These firms serve similar markets and they see themselves as members of the same industry and strategic group. Tesco has a competitive advantage over Argyll. In a paired comparison one firm will have a relative competitive advantage over another.
The resource based theory of the firm indicates, " If all firms in a market have the same stock of resources and capabilities, no strategy for value creation is available to one firm that would not also be available to all other firms in the market.".
The theory is implying that a resource must be scarce in order to sustain profitability in the industry. A firms profitability is a function not only of industry conditions, but also of the amount of value it creates relative to it's competitors. The amount value the firm creates in comparison depends on it's cost and differentiation positions relative to competitors. No business can exist without creating positive value, and to achieve a competitive advantage it must add more value that it's competitors.
Added value is the difference between the market value of a firm's output and the value which it's inputs would have in comparable activities undertaken by other firms. Added value can be achieved if customers or suppliers are willing to undertake relationships which they would not make available to other people. .
The main sources of competitive advantage are architecture, reputation and innovation. It is the ability of the firm in how it utilizes it's distinctive capabilities to add value to it's competitive advantage.
Architecture is the first primary distinctive capability of competitive advantage. It is a network of relational contracts within , or around, the firm. It is a description of relationships held by a firm internally or externally, or with a group of other firms. Architecture can add value and provides competitive advantage by encouraging the formation of organizational knowledge and the development of organizational routines and cooperative ethics.
