Competitive Advantage

The primary objective of a firm’s strategy is to identify, create, and sustain a competitive advantage over its industry rivals. A firm is said to possess a competitive advantage if it outperforms its industry rivals over a sustained period of time. Although the scholarly roots of a hypothetical theory of competitive advantage are dispersed across a fragmented management literature, it can be inarguably stated that the primary roots lie in Michael Porter’s seminal work on the strategic management of firms—often informally referred to as Porter’s theory of competitive advantage. Accordingly, a firm’s strategy should identify a unique strategic position within its industry so as to reduce or counter the profit-reducing effect of the competitive forces in that industry. The entry is organized as follows. The next section is focused on the fundamentals of this theory as laid out in Porter’s seminal work that provides both frameworks to explain various position-based advantages and prescriptions to achieve and sustain the same. The subsequent section is focused on other developments in the management literature that either were triggered as systematic efforts to provide an alternate [Page 126]explanation for the competitive advantage of firms or extend the concept of competitive advantage to other contexts (e.g., multibusiness firms). This section also shows the conceptual gaps that need to be addressed in order to develop a comprehensive theory of competitive advantage. The final section is a combination of arguments that articulate the internal—and external— environmental perspective on competitive advantage to provide an explanation of how firms create and sustain competitive advantage.