a competency-based model of sustainable competitive advantage

I6h Journal of Management~ 1992. Vol. IS. No. 1, TI-91

A Competency-Based Model ofSustainable Competitive Advantage:

Toward a Conceptual IntegrationAugustine A. Lado

Cleveland State University

Nancy G. BoydUniversity ofNorth Texas

Peter WrightMemphis State University

This article examines the concept ofsustainable competitive advantage in the context oftwo theoreticalframeworks: environmental determinism (which encompasses microeconomic and industrial organization traditions) and "strategic selection" (which incorporatesSchumpeterian economic and strategic choice perspectives). It is argued that by ascribing competitive advantage to industrylmarket imperatives, the YO-based model apparently overlooks the idiosyncraticcompetencies that potentially generate a sustainable competitive advantage for the firm. An alternative conceptualization of sustainablecompetitive advantage from a resource-based perspective is offered.Specifically, a systems model that integrally links four components ofafirm's "distinctive competencies" (managerial competencies andstrategic focus. resource-based. transfonnation-based. and outputbased competencies) is proposed.

The concept of competitive advantage drives business strategy and has received considerable treatment in the literature. Within the strategic managementliterature, we have two competing models of sustainable competitive advantage.One is grounded in neoclassical economics (Chamberlin, 1933; Friedman, 1953)and more explicitly dealt with in the industrial organization literature (Bain, 1956;Hill, 1988; Porter, 1980, 1981, 1985). The other is rooted in a resource-basedview of the fIrm (Barney, 1986c, 1988; Dierickx & Cool, 1989; Lippman &Rumelt, 1982; Reed & DeFillippi, 1990).

The I/O model views competitive advantage as a position of superior performance that a fum achieves through offering no-frills products at low prices or offering differentiated products for which customers are willing to pay a price premium (e.g. Porter, 1980, 1985). The underlying premise is that the market orindustry imposes selective pressures to which the fum must respond. Firms that

Address all COITespondence to Augustine A. Lado. Department of Management and Labor Relations. Collegeof Business. Cleveland Stale University, Cleveland, OH 44115.

Copyright 1992 by the Southern Management Association 0149-20631921$2.00.

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78 LADO, BOYD, AND WRIGHT

can successfully adapt to those industry/market requirements will survive andgrow, whereas those that fail to adapt are doomed to failure and exit from the industry/market. Thus, in the neoclassical economic and industrial organization traditions, competitive advantage is ascribed to external characteristics rather than tothe ftrm's idiosyncratic competencies and resource-based deployments.

In the resource-based model, competitive advantage is viewed from the perspective of the "distinctive competencies" that give a ftrm an edge over its rivals(Barney, 1986a, 1986b; Day & Wensley, 1988; Fahey, 1989; Ghemawat, 1986;Hitt & Ireland, 1985; Lippman & Rumelt, 1982; Reed & DeFillippi, 1990). Thesestudies have entertained the view of an organization as a nexus or bundle of specialized resources that are deployed to create a privileged market position (seee.g., Barney, 1986c, 1988; Dierickx & Cool, 1989; Rumelt, 1984, 1987; Wernerfelt, 1984). Unequivocally, these works have enriched our understanding of theconcept of sustainable competitive advantage. Perhaps their greatest contributionhas been in generating alternative concepts that may serve as building blocks fordeveloping a ~'strategic theory of the ftrm" (Rumelt, 1984). In this article, the concept of sustainable competitive advantage is extended in the context of resourcebased competencies. Our discussion of the concept of sustainable competitive advantage is based on the premise that ftrm-speciftc competencies are potentialrent-yielding strategic assets (Barney, 1986c, 1988; Dierickx & Cool, 1989;Itami, 1987; Rumelt, 1987; Winter, 1987).

Our analysis assumes that these competencies do not merely "accrue" to thefmn (from a good "ftt" with industry/environmental requirements), but may consciously and systematically be developed by the willful choices and actions of thefmn's strategic leaders (see e.g., Bourgeois, 1984; Child, 1972; Smircich & Stubbart, 1985; Weick, 1979). Thus, a voluntaristic (as opposed to a deterministic)philosophical stance is adopted in our discussion of the concept of sustainablecompetitive advantage. An overview of the theoretical perspectives of neoclassical economics and industrial organization economics is ftrst presented under therubric "environmental determinism." Then, the topic of strategic selection is discussed. The concept of sustainable competitive advantage is examined withineach of these perspectives. Subsequently, a competency-based model of sustainable competitive advantage is proposed.

Environmental Determinism and Competitive Advantage

Deterministic models depicting the relationship of fmns to their environmentsmay be found throughout the strategy-related literature. These models are influenced by theoretical frameworks supplied by such disciplines as neoclassical economics and industrial organization economics.

Neoclassical economic theory is predicated on the logic of economic efficiencyas a selective force that determines the long run survival of a fmn (e.g., Friedman,1953). In this view, fmns are assumed to be rational with an overriding objectiveof allocating scarce resources to alternative ends in such a way as to maximizeproftts. These proftts would be partly reinvested to expand productive capacityand increase the volume of goods and services produced. Managerial competencies are implicitly reduced to elements of labor input whose value is realizable

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SUSTAINABLE COMPETITIVE ADVANTAGE 79

only in combination with the other factors of production. Managerial proactiveness based on competencies (or limitations) are not given any serious consideration. The neoclassical theory fails to provide a basis for understanding fIrm-levelstrategic behavior, as it assumes away such phenomena as transaction costs, limitson rationality, technological uncertainty, constraints on factor mobility, informational asymmetries, consumer and producer learning, and dishonest or foolish behavior of the fIrms' key actors (Rumelt, 1984).

Similarly, Classical industrial organization scholars have typically assumed thatthe fmn can neither influence industry conditions nor its own performance. Thisview, reflected by such works as Bain (1956) and Mason (1939), maintains that"because [industry] structure determines performance, we could ignore conductand look directly at industry structure in trying to explain performance" (porter,1981: 611). In this context, competitive advantage is industry driven (Le., determined by industry characteristics such as concentration ratio and cost structure)rather than proactively created·by fmns through accumulation of unique, valuable, and imperfectly imitable resources.

The modifIed framework advanced by a new group of I/O theorists recognizesthe role of fIrm conduct in influencing the relationship between industry structureand fIrm performance. According to Porter (1981), "there are some fundamentalparameters of industry dictated by the basic product characteristics·and technology, but ... within those parameters, industry evolution can take many paths, ...depending [among other things] on the strategic choices fmns actually make thatfollow from their [strategic goals]" (P616). The normative implications of theI/O-based model for strategic management are that a fmn should carefully analyze the industry in terms of its structural parameters (power of buyers, power ofsuppliers, entry barriers, etc.) to assess its profItability potential (porter, 1980).Once this is achieved, a strategy that can effectively align the fmn to the industryand generate superiot perfonnance. sh~u'd pe se1ecte<i an<l.implemented. Again,the contention here is that competitNe, ~dvantag~,is~arge1Y determined by the industry's struc~al characte~~ticsthat~~uehc9rmr~rformance~orter, 1?80).

In Porter's VIew, competItIve advantage can l>e sustamed by erecting bamers toentry by potential competitors, such a~ ~daleaI1diSCOpe economies, experience orlearning curve effects, product differe~tiatlon, ~pital requirements, and buyerswitching costs. Accordingly, flfllis ~hou1d i continue to raise these barriersthrough reinvestment of earnings if they~~osuccessfullydeter entry by potential competitors and mobility by existing:competitors across the industry's strategic groups (Caves & Porter, 1977; Porter, 1980, 1985). Porter's framework alsorecognizes the threat of substitute products as well as the bargaining power ofbuyers and suppliers as potential moderators in achieving competitive advantage.However, emphasis should be made that, in the context of industry structure, fmnreinvestment may prove disadvantageous beyond a certain point when diseconomies of scale begin to set in or when product differentiation reaches a pointof saturation.

In summary, the neoclassical and industrial organization theories tend to offerlittle understanding of the proactive structuring of sustainable competitive advantage. By consigning competitive advantage to the imperatives of industry/market

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structure, these theories apparently overlook the idiosyncratic fIrm competencieselicited from managerial volition, organizational routines, reputation, and culturethat are potential sources of sustainable competitive advantage. In the modifIed110 version, the concept of competitive advantage is recognized and discussedwith respect to creating barriers to entry by potential competitors as well as creating mobility barriers (Caves, 1984; Caves & Porter, 1977; Porter, 1980). Theissue of how unique fIrm competencies that generate quasi-rents can be protectedfrom imitation by competitors has not been closely examined. Unique fmn competencies have been examined by other scholars as detailed next.

Strategic Selection and Competitive Advantage

An alternative view of competitive advantage has been provided by a strategicselection perspective. The term strategic selection is used in contradistinction tothe natural selection view to emphasize the fact that it is the pattern of strategicdecisions and actions that determines organizational survival and renewal. Although "luck" may playa role in generating earnings for the fmn (Barney, 1986c;Mancke, 1974), we argue that what constitutes good fortune or luck may alternatively be conceived as the point at which stochastic opportunity and acquired/cultivated fIrm-specifIc resources meet.

The strategic selection view is consistent with Schumpeterian economics of innovation and entrepreneurship (Barney, 1986b; Rumelt, 1984, 1987) and with select views in strategic management (Jauch & Kraft, 1986; Mintzberg & Waters,1985; Smircich & Stubbart, 1985; Yvette & Mintzberg, 1988). It is also consistentwith interpretive sociology (Morgan, 1983, 1986; Morgan & Ramirez, 1984),cognitive psychology (Argyris & Shon, 1978; Dutton & Jackson, 1987; Hurst,Rush, & White, 1989; Weick, 1979), and behavioral economics· (penrose, 1952;Simon, 1947, 1984).

Emphasis should be made that the concept of strategic selection is more proactive than "strategic choice." That is, the notion ofstrategic choice (Child, 1972;Hrebiniak & Joyce, 1985) is limiting in that it implies choosing from given alternatives. Strategic selection, on the other hand, embraces a broader perspective toinclude the capacity to create and grasp opportunities internal and external to thefIrm. Moreover, strategic selection focuses attention on organizational variablesthat are important for creating and sustaining competitive advantage. This approach to fIrm analysis explicitly recognizes managerial proactiveness in influencing business performance.

The Schumpeterian premise of entrepreneurially driven "creative destruction"(Schumpeter, 1934, 1950) has provided impetus to the resource-based model ofstrategy and competitive advantage. For example, Rumelt (1984: 560) has stated:"corporate entrepreneurship is intimately connected with the appearance and adjustment of unique and idiosyncratic resources." He has further argued: "Entrepreneurs are seen to possess special information, to be unique, to create pureprofIt, and to act as the essential indivisibilities governing the size distribution offIrms" (1984: 561). Similarly, Leibenstein (1968, 1987) has observed that entrepreneurs perform special roles of "gap fIlling" and "input completion"; the former refers to identifying unmet customer needs and responding to them with a

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:,-'------------------------SUSTAINABLE COMPETITIVE ADVANTAGE 81

unique product offering, and the latter to the special talents (or unique competencies) of organizing, leading, and motivating people to accomplish desired ends.Additionally, Barney (1986b: 796) has stated that:

certain fIrms in an industry may have the unique skills required to bethe source of revolutionary changes in industry. '" Other fIrms mayhave the unique ability to rapidly adapt to whatever revolutionarychanges might occur. ... Firms that possess either of these organizational capabilities may have a greater likelihood of survival in industries threatened by revolutionary Schumpeterian changes than fIrmswithout these capabilities.

In summary, the strategic selection view provides a compelling theoreticalframework for sustainable competitive advantage. The recognition by this framework that idiosyncratic competencies are created and developed by a fIrm'sagents (or entrepreneurs) suggests the need to focus on organizational phenomena(such as informational asymmetries, organizational routines, histories, and reputation) that go beyond techno-economic considerations in assessing competitiveadvantage. Put in other words, implicit in the strategic selection philosophy is theconcept of unique or distinctive competencies (Selznick, 1957). An overview ofthe concept of distinctive competencies and its relationship to sustainable competitive advantage is presented in the following section. This information provides the background upon which our proposed model of sustainable competitiveadvantage is structured.

Distinctive Competencies and Competitive Advantage

Selznick (1957) fIrst coined the term distinctive competencies to describe theleadership capabilities that were responsible for transforming a public organization into a successful operation. The concept was incorporated into the Learned,Christensen, Andrews, and Guth (1969) business policy framework, whichplaced emphasis on assessing internal organizational capabilities (strengths andweaknesses) and matching these with environmental opportunities and threats.Additionally, Ansoff (1965, 1976) discussed the concept as an integral component of corporate strategy and subsequently argued that an organization's distinctive competencies are essential to identifying and responding to weak environmental signals. Hofer and Schendel (1978) have defIned distinctive competenciesas the unique competitive position that a firm achieves through its resource deployment. They have also viewed competencies as an integral part of organizational strategy.

Reed and DeFillippi (1990) have further developed the concept of distinctivecompetencies by relating it to sustainable competitive advantage and causal ambiguity. Causai ambiguity is defIned as the "basic ambiguity concerning the natureof the causal connections between actions and results" (Lippman & Rumelt,1982: 420). It describes the fum-specific resources and competencies (or vulnerabilities) that have the potential to generate superior (or inferior) performance.Reed and DeFillippi have argued that achieving a sustainable competitive advantage requires reinvestment in causally ambiguous organizational competenciesthat are characterized by tacitness, complexity, and specifIcity. Tacit knowledge

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describes information and competencies that are non-codifiable and non-explicitly replicable (polanyi, 1967). Complexity describes the range of interrelationships among skills and other knowledge-based competencies (Winter, 1987).Specificity describes the extent to which resources and skills are idiosyncratic tothe firm (i.e., not easily transferrable to alternative use without substantial costs)and can be advantageously channeled toward particular customers (Reed & DeFillippi, 1990; Williamson, 1985). Thus, the conceptualization of distinctive competencies encompassing these and other attributes provides a rationale for viewing firm-specific competencies as sources of sustainable competitive advantage.

A Competency-Based Model ofSustainable Competitive Advantage

Figure I presents a systems model which integrally links four sources of competencies: managerial competencies and strategic focus, input-based, transformation-based, and output-based competencies. These competencies may be valuableto the firm and their interlinkage may lead to a unique competitive advantage thatis not subject to imitation. The basic premise of the model is that managerial competencies and strategic focus are largely responsible for attracting specialized resources that are synergistically combined, transformed, and channeled to selectclients in such ways as to generate a sustainable competitive advantage to thefirm. Although the components of the model are discussed individually for elucidation purposes, a holistic construal of the concept of competitive advantage ispresumed.

Managerial Competencies and Strategic Focus

Ultimately, managerial values and competencies delineate the strategic focusof the organization (Guth & Tagiuri, 1965; Hambrick & Mason, 1984). For example, Westley and Mintzberg (1989) argue that leaders create a strategic vision,

Mllnllgerllll Competencies

lind Strllteglc Focus

Transformlltlon-BllsedCompetencies

Figure I.A Competency Based Model ofSustainable Competitive Advantage

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communicate it throughout the organization, and empower employees to realizethat vision. In their view, strategic vision is achieved through repetition (or experimentation and improvisation), representation (or articulation of core values), andassistance (or acceptance and legitimation of the vision by key stakeholders).Thus, the articulated strategic vision becomes the fulcrum around which thefIrm's unique competencies may be developed.

Effective implementation of such vision will depend crucially on the extent towhich a fIrm's managers acquire and mobilize specialized strategic resources thatmay yield superior returns relative to competitors. Barney (1986c) argues thatfIrms may obtain above normal returns from the acquisition of strategic resourcesby exploiting informational and expectational asymmetries in the strategic factormarkets. Thus, it takes unique managerial competencies to evaluate the expectedearnings streams accruing from strategic resources that are vital to implementation of a fIrm's strategy. Hence the arrow in Figure 1 that connects managerialcompetencies and strategic focus with resource-based competencies portraysmanagerial effects on specialized strategic resource acquisition and mobilization.

The influence of strategic leadership on specifIc outcomes such as organizational performance has been the subject of controversy. For example, the resultsof a longitudinal study conducted by Lieberson and O'Connor (1972) indicatethat environmental factors account for more variance in organizational performance than leadership factors. On the other hand, a subsequent replication of thisstudy found that the amount of variation in performance attributed to leadershipfactors substantially increased when the order in which the independent variableswere entered into the analysis was changed (Weiner & Mahoney, 1981). Ourmodel suggests that strategic leadership (through managerial competencies) willhave a signifIcant impact on organizational strategy and performance and be asource of sustainable competitive advantage insofar as such leadership exhibitscharacteristics of uniqueness in exploiting f"mn-specific competencies.

The contention that strategy and performance are ultimately a reflection of topmanagers or the dominant coalition (Cyert & March, 1963; Hambrick, 1987,1989; Hambrick & Mason, 1984) underscores the importance ofmanagerial competencies as a source of sustainable competitive advantage. Managers are responsible for developing "an overall sense of purpose and direction that guide[s] integrated strategy formulation and implementation in organization" (Shrivastava &Nachman, 1989: 51). As is evident, managerial volition is assumed in this context. The deterministic alternative view (not adopted in this article) argues for theneed to match, align, or "fIt" managers to strategy (Kerr & Jackofsky, 1989; Szilagyi & Schweiger, 1984).

As indicated in Figure 1, managerial competencies and strategic focus assumea central position in creating resource-based, transformation-based, and outputbased competencies. In other words, organizational distinctive competencies maybe generated by the decisions and actions of top managers. Thus, managerialcompetencies may be viewed as influencing the interaction among resourcebased, transformation-based, and output-based components of the system.

Furthermore, top managers are viewed as capable of imposing order on the environment through the selective identifIcation of strategic issues (Dutton & Jack-

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son, 1987; Miles & Snow, 1978). That is, top managers may generate unique information that enables them to effectively interpret the firm's environment withrespect to opportunities and threats. Hence, in Figure 1, the linkages betweenmanagerial competencies and the environment are depicted by two arrows. Onedenotes the potential managerial influence on the environment and the other indicates the feedback flow of information (from the environment) that is necessaryto further develop managerial competencies and strategic focus. Managerial competencies are developed via cognitive and behavioral characteristics that areunique toeach decision maker or to the top management team of a particular firm(Hambrick, 1989). Schoemaker (1990) has offered persuasive arguments suggesting how "behavioral friction forces" can, when properly exploited, yield quasirents and provide a source of sustainable competitive advantage. Specifically,these managerial competencies may be generated through the gathering of information, framing ofproblems, reaching conclusions, and learning from experience(See Russo & Schoemaker, 1989; and Schoemaker, 1990 for a detailed treabnentof this line of thought).

Resource-Based Competencies

Wernerfelt (1984) broadly defines a resource as "anything which could bethought of as a strength or weakness of a given firm" (p172). More specifically,resource-based competencies consist of core human and nonhuman assets, bothtangible and intangible, that allow a firm to outperform rival firms over a sustained period of time (Oster, 1990; Wernerfelt, 1984).

In Figure 1, resource-based competencies are linked to transformation-basedcompetencies and to output-based competencies to suggest the synergistic interactions among them. For example, a firm's innovative capabilities are dependentupon its unique competencies for acquiring and mobilizing specialized resources.Innovative outputs require investments in idiosyncratic transformation processes.Subsequently, the firm's technological breakthroughs may generate desirable outcomes that may reinforce its resource-based, transformation-based, and outputbased competencies and elicit further internal and external support for the firm'svolition (e.g., Wernerfelt, 1984). If and when an industry's structural barriersbreak down as a result of Schumpeterian revolutions, those firms that have acquired, mobilized, and nurtured unique and idiosyncratic skills and capabilitiesmay survive and grow. These resource-based competencies potentially influencethe ability of the firms to develop transformation-based and output-based competencies (Irvin & Michaels, 1989).

In order for resource-based competencies to generate quasi-rents and be asource of sustainable competitive advantage, they must be causally ambiguous(Lippman & Rumelt, 1982; Reed & DeFillippi, 1990). That is, they would exhibitcomplex relationships with other firm-specific resources and capabilities. Thetacitness of intangible input/skill-based competencies would also enhance the difficulty of competitor imitation.

The acquisition and mobilization of resource-based competencies that potentially generate a sustainable competitive advantage not only require managerialcompetencies in information gathering, but also accurate expectations about the

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future earning streams from these resources. This may be linked to what Barney(1986c) has considered to be imperfections in strategic factor markets that occurdue to informational and expectational asymmetries among buyers and sellers ofstrategic resources. Thus, a ftrm that has unique skills and capabilities and/or thatis lucky may earn above normal returns by buying resources that are undervaluedin the market and using these resources to implement its strategy, or by not buyingresources that are overvalued in the market. Hence, in Figure 1, the flow of inputsfrom the environment to the ftrm is depicted by the arrow connecting the environment to the resource-based competencies. These inputs are subsequently synergistically combined with other fmn-speciftc competencies to generate a sustainable competitive advantage.

Transformation-Based Competencies

Transformation-based competencies may be conceived as those organizationalcapabilities that are required to advantageously convert inputs into outputs (Day& Wensley, 1988). The notion of transformation-based competencies is alsoclosely linked to the "value chain" concept ftrst developed by McKinsey and Co.and subsequently adopted as an analytical tool for strategic management byPorter (1985). Essentially, an organization's value chain embraces discrete but related sets of activities concerned with designing, developing, producing, and marketing outputs to customers. These activities may be divergently related to eachother, depending on the interlinkage of the organization's idiosyncratic competencies (Gluck, 1980; Porter, 1985). As shown in Figure 1, transformation-basedcompetencies are interrelated with managerial competencies and strategic focus,resource-based competencies, and output-based competencies.

Transformation-based competencies may encompass both innovation and organizational culture. Innovation (including technological, marketing, and managerial, among others) provides an organization with the capability to generatenew products/processes faster than competitors (lwai, 1984; Nelson & Wmter,1982; Wmter, 1984). Organizational culture may enhance the capacity for organizationallearning and adaptation (Fiol & Lyles, 1985).

The I/O based model suggests that a fmn can achieve a low-cost competitiveadvantage primarily through learning effects, economies of scale, economies ofscope, and capita1l1abor substitution (BCG, 1976; Hill, 1988; Porter, 1980, 1985).Learning effects are usually viewed as the operations economies resulting fromrepetition of activities that lead to greater learning and efficiency in production(Hayes & Wheelwright, 1984). Scale economies are expected decreases in longrun average costs due to capacity expansion and factor intensity. Economies ofscope result from sharing of resources among organizational units (Teece, 1980).Capita1l1abor substitution involves substituting capital for labor or vice versa inorder to enhance efficiencies.

However, it has been argued that any low-cost position gained through learningeffects, scale/scope economies, and capita1l1abor substitution might not necessarily constitute a sustainable competitive advantage (Alberts, 1989; Amit & Fershtman, 1989). Such efficiency gains may be imitable and consequently are likely tobe eroded over time (Amit & Fershtman, 1989; Hill, 1988; Reed & DeFillippi,

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1990), Furthennore, cost economies do not merely accrue from such factors aslearning effects and scale/scope economies, but also from behavioral considerations that make low-cost operations possible. In a rebuttal·of the "experiencecurve doctrine," it has been argued that a cost advantage due to experience-curveeffects is realizable only when three behavioral traits are present in an organization or unit: (a) volition, or the will to innovate; (b) imaginativeness, or creativeintelligence; and (c) drive, or the ability to vigorously pursue a desired goal (Alberts, 1989: 41). In other words, cost economies do not just accrue from technoeconomic factors; they are driven down through managerial, group, and operatorvolitions. This argument implies that sustainability of a low-cost position may beachieved through managerial and personnel efforts directed at "harnessing volition, imaginativeness and drive" to push production and operations costs belowthose of competitors (Alberts, 1989: 47). Transfonnation-based competencies,however, must be idiosyncratic to the firm in order for the ftnn to achieve a sustainable competitive advantage.

Similarly, the I/O-based analysis of competitive advantage with respect to differentiation efforts has concentrated on techno-economic variables (Buzzell &Gale, 1987; Hill, 1988; Porter, 1985). For example, Porter (1985) lists an array offactors that are likely to generate competitive advantage through differentiation.These include investment in product development, facility design and layout, increased advertising and promotional efforts, and customized service. Again thereis no reason to suggest that these activities cannot be imitated by competitors. Asargued previously, reinvestment in differentiation efforts, though necessary, is notsufficient to insure sustainability of a fmn's competitive advantage.

Thus, the 1I0-based analysis of competitive advantage has not heavily emphasized the managerial and organizational components ofcompetition that may playcrucial roles in creating and sustaining competitive advantage. It has been empirically shown that economic factors account for only about 15-40% of ftnn performance (Hansen & Wemerfelt, 1988); the rest of the variance may be explained by ~

such factors as managerial competencies and organizational culture or climate.Although the role oforganizational culture in achieving a superior level of performance has long been recognized in the organizational behavior literature (Smircich, 1983; Tichy, 1983; Wilkins & Ouchi, 1983), strategy researchers have paidrelatively little attention to this important factor until recently (Barney, 1986a;Weigelt & Camerer, 1988).

It has been recognized that for an organizational culture to provide a sustainable competitive advantage, it must be valuable, rare, and difficult to imitate bycompetitors (Barney, 1986a). A strong organizational culture unleashes humancreative potential to generate a continuous stream of ideas that may be translatedinto new products and processes. At the same time it permits realization of scaleeconomies and incremental learning by encouraging and rewarding "volition,imaginativeness and drive" in the implementation of efficiency- and innovationenhancing strategies (Alberts, 1989).

Output-Based Competencies

Output-based competencies not only refer to a ftnn's physical outputs that de-

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liver value to customers, but also to the "invisible" outputs (ltarni, 1987), such asreputation for product and service quality, brand name, and dealer networks thatprovide value to customers. A fIrm's long-run survival and growth largely depends on how well value is delivered to its most important constituents--the customers (Anderson, 1983; Day & Wens1ey, 1988). The link between output-basedcompetencies and the environment, as depicted in Figure 1, reflects the uniquecompetencies that are advantageously channeled toward creating value for customers and that subsequently may generate a sustainable competitive advantagefor the fIrm.

The 110 paradigm has conventionally focused on market share or relative market share and profItability as measures of a fIrm's performance and as indicatorsof strategic advantage (Gale & Buzzell, 1990). A large market share, it is argued,indicates market power, which provides a barrier to entry for the fIrm. For example, Schmalensee (1985) has empirically shown that industry or market factorsaccount for almost all the explained variance in fIrm performance, suggesting thata larger market share is indicative of the extent to which the fIrm adapts to industry forces. Accordingly, a high market share enables a fIrm to appropriate superiorreturns from its investments relative to competitors (BCG, 1976; Buzzell, Gale, &Sultan, 1976). However, in order for market share to be a source of competitiveadvantage, it must be gained in such a way that it is not easily imitated by competitors, and it must have stable, defmable boundaries (Day & Wensley, 1988).

In order to achieve a sustainable competitive advantage, fIrms may need to deliver value via service, quality, reliability, among others. For example, concernwith customer service as a competitive thrust has received much attention inacademia (Buzzell & Gale, 1987) and in the popular press (phillips, Dunkin, &Treece, 1990). Companies such as American Express, American Airlines, and 3Mhave had an enduring reputation for superior customer service that has earnedthem higher returns than competitors (Phillips et al., 1990). These companieshave built unique competencies for producing and delivering quality products andservices that effectively meet customer tastes and preferences relative to competitors. Thus, they earn above-normal profIts in the short run and an image for reliability and dependability in dealing with customers and other clients that promotetheir long-run prosperity. The reputation so earned takes time to cultivate andreplicate and so becomes a source of sustainable competitive advantage (Ghemawat, 1986; Milgrom & Roberts, 1982; Weigelt & Camerer, 1988).

Concern for customers also promotes close relationships between the fIrm andits clients (Peters & Waterman, 1982). These relationships benefIt the frrm ingaining timely market information and brand loyalty that will generate high salesand returns relative to competitors. Thus, the frrm earns its present reputationthrough its previous relationships with customers, dealers, suppliers, and otherstakeholders. Additionally, the present quality of the frrm's relationships with itsstakeholders provides the basis for its future reputation.

Reputation building is achieved through specification of consistent productquality and customer service requirements, provision of unconditional serviceguarantees, and empowerment of employees to solve customer problems as theyarise (Hart, 1989; Irvin & Michaels, 1989). But reputation building must be a pri-

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ority of top management if it is to earn a sustainable competitive advantage. Topmanagement contributes to the ongoing delivery of value by specifying standardsof perfonnance, communicating these clearly and unambiguously to employees,establishing appropriate hiring, training, motivation, and reward systems for developing core skills, and boosting employee morale (Irvin & Michaels, 1989).

Conclusion

In this article, the concept of sustainable competitive advantage has been examined. Contrary to the I10-basedpropositions that ascribe competitive advantage to market/industry imperatives, this study has extended the resource-basedresearch that places emphasis on distinctive competencies as sources of sustainable competitive advantage. These competencies are proactively created and nur~

tured through the pattern of strategic decisions and actions of the fInn's agents.This article has proposed a systems model within which the concept of sustain

able competitive advantage can be examined. The importance of an integrativeframework for strategy research has been previously recognized (Jemison, 1981;Mitroff & Mason, 1982). This article has incorporated such resource~based

propositions as the importance of organizational culture (Barney, 1986a; Hansen& Wernerfelt, 1989), reputation (Weigelt & Camerer, 1988), entrepreneurship(e.g., Rumelt, 1987), and managerial cognitive and behavioral characteristics(Schoemaker, 1990). The presentation of sustainable competitive advantage withrespect to four sources of frrm~specifIcdistinctive competencies (managerial, resource~based, transfonnation-based, and output-based), that are synergisticallyrelated, allows for a holistic resource-based theoretical development. The extentto which these four theoretical sources ofdistinctive competencies generate a sustainable competitive advantage for a frrm is, of course, an empirical question.

The message conveyed here is that achieving and sustaining a competitive advantage position require that managers focus on developing and nurturing theirfrrms' idiosyncratic competencies that inhibit imitability. Thus, frrms should continually invest in skills and capabilities that are causally ambiguous (Lippman &Rumelt, 1982; Reed & DeFillippi, 1990), are not easily tradeable in the marketfor strategic factors (Dierickx & Cool, 1989), or when acquired from such a mar~

ket, have the potential to generate above nonnal returns (Barney, 1986c).

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