It used to be that competitive advantage was focused on a defensive position of keeping the most valuable resources away from your opponents, whether the best intellectual property, the best technology, the best staff, or the best locations. Moreover, if those resources were rare or unique, and could not be copied or substituted, then this was considered a strategic position of long-term competitive advantage. But digital transformation has changed this thinking.

 

 

Sustaining Digital Competitive Advantage through Continuous Renewal

There are still clear examples of physical, supply-based, product-centric, resources that are valuable over a long period of time, such as the recipe for Coca-Cola. But even that product has fragmented to over 100 variations worldwide, including Diet Coke, Coke Zero, and Cherry Coke. In the digital world, Google has similar intellectual property in terms of its search engine algorithms.

However, unlike Coca-Cola, these algorithms are very frequently updated to reflect changing times, such as new technology, new content on the internet, and new user behaviors. Hence, at any point in time Google search algorithms provide value and competitive advantage, but over time this competitive advantage is only sustained by updating the underlying algorithms thousands of times each year.

The value of this digital resource quickly decays over time. Such value may be legally protected in law. However, such protection is often of fleeting importance because the nature of these digital resources is changing all the time. Witness the number of legal battles, for example between Apple and Samsung, regarding digital products and services that are either never resolved or only resolved long after any competitive advantage has been gained or lost. Hence, it requires constant attention and innovation to retain competitive advantage when digital transformation is involved.

Digital resources must be renewed on a timely basis to remain valuable and relevant.

This analysis illustrates the importance of the organization in providing the offensive dynamic capability to renew and refresh digital resources.

This analysis illustrates the importance of the organization in providing the offensive dynamic capability to renew and refresh digital resources. Such dynamic capabilities are underpinned by the interactions of leadership, managers, operators, their relationships, networks, structures, processes, routines, cultures, and so on.

Thus, the long-term competitive advantage of firms lies not in their digital developments per se but in their physical dynamic capabilities to renew and refresh those digital developments. All firms ultimately rely on their dynamic capabilities to sustain their competitive advantage.

For example, even with the inherent value of the Coca-Cola recipe, Coca-Cola still has to continually develop their production and distribution systems to reflect new market dynamics, technological progress, changing legislation, and so on. Without renewal, all firms eventually fail.

 

Harnessing Relationships for Digital Competitive Advantage

For digital transformation, the strategic focus is less on capturing resources and more on utilizing resources to capture relationships – hence the success of the platforms, such as Amazon.

Moreover, connected physical activities may extend the window of digital competitive advantage. For example, Amazon already has your delivery and account details for one stop shopping; Facebook already links you to your friends and family; Microsoft is already integrated into your company’s existing IT architecture. So, for existing customers there may be some physical barriers to surmount in moving to a competitor – though probably not for completely new customers.

This highlights the difference between resource capacity (possession) and resource capabilities (configuration and reconfiguration). In digital transformation, similar digital resources are available to many firms, while relatively few have the capability to provide long-term value. It is the leadership to organize resources that enables the dynamic capabilities to innovate and so move towards competitive advantage.

Such innovation may be developed internally or through acquiring other firms with new capabilities. Hence, Google’s more than 200 acquisitions over the last decade are part of what enables such companies to develop their services and so retain competitive advantage.

The value created through the firm’s network of relationships with customers, suppliers, and owners is based on the capabilities of the firm to organize their resources, as illustrated in the Value-Capability-Capacity Triangle. A firm is a collection of physical and human capital providing the capacity for innovation and value.

 

 

It is this organizational capital that provides the capabilities of a firm to manage this collection of physical, human, and digital capital to create value, and thus develop any competitive advantage. Competitive advantage cannot be based on existing value alone. In the digital age, now more than ever, it is up to the leadership to provide the dynamic capabilities for a firm to reconfigure resources to continually seek new value.

This article is based on Cuthbertson & Furseth (2022). Digital services and competitive advantage: Strengthening the links between RBV, KBV, and innovation. Journal of Business Research, 152, 168-176.

Author

Richard Cuthbertson is a Senior Research Fellow at Saïd Business School, University of Oxford.

He is also Director of Oxford Institute of Retail Management, Governing Body Fellow of Green Templeton College, Oxford, and was previously FiDiPro Professor at Aalto School of Business, where some of his research is captured in the book: The Red Queen Retail Race: An Innovation Pandemic in the Era of Digitization.

Richard is a leading expert in innovation and business transformation. The full paper to which this article refers was co-authored with Peder Inge Furseth, Professor of Innovation Management, BI Norwegian Business School. Read more here!