A
firm has a competitive advantage when it implements a strategy
competitors are unable to duplicate or find too costly to try to
imitate. An organization can be confident that its strategy has resulted
in one or more useful competitive advantages only after competitors’
efforts to duplicate its strategy have ceased or failed. In addition, 
firms
must understand that no competitive advantage is permanent. The speed
with which competitors are able to acquire the skills needed to
duplicate the benefits of a firm’s value creating strategy determines
how long
firms
must understand that no competitive advantage is permanent. The speed
with which competitors are able to acquire the skills needed to
duplicate the benefits of a firm’s value creating strategy determines
how long
the competitive advantage will last.
Above-average
returns are returns in excess of what an investor expects to earn from
other investments with similar amount of risk. Risk is an investor’s
uncertainty about the economic gains or losses that will result from a
particular investment. The most successful companies learn how to
effectively manage risk. Effectively managing risks reduces investors’
uncertainty about the results of their investment. Returns are often
measured in terms of accounting figures, such as return on assets,
return on equity, or return on sales. Alternatively, returns can be
measured on the basis of stock market returns, such as monthly returns
(the end-of-the-period stock price minus the beginning stock price,
divided by the beginning stock price, yielding a percentage return). In
smaller, new venture firms, returns are sometimes measured in terms of
the amount and speed of growth (e.g., in an sales) rather than more
traditional profitability measures because new ventures require time to
earn acceptable returns (in the form of return on assets and so forth)
on investors’ investments.
Understanding
how to exploit a competitive advantage is important for firms seeking
to earn above-average returns. Firms without a competitive advantage or
that are not competing in an attractive industry earn, at best, average
returns. Average returns are returns equal to those an investor expects
to earn from other investments with a similar amount of risk. In the
long run, an inability to earn at least average returns results first in
decline and, eventually failure. Failure occurs because investors
withdraw their investments from those firms earning less-than-average
returns.
The
strategic management process is the full set of commitments, decisions,
and actions required for a firm to achieve strategic competitiveness
and earn above-average returns. The firm’s first step in the process is
to analyze its external environment and internal organization to
determine its resources, capabilities, and core competencies—the sources
of its “strategic inputs”. With this information, the firm develops its
vision and mission and formulates one or more strategies. To implement
its strategies, the firm takes actions toward achieving strategic
competitiveness and above-average returns. Effective actions that take
place in the context of carefully integrated strategy formulation and
implementation efforts result in positive outcomes. This dynamic
strategic management process must be maintained as ever-changing markets
and competitive structures are coordinated with a firm’s continuously
evolving strategic inputs.
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