I6h Journal of Management

~ 1992. Vol. IS. No. 1, TI-91

A Competency-Based Model of
Sustainable Competitive Advantage:
Toward a Conceptual Integration
Augustine A. Lado
Cleveland State University
Nancy G. Boyd
University ofNorth Texas
Peter Wright
Memphis State University
This article examines the concept ofsustainable competitive advan-
tage in the context oftwo theoreticalframeworks: environmental deter-
minism (which encompasses microeconomic and industrial organiza-
tion traditions) and "strategic selection" (which incorporates
Schumpeterian economic and strategic choice perspectives). It is ar-
gued that by ascribing competitive advantage to industrylmarket im-
peratives, the YO-based model apparently overlooks the idiosyncratic
competencies that potentially generate a sustainable competitive ad-
vantage for the firm. An alternative conceptualization of sustainable
competitive advantage from a resource-based perspective is offered.
Specifically, a systems model that integrally linksfour components ofa
firm's "distinctive competencies" (managerial competencies and
strategic focus. resource-based. transfonnation-based. and output-
based competencies) is proposed.
The concept of competitive advantage drives business strategy and has re-
ceived considerable treatment in the literature. Within the strategic management
literature, 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-based
view 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 perfor-
mance that a fum achieves through offering no-frills products at low prices or of-
fering differentiated products for which customers are willing to pay a price pre-
mium (e.g. Porter, 1980, 1985). The underlying premise is that the market or
industry imposes selective pressures to which the fum must respond. Firms that
Address all COITespondence to Augustine A. Lado. Department of Management and Labor Relations. College
of Business. Cleveland Stale University, Cleveland, OH44115.
Copyright 1992 by the Southern Management Association 0149-20631921$2.00.
77
Copyright 2001. All Rights Reserved.
78 LADO, BOYD, AND WRIGHT
can successfully adapt to those industry/market requirements will survive and
grow, whereas those that fail to adapt are doomed to failure and exit from the in-
dustry/market. Thus, in the neoclassical economic and industrial organization tra-
ditions, competitive advantage is ascribed to external characteristics rather than to
the ftrm's idiosyncratic competencies and resource-based deployments.
In the resource-based model, competitive advantage is viewed from the per-
spective 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). These
studies have entertained the view of an organization as a nexus or bundle of spe-
cialized resources that are deployed to create a privileged market position (see
e.g., Barney, 1986c, 1988; Dierickx & Cool, 1989; Rumelt, 1984, 1987; Werner-
felt, 1984). Unequivocally, these works have enriched our understanding of the
concept of sustainable competitive advantage. Perhaps their greatest contribution
has been in generating alternative concepts that may serve as building blocks for
developing a theory of the ftrm" (Rumelt, 1984). In this article, the con-
cept of sustainable competitive advantage is extended in the context of resource-
based competencies. Our discussion of the concept of sustainable competitive ad-
vantage is based on the premise that ftrm-speciftc competencies are potential
rent-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 the
fmn (from a good "ftt" with industry/environmental requirements), but may con-
sciously and systematically be developed by the willful choices and actions of the
fmn's strategic leaders (see e.g., Bourgeois, 1984; Child, 1972; Smircich & Stub-
bart, 1985; Weick, 1979). Thus, a voluntaristic (as opposed to a deterministic)
philosophical stance is adopted in our discussion of the concept of sustainable
competitive advantage. An overview of the theoretical perspectives of neoclassi-
cal economics and industrial organization economics is ftrst presented under the
rubric "environmental determinism." Then, the topic of strategic selection is dis-
cussed. The concept of sustainable competitive advantage is examined within
each of these perspectives. Subsequently, a competency-based model of sustain-
able competitive advantage is proposed.
Environmental Determinism and Competitive Advantage
Deterministic models depicting the relationship of fmns to their environments
may be found throughout the strategy-related literature. These models are influ-
enced by theoretical frameworks supplied by such disciplines as neoclassical eco-
nomics and industrial organization economics.
Neoclassical economic theory is predicated on the logic of economic efficiency
as 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 objective
of allocating scarce resources to alternative ends in such a way as to maximize
proftts. These proftts would be partly reinvested to expand productive capacity
and increase the volume of goods and services produced. Managerial competen-
cies are implicitly reduced to elements of labor input whose value is realizable
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SUSTAINABLECOMPETITIVE ADVANTAGE 79
only in combination with the other factors of production. Managerial proactive-
ness based on competencies (or limitations) are not given any serious considera-
tion. The neoclassical theory fails to provide a basis for understanding fIrm-level
strategic behavior, as it assumes away such phenomena as transaction costs, limits
on rationality, technological uncertainty, constraints on factor mobility, informa-
tional asymmetries, consumer and producer learning, and dishonest or foolish be-
havior of the fIrms' key actors (Rumelt, 1984).
Similarly, Classical industrial organization scholars have typically assumed that
the fmn can neither influence industry conditions nor its own performance. This
view, reflected by such works as Bain (1956) and Mason (1939), maintains that
"because [industry] structure determines performance, we could ignore conduct
and look directly at industry structure in trying to explain performance" (porter,
1981: 611). In this context, competitive advantage is industry driven (Le., deter-
mined by industry characteristics such as concentration ratio and cost structure)
rather than proactively created by fmns through accumulation of unique, valu-
able, and imperfectly imitable resources.
The modifIed framework advanced by a new group of I/O theorists recognizes
the role of fIrmconduct in influencing the relationship between industry structure
and fIrm performance. According to Porter (1981), "there are some fundamental
parameters of industry dictated by the basic product characteristics and technol-
ogy, but ... within those parameters, industry evolution can take many paths, ...
depending [among other things] on the strategic choices fmns actually make that
follow from their [strategic goals]" (P616). The normative implications of the
I/O-based model for strategic management are that a fmn should carefully ana-
lyze the industry in terms of its structural parameters (power of buyers, power of
suppliers, entry barriers, etc.) to assess its profItability potential (porter, 1980).
Once this is achieved, a strategy that can effectively align the fmn to the industry
and generate superiot perfonnance. pe se1ecte<i an<l.implemented. Again,
the contention here is that competitNe, determined by the in-
dustry's 1?80).
In Porter's VIew, competItIve advantage can l>esustamed by erecting bamers to
entry by potential competitors, such iSCOpe economies, experience or
learning curve effects, product requirements, and buyer
switching costs. Accordingly, flfllis i continue to raise these barriers
through reinvestment of earnings if they deter entry by poten-
tial competitors and mobility by existing:competitors across the industry's strate-
gic groups (Caves & Porter, 1977; Porter, 1980, 1985). Porter's framework also
recognizes the threat of substitute products as well as the bargaining power of
buyers and suppliers as potential moderators in achieving competitive advantage.
However, emphasis should be made that, in the context of industry structure, fmn
reinvestment may prove disadvantageous beyond a certain point when dis-
economies of scale begin to set in or when product differentiation reaches a point
of saturation.
In summary, the neoclassical and industrial organization theories tend to offer
littleunderstanding of the proactive structuring of sustainable competitive advan-
tage. By consigning competitive advantage to the imperatives of industry/market
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80 LADO, BOYD, AND WRIGHT
structure, these theories apparently overlook the idiosyncratic fIrm competencies
elicited from managerial volition, organizational routines, reputation, and culture
that are potential sources of sustainable competitive advantage. In the modifIed
110 version, the concept of competitive advantage is recognized and discussed
with respect to creating barriers to entry by potential competitors as well as creat-
ing mobility barriers (Caves, 1984; Caves & Porter, 1977; Porter, 1980). The
issue of how unique fIrm competencies that generate quasi-rents can be protected
from imitation by competitors has not been closely examined. Unique fmn com-
petencies 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 strategic
selection perspective. The term strategic selection is used in contradistinction to
the natural selection view to emphasize the fact that it is the pattern of strategic
decisions and actions that determines organizational survival and renewal. Al-
though "luck" may playa role in generating earnings for the fmn (Barney, 1986c;
Mancke, 1974), we argue that what constitutes good fortune or luck may alterna-
tively be conceived as the point at which stochastic opportunity and acquired/cul-
tivated fIrm-specifIc resources meet.
The strategic selection view is consistent with Schumpeterian economics of in-
novation and entrepreneurship (Barney, 1986b; Rumelt, 1984, 1987) and with se-
lect views in strategic management (Jauch & Kraft, 1986; Mintzberg & Waters,
1985; Smircich & Stubbart, 1985; Yvette & Mintzberg, 1988). It is also consistent
with 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 proac-
tive than "strategic choice." That is, the notion ofstrategic choice (Child, 1972;
Hrebiniak & Joyce, 1985) is limiting in that it implies choosing from given alter-
natives. Strategic selection, on the other hand, embraces a broader perspective to
include the capacity to create and grasp opportunities internal and external to the
fIrm. Moreover, strategic selection focuses attention on organizational variables
that are important for creating and sustaining competitive advantage. This ap-
proach to fIrm analysis explicitly recognizes managerial proactiveness in influ-
encing business performance.
The Schumpeterian premise of entrepreneurially driven "creative destruction"
(Schumpeter, 1934, 1950) has provided impetus to the resource-based model of
strategy and competitive advantage. For example, Rumelt (1984: 560) has stated:
"corporate entrepreneurship is intimately connected with the appearance and ad-
justment of unique and idiosyncratic resources." He has further argued: "En-
trepreneurs are seen to possess special information, to be unique, to create pure
profIt, and to act as the essential indivisibilities governing the size distribution of
fIrms" (1984: 561). Similarly, Leibenstein (1968, 1987) has observed that en-
trepreneurs perform special roles of "gap fIlling" and "input completion"; the for-
mer refers to identifying unmet customer needs and responding to them with a
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SUSTAINABLECOMPETITIVE ADVANTAGE 81
unique product offering, and the latter to the special talents (or unique competen-
cies) 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 be
the source of revolutionary changes in industry. '" Other fIrms may
have the unique ability to rapidly adapt to whatever revolutionary
changes might occur. ... Firms that possess either of these organiza-
tional capabilities may have a greater likelihood of survival in indus-
tries threatened by revolutionary Schumpeterian changes than fIrms
without these capabilities.
In summary, the strategic selection view provides a compelling theoretical
framework for sustainable competitive advantage. The recognition by this frame-
work that idiosyncratic competencies are created and developed by a fIrm's
agents (or entrepreneurs) suggests the need to focus on organizational phenomena
(such as informational asymmetries, organizational routines, histories, and repu-
tation) that go beyond techno-economic considerations in assessing competitive
advantage. Put in other words, implicit in the strategic selection philosophy is the
concept of unique or distinctive competencies (Selznick, 1957). An overview of
the concept of distinctive competencies and its relationship to sustainable com-
petitive advantage is presented in the following section. This information pro-
vides the background upon which our proposed model of sustainable competitive
advantage is structured.
Distinctive Competencies and Competitive Advantage
Selznick (1957) fIrst coined the term distinctive competencies to describe the
leadership capabilities that were responsible for transforming a public organiza-
tion into a successful operation. The concept was incorporated into the Learned,
Christensen, Andrews, and Guth (1969) business policy framework, which
placed emphasis on assessing internal organizational capabilities (strengths and
weaknesses) and matching these with environmental opportunities and threats.
Additionally, Ansoff (1965, 1976) discussed the concept as an integral compo-
nent of corporate strategy and subsequently argued that an organization's distinc-
tive competencies are essential to identifying and responding to weak environ-
mental signals. Hofer and Schendel (1978) have defIned distinctive competencies
as the unique competitive position that a firm achieves through its resource de-
ployment. They have also viewed competencies as an integral part of organiza-
tional strategy.
Reed and DeFillippi (1990) have further developed the concept of distinctive
competencies by relating it to sustainable competitive advantage and causal ambi-
guity. Causai ambiguity is defIned as the "basic ambiguity concerning the nature
of the causal connections between actions and results" (Lippman & Rumelt,
1982: 420). It describes the fum-specific resources and competencies (or vulnera-
bilities) that have the potential to generate superior (or inferior) performance.
Reed and DeFillippi have argued that achieving a sustainable competitive advan-
tage requires reinvestment in causally ambiguous organizational competencies
that are characterized by tacitness, complexity, and specifIcity. Tacit knowledge
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82 LADO, BOYD, ANDWRIGHT
describes information and competencies that are non-codifiable and non-explic-
itly replicable (polanyi, 1967). Complexity describes the range of interrelation-
ships among skills and other knowledge-based competencies (Winter, 1987).
Specificity describes the extent to which resources and skills are idiosyncratic to
the firm (i.e., not easily transferrable to alternative use without substantial costs)
and can be advantageously channeled toward particular customers (Reed & De-
Fillippi, 1990; Williamson, 1985). Thus, the conceptualization of distinctive com-
petencies encompassing these and other attributes provides a rationale for view-
ing firm-specific competencies as sources of sustainable competitive advantage.
A Competency-Based Model of Sustainable Competitive Advantage
Figure I presents a systems model which integrally links four sources of com-
petencies: managerial competencies and strategic focus, input-based, transforma-
tion-based, and output-based competencies. These competencies may be valuable
to the firm and their interlinkage may lead to a unique competitive advantage that
is not subject to imitation. The basic premise of the model is that managerial com-
petencies and strategic focus are largely responsible for attracting specialized re-
sources that are synergistically combined, transformed, and channeled to select
clients in such ways as to generate a sustainable competitive advantage to the
firm. Although the components of the model are discussed individually for eluci-
dation purposes, a holistic construal of the concept of competitive advantage is
presumed.
Managerial Competencies and Strategic Focus
Ultimately, managerial values and competencies delineate the strategic focus
of the organization (Guth & Tagiuri, 1965; Hambrick & Mason, 1984). For exam-
ple, Westley and Mintzberg (1989) argue that leaders create a strategic vision,
Mllnllgerllll Competencies
lind Strllteglc Focus
Transformlltlon-Bllsed
Competencies
Figure I.
ACompetency Based Model ofSustainable Competitive Advantage
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SUSTAINABLECOMPETITIVEADVANTAGE 83
communicate it throughout the organization, and empower employees to realize
that vision. In their view, strategic vision is achieved through repetition (or exper-
imentation and improvisation), representation (or articulation of core values), and
assistance (or acceptance and legitimation of the vision by key stakeholders).
Thus, the articulated strategic vision becomes the fulcrum around which the
fIrm's unique competencies may be developed.
Effective implementation of such vision will depend crucially on the extent to
which a fIrm's managers acquire and mobilize specialized strategic resources that
may yield superior returns relative to competitors. Barney (1986c) argues that
fIrms may obtain above normal returns from the acquisition of strategic resources
by exploiting informational and expectational asymmetries in the strategic factor
markets. Thus, it takes unique managerial competencies to evaluate the expected
earnings streams accruing from strategic resources that are vital to implementa-
tion of a fIrm's strategy. Hence the arrow in Figure 1 that connects managerial
competencies and strategic focus with resource-based competencies portrays
managerial effects on specialized strategic resource acquisition and mobilization.
The influence of strategic leadership on specifIc outcomes such as organiza-
tional performance has been the subject of controversy. For example, the results
of a longitudinal study conducted by Lieberson and O'Connor (1972) indicate
that environmental factors account for more variance in organizational perfor-
mance than leadership factors. On the other hand, a subsequent replication of this
study found that the amount of variation in performance attributed to leadership
factors substantially increased when the order in which the independent variables
were entered into the analysis was changed (Weiner & Mahoney, 1981). Our
model suggests that strategic leadership (through managerial competencies) will
have a signifIcant impact on organizational strategy and performance and be a
source of sustainable competitive advantage insofar as such leadership exhibits
characteristics of uniqueness in exploiting f"mn-specific competencies.
The contention that strategy and performance are ultimately a reflection of top
managers or the dominant coalition (Cyert & March, 1963; Hambrick, 1987,
1989; Hambrick & Mason, 1984) underscores the importance of managerial com-
petencies as a source of sustainable competitive advantage. Managers are respon-
sible for developing "an overall sense of purpose and direction that guide[s] inte-
grated strategy formulation and implementation in organization" (Shrivastava &
Nachman, 1989: 51). As is evident, managerial volition is assumed in this con-
text. The deterministic alternative view (not adopted in this article) argues for the
need to match, align, or "fIt" managers to strategy (Kerr & Jackofsky, 1989; Szi-
lagyi & Schweiger, 1984).
As indicated in Figure 1, managerial competencies and strategic focus assume
a central position in creating resource-based, transformation-based, and output-
based competencies. In other words, organizational distinctive competencies may
be generated by the decisions and actions of top managers. Thus, managerial
competencies may be viewed as influencing the interaction among resource-
based, transformation-based, and output-based components of the system.
Furthermore, top managers are viewed as capable of imposing order on the en-
vironment through the selective identifIcation of strategic issues (Dutton & Jack-
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84 LADO, BOYD, AND WRIGHT
son, 1987; Miles & Snow, 1978). That is, top managers may generate unique in-
formation that enables them to effectively interpret the firm's environment with
respect to opportunities and threats. Hence, in Figure 1, the linkages between
managerial competencies and the environment are depicted by two arrows. One
denotes the potential managerial influence on the environment and the other indi-
cates the feedback flow of information (from the environment) that is necessary
to further develop managerial competencies and strategic focus. Managerial com-
petencies are developed via cognitive and behavioral characteristics that are
unique toeach decision maker or to the top management teamof a particular firm
(Hambrick, 1989). Schoemaker (1990) has offered persuasive arguments suggest-
ing how "behavioral friction forces" can, when properly exploited, yield quasi-
rents and provide a source of sustainable competitive advantage. Specifically,
these managerial competencies may be generated through the gathering of infor-
mation, framing of problems, reaching conclusions, and learning from experience
(See Russo & Schoemaker, 1989; and Schoemaker, 1990 for a detailed treabnent
of this line of thought).
Resource-Based Competencies
Wernerfelt (1984) broadly defines a resource as "anything which could be
thought of as a strength or weakness of a given firm" (p172). More specifically,
resource-based competencies consist of core human and nonhuman assets, both
tangible and intangible, that allow a firm to outperform rival firms over a sus-
tained period of time (Oster, 1990; Wernerfelt, 1984).
In Figure 1, resource-based competencies are linked to transformation-based
competencies and to output-based competencies to suggest the synergistic inter-
actions among them. For example, a firm's innovative capabilities are dependent
upon 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 out-
comes that may reinforce its resource-based, transformation-based, and output-
based competencies and elicit further internal and external support for the firm's
volition (e.g., Wernerfelt, 1984). If and when an industry's structural barriers
break down as a result of Schumpeterian revolutions, those firms that have ac-
quired, mobilized, and nurtured unique and idiosyncratic skills and capabilities
may survive and grow. These resource-based competencies potentially influence
the ability of the firms to develop transformation-based and output-based compe-
tencies (Irvin & Michaels, 1989).
In order for resource-based competencies to generate quasi-rents and be a
source of sustainable competitive advantage, they must be causally ambiguous
(Lippman & Rumelt, 1982; Reed & DeFillippi, 1990). That is, they would exhibit
complex relationships with other firm-specific resources and capabilities. The
tacitness of intangible input/skill-based competencies would also enhance the dif-
ficulty of competitor imitation.
The acquisition and mobilization of resource-based competencies that poten-
tially generate a sustainable competitive advantage not only require managerial
competencies in information gathering, but also accurate expectations about the
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SUSTAINABLECOMPETITIVE ADVANTAGE 85
future earning streams from these resources. This may be linked to what Barney
(1986c) has considered to be imperfections in strategic factor markets that occur
due to informational and expectational asymmetries among buyers and sellers of
strategic resources. Thus, a ftrm that has unique skills and capabilities and/or that
is lucky may earn above normal returns by buying resources that are undervalued
in the market and using these resources to implement its strategy, or by not buying
resources that are overvalued in the market. Hence, in Figure 1, the flow of inputs
from the environment to the ftrm is depicted by the arrow connecting the environ-
ment to the resource-based competencies. These inputs are subsequently syner-
gistically combined with other fmn-speciftc competencies to generate a sustain-
able competitive advantage.
Transformation-Based Competencies
Transformation-based competencies may be conceived as those organizational
capabilities that are required to advantageously convert inputs into outputs (Day
& Wensley, 1988). The notion of transformation-based competencies is also
closely linked to the "value chain" concept ftrst developed by McKinsey and Co.
and subsequently adopted as an analytical tool for strategic management by
Porter (1985). Essentially, an organization's value chain embraces discrete but re-
lated sets of activities concerned with designing, developing, producing, and mar-
keting outputs to customers. These activities may be divergently related to each
other, depending on the interlinkage of the organization's idiosyncratic competen-
cies (Gluck, 1980; Porter, 1985). As shown in Figure 1, transformation-based
competencies are interrelated with managerial competencies and strategic focus,
resource-based competencies, and output-based competencies.
Transformation-based competencies may encompass both innovation and or-
ganizational culture. Innovation (including technological, marketing, and man-
agerial, among others) provides an organization with the capability to generate
new products/processes faster than competitors (lwai, 1984; Nelson & Wmter,
1982; Wmter, 1984). Organizational culture may enhance the capacity for organi-
zationallearning and adaptation (Fiol & Lyles, 1985).
The I/O based model suggests that a fmn can achieve a low-cost competitive
advantage primarily through learning effects, economies of scale, economies of
scope, and capita1l1abor substitution (BCG, 1976; Hill, 1988; Porter, 1980, 1985).
Learning effects are usually viewed as the operations economies resulting from
repetition of activities that lead to greater learning and efficiency in production
(Hayes & Wheelwright, 1984). Scale economies are expected decreases in long-
run average costs due to capacity expansion and factor intensity. Economies of
scope result from sharing of resources among organizational units (Teece, 1980).
Capita1l1abor substitution involves substituting capital for labor or vice versa in
order to enhance efficiencies.
However, it has been argued that any low-cost position gained through learning
effects, scale/scope economies, and capita1l1abor substitution might not necessar-
ily constitute a sustainable competitive advantage (Alberts, 1989; Amit & Fersht-
man, 1989). Such efficiency gains may be imitable and consequently are likely to
be eroded over time (Amit & Fershtman, 1989; Hill, 1988; Reed & DeFillippi,
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86 LADO, BOYD, AND WRIGHT
1990), Furthennore, cost economies do not merely accrue from such factors as
learning effects and scale/scope economies, but also from behavioral considera-
tions that make low-cost operations possible. In a rebuttalof the "experience
curve doctrine," it has been argued that a cost advantage due to experience-curve
effects is realizable only when three behavioral traits are present in an organiza-
tion or unit: (a) volition, or the will to innovate; (b) imaginativeness, or creative
intelligence; and (c) drive, or the ability to vigorously pursue a desired goal (Al-
berts, 1989: 41). In other words, cost economies do not just accrue from techno-
economic factors; they are driven down through managerial, group, and operator
volitions. This argument implies that sustainability of a low-cost position may be
achieved through managerial and personnel efforts directed at "harnessing voli-
tion, imaginativeness and drive" to push production and operations costs below
those of competitors (Alberts, 1989: 47). Transfonnation-based competencies,
however, must be idiosyncratic to the firm in order for the ftnn to achieve a sus-
tainable competitive advantage.
Similarly, the I/O-based analysis of competitive advantage with respect to dif-
ferentiation efforts has concentrated on techno-economic variables (Buzzell &
Gale, 1987; Hill, 1988; Porter, 1985). For example, Porter (1985) lists an array of
factors that are likely to generate competitive advantage through differentiation.
These include investment in product development, facility design and layout, in-
creased advertising and promotional efforts, and customized service. Again there
is no reason to suggest that these activities cannot be imitated by competitors. As
argued previously, reinvestment in differentiation efforts, though necessary, is not
sufficient to insure sustainability of a fmn's competitive advantage.
Thus, the 1I0-based analysis of competitive advantage has not heavily empha-
sized the managerial and organizational components of competition that may play
crucial roles in creating and sustaining competitive advantage. It has been empiri-
cally shown that economic factors account for only about 15-40% of ftnn perfor-
mance (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 of organizational culture in achieving a superior level of perfor-
mance has long been recognized in the organizational behavior literature (Smir-
cich, 1983; Tichy, 1983; Wilkins & Ouchi, 1983), strategy researchers have paid
relatively 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 sustain-
able competitive advantage, it must be valuable, rare, and difficult to imitate by
competitors (Barney, 1986a). A strong organizational culture unleashes human
creative potential to generate a continuous stream of ideas that may be translated
into new products and processes. At the same time it permits realization of scale
economies and incremental learning by encouraging and rewarding "volition,
imaginativeness and drive" in the implementation of efficiency- and innovation-
enhancing strategies (Alberts, 1989).
Output-Based Competencies
Output-based competencies not only refer to a ftnn's physical outputs that de-
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SUSTAINABLECOMPETITIVE ADVANTAGE 81
liver value to customers, but also to the "invisible" outputs (ltarni, 1987), such as
reputation for product and service quality, brand name, and dealer networks that
provide value to customers. A fIrm's long-run survival and growth largely de-
pends on how well value is delivered to its most important constituents--the cus-
tomers (Anderson, 1983; Day & Wens1ey, 1988). The link between output-based
competencies and the environment, as depicted in Figure 1, reflects the unique
competencies that are advantageously channeled toward creating value for cus-
tomers and that subsequently may generate a sustainable competitive advantage
for the fIrm.
The 110 paradigmhas conventionally focused on market share or relative mar-
ket share and profItability as measures of a fIrm's performance and as indicators
of 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 exam-
ple, Schmalensee (1985) has empirically shown that industry or market factors
account for almost all the explained variance in fIrm performance, suggesting that
a larger market share is indicative of the extent to which the fIrm adapts to indus-
try forces. Accordingly, a high market share enables a fIrm to appropriate superior
returns from its investments relative to competitors (BCG, 1976; Buzzell, Gale, &
Sultan, 1976). However, in order for market share to be a source of competitive
advantage, it must be gained in such a way that it is not easily imitated by com-
petitors, and it must have stable, defmable boundaries (Day & Wensley, 1988).
In order to achieve a sustainable competitive advantage, fIrms may need to de-
liver value via service, quality, reliability, among others. For example, concern
with customer service as a competitive thrust has received much attention in
academia (Buzzell & Gale, 1987) and in the popular press (phillips, Dunkin, &
Treece, 1990). Companies such as American Express, American Airlines, and 3M
have had an enduring reputation for superior customer service that has earned
them higher returns than competitors (Phillips et al., 1990). These companies
have built unique competencies for producing and delivering quality products and
services that effectively meet customer tastes and preferences relative to competi-
tors. Thus, they earn above-normal profIts in the short run and an image for relia-
bility and dependability in dealing with customers and other clients that promote
their long-run prosperity. The reputation so earned takes time to cultivate and
replicate and so becomes a source of sustainable competitive advantage (Ghe-
mawat, 1986; Milgrom & Roberts, 1982; Weigelt & Camerer, 1988).
Concern for customers also promotes close relationships between the fIrm and
its clients (Peters & Waterman, 1982). These relationships benefIt the frrm in
gaining timely market information and brand loyalty that will generate high sales
and returns relative to competitors. Thus, the frrm earns its present reputation
through its previous relationships with customers, dealers, suppliers, and other
stakeholders. Additionally, the present quality of the frrm's relationships with its
stakeholders provides the basis for its future reputation.
Reputation building is achieved through specification of consistent product
quality and customer service requirements, provision of unconditional service
guarantees, and empowerment of employees to solve customer problems as they
arise (Hart, 1989; Irvin & Michaels, 1989). But reputation building must be a pri-
JOURNAL OFMANAGEMENT, VOL. 18, NO. 1,1992
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88 LADO, BOYD, ANDWRIGHT
ority of top management if it is to earn a sustainable competitive advantage. Top
management contributes to the ongoing delivery of value by specifying standards
of perfonnance, communicating these clearly and unambiguously to employees,
establishing appropriate hiring, training, motivation, and reward systems for de-
veloping core skills, and boosting employee morale (Irvin & Michaels, 1989).
Conclusion
In this article, the concept of sustainable competitive advantage has been ex-
amined. Contrary to the I10-basedpropositions that ascribe competitive advan-
tage to market/industry imperatives, this study has extended the resource-based
research that places emphasis on distinctive competencies as sources of sustain-
able competitive advantage. These competencies are proactively created and
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 integrative
framework for strategy research has been previously recognized (Jemison, 1981;
Mitroff & Mason, 1982). This article has incorporated such
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 with
respect to four sources of distinctive competencies (managerial, re-
transfonnation-based, and output-based), that are synergistically
related, allows for a holistic resource-based theoretical development. The extent
to which these four theoretical sources of distinctive competencies generate a sus-
tainable competitive advantage for a frrm is, of course, an empirical question.
The message conveyed here is that achieving and sustaining a competitive ad-
vantage position require that managers focus on developing and nurturing their
frrms' idiosyncratic competencies that inhibit imitability. Thus, frrms should con-
tinually invest in skills and capabilities that are causally ambiguous (Lippman &
Rumelt, 1982; Reed & DeFillippi, 1990), are not easily tradeable in the market
for strategic factors (Dierickx & Cool, 1989), or when acquired from such a
ket, have the potential to generate above nonnal returns (Barney, 1986c).
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