Tool for Diagnosing the Sustainability of a Business' Competitive Advantage

Sustainable Competitive Advantage
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Luis Eduardo Herrera Gonzalez
Strategy Consultant, Colombia

Tool for Diagnosing the Sustainability of a Business' Competitive Advantage

🔥NEW There are many authors who have focused on how to achieve a competitive advantage. Porter's book published in 1998 is one of the most famous in this field. However, I have found that over the last couple of years that companies are facing new challenges in terms of economic downturns, consumer shifting behavior, new and disrupting technologies - and so many others that keep managers up at night –. So, I believe today's question for many traditional companies might not be how to ACHIEVE competitive advantage but how to SUSTAIN it.
Here is a very useful (and graphical) model for analyzing the sustainability of your competitive advantage: The Tetra-Threat Model by the Professors Pankaj Ghemawat and Jan Rivkin.

In this framework, the Added Value that you as a company provide to your chain of value, might be threatened by Imitation or Substitution while the value that you are able to capture as part of your participation in the mentioned chain of value might be threatened by Slack or Holdup"
  • IMITATION happens when the resources and activities which provide your superior performance are no longer scarce and therefor the added value that you provide your customers might be diminished by others who can provide the same products/services increasing the industry rivalry.
  • SUBSTITUTION happens when your customers can find ways to solve their problems by reaching others rather than you. Not to go any further, the introduction of new technologies facilitated the Netflix business model which led to former Blockbuster's customer to find a better way to watch movies. We all know how the story ended up.
Whereas the two mentioned threats which can be linked to two of the 5 Porter's forces and on a general point of view depend on the industry, the other two threats of this framework relate to the capability of the firm to use its resources and relationship with partners effectively and efficiently:
  • SLACK occurs when a firm does not manage to appropriate the value resulting from his participation on the industry. In simple terms, slack refers to any type of inefficiency that reflects the inability of the company to perform better. Examples are: poor financial management, low-return capital investments, higher operating costs compared to the industry average, few (or no) market differentiators…
  • HOLDUP refers to the threat in which interdependency is created between the firm and other business partners. If your only way to reach the market is through an intermediary and they go bankrupt, you go bankrupt as well. If the source of your differentiation comes from one single supplier, then if your competitor buys your supplier, your competitive advantage is gone. In simple words, as one of my teacher used to say "if you only have one client it's not your business, is theirs".
These four threats to competitive advantage analyzed from an industry point of view, but also from an internal organizational perspective, can help you diagnose the challenges you have with the sustainability of your competitive advantage. Use this model as a complement for Porter's Five Forces and you will have a powerful basis for your strategic analysis.
References
Ghemawat, P., & Rivkin, J. (2006). Chapter 5. Sustaining superior performance. In P. Ghemawat, J. Rivkin, D. Collis, & B. Cassiman, Strategy and the business landscape (pp. 95-119). Pearson/PrenticeHall.
Porter, M. (1998). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press.
Porter, M. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review(86), 79-93.

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