Creating Sustained Competitive Advantage with Systems Thinking: Expanded Article

by on March 7th, 2015
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System Negative Feedback

An organization’s performance is directly linked to its ability to compete. Yet, true competitive advantage is results from the interactions between organizational components, not performance alone. Sustained competitive advantage requires constant adjustments to the organizational system in response to varying inputs and desired outputs. This advantage must be supported by a unique capability or capabilities. A competitive capability, such as delivery, quality, or price, is measured by the value which a customer observes. Every capability is supported by competencies, those internal structures that an organization possesses such as a filing system, a milling machine, proprietary software, or an experienced manager. Competencies alone do not guarantee results; competencies must be used properly and in conjunction with each other to meet strategic demands. A firm’s competencies are remarkably intertwined, especially in their effect on competitive advantage (Koufteros, 2002).

There is a closed feedback loop which organizations use to develop their competitive capabilities. That closed feedback loop measures performance outcomes to alter business strategy. Business strategy can revise current capabilities, or develop new capabilities through planning and implementation. Competitive advantages will develop in a tuned organizational system. However, a firm which does not align strategy with the application, refinement, and development of capabilities will become uncompetitive. Koufteros (2002) offered this example of the strategy-capability relationship, ” if an organization’s goals are to increase product variety and reduce lead time for customers (competitive priorities), it may develop programs and practices that reduce setup time and increase equipment reliability” (p. 259). This organization effectively used a closed loop to develop strategic goals, identify the distance from the current state, and implement plans to reach those goals.

System Interdependence of Competitive Capabilities

Capabilities are emergent, strategic results of competencies that allow for the transformation of inputs to outputs. The purpose of system feedback is to ensure capabilities are properly developed to reach desired outputs. Koufteros’ (2002) research agreed with the suggestions of Porter, that companies mainly compete on a basis of cost leadership or differentiation. These main themes drive the selection of competitive priorities and the development of competencies. In order to develop or maintain a competitive advantage, strategic goals must be value focused. Customers may perceive value in terms of cost, time, or any other expenditure. It is not logical to pursue a single capability when capabilities positively reinforce each other. For instance, if a firm can produce quality products, it must also be able to innovate, because undesirable products of high quality and innovative products of low quality have a small market. An innovative firm with quality products will deliver products to market faster than the competition without costly rework or returns. The cost of quality can be a detriment to a firms value, as will be seen in later sections. Typically, it can be assumed that capabilities are positively reinforcing, and that if any one capability is lacking, the overall performance targets of the organization will be difficult to achieve. This symbiotic relationship of an organization’s capabilities explains why it is challenging to be competitive. It is possible that different capabilities carry differing importance weights depending upon the main organizational strategy. For example, quality can allow for cost leadership via cost cutting, but is more effective at supporting differentiation and premium pricing. Quality enhances the chance of delivery dependability and the likelihood of return customers. Interestingly, innovation does not greatly affect delivery, even though it affects quality. On-time delivery supports profitability more as a customer requirement than an optional advantage. From Koufteros’ (2002) results, it can be concluded that competitive advantage is attained through interrelated competencies and capabilities.

Information Technology

One capability that has garnered much attention in maintaining a sustained competitive advantage is information technology (IT). The power of IT to retain, enhance, and reuse knowledge supports its role in creating competitive organizations. A popular assumption might be that any IT competency will yield competitive success. However, Kettinger (1994) discovered that creating a sustained competitive advantage was not guaranteed solely by the use of a computer database. He pointed out that “opportunities for achieving sustained competitive advantage from early use of IT may be more difficult than originally conceived” (p. 32). IT is a distinct capability and is impacted by the whole organizational system. Factors that influence how successful an organization is at maintaining a sustained competitive advantage include the organization’s competitive environment, organizational structure, and organizational strategy. Negative factors are exemplified by easy market entry for competitors, large organizational size which prevents action, and ignoring risk management strategies. The proper alignment of structure and strategies is clearly just as important for information technology as it is for manufacturing technology.

Quality

Quality has become a major competitive focus in US manufacturing due to competition. Global competition in areas like the automotive industry was created by different quality levels, which were illustrated by defect rates. “The 1980s saw Japanese firms make dramatic gains in market share in industries such as automobiles, semiconductors, and consumer electronics. A major reason for the success of these firms was the superior quality and reliability of their products” ( Banker, Khosla, & Sinha, 1998, p. 1179). Companies with higher quality levels gained market share and forced other companies to also increase their quality levels to prevent continued losses.

Quality is a relative item. Competition exists to win over customers with options. These customers form the demand for a certain quality level. As organizations compete, they look amongst each other to determine what quality levels (combined with other competitive items) best meet customer demand. The level of competition arises from several factors. Banker, Khosla, and Sinha (1998) researched competitive intensity as it was driven by three separate forces. One force was the need to compete with the quality baseline set by the dominant firm in the industry. The second force was one of restraining cooperation between firms in quality partnerships. The third force studied was not from individual firms owning separate quality levels, but rather by the number of competitors in the industry. Consumer demand was modeled as a linear function of price and quality. Quality’s effects on production cost and price was central to the authors’ game theory based findings.

When an industry contains a large, dominant competitor, it might be expected that smaller firms have a lower cost related to increasing their quality levels. This causes industry wide quality to increase when the firms have a desire to compete on a basis of quality value. Intuitively, this makes sense since the smaller firm will increase its own quality without affecting cost greatly, thereby taking market share from its competitor. This is the situation assumed by most quality supporters. On the other hand, when the dominant firm has cost advantages for improving quality, the industry wide quality level tends to decrease as desire to compete on quality levels increases. The larger firm controls such a major competitive advantage that it eliminates the ability of smaller firms to compete on a quality basis. That is a truly sustained advantage. Such a firm might arise in the form of a monopoly, and the illustrated negative impact to society could be mitigated by government intervention. Although competitive advantage is generally seen as admirable, it is possible that competitive advantages are not always beneficial to society. Banker, Khosla, and Sinha (1998) continued their games with two other scenarios.

In the second scenario, the formation of a partnership creates an event where organizations collaborate on determining quality levels. The partnership quality level is higher than purely competitive quality levels if the cost to implement quality improvements is high enough. Industries with costly design cycles tend to benefit most from the pooling of resources to build quality into the design. The end result is a more attractive product to customers, due to a lack of competition. In this case, the partner defined quality can be a competitive advantage only against firms outside the partnership, but it may also increase the size of the customer pool by adding new customers who would not otherwise be shopping. The outcome could also be looked at as creating a sustained competitive advantage over a firm’s historic quality levels.

McEvily (2005) also looked at partnerships as a key method for developing competitive capabilities. The McEvily study concluded that organizations tend to form capabilities with support from their supply chains. Although the supplier does not compete with its buyer, it may be hesitant to offer information or share costs. It is interesting that competitive advantage formed by supply chain cooperation can be extremely beneficial, without sharing knowledge with rivals.

The final scenario investigated by Banker, Khosla, and Sinha (1998) defines competition by the number of competitors. Their model showed that quality levels cannot increase without limits, and that increasing competitor numbers does not automatically deliver an increase in quality. This contradicts generalizations such as “quality is free.” The authors again base their model on the cost of quality levels which affects price. As more competitors enter the industry, dividing up the available customer demand, quality levels will only increase if the cost to improve quality decreases at a strong rate. A decreasing rate for the cost to improve quality is plausible since experts in the industry become more available and machinery becomes more standardized. This decreasing cost of quality is not guaranteed, and must outweigh the dividing of market share in order to prevent industry wide quality levels from decreasing. In the case of a high cost of quality, with a large number of competitors, firms will focus on the development other competitive advantages with lower costs.

Quality as a Minimized Advantage

The study by Scanlon, Swaminathan, Lee, & Chernew (2008) found that increased numbers of HMOs, competing for the same pool of customers, did not result in increased quality. The study found that offering cheaper services at lower rates was the likely reason. This supports the assertion that the cost related to quality and quality improvement does not always result in a gain in value as perceived by the customer. Competitive advantage can only be established in those areas which are highly desirable. The study may not have proceeded long enough since the worst quality HMOs may ultimately fail due to customer defection and costs associated with poor quality such as lawsuits.

The healthcare industry is an example of a very complex marketplace. Portions of it are public and subsidized, while other portions are private and supported by both individuals and groups of individuals. Free switching may not always be possible, especially given enrollment periods. Without study, it would expected for HMO companies to raise quality standards in order to capture more business or lower costs. The fact that this did not happen shows that being competitive is extremely sensitive to the market in which an organization competes. The authors admitted that the sample size for their study was small enough to have statistical errors. While the results did not show a definite decline in quality due to competition, they certainly did not show an increase in quality.

Mixing of public and private support does create challenges for quality as a competitive advantage. It is not always enough for products to be high quality, since organizations can compete on a cost basis regardless of quality levels. Customers may defect to other firms, but they may also lower their quality demands. At equal costs (including price and time), a higher quality product should win. In the case of domestic solar cell manufacturer, Solyndra, global competition was fed by a mix of public and private support. The markets desired solar cells, fueled by a growing demand from individuals, companies, and government bodies. Chinese manufacturers were so heavily subsidized that they were able to sell products well below Solyndra’s threshold. China’s subsidies altered the market in a way that prevented quality from being leveraged as a competitive advantage for Solyndra against global competition. Solyndra’s quality can be seen in their product certifications to IEC61646/61730 requirements for Europe and UL 1703 requirements for North America, as well as compliance with hail, wind and seismic events. “According to the Energy Department, the Chinese government poured $33 billion into its solar industry in 2010, allowing Chinese companies to produce solar panels at a fraction of the cost that American companies like Solyndra were paying” (Bingham, 2011). The US government did provide a $528 million loan to Solyndra which is less than 1% of the Chinese investment. It is clear that it would take dramatic competency changes to allow Solyndra to achieve the internal cost reductions that Chinese manufacturers enjoyed as an external subsidy. Could Solyndra have maximized its value by strategically positioning itself in a way that would not directly compete with Chinese manufacturers? The poor response to Solyndra’s quality may have been that Chinese solar cells perform equally well to a customer’s requirements. If Solyndra was unable to compete on price or quality alone, could the company have competed on fast delivery, and greater knowledge of the domestic electricity market? Perhaps the company may have been able to diversify its product into a new solar cell market that placed high demands on competitive needs other than price. Business strategies are formed by management and are of extreme importance to remaining competitive.

The Importance of Management

In seeking the methods for remaining competitive, a recurring theme is that the management of complex a system governs the success of an organization. Within the organization, purpose, principles, processes, people, and performance make up the complex system as identified by Pryor (2007). Strategy (purpose and principles) and operations (processes) are the baseline for enabling competitive competencies. Therefore, management is a critical, and accountable role for any organization.

Van Reenen (2011) investigated why companies can have extremely different performance outputs when they are making similar products. The products of the studied firms were relatively easy to copy, and therefore competed on price. The similar inputs and outputs suggested that the main organizational differences were in operations. Firms that focus on differentiation would have been more difficult for the study, but competition would still reward firms that effectively use resources to create value for customers. Organizations that use all available tools in a way that optimizes overall performance will perform better than organizations with sub-optimized components. This means that new technology alone is not enough to guarantee increased performance. New technology must be properly managed in order to make improvements to performance levels.

Van Reenen (2011) found that organizations in strongly competitive environments tended to have highly competent managers. Managers were interviewed and ranked based on their ability to perceive and react to organizational problems, as well as their ability to increase the productivities of their organizations. These competitive firms, which exist in the U.S. markets, are forced to use quality and lean processes in order to keep efficiency high.

Similar to adopting new technologies, management practices do change over time in the ongoing struggle to be the best. Management practices strongly influence organizational ability to create competitive advantages through unified strategy. In addition, management practices are dynamic enough to circulate between organizations. An organization which does not value or foster management talent is likely to give up that talent to another organization. Von Reenen (2011) demonstrated that highly competitive markets have a positively reinforcing effect on quality levels. In this case, quality levels are a competitive advantage observed by the customer directly, but moreover, in price. These results support the likelihood of quality costs to decrease as more competitors enter a market. Managers should consider quality initiatives as a means for remaining competitive, but only if they are understood in terms of customer value and in relation to the entire organizational system.

The Importance of Human Resources

Even though management is important, it is people at all levels that ultimately make an organization perform successfully. By analyzing other studies, O’Daniell (1999) found that companies are trying to increase employee satisfaction in order to effectively use organizational culture as a competitive advantage. The culture of an organization is a critical internal factor that affects productivity. Disgruntled or demoralized employees are less likely to support a positive and productive culture. Methods such as work sharing, and flexible scheduling make the job fit the employee rather than trivialize the employee to fit the job. The purpose is to emphasize an employee’s skills and competencies as a business asset rather than emphasizing their time or physical location. Communication is another important factor to creating a strong organizational culture. Honest communication enables fast response times, identification of problems, and creates a sense of teamwork. A strong culture of honesty, innovation, empowerment, and efficiency reinforces other competitive advantages.

Wilkinson (2004) asserts that global competition has created a need for total quality management (TQM). She goes further by suggesting that human resources management is often left out of specifics which tend to focus more on operations. “As a commitment to quality management is one component of most business strategies, so thinking about strategic [human resources management] is likely to emphasize quality management issues, for example the need to create employee commitment to quality and flexibility.” (Wilkinson, 2004 p. 1020). Human resources are part of the organizational structure, those people are critical to success. It is equally important to align the strategic management of human resources with organizational strategy as it is to align process management.

In order for TQM to be adopted by people, it must work within their personal and organizational culture. TQM may be repelled as invasive and disruptive if it contradicts established norms. For this reason, TQM must be used in alignment with achievable strategic goals. Those goals propel an organization forwards in the creation of competitive systems. This integration is more properly labeled as strategic quality management. People are the ultimate tools in creating competitive advantage. Strong organizational culture and clear, disseminated strategy enable people to work together in sustaining a competitive organization.

Conclusions
Organizations seeking a competitive advantage must examine every component of their internal system. A focused strategy is expected to define what capabilities are required to maximize value observed by the customer. Competencies such as human resources, machinery, building structure, and software all contribute to organizational capabilities. As the organization takes measurements from the customer’s viewpoint, it must flow down adjustments in its system to increase customer satisfaction with enhanced capabilities. It is not enough to optimize only one component of the system, nor is it enough to optimize each component in isolation. The system optimization that occurs at each level must work in conjunction to support the large-scale goal of sustained competitive advantage

References

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