Blackwell Reference Online

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In the entry on strategy we draw the connection between strategy choices and profitability. There we argue that strategy choices are resource allocation decisions that enable the firm to create distinctive assets and capabilities ( see core competences ; resource‐based view ). These enable the firm to create imperfections in markets that are specific to itself, and therefore the firm can capture the benefits of this positioning in terms of higher prices or lower costs, or both. Figure 1 illustrates the point. A successful strategy can earn superior financial returns because it has an unfair advantage , that is: it creates, exploits, and defends firm‐specific imperfections in the market vis‐à‐vis competitors. We deliberately use the term unfair advantage as a colloquial simile for competitive advantage in order to underline that such advantage is achieved in the teeth of organized opposition, both from competitors who wish to emulate the firm's success and from customers who will exercise bargaining power to achieve lower prices. Figure 1  Firm‐specific imperfections as the source of profits In theory, competitive advantage is the delivering of superior value to customers and, in doing so, earning an above‐average return for the company and its stakeholders . These twin criteria impose a difficult hurdle for companies, because competitive advantage cannot be bought by simply ... log in or subscribe to read full text