INNOVATION AS A PATHWAY TO GAINING

COMPETITIVE ADVANTAGE: A LITERATURE

REVIEW
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................................................. 3
LITERATURE REVIEW ..................................................................................................................................... 5
DISCUSSION AND RECOMMENDATION ........................................................................................................ 8
RECOMMENDATION AND CONCLUSION .................................................................................................... 10
REFERENCES ................................................................................................................................................ 11
INTRODUCTION
The business world is ever growing and rivalries that used to be within national borders have
grown into international rivalries. Organizations that fail to grow with the times will get left
behind losing customers and revenue, and eventually might fold up (Gareche, Hosseini, & Taheri,
2017). There have been several definitions for competitive advantage over the years, however,
for this study, we’ll use the definition by Bobillo et al. (2010) which defines competitive
advantage as a set of core competencies an organization possesses that allows the said
organization to fair better than its competitors (Bobillo, Iturriaga, & Gaite, 2010). The rapid
changes in the global business environment have altered the competitive landscape.
Globalization, innovation, and sustainability present real challenges to the sustainable
competitive advantages of businesses. As a result, to compete and sustain their advantages,
businesses have to adapt their strategies. One of the strategies an organization can employ into
gaining a competitive advantage is the innovative strategy.

Every business has a starting point and for most organizations, the starting phase is small. It is
from their small stage they grow into the large organizations they are today and the big brands
the world has accepted as quality (Distanont & Khongmalai, 2020). The point of going into
business is to make a profit and part of making a profit means gaining a competitive advantage
over your competitors. Gaining a competitive advantage over your competitors will aid the
business in making more sales and profit in the long run (Nejhad, 2015). Gaining a competitive
advantage in business requires a number of factors to be met; these factors will help place the
organization in a better standing against its competitors making the business more profitable. It
is always advisable when looking at gaining a competitive advantage to use methods and
techniques that cannot be easily copied (Nejhad, 2015). Hence, it is often suggested that apart
from domestic capabilities, the organization should consider its external status also (Porter,
1980).

According to Porter (1980), gaining a competitive advantage can be accomplished through cost
leadership, centralization, and creating differentiation of products. He then further suggested
that organizations should go into a business with a mindset of gaining a competitive advantage
over the existing competitors. This way, the organization has a built-in culture of gaining and
maintaining a competitive advantage over its competitors (Porter M. , 1980). The basic idea
behind gaining a competitive advantage is quite the same across various industries. Authors and
researchers have only learned to apply the principles and the basics of the topic in creating
various models to explain the application of competitive advantage. In summary, gaining a
competitive advantage is about creating leverage against your competitors.

Leveraging against the competitors using disruptive innovation has been very profitable for
organizations in recent times according to the data gathered by KPMG and Deloitte. The laws of
economics clearly states that the needs of man are insatiable. This clearly explains why there will
always be changes in customers’ needs and the need for companies to continuously find ways to
satisfy their customers. According to data gathered, disruptive innovation has been used in
providing better service to customers by organizations through improving products and services,
providing better communication between organizations and their customer base, and improving
productivity and efficiency. Also, destructive innovation makes use of new technologies to
further the business. 25% of tech companies will invest in cyber security solutions over the next
three years (KPMG, 2016). 55% of tech companies expect headcount to increase at least 6%; 75%
think automation and machine learning could replace 5% of their sales, marketing, tech, and
manufacturing workforce. Furthermore, destructive innovation makes use of new creative
employers that think outside the box (Deloitte, 2016).

The aim of this report is to discuss how organizations can gain a competitive advantage through
a critical literature review of previous reports and journals on the application of relevant
academic theories and up-to-date literature. Also, using sufficient case-specific research data to
support the answers, this report will aid in the analysis of the different theoretical models and
how they can be applied to gain a competitive advantage.
LITERATURE REVIEW
There has been several authors who have worked on the competitive advantage topic thereby
creating several schools of thought on the topic. Each school of thought has their preferred
definition and approach towards the gaining a competitive advantage.

Definition: Competitive Advantage and Innovation

According to Ferrell (2012), gaining a competitive advantage can be explained as the act or
strategy an organization takes in providing better service to its customers with respect to their
competitors while also satisfying the company stakeholders (Ferrell, 2012). McDaniel (2002),
defined innovation as the strategy of upgrading the present products and services rendered by
an organization. It can also be the process of completely changing the old ways of operation
through the adaption of new ideas which could also lead to the development of new products
(McDaniel, 2002). According to McDaniel (2002), the innovation strategy can be divided into
several steps which include, the introduction of a new product, the introduction of a developed
method of production, the establishment of a new product or market, changing the materials
used in production, and the creation of a brand new organization entirely (McDaniel, 2002).

Factors that Affect Competitive Advantage

According to Porter (1998), the key factors in gaining a competitive advantage include the threat
that comes with the introduction of new products, the bargaining power of manufacturers, and
the price haggling skills of suppliers. When companies seek to gain a competitive advantage, one
of these key factors plays a role in the process (Dudovskiy, 2014).

Grant (1991) discussed the resourced-based approach to gaining a competitive advantage. The
approach emphasizes how an organization can make use of its resources and core competencies
to gain competitive advantage and profitability (Dudovskiy, 2014). The idea of using a company’s
core capabilities in gaining a competitive advantage was first presented by Prahalad and Hamel
in 1990. According to Prahalad and Hamel (1990), core competencies simply mean the ability of
an organization to utilize its skills to the optimum level while also accommodating various
technological advancements (Prahalad & Hamel, 1990). It is suggested that in order for an
organization to discover its core competencies, three questions must be answered. The first
question focuses on the service rendered by the organization which has potential for
diversification. It asks, “Which aspects of a product or service can provide it access to other
markets?” The second question helps the organization figure out which of its services poses a
threat to the competitors. It asks, “Which aspects of a product or service are perceived by
potential and current customers as increasingly valuable?” and the final question helps the
organization figure out what makes them stand out from their competitors (i.e. their
uniqueness). The question asks, “What are the specific elements associated with the brand in
general and/or product or service in particular that are difficult to be imitated by competitors?”
(Prahalad & Hamel, 1990)

Gaining Competitive Advantage through Customer Satisfaction

According to Sekhar (2010), an organization gains a competitive advantage when its customer
base feels a sense of connection to its brand image and products (Sekhar, 2010). However, it is
possible to copy the competitive advantage of an organization. As explained by Boone and Kurtz
(2013), some organizations with access to less costly raw materials can imitate a competitor’s
pricing and branding in order to gain a competitive advantage over their rivals (Boone & Kurtz,
2013). This approach can be utilized as a long-term approach toward the sustainability of a
business. Hence, it is advised to create a brand image that is difficult to imitate and to utilize
technological innovations to constantly keep a competitive advantage. This approach will ensure
the long continuity of the business (Boone & Kurtz, 2013).

Another approach that can be taken to gain a competitive advantage is through satisfying
customers. According to Loudon et al. (2010), it was proposed that since human needs and wants
changes and are insatiable, an organization can bank on this change to always anticipate the
changes in gaining a competitive advantage. Although this approach has never been tested, the
theory does hold some level of validity that can be applied to the business world (Loudon,
Stevens, & Wrenn, 2010). Also, government regulations and other political factors can be a factor
in gaining a competitive advantage. According to Ginter (2013), changes in federal laws can serve
as a factor for some organizations to gain a competitive advantage over their rivals. A simple
example can be the introduction of taxes or import duties on certain imports can be a source of
competitive advantage for local producers over importers (Ginter, 2013).

Disruptive Innovation

In 1997, Professor Christensen and his colleagues published a book title “The Innovator’s
Dilemma” with a focus on disruptive innovation. According to the book, a disruptive innovation
usually occurs when venturing into a new market opportunity different from the usual product
line (Christensen, Raynor, & McDonald, What Is Disruptive Innovation? , 2015). According to
Christensen (2013), disruptive innovation is the creation of a new line of products and services
entirely different from what the customers are used to but which still satisfies the customer’s
needs (Christensen, 2013). Usually, disruptive innovations is not the first course of action to take
by leadership as it goes against the normal culture of the organization (Thomond & Lettice, 2002).
However, it has been seen from various examples that disruptive innovation can be a productive
step to take towards gaining a competitive advantage (Grant, Hackney, and Edgar, 2010).
DISCUSSION AND RECOMMENDATION
Using Apple as a case study, we can see clearly how gaining a competitive advantage can be
advantageous to an organization. Apple started off with creating the computer which was then
regarded as better than its counterparts such as the IBM and the Microsoft computers. The focus
of the company was on developing their products to satisfy their customers. This approach drove
their innovation strategy in creating more user-friendly and customer-satisfaction-driven
products. For years now, Apple has successfully miniaturized the computer into the iPhone series,
the iPad series, and the i-Watch series. The brand Apple has built has made it difficult for
competitors and rivals to copy. Also, the level at which customers are satisfied with their Apple
products has placed the organization far beyond its rivals (Nawal, 2021).

On the other hand, a good example of the utilization of disruptive innovation to gain competitive
advantage can be seen in the Lego Company. The Lego came into existence in the early 1930s
and since then, there had been several innovations around the initial product ever since. In 1969,
the product line started creating the Duplo product line which achieved success until the creation
of the mini-figures which hit the stores in 1978. The company market shares and brand continued
to grow all through the 90s until around 1998 when the company experienced a first annual loss.
The problem was that people were giving birth as much as they used to and the world was getting
technologically advanced. But with the advent of video games, the larger part of the Lego
customer base which was young male children had abandoned their Legos for the video game
(Kilkku, 2014).

Obviously, the company knew they required things to turn around. Kjeld Kirk Kristiansen, Ole Kirk
Christiansen’s grandson, brought in a specialist in Poul Plougmann to take over as the CEO in
1998. Under Ploughman, he sought to bring about disruptive innovation in the company. The
CEO had seven goals to achieve his turnaround. He sought to employ creative people that
thought outside the box while heading for blue-ocean markets. He also ensured that the
company products were customer-driven and that the feedback from the customers was taken
into consideration. After several tries at reviving the company which proved unfruitful, a new
CFO was employed in 2003 in Jesper Ovesen. Time had run out for Poul Plougmann, and he was
replaced with Jordan Knudstorp in 2004.
Around 2004, the company was almost running under after having suffered losses in revenue for
over 6 years consecutively under the leadership of the previous CEO. The appointment of a new
Chief Executive Officer (CEO), Jordan Knudstorp brought about the turnaround the organization
required. The CFO, Jesper Ovesen, along with the new CEO, Jordan Knudstorp discovered that
the major problem behind the company’s downfall was not really about lack of innovation in
their product line, but rather a financial problem. Lego had suddenly increased output production
between 1994 and 1998 to triple the previous production. The first major change the new
management brought to the organization was the reduction of the production line by half in
2004.

Lego had always maintained a culture of creating toys that promoted violence or fighting. Jordan
Knudstorp decided to change the culture by creating Legos that modeled action movies that the
children loved such as Marvel Movies characters, DC Comics characters, and Star Wars characters
(Macharia, 2019). The new management realized that these new production lines sold a lot more
especially with the release of new movies from the franchise. Drastically, the sales grew as well
as the stocks of the company. The company took a drastic turnaround for the better. This
example shows how a change (disruptive innovation) in the production line can bring about a
competitive advantage for an organization.
RECOMMENDATION AND CONCLUSION
It is important for organizations to know that gaining a competitive advantage over its
competitors needs a collective methodology as well as an inclusive organizational structure. This
means the management of the organizations must be supportive of the innovative culture and
create an environment that supports the culture. Gaining competitive advantage is a long-term
process and there is not quick way around it, so also is innovation. Organization engaging in the
innovative process must follow due protocol and procedure; corner must not be cut, else, the
business might fail (Egbu, 1999).

The case study of the Lego Company showed that the innovation was a major part of their
business model which proved successful for many years. However, when innovation is done
without the satisfaction of the customer base in mind, the whole aim of the innovation becomes
pointless. Innovation when mixed with customer satisfaction produces improved and increased
organizational productivity and efficiency, as well as increased market shares (Macharia, 2019).
The study also showed that the development of a new product line with the customers in mind
improved the brand of the organization. The customers’ needs will continually change and it is
up to the organization to continually meet the customer’s needs and wants. That’s how
customers grow to connect with the brand of the company. It can be seen that there is a direct
relationship between innovation, business development, customer satisfaction, and gaining a
competitive business advantage (Christensen, 2013).
REFERENCES
1. Bobillo, A., Iturriaga, F., & Gaite, T. (2010). Firm performance and international
diversification: The internal and external competitive advantages. International Business
Review, 607–618.
2. Boone, L., & Kurtz, D. (2013). Contemporary Marketing. Cengage Learning.
3. Christensen, C. M. (2013). The Innovator’s Solution: Creating and Sustaining Successful
Growth. Harvard Business School Press.
4. Christensen, C. M., Raynor, M., & McDonald, R. (2015). What Is Disruptive Innovation? .
Harvard Business School Press: Boston, MA.
5. Deloitte. (2016). 2017 Technology Industry Outlook. Deloitte.
6. Distanont, A., & Khongmalai, O. (2020). The role of innovation in creating a competitive
advantage. Kasetsart�Journal� of�Social�Sciences, 15–21.
7. Dudovskiy, J. (2014). Importance of Competitive Advantage: a brief literature review.
Business Research and Methodology.
8. Egbu, C. (1999). Mechanisms for Exploiting Construction Innovations to Gain Competitive
Advantage. . In: Hughes, W (Ed.), 15th Annual ARCOM Conference, 15-17 September 1999,
Liverpool John Moores University. Association of Researchers in Construction
Management, 115-123.
9. Ferrell, O. (2012). Marketing Strategy: Text and Cases . Cengage Learning.
10. Gareche, M., Hosseini, S. M., & Taheri, M. (2017). A Comprehensive Literature Review in
Competitive Advantages of Businesses. International Journal of Advanced Studies in
Humanities and Social Science (IJASHSS), 312-329.
11. Ginter, P. (2013). The Strategic Management of Health Care Organisations. John Wiley &
Sons.
12. Kilkku, V. (2014). Sustaining innovation and disruptive innovation – case Lego. Business
Innovation, Lego.
13. KPMG. (2016). U.S. Tech Industry CEO Outlook. KPMG.
14. Loudon, D., Stevens, R., & Wrenn, B. (2010). Marketing Management: Text and Cases.
Routledge.
15. Macharia, M. J. (2019). Effects of Disruptive Innovations on Competitive Advantage of
Youth Owned Small and Medium Enterprises in Nairobi City County. School Of Business,
University Of Nairobi.
16. McDaniel, B. (2002). Entrepreneurship and Innovation: An Economic Approach. M.E
Sharpe, London.
17. Nawal, C. (2021). Disruptive innovation in a dynamic environment: a winning strategy? An
illustration through the analysis of the yoghurt industry in Algeria. Journal of Innovation
and Entrepreneurship.
18. Nejhad, M. M. (2015). Gaining Competitive Advantage by Innovation in Different Aspects
of Providing Customer Service. Journal of Applied Environmental and Biological Sciences,
590-594.
19. Porter. (1980). Competitive Strategy. The Free Press.
20. Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and
Competitors. Simon & Schuster Inc., 1-422.
21. Prahalad, C., & Hamel, G. (1990). The Core Competence of the Corporation. Harvard
Business Review.
22. Sekhar, G. (2010). Business Policy and Strategic Management. I.K. International Pvt Ltd.