THE NEW MO-MO VARI-SACS FRAMEWORK: MARKETING STRATEGY AND SUSTAINABLE COMPETITIVE ADVANTAGE

Transcription

1 THE NEW MO-MO VARI-SACS FRAMEWORK: MARKETING STRATEGY AND SUSTAINABLE COMPETITIVE ADVANTAGE Sunil Venaik Indian Institute of Management Vastrapur, Ahmedabad Phone: +(91 79) Fax: +(91 79) Working Paper July 2002

2 THE NEW MO-MO VARI-SACS FRAMEWORK: MARKETING STRATEGY AND SUSTAINABLE COMPETITIVE ADVANTAGE Sunil Venaik 1 INTRODUCTION The concept of sustainable competitive advantage (SCA) originated in the strategic management literature, in particular, the literature on the resource-based view (RBV) of the firm (Barney, 1991, 2002; Coyne, 1985; Nelson and Winter, 1982; Penrose, 1959; Porter, 1985; Wernerfelt, 1984, 1995). Barney (1991) argued that to gain sustainable competitive advantage, firms must possess resources and capabilities that have four essential characteristics, namely, valuable, rare, inimitable and non-substitutable. Although the focus of marketing is to gain competitive advantage in the marketplace, there has been little formal and systematic examination of how the marketing mix strategy can be a source of SCA for the firm. The objective of this paper is to study the sources of SCA from the perspective of the firm s marketing strategy. The aim is to develop an integrated framework that links the elements of the global marketing mix with the strategic management concept of SCA and the resource characteristics of valuable, appropriable, rare and inimitable. Thus, the key research question addressed in the paper is how should a firm design its marketing mix (of positioning, product, price, place and promotion) in order that the firm s overall marketing offering becomes a source of SCA for the firm? The paper is organized as follows. First, a brief overview of the SCA concept and its linkage with the resource-based view of the firm is presented. Next, a framework is proposed linking the resource characteristics with the components of SCA. Finally, the paper discusses how the elements of the marketing mix can be designed to have the characteristics of valuable, appropriable, rare and inimitable and thus become a source of SCA for the firm. 1 Indian Institute of Management, Vastrapur, Ahmedabad , India. Phone: +(91 79) , Fax: +(91 79) svenaik@iimahd.ernet.in 2

3 RESOURCE-BASED VIEW AND SUSTAINABLE COMPETITIVE ADVANTAGE Barney (1991) identified four key characteristics for firm resources and capabilities (RCs) to be a source of sustainable competitive advantage. These are valuable, rare, inimitable and non-substitutable. RCs are considered valuable if they enable the firm to carry out its valuechain activities with greater efficiency and effectiveness. However, for the RCs to be a source of SCA, they should not only be valuable bur also rare, that is, not available with competitors, and inimitable, that is, the competitors should not be able to easily or quickly fill the capability gap. In addition, the RCs should not be easily substitutable with another set of similar or different RCs. According to Wernerfelt (1984), resources and products are two sides of the firm. The literature on strategic management discusses firms from both these perspectives. Whereas Andrews (1971) concept of strategy is based on the firm s resources, formal economic tools operate on the product-market side (Wernerfelt, 1984). Amit and Schoemaker (1993) developed a framework linking the concepts of strategic industry factors at the market level and strategic assets at the firm level. According to Amit and Schoemaker (1993), to gain sustainable competitive advantage, firms must not only have the resources and capabilities that are valuable, rare, inimitable and non-substitutable, but the RCs must also be appropriable by the firm. That is, the economic rents from the RCs should be appropriated by the firm and not taken away by entities that transact with the firm such as suppliers, buyers, channels and employees. In sum, the resource-based view mainly focuses on the resources and capabilities inside the firm as the key source of SCA and superior firm performance. Customers, the key player in a business and the raison d être for the existing of a firm, are conspicuous by their absence in the SCA framework. It is implicitly assumed that the internal RCs are either created by taking into consideration the needs and requirements of the external markets and customers, or, that the RCs can be easily translated into products and services that are valued by customers. But, if these assumptions do not hold, the firm s RCs are unlikely to result in SCA, however rare or inimitable the RCs might be. 3

4 A FRAMEWORK LINKING RESOURCE CHARACTERISTICS AND SCA Barney (1991) identified four key characteristics for a resource to be a source of SCA. These are valuable, rare, inimitable and non-substitutable. Inimitability and non-substitutability are seemingly related concepts as both refer to the competitor s ability to copy the firm with same (imitable) or similar (substitutable) resources. Amit and Schoemaker (1993) identify appropriability as another important characteristic of a resource to be a source of SCA. Similarly, Barney (2002, p.173) introduced a new characteristic called exploitable by organisation for RCs to be a source of SCA. Following current thinking in the RBV literature, the four characteristics of RCs that will be discussed in this paper are valuable, appropriable, rare and inimitable (VARI). The literature on sustainable competitive advantage regards SCA as an aggregate concept, just as the four characteristics of RCs are jointly considered to be a source of SCA. Recently, Barney (2002, p.173) proposed the VRIO (valuable, rare, costly to imitate, exploitable by organisation) framework that explains how a firm s RCs can have one or all of the four attributes of VRIO. The framework explores how a heterogeneous bundle of RCs with diverse characteristics influences firm competitiveness and performance. Whereas the RBV literature contributes to our understanding of the concepts of firm RCs and SCA, and the linkage between the RCs and SCA, a few important questions remain unanswered. For example, how do the diverse RCs of the firm differ on the characteristics of valuable, appropriable, rare and inimitable? How do the diverse RCs influence the level of SCA gained by the firm? This paper attempts to address some of these important questions in the context of the firm s marketing strategy. The framework proposed in this paper is shown in Figure 1. As shown in the Figure, the two dimensions of the framework are called marketing offering and market outcome (i.e., MO- MO) respectively. The framework links the characteristics of the firm s marketing strategy with its market outcomes. It shows how the diversity in marketing strategy influences the different levels of outcomes in the organisation. Each dimension of the framework is further divided into four levels. The four levels of marketing offering are valuable, appropriable, rare and inimitable (i.e., VARI). These reflect the characteristics that the firm s RCs should possess in order to be a source of SCA for the firm. The characteristics are arranged 4

5 hierarchically, with valuable at the lowest level followed by appropriable, rare and finally inimitable at the highest level. Figure 1 Marketing Offering Market Outcome (MO-MO) Framework Sustainable Market Outcome Competitive Advantage Survival Valuable Appropriable Rare Inimitable Marketing Offering Four Levels of Marketing Offering Valuable, Appropriable, Rare and Inimitable (VARI) Four Levels of Market Outcome Survival, Advantage, Competitive and Sustainable (SACS) Next, the aggregate concept of SCA is represented with its three constituents, namely, sustainable, competitive, and advantage. In addition, the SCA dimension is extended to include another level of outcome called survival. Thus, the four levels of market outcome are survival, advantage, competitive, and sustainable, (i.e., SACS). Survival is considered to be the lowest level of outcome, followed by advantage, competitiveness and ultimately sustainable competitive advantage. Finally, the upward pointing arrow from left to right in the Figure indicates that as the firm enhances its RCs, there is a corresponding improvement in the firm s outcome. That is, the level of outcome is a function of the characteristics of RCs owned by the firm. As the firm s RCs progressively improve from being valuable to becoming appropriable, rare and ultimately inimitable, its market outcome is correspondingly enhanced from mere survival at the lowest level, to simple advantage, competitive advantage and ultimately sustainable 5

6 competitive advantage at the highest level. Thus, the level of outcome that is attained by the firm depends critically on the quality of its RCs on the VARI continuum. Conversely, depending on the objectives, firms can configure their resources and capabilities to achieve the desired level of outcome on the SACS continuum. MARKETING STRATEGY AND SCA In contrast to the resource-based view that focuses mainly on the firm s internal RCs, the marketing-based view is to gain competitive advantage at the consumption end of the firm s value chain. Marketing activities are designed to enhance customer value and ensure longterm customer loyalty. The concepts of valuable, rare, inimitable and non-substitutable that are developed in the strategic management literature for the firm s resources and capabilities can therefore be usefully adapted to analyse and evaluate the firm s marketing activities. The aim is to apply these concepts to analyse the firm s marketing strategy and to understand how the marketing mix can be designed to have the characteristics of VARI and become a source of SACS for the firm. Marketing strategy focuses on activities that enable the organisation to gain competitive advantage in its product-markets. Marketing offering, the X-axis in Figure 1, refers to the bundle of tangible and intangible attributes and benefits, both real and perceived, that is created and delivered by the firm s marketing strategy for its target customers. To gain a sustainable competitive advantage from its market offering, firms must offer a value proposition that is valuable, appropriable, rare and inimitable. Valuable implies that the firm s target customers value the offering that is delivered by the company. To create and enhance the value of the offering, firms carry out a number of tactical and strategic activities related to the marketing mix elements of product, price, place, promotion and positioning. Each element of the marketing mix contributes towards delivering customer value. Product refers to the attributes and benefits in the offering that satisfy customers needs. Brand name, quality and reliability of the product and service, and other tangible and intangible attributes are some of the factors that create and enhance the value proposition of the offering in the eyes of the customers. Price refers to the cost that the customers pay in exchange for the goods and services offered by the firm. In most cases, lower price enhances customer value. There are exceptions, however, especially in situations where it is difficult for the 6

7 customer to objectively assess the value of the product attributes and benefits. Examples of the latter include prestige and image-related products such as paintings and artwork, and products where price serves as a proxy for product quality and benefits such as perfumes. Place refers to the physical location where the product is available for purchase, experience or consumption by the target customers. Easy availability and access usually enhance customer value. However, there may be exceptions where restricted access adds value and prestige due to exclusivity, for example, membership of exclusive clubs or ownership of premium platinum credit cards. Promotion refers to the process of communicating the benefits of the firm s offering to its target customers. Like place that is concerned with the physical availability and delivery of the product or service to customers, promotion deals with the delivery of information regarding the product or service to potential customers. Effective promotion helps customers to take informed decisions and enhances the value of pre-purchase tasks and post-purchase usage experiences. Finally, positioning refers to the overall value that the firm s market offering provides to its target customers. Successful position is achieved by effectively integrating the 4Ps of product, price, place and promotion so that the whole is greater than the sum of the parts. In sum, the various elements and sub-elements of the marketing mix, individually and collectively, support and enhance the value proposition of the firm s market offering. Providing valuable market offering is the most important and, at the same time, the most basic and fundamental activity of a firm. It takes the firm to the starting point in the marketing offering-outcome framework and ensures that firm is able to survive in the marketplace. Unfortunately, firms that do nothing more than providing customer value end up at the starting point itself. That is, they barely survive in the marketplace. To attain higher levels of outcomes, firms need to do much more than simply provide valuable offering to customers. And, to reach the goal of SCA, the firm s marketing offering must have a number of other important characteristics such as appropriable, rare and inimitable. Appropriable means the gains/rents from the firm s offering are appropriated by the firm and not completely arrogated by other entities such as suppliers, buyers, channels and employees. For example, a firm may initiate a major cost cutting program in its marketing activities. To gain advantage, it is important that the firm retains most of the savings arising from the cost reduction program and does not transfer all the gains to its customers and channels in the form 7

8 of lower prices. Examples of cost savings programs that can be undertaken to enhance advantage to the firm include reduction in advertising and promotion activities, rationalizing the number of brands in the company s portfolio, and better and more efficient management of the firm s supply chain. Ultimately, the aim is to maximize the margins and markups to the level that the target market segments can bear without adversely affecting the company s market share and sales volumes. As shown in Figure 1, offerings that are both valuable and appropriable enable the firm to survive with advantage in the form of higher economic rents from its customers. Therefore, to reach the outcome of survival with advantage, firms must not only provide offerings that are valued by its target customers, but also ensure that a good proportion of the benefits of marketing exchange are appropriated by the firm and not taken away by other members involved in the exchange process. Rare implies that the firm s target customers regard the marketing offering as unique. No other competitor is perceived to offer the same or similar bundle of benefits to the customers. In a multidimensional product attribute space, the product occupies a solitary position that is easily identified and is far removed from the crowd of competitors in the market. The total marketing mix is so designed that the firm s overall value proposition is unmatched by its rivals in the marketplace. As shown in Figure 1, if the firm s market offering is valuable, appropriable and rare, the firm is successful in gaining competitive advantage. However, it is important to recognize that competition is not static. Nor are the customer needs unchanging. If competitive advantage results in complacency and reluctance to deviate from the path dotted with past successes, the advantage may be ephemeral, eventually endangering firm survival. No advantage, however rare, is likely to last forever. How then does a firm gain a sustainable competitive advantage? That takes us to the last characteristic of the firm s offering, that is, inimitability. Inimitable means that the firm s marketing offering cannot be copied by its competitors. Inimitability is sustaining rarity over time. In practice, this is an extremely difficult level for a firm to reach. Inevitably, competition will catch up sooner rather than later. How then should a firm craft an inimitable market offering? By being a continuous innovator. At any point in time, one or a few elements of the marketing mix may be changed so that the overall value proposition is unique even though some elements remain unchanged. To sustain its unique position, the firm must seek creative ways of configuring the various elements and subelements of the marketing mix so that its new marketing offerings are perceived to be 8

9 different not only from its past offerings but also from that of its competitors. The firm must have a systemic program of constant improvement and continuous innovation and an incessant zeal to reconfigure the marketing mix in new and ingenious ways. It must aim to be a change initiator and a market leader and not simply a follower of trends set by its pioneering competitors. This alone will ensure that the firm s marketing offering continues to be a source of sustainable competitive advantage over a long period of time. Superior execution of marketing strategy is another tool for gaining SCA. The firm can design marketing processes including structure, systems, policies and procedures that support better decision-making and faster implementation vis-à-vis competitors. Since the firm s structure and systems are proprietary, tacit and intangible in nature, they are much more difficult to imitate than the relatively more tangible aspects of marketing strategy such as product features, pricing, promotion, advertising and distribution. Ceteris paribus, good marketing implementation is likely to be a superior source of SCA than a great marketing strategy. Examples of MNCs that provide near ideal value propositions with valuable, appropriable, rare and inimitable marketing offerings and achieve sustained superior performance include 3M, Coca-Cola, GE, IBM and McDonald s. CONCLUSIONS The resource-based perspective postulated the characteristics of valuable, appropriable, rare and inimitable (VARI) for resources to be a source of sustainable competitive advantage (SCA) for the firm. These concepts can be usefully applied to analyse the sources of SCA at the broad level of the firm as a whole, as well as at the fine level of the different businesses, products, brands, functions, tasks and activities within the organisation. In this paper, a new Marketing Offering-Market Outcome framework is proposed and applied to analyse the marketing mix strategy of firms. The framework shows how the different levels of marketing offering result in the various levels of market outcome, and how the ultimate the goal of SCA is achieved with offerings that are not just valuable, but also appropriable, rare and inimitable. The proposed framework is flexible and can be applied at different levels in the organisation. For example, the framework can be used to assess competitiveness for the firm as a whole; for the diverse businesses within a firm; for the various functions, products or brands within a business; as well as for the numerous individual tasks and activities within each function. 9

10 Overall, the framework serves several useful purposes. First, it is useful for mapping the current characteristics of the firm s RCs as a result of past managerial decisions about the development and deployment of resources and capabilities for different elements of the firm s value chain. Second, it can be used to map the levels of outcomes for the firm, business or function along the SACS continuum. Finally, it can help managers to develop a fine level understanding of the linkages between the RCs and the corresponding outcomes. The framework can also be used to track the changes in the characteristics of the firm s RCs over time and how these changes impact on the level of outcome on the SACS continuum. For researchers, the framework provides a new tool to test the theory of SCA in the context of the marketing function. The challenge ahead is to develop measures for each of the four levels of marketing offering and the corresponding levels of desirable market outcomes. Correlating the four constructs/levels of marketing offering with the corresponding constructs/levels of market outcome would help in validating the proposed framework empirically. Additionally, on the input side, theoretical and empirical linkages need to be developed between the marketing mix elements and the four levels of marketing offering, namely, valuable, appropriable, rare and inimitable. Similarly, on the output side of the framework, there is a need to validate, theoretically and empirically, the relationships between SCA and superior firm performance. Marketing managers will find the framework useful in a number of ways. The framework can be used to evaluate the firm s current market offerings on the four characteristics of valuable, appropriable, rare and inimitable. The evaluation will help managers to assess the position that the firm can potentially occupy with its current offering on the survival, advantage, competitive, and sustainable (SACS) continuum. If the objective of the firm is to reach the ultimate goal of SCA, the evaluation will help the firm to identify the gaps in its marketing offering that need to be filled, and plan the resources that are required to fill these gaps. Another useful application of the framework is to help the firm decide the position that it aims to occupy on the SACS continuum and design appropriate marketing offering to fit the desired position. The proposed framework is therefore an extremely useful tool that can be used by marketing managers for both diagnosing their current marketing strategy and for designing more effective solutions to solve their marketing problems. If applied correctly, the framework can help managers to achieve the best fit between their marketing offering and 10

11 desired market outcome, and thereby protect the firm against both under- and overdeployment of resources to reach the desired goals. With growing global competition, firms are becoming increasingly customer-centric in order to survive and grow in the global marketplace. Increasingly, customers occupy the centerstage and are the starting point for planning, developing and deploying resources in organisations. With external customers rather than the internal resources of the firm becoming the key source of SCA, the resource-based view of the firm needs to be augmented with a customer-based view (CBV) of the firm. Several large, successful MNCs are reorganising their strategic business units (SBUs) into customer business units (CBUs) to reflect this new perspective. Key account management is another approach that is commonly used by firms to become more and more customer oriented. The new trend towards customer-based organisations is evident in both industrial and consumer markets. The framework proposed in this paper advocates that the firm s marketing offering should be designed and delivered in such a way that it simultaneously serves the needs of the firm and that of its customers and other constituents. Maintaining this fine balance is critical for gaining sustainable competitive advantage. BIBLIOGRAPHY Amit, Raphael and Schoemaker, Paul J H Strategic Assets and Organizational Rent. Strategic Management Journal. 14, Barney, Jay Firm Resources and Sustained Competitive Advantage. Journal of Management. 17(1), Gaining and Sustaining Competitive Advantage. 2e. New Jersey: Pearson. Bharadwaj, Sundar P. Varadarajan, Rajan P. and Fahy, John Sustainable Competitive Advantage in Service Industries: A Conceptual Model and Research Propositions. Journal of Marketing. 57(October), Coyne, Kevin P Sustainable Competitive Advantage: What it is, What it isn t. Business Horizons. 29(January-February), Day, George S. and Wensley, Robin Assessing Advantage: A Framework for Diagnosing Competitive Superiority. Journal of Marketing. 52(April), Dierickx, I. and Cool, K Asset Stock Accumulation and Sustainability of Competitive Advantage. Management Science. 35(November), Javidan, Mansour Core Competence: What Does it Mean in Practice? Long Range Planning. 31(1), Nelson, R. and Winter, S An Evolutionary Theory of Economic Change. Cambridge: Harvard University Press. Penrose, E.T The Theory of the Growth of the Firm. New York: Wiley. In. Barney, Jay Firm Resources and Sustained Competitive Advantage. Journal of Management. 17(1),

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