how a firm can create and sustain competitive advantage from the
strategies it employs to build the business itself, and, in particular its infrastructure. Accordingly,
it represents resource-based approach, but different from traditionally used in strategy. This
approach is based on 30 years research on organizational behavior and can be termed a ‘micro’
perspective on strategy and competitive advantage
Introduction
Porter famously described the 3 factors that can provide Competitive Advantage: Cost
Leadership, Differentiation, and Focus. Well known Porter’s analysis concentrates on the firms’
competitive interactions on the demand or industry/market side. And it is a positional approach
based on industry/market analyses and dealing with product’s costs/differentiations and market
penetration, (positional advantages factors). And even in now days managerial‘s attention has
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Business-Science-Government Partnership: Fostering Country competitiveness
often focused only on competition in product markets. This approach can be termed a ‘macro’
perspective on strategy and competitive advantage.
Initiated in the mid-1980s by Wernerfelt (1984), Rumelt (1984) and Barney (1986), the resourcebased approach has a central premise that firms compete on the basis of their resources and
capabilities (Peteraf and Bergen, 2003). In this paper we will deal with the resource-based
approach.
Literature review
Most resource-based view researchers choose to “look within the enterprise and down to the
factor market conditions that the enterprise must contend with, to search for some possible
causes of sustainable competitive advantages” holding constant all external environmental
factors (Peteraf and Barney, 2003, p. 312). Definition of firm resources (Makadok, 2001)
includes all stocks of available factors that are owned or controlled by the organization, and
capabilities are an organization’s capacity to deploy available resources to conceive of and
implement strategies that improve its efficiency and effectiveness and apply market potential.
By sustained competitive advantage we will understand a competitive advantage that persists
over a long period of time. This approach proposed by Porter (1985) has been adopted. Some
scholars define concept of sustained competitive advantage related to consumers’ preferences:
when an attractive number of customers prefers firm’s products or services over the offering of
competitors and when the basis for this preference is durable (Thompson, Stricland, Gamble,
2008), but do not describe the process to gain this position. There are different views on sustain
competitive advantage. Transformation of short-run competitive advantage into a sustained
competitive advantage requires that these resources should be superior to their competitors,
heterogeneous in nature and not perfectly mobile (Barney, 1991; Peteraf, 1993). When the
imitative actions have come to an end without disrupting the firm’s competitive advantage, the
firm’s strategy can be called sustainable. This is in contrast to views of others (e.g., Porter, 1985)
that a competitive advantage is sustained when it provides above-average returns in the long run.
Resources and capabilities together form (Prahalad and Hamel, 1990) distinctive competences
that are required to develop and deliver superior value to customers. According Prahalad and
Hamel (1990), firms may succeed in establishing a Sustainable Competitive Advantage by
combining skills and resources in unique and enduring ways.
The current paper deals with general review of approaches for sustainable competitive advantage
and demonstrates application for new resource-based approach, developed by Prof. Eric
Flamholtz, that deals with how a firm can create and sustain competitive advantage from the
strategies it employs to build the business itself, and, in particular its infrastructure. Accordingly,
it represents resource-based approach, but different from traditionally used in strategy. This
ISSN: 2029-7971
Business-Science-Government Partnership: Fostering Country competitiveness
approach is based on 30 years research on organizational behavior and can be termed a ‘micro’
perspective on strategy and competitive advantage
Keywords: Organizational development, Sustainable Competitive advantage, Pyramid of
Organizational development, Organizational infrastructure, Strategic building blocks,
Financial success
Methodology
Flamholtz (1995) proposed a six factor framework to understand and plan the successful growth
of firms at different stages of growth as well as to explain organizational success and failure.
The initial hypothesis underlying this framework is that organizations must perform certain tasks
to be successful at each stage of their growth.
The six key tasks that have all been supported by previous research are:
1. Identification and definition of a viable market niche (Aldrich, 1979; Brittain and
Freeman, 1980; Freeman and Hannan, 1983),
2. Development of products or services for the chosen market niche (Burns and Stalker,
1961; Midgley, 1981),
3. Acquisition and development of resources required to operate the firm (Pfeffer and
Salancik,1978; Brittain and Freeman, 1980; Caroll and Yangchung, 1986),
4. Development of day-to-day operational systems (Starbuck, 1965),
5. Development of the management systems necessary for the long-term functioning of the
organization (Child & Keiser, 1981; Tushman et al., 1985)
6. Development of the organizational culture that management feels necessary to guide the
firm
The last four of the key tasks (resources, operational systems, management systems, and culture)
comprise a firm’s “infrastructure”.’In this context, infrastructure is defined as the resources and
capabilities (both tangible and intangible) required to support the long-run growth and
development of a firm as well as its day-to-day operations. And organization must perform this
all 6 tasks but attention and efforts that should be allocated to each task differs depending on the
size of the firm (Flamholtz, 1995). The parallel relationship between size and organizational
structure leads to an organizational life cycle model that complements the Pyramid of
Organizational Development (Flamholtz, 1995).
A second hypothesis is that there is a relationship between successful performance of the six key
tasks and the financial results of firms (Figure 1) and that each of these tasks must be performed
in a stepwise fashion in order to build a successful organization.
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Business-Science-Government Partnership: Fostering Country competitiveness
Fig. 1. Six key tasks organization should perform to be successful in the long-run
This has been tested and proved (Flamholtz, 2003). Stepwise fashion tasks’ performance leads
to hierarchical Pyramid model of Organizational Development, as shown in Figure 2. Similar
hierarchical views are present in the previous literature. For example, Woodward (1985)
discussed a similar relation between market niche and product, and structure and culture. In
addition, Chandler’s (1962) book, Strategy and Structure, suggests that a firm’s structure follows
from its long-term strategy.
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Business-Science-Government Partnership: Fostering Country competitiveness
Figure 2. Pyramid of Organizational Development
A third hypothesis is that these six key tasks are areas for competition among enterprises. This,
in turn, suggests that each of these key are potential sources of competitive advantage.
Relationship has been found between successful performance of the six key tasks of strategic
organizational development and the competitive success of firms. Also it opens that the key
sources of competitive advantage are a firm’s infrastructure, rather than its choice of markets and
its competitive advantage products, and each of these tasks must be performed in a stepwise
fashion in order to build a successful organization. This has been tested and proved (Flamholtz,
2003).
Revealed findings validate the Flamholtz Pyramid model for organizational development. This is
a development of resource based approach, where market and product – are common levels,
resources includes all stocks of available factors and competences covering operational systems,
management systems and corporate culture.
Findings
The first two levels of the pyramid define markets and products. Although the prevailing
paradigm of strategy tends to view these two areas as the principal key strategy. But in the longer
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Business-Science-Government Partnership: Fostering Country competitiveness
term they are unlikely to be so. So, new market will attract competitors. Similarly, even though
marketing strategy is built around the classic ‘4P’s’ (product, price, promotion, and place) or
new concepts 5P, 6Р, 7Р, ... 12Р & 4С, SIVA, competition will typically neutralize
product/service advantages in a relatively short time, because this advantage is mobile and
transferable as a matter of fact.
But the true sources of sustainable competitive advantage can be found in areas with less
potential for imitation. Flamholtz (1995) has shown that four levels of the pyramid, named as
“infrastructure” of the firm, are less susceptible to imitation, and, accordingly, provide the basis
for long-term sustainable competitive advantage. The contemporary findings (Flamholtz, 2003)
showing that although competition between firms takes place at all levels of the Pyramid, but the
long-term sustainable advantage is primarily found at the top four levels.
Our research (Flamholtz, 1995, 200, 2005) indicates a strong statistically significant relationship
between the variables included in the Pyramid and financial performance:
•
Gross Margin: 70% of Gross Margin explained by successful management of the Pyramid.
•
EBIT: Successful management of the Pyramid accounts for as much as 55% of EBIT.
•
ROI: 22% of ROI is linked to effective design and management of the Pyramid.
Research limitations
Ultimately, we expect to elaborate our estimations on further cases and will be able to explain as
much as 70 to 90% of financial performance by our model application.
Conclusion
A differential competitive advantage of Wal-Mart versus K-Mart has been estimated (Flamholtz,
2003) and shown in Figure 3 below. Perhaps it is the clearest example; there is no physical
product that Wal-Mart can offer that cannot be offered by K-Mart. Accordingly, the difference in
sustainable competitive advantages over the long run and, in turn, differences in financial
performance between Wal-Mart and K-Mart are ultimately derived from differences at the top of
the Pyramid model. This is counter to the conventional view that companies typically compete in
product and markets, and it provides empirical evidence that management actually matters.
Competitive advantage in infrastructure creates obvious advantages in products and markets
(brand equity, market position, etc.). The bottom line is that infrastructure is a true source of
potential sustainable competitive advantage.
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Business-Science-Government Partnership: Fostering Country competitiveness
Figure 3. Differential Competitive Advantage: Wal-Mart vs. K-Mart
Management Systems Consulting Corporation developed methodology and unique products to
build long-run sustainable competitive advantage for commercial enterprises and not-for profit
organizations. This has been proved in 30+ years of consulting practice on USA, Europe and
BRIC markets and ready for further implementations.
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