Competition, Competitive Advantage, and

Sustainable Competitive Advantage

Sreedhar Madhavaram
Alumni Professor of Marketing

Competition

• Competition is the disequilibrating, ongoing process that

consists of the constant struggle among firms for comparative
advantages in resources that will yield marketplace positions
of competitive advantage and, thereby, superior financial
performance (Hunt 2000)

Foundational Premises of Resource-Advantage

Theory and Perfect Competition Theory

Resource-Advantage Theory Perfect Competition Theory

P1. Demand is: Heterogeneous across industries, Heterogeneous across industries,

P2. Consumer information is:
P3. Human motivation is:
P4. The firm's objective is:
P5. The firm's information is:
P6. The firm's resources are:
P7. Resource characteristics are:
P8. The role of management is:
P9. Competitive dynamics are:
heterogeneous within industries,
and dynamic.
Imperfect and costly.
Constrained self-interest seeking.
Superior financial performance.
Imperfect and costly.
Financial, physical, legal, human,
organizational, informational,
and relational.
Heterogeneous and imperfectly
mobile.
To recognize, understand, create,
select, implement, and modify
strategies.
Disequilibrium-provoking, with
innovation endogenous.
homogenous within industries, and static
Perfect and costless.
Self-interest maximization.
Profit maximization.
Perfect and costless
Capital, labor, and land.
homogenous and perfectly mobile.
To determine quantity and implement
production function.
Equilibrium-seeking with innovation
exogenous.

Note: The foundational premises of R-A theory are to be interpreted as descriptively realistic of the general case. Specifically, P1, P2, P5 and P7 for
R-A theory are not viewed as idealized states that anchor end-points of continua. For example, P1 posits that intra-industry demand in most industries
(i.e., the general case) is substantially heterogeneous, not perfectly heterogeneous. In contrast, P1 for perfect competition assumes the idealized state of
perfect homogeneity.
Source: Hunt and Morgan (1997).

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 Firm Resources (Hunt 2000)
Definition: The tangible and intangible entities available to the firm that
enable it to produce efficiently and/or effectively a market offering that has
value for some market segment(s).
Characteristics: Significantly heterogeneous and imperfectly mobile.
Categories:
Financial (e.g., cash reserves and access to financial markets)
Physical (e.g., plant, raw materials, and equipment)
Legal (e.g., trademarks and licenses)
Human (e.g., the skills and knowledge of individual employees)
Organizational (e.g., controls, routines, cultures, and competences)
Informational (e.g., knowledge about market segments, competitors,
and technology)
Relational (e.g., relationships with competitors, suppliers, and
customers)
For example: Brand equity is a relational, legal resource

FIGURE 1

A Schematic of the Resource-Advantage Theory of Competition

Societal Resources Societal Institutions

Resources Market Position Financial Performance

• Comparative Advantage • Competitive Advantage • Superior

• Parity • Parity • Parity
• Comparative Disadvantage • Competitive Disadvantage • Inferior

Competitors -Suppliers Consumers Public Policy

Read: Competition is the disequilibrating, ongoing process that consists of the constant struggle among firms for a comparative
advantage in resources that will yield a marketplace position of competitive advantage . and, thereby, superior financial performance
Firms learn through competition as a result of feedback from relative financial performance “signaling” relative market position, which,
in turn signals relative resources.

Source: Hunt and Morgan (1997)

1D 2D 3D
1C 2C
2C 3C
1B
Intermediate 2B
Competitive 3B
Competitive
Intermediate
Position 1A Competitive
Advantage 2A Competit 3A ive
Competitive
Advantage
Intermediate
Position Competit
Advantage ive Advantage
Competitive Segment A
Indeterminate
Position Competitive
Advantage Competitive
Advantage
Ad vantage
Position Advantage Advantage
4D 5A 6A Lower
4C 5A 6A
4B
Competitive 5A
Parity 6A
Competitive
Competitive Parity
Position Competitive
Advantage
Disadvantage
Competitive
4A Position
Parity
5A Advantage
Competitive
6A
Disadvantage
Competitive Position
Parity Advantage
Competitive Relative
7D Disadvantage
8A Position 9A Advantage Parity Resource
7C
7C 8A 9A Costs
7B
Competitive Competitive Intermediate (Efficiency)
Competitive
Disadvantage Competitive
Disadvantage Intermediate
Position
Disadvantage
Competitive
7A Disadvantage
8A Position 9A
Disadvantage
Competitive Competitive Indeterminate
Disadvantage Disadvantage Position Higher

Lower Parity Superior

Relative Resource-Produced Value (Effectiveness)

Read: The marketplace position of competitive advantage identified as Cell 3A, for example, in segment A
results from the firm, relative to its competitors, having a resource assortment that enables it to produce an
offering that (a) is perceived to be of superior value by consumers in that segment and (b) is produced at
lower costs than rivals.
Note: Each competitive position matrix constitutes a different market segment (denoted as segment A,
segment B…).
Source: Adapted from Hunt and Morgan (1997).

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 Success and Failure Sequences - Competitive
Position Matrix
Relative Resource-Produced Value
Lower Parity Superior

Relative
Resource Lower
Costs

Relative
Parity
Resource
Costs

Higher

Read: (1) All firms in marketplace positions of competitive disadvantage seek reactive innovations
that will move them upward and to the right. (2) All firms in marketplace positions of
competitive advantage seek proactive innovations to avoid moving downward and to the left.

Competitive Advantage

1. Marketplace positions of competitive advantage (parity value

and lower costs, superior value and parity costs, and superior
value and lower costs) lead to superior financial performance.

2. It is a comparative advantage in resources that leads to

marketplace positions of competitive advantage.

Sustainable Competitive Advantage

1. Factors internal to the firm
Reinvest
Know thyself (causal ambiguity)
Adapt
Proactively innovate
2. Factors external to the firm
Consumer activities
Governmental actions
Competitor actions
a. Acquisition of same resources
b. Imitation of resources
c. Substitution of resources
d. Major innovation (reactive innovation) in resources

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 Sustainable Competitive Advantage
(Contd.)
3. Characteristics of offering
Offering → Consumers (Causal ambiguity)
Resources → Offering (Causal ambiguity)
4. Characteristics of resources
Mobility
Complexity
Interconnectedness
Mass efficiencies
Tacitness
Time compression diseconomies

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