Distinctive Competencies and Competitive Advantage

A distinctive competency is a unique firm-specific strength that allows a company

to better differentiate its products and/or achieve substantially lower costs than its rivals
and thus gain a competitive advantage. If managers are successful in their efforts to
improve the efficiency, quality, innovation and customer responsiveness of their
organization, they may lower the cost structure of the company and/or better
differentiate its product offering, either of which can be the basis for a competitive
advantage. When a company is uniquely skilled at a value chain activity that underlies
superior efficiency, quality, innovation, or customer responsiveness relative to its rivals,
we say that it has a distinctive competency in this activity. For example, 3M has a
distinctive competency in innovation that has enabled the company to generate 30% of
its sales from differentiated products introduced within the last 5 years. Distinctive
competencies can be viewed as the bedrock of a companys competitive advantage.
Distinctive competencies arise from two complementary sources:resources and
capabilities.

Resources and Capabilities

Resources are financial, physical, social or human, technological, and
organizational factors that allow a company to create value for its customers. Company
resources can be divided into two types: tangible and intangible resources. Tangible
resources are something physical, such as land, buildings, plant, equipment, inventory,
and money. Intangible resources are nonphysical entities that are the creation of
managers and other employees, such as brand names, the reputation of the company,
the knowledge that employees have gained through experience, and the intellectual
property of the company, including that protected through patents, copyrights, and
trademarks.
The more firm specific and difficult to imitate is a resource, the more likely a
company is to have a distinctive competency. For example, Polaroids distinctive
competency in instant photography was based on a firm- specific and valuable
intangible resource: technological know- how in instant fi lm processing that was
protected from imitation by a thicket of patents. Once a process can be imitated, as
when patents expire, or a superior technology, such as digital photography, comes
along, the distinctive competency disappears, as has happened to Polaroid. Another
important quality of a resource that leads to a distinctive competency is that it is
valuable: in some way, it helps to create strong demand for the companys products.
Thus, Polaroids technological know- how was valuable while it created strong demand
for its photographic products; it became far less valuable when superior digital
technology came along.
Capabilities refer to a companys skills at coordinating its resources and putting
them to productive use. These skills reside in an organizations rules, routines, and
procedures, that is, the style or manner through which it makes decisions and manages
its internal processes to achieve organizational objectives. More generally, a companys
capabilities are the product of its organizational structure, processes, and control
systems. They specify how and where decisions are made within a company, the kind of
behaviors the company rewards, and the companys cultural norms and values.
Capabilities are intangible. They reside not so much in individuals as in the way
individuals interact, cooperate, and make decisions within the context of an
organization.
The distinction between resources and capabilities is critical to understanding
what generates a distinctive competency. A company may have firm-specific and
valuable resources, but unless it has the capability to use those resources effectively, it
may not be able to create a distinctive competency. It is also important to recognize that
a company may not need firm-specific and valuable resources to establish a distinctive
competency so long as it does have capabilities that no competitor possesses. For
example, the steel mini- mill operator Nucor is widely acknowledged to be the most
cost- efficient steel maker in the United States. Its distinctive competency in low- cost
(efficient) steel making does not come from any firm-specific and valuable resources.
Nucor has the same resources (plant, equipment, skilled employees, know- how) as
many other mini- mill operators. What distinguishes Nucor is its unique capability to
manage its resources in a highly productive way. Specifically, Nucors structure, control
systems, and culture promote efficiency at all levels within the company.
In sum, for a company to have a distinctive competency it must at a minimum
have either (1) a firm-specific and valuable resource and the capabilities (skills)
necessary to take advantage of that resource (as illustrated by Polaroid) or (2) a firm-
specific capability to manage resources (as exemplified by Nucor). A companys
distinctive competency is strongest when it possesses both firm-specific and valuable
resources and firm-specific capabilities to manage those resources.
The figure below illustrates the relationship of a companys strategies, distinctive
competencies, and competitive advantage. Distinctive competencies shape the
strategies that the company pursues, which build superior efficiency, quality, innovation
or customer responsiveness. In turn, this leads to competitive advantage and superior
profitability. However, it is also very important to realize that the strategies a company
adopts can build new resources and capabilities or strengthen the existing resources
and capabilities of the company, thereby enhancing the distinctive competencies of the
enterprise. Thus, the relationship between distinctive competencies and strategies is not
a linear one; rather, it is a reciprocal one in which distinctive competencies shape
strategies, and strategies help to build and create distinctive competencies.
 Resources
Build

Distinctive Competitive Superior

Strategies
competences advantage Profitability
Shape

Capabilities

Build

Strategy, Resources, Capabilities, and Competencies

The Durability of Competitive Advantage

A company with a competitive advantage will have superior profitability. This
sends a signal to rivals that the company has some valuable distinctive competency that
allows it to create superior value. Competitors will try to identify and imitate that
competency, and in so far as they are successful, ultimately the imitators may compete
away the companys superior profitability. The speed at which this process occurs
depends upon the height of barriers to imitation.
Barriers to imitation are factors that make it difficult for a competitor to copy a
companys distinctive competencies; the greater the barriers to imitation, the more
sustainable are a companys competitive advantage. Barriers to imitation differ
depending on whether a competitor is trying to imitate resources or capabilities.
In general, the easiest distinctive competencies for prospective rivals to imitate
tend to be those based on possession of firm-specific and valuable tangible resources,
such as buildings, plant, and equipment. Such resources are visible to competitors and
can often be purchased on the open market. For example, if a companys competitive
advantage is based on sole possession of efficient-scale manufacturing facilities,
competitors may move fairly quickly to establish similar facilities. Although Ford gained
a competitive advantage over General Motors in the 1920s by being the first to adopt an
assembly line manufacturing technology to produce automobiles, General Motors
quickly imitated that innovation, competing away Fords distinctive competence in the
process.
Intangible resources can be more diffi cult to imitate. This is particularly true of
brand names, which are important because they symbolize a companys reputation. In
the heavy earthmoving equipment industry, for example, the Caterpillar brand name is
synonymous with high quality and superior after- sales service and support. Customers
often display a preference for the products of such companies because the brand name
is an important guarantee of high quality. Although competitors might like to imitate well-
established brand names, the law prohibits them from doing so.
Marketing and technological know- how are also important intangible resources
and can be relatively easy to imitate. Successful marketing strategies are relatively easy
to imitate because they are so visible to competitors. Thus, Coca- Cola quickly imitated
PepsiCos Diet Pepsi brand with the introduction of its own brand, Diet Coke.
With regard to technological know- how, the patent system in theory should make
technological know- how relatively immune to imitation. Patents give the inventor of a
new product a 20- year exclusive production agreement. However, it is often possible to
invent around patents that is, produce a product that is functionally equivalent, but
does not rely upon the patented technology. One study found that 60% of patented
innovations were successfully invented around in 4 years. This suggests that in general,
distinctive competencies based on technological know- how can be relatively short-
lived.
Imitating a companys capabilities tends to be more difficult than imitating its
tangible and intangible resources, chiefly because capabilities are based on the way in
which decisions are made and processes managed deep within a company. It is hard
for outsiders to discern them.
On its own, the invisible nature of capabilities would not be enough to halt
imitation; competitors could still gain insights into how a company operates by hiring
people away from that company. However, a companys capabilities rarely reside in a
single individual. Rather, they are the product of how numerous individuals interact
within a unique organizational setting. It is possible that no one individual within a
company may be familiar with the totality of a companys internal operating routines and
procedures. In such cases, hiring people away from a successful company in order to
imitate its key capabilities may not be helpful.
In sum, a companys competitive advantage tends to be more secure when it is
based upon intangible resources and capabilities, as opposed to tangible resources.
Capabilities can be particularly difficult to imitate, since doing so requires the imitator to
change its own internal management processes something that is never easy due to
organization inertia. Even in such a favorable situation, however, a company is never
totally secure. The reason for this is that rather than imitating a company with a
competitive advantage, competitors may invent their way around the source of
competitive advantage. The decline of once dominant companies like IBM, General
Motors, and Sears has not been due to imitation of their distinctive competencies, but to
the fact that rivals such as Dell, Toyota, and Walmart developed new and better ways of
competing which nullified the competitive advantage once enjoyed by these enterprises.
Herein lies the rationale for the statement popularized by the former CEO of Intel, Andy
Grove that only the paranoid survive! Even if a companys distinctive competencies
are protected by high barriers to imitation, it should act as if rivals are continually trying
to nullify its source of advantage either by imitation, or by developing new ways of doing
business for in reality, that is exactly what they are trying to do.