Sustainable Competitive Advantage in Small and ...

Sustainable Competitive Advantage in Small and Medium Enterprises Through a Qualitative Lens: Insights on Intellectual Capital

Abstract Sustainable competitive advantage is important when companies keep searching new ways to offer value better than their competitors, especially when the competitive environment changes. Knowing which elements of competitive advantage to deploy would help companies set effective competitive strategies from the very beginning. Intellectual capital as intangible resources is important for a sustainable competitive advantage. The main concerns of this paper are to identify the elements of sustainable competitive advantage of small and medium enterprises and how intellectual capital influences sustainable competitive advantage. Focus group approach was used to explore the perception of sustainable competitive advantage and intellectual capital of SMEs. Content analysis was analysed using a mechanical method. The findings show that cost leadership and differentiation strategies are commonly used by SMEs to achieve sustainable competitive advantage. In addition, innovation is considered vital to create value for customers. The majority of the participants agreed that human capital is the most important element of intellectual capital regardless of industry. Innovation capital is regarded more important than relational capital and structural capital.

INTRODUCTION In a turbulent and competitive environment, having competitive advantage will help a company stay profitable and ahead of its competitors. However, competitive advantage alone does not guarantee the company will remain relevant. Companies should strive for sustainable competitive advantage to remain in the business for the long term. This can be achieved by leveraging and capitalising their internal resources and capabilities. Intellectual capital is a key driver of innovation and competitive advantage in a knowledge based economy (Taie, 2014; Guthrie and Perry, 2000) where learning and knowledge are the key parameters of sustainable

competitive advantage (Hana, 2013). Most studies on competitive advantage and intellectual capital employ the quantitative approach gather general ideas or perception of large population which means that the real and hidden answers were not recorded. Furthermore, SMEs have limitations compared to large organisations such as limited resources, lack of experts, and lack of impact especially in strategic approaches, role of owner/manager and lack of formalised policies and practices (Darcy et al., 2004). A qualitative study would help explore in depth of sustainable competitive advantage, intellectual capital, and innovative intelligence among entrepreneurs. This paper investigates the sustainable competitive advantage of SMEs and the link of intellectual capital and innovative intelligence of SMEs in Malaysia through the use of focus group. Sustainable Competitive Advantage Competition has forced SMEs to set their competitive advantage (Kocoglu et al., 2009; Hana, 2013). They have to identify new ways to satisfy their customers and provide value better than their competitors. When customer value firms offer more than that of their competitors, they attain competitive advantage (Choplin, 2002; Ipek, 2009; Ismail, 2014). Kotler (2000) defined competitive advantage (CA) as the capability of the organisation to carry out its activities in ways other cannot imitate. By having its CA, the firm builds its base for a strategy (Daou et al., 2013). A firm that differs from its competitors and remains outstanding to their consumers would gain sustainable CA (Darcy et al., 2014; Gonzalez-Loureiro and Dorrego, 2012; Khan, 2014). CA lies in the resources and capabilities that produce products or services (Papula and Volna, 2013). Sources of CA depend on the internal resources or assets of the organisation either tangible or intangible. Tangible assets comprise financial, physical, and technological assets while intangible assets are human, innovation, creativity, and reputation (Papula and Volna, 2013). They emphasised that the source of CA is an intangible asset comprising human capital, structural capital, relational capital, and customer capital. In contrast, according to Alawneh et al. (2009), SMEs have unique characteristics that prevent them from developing a CA compared to large organisation. Nevertheless, Papula and Volna (2013) highlighted that SMEs can more easily differentiate from their competitors because they are fast to adapt to the changing environment compared to larger organisations. Based on resource based theory, CA can be achieved if the organization’s resources are valuable, rare, hard to imitate, and non-substitutable (Barney, 1991). Porter (1980) established

three generic strategies which are cost leadership, differentiation, and focus. Cost leadership strategy focuses on cost reduction by selling cheaper than competitors. Differentiation strategy is where companies differentiate their products by features, product mix, services. and product complexity. Focus strategy concentrates on a market niche where the company tries to maintain its market leadership. A company can achieve its CA either by operating at a low cost, or by charging a premium price, or by doing both (Porter and Stern, 2001). A survey in Europe found that differentiation strategy is more attractive and suitable to small companies as they are more innovative (3i European Enterprise Centre, 1994). Barney (1991) emphasised that a firm possesses sustained CA when it adopts a strategy that is, “not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy.” According to Coyne (1986), sustainable competitive advantage is when the company is able to maintain the durability of its attractive attribute gap for a certain period of time. As long as competitors cannot fill the gap, the company has a sustainable competitive advantage. Intellectual Capital Intellectual capital (IC) has gained popularity, especially in the knowledge based economy. IC studies have focused on large organisations. Studies of IC have extended to SMEs to help them perform better. Generally, IC is knowledge, information, skill, experience, intellectual property that can be put to use to create wealth (Stewart, 1997). Bontis (1998) further elaborated that IC is about the pursuit of the effective use of knowledge (the finished product) as opposed to information (the raw material). Cohen and Kaimenakis (2007) concluded that IC comprises valuable intangible resources containing knowledge that can be used by the firm to accomplish its goals. However, these intangible resources must be complimented with effective management to provide the firm with sustainable competitive advantage. Basically, IC can be located in its people (human capital), its structures (structural capital) and its relationship with stakeholders (relational capital) (Bontis, 1998; Marr, 2008; Ling, 2012; Human capital (HC) comprises employees’ skills, commitment, competence, attitude, capabilities, talents, creativity, and knowledge as an organisation’s intangible assets that can be turned into CA (Cohen and Kaimenakis, 2007; Chen et al., 2004). HC can be described as, “knowledge, skills and experience employees take with them when they leave the company’ (Djurica et al., 2014). According to Mouritsen et al. (2002), HC contains creativity,

innovativeness, initiative, adaptability, flexibility, motivation, persistence, expertise, skills, experience, devotion to organisation, teamwork training, flexibility, loyalty, ability to establish and develop relations with other employees in the company and its partners, readiness to accept changes, and ability to learn. IC by itself is of little value without the leveraging effect of the firm’s supporting structural capital resource. The structural capital (SC) comprises systems, structure, corporate culture, the organisational process efficiency, databases, information and production technology (Cohen and Kaimenakis, 2007). SC is the embodiment, empowerment, and supportive infrastructure of HC (Bontis, 1998). SC provides a platform for people to be creative (Stewart, 2000). It is owned by the firm. The management’s dedication and efficiency is important for the firm’s sustainable competitive advantage (van Zyl, 2005). SC comprises innovation capital, organisational capital, and process capital. Relational capital (RC) embraces all the relations the firm has established with its stakeholder groups such as customers, suppliers, the community, and the government (Bontis, 1998; Allee, 2000). Specifically, RC fosters a knowledge-producing behaviour – providing a source of ideas for change and improvement by market information processing and marketing strategies (Keskin, 2006). However, this knowledge has little benefit if not appreciated and implemented to enhance firm innovation. According to de Castro et al. (2004), IC, especially RC is very much into social networking where the relationship with external parties such as customers, suppliers, and the government play a crucial role in the organisation. However, Mc Elroy (2003) commented that IC itself does not emphasise the value of the relationships between people in firms and between firms and other firms. More capital has been introduced to help companies achieve better performance and acquire sustainable competitive advantage. Innovation capital (Chang and Hsieh, 2011) and technological capital (Pedro et al., 2010) have helped companies capitalise their knowledge and turn it into innovation and intellectual property. Sustainable Competitive Advantage and IC IC components especially HC play a crucial role in establishing and maintenance of CA of a company (Djurica et al., 2014). Knowledge that resides in HC, SC, and RC is a source of a company’s competencies and are thus vital in building sustainable CA (Lopez et al., 2006). The interactions of IC elements can result in sustained competitive advantage (Gannon et al., 2009).

Researches have highlighted that IC is the basis for the generation of sustainable competitive advantages, and this relationship has been broadly studied in the case of medium and large-sized organisations (Ugalde-Blinda et al., 2014; Gannon et al., 2009; Daou et al., 2013; Akhtar et al., 2015 ).

METHODOLOGY This is a qualitative and exploratory study. Focus group can be defined as, “a small group of people selected to discuss on a particular topic which is led by a facilitator” (Reinard, 1999 as cited by Kratt, 2003). According to Stokes (2009), focus groups provide the possibility of a shift in the power balance from the researcher to entrepreneurs. Furthermore, focus groups allow participants to focus on the researcher’s emphasis (Threlfall, 1999). The focus session provides useful information on participants’ perception, experience, and knowledge in their own terms and language (Stewart and Shamdasani, 1990). This paper intends to capture this primary information. The participants for this study were selected through nonrandom methods. Purposive sampling and networking were used to identify the target group and invite volunteers to participate (Latham, 2007). Personal contact was used to identify the target group and the participants. Participants were informed of the date and venue of the session. Eleven entrepreneurs agreed to attend the session which is within the conventional group size of six to 12 (Millward, 2012; Cameron, 2005). Two prime considerations for participants are convenience and comfort. We reserved a small business room that can accommodate 15 people. The participants were seated at a big round table so that they would be able to hear and listen to others clearly. Since all the participants are entrepreneurs, they were willing to participate in a two hour session. The success of the session will depend on preparation and good people skills (Greenbaum, 2000; Wilkinson, 2003 as cited by Millward, 2012). Three facilitators and two research assistants were deployed for this purpose. Prior to the focus group session, a list of questions was prepared. The questions included: what is the sustainable competitive advantage to your firm, what elements of CA are for the firm, which of the elements are important for sustainable competitive advantage for your company and which of the IC elements is the most

important for SMEs? During the session, an audio recorder was used to tape the discussion. The entire discussion was recorded directly on tape. There is no single way to analyse the focus group data (Wilkinson, 2003). The form of analysis will depend fundamentally on whether it is the “content” or the “interaction process” that is the “data” of interest (Millward, 2012). The discussion of content analysis is used to analyse transcription data which can be done either through mechanical or an interpretative component (Krippendorf, 1980 as cited by Millward, 2012). For this study, a mechanical aspect involving physically organising and subdividing the data into categories is adopted.

Research Design The participants for this study were selected using nonprobability sampling method. Nonprobability sampling is subjective whereby not all members of a population have an equal chance of being selected (Cooper and Schindler, 2003; Reinard, 1999 as cited by Kratt, 2003). The participants were selected on the basis of their accessibility or by the purposive personal judgement of the researcher. For this study, nonrandom tactics used included purposive sampling and networking. The researcher contacted an entrepreneur who is a member of few entrepreneurial associations. The researcher then requested her to extend the invitation to other entrepreneurs who met the requirements of this session. Eleven entrepreneurs agreed to participate in the focus group session.

RESULTS OF THE STUDY The results from the focus group discussion protocol are presented. It is organised under the sustainable competitive advantage, IC, and general reflections. Sustainable Competitive Advantage Sustainable competitive advantage (SCA) is important for SMEs to remain relevant in the industry. Depending on the industry, the focus on the elements of SCA would differ as stated by one participant that, “between cost leadership and product differentiation, it depends on what stage the company is which is life-cycle…”. Furthermore, the stages and level of maturity of SMEs are other factors that influence the focus of SCA. For example, in the service industry, cost leadership is more important than product differentiation as stated by one of the participants,

“For the service industry, I think cost leadership is more important because it is reflected in our financial budget…” Another view of one of the entrepreneurs, “I think depending on the industry, for example for manufacturer they have to focus on product to create CA, however, in service industry basically very competitive. You can imitate your competitor, your competitor could be your benchmark but at the end of the day, you must set your own CA.” Most participants agreed that cost leadership and product differentiation strategies are equally important and have to be included in the company’s CA strategy. However, depending on cost leadership and product differentiation strategies is not sufficient to sustain and maintain their position in the industry. In this study, innovation has been proposed as an element of SCA. In order to sustain the CA, “…innovation is what we must do to sustain”. “I think when we are talking about SCA, we have to focus on innovation which means you to be innovative every day, every month together with your employees and so the company’s CA can be sustained in the market”. The company has to be innovative in creating value for customers and being different than its competitors, “SCA for us is create value and do differently”. As innovation is important in SCA, innovation performance should be included as an organisational performance measure. “Cost-leadership is important to my company. Product differentiation is also what we must have, we should do what our competitors are not doing and do better than them where product and process innovation are important today”. However, one of the entrepreneurs disagreed, as for her company product differentiation strategy and innovation performance are more important than cost leadership strategy. IC In a knowledge based economy, knowledge, which is an intangible resource, is more important than tangible resources like labour and capital. IC comprises HC, SC, and RC has evolved to help the organisation to perform and better acquire SCA. As IC goes in-depth, capitals like technological capital, innovation capital, and spiritual capital have been included. The participants agreed that all IC elements are important for achieving SCA. They are not familiar with the terms and did not realise the importance to identifying and capitalising on IC as stated by one of the entrepreneurs, “I am glad that today I learned what IC is about. We don’t have a proper plan but we have a goal. What we do we just set out our goals and do whatever necessary to achieve it”. After the explanation of IC, the entrepreneurs were given questions on IC. Some thought that spiritual capital should be included, “…spiritual capital is important in my

company. Spiritual capital is about honesty among staff. Therefore, in order for them to be honest, it is good to have spiritual capital”. However, another participant disagreed with including spiritual capital, “I think spiritual capital can become very religious meaning I don’t need money… I don’t need anything”. Participants had mixed views on the importance of IC. One participant stated, “For my training company, HC is a main priority, follows by RC, innovation capital, SC and technological capital”. For another training company, “For me HC is very important, then SC, RC, innovation capital and technological capital”. SC is whatever is left behind after office hour which includes a database, system etc. “…some of the structural elements are costly; there are many ways to cut costs. We know many ways to cut costs, for example, we fully utilised google.doc. Whatever transpired between customers and employees, all information will be shared among the employees through cloud application such as google.doc.…”. We share information on google.doc between our staff and customers. Overall, all the participants agreed that HC is the most important element of IC as stated by a participant, “even if you have the best SC but not HC, everything will be collapsed”. For entrepreneurs from the IT industry, “…in my industry, innovation can be easily duplicated. I have to innovate quickly ahead of my competitors. I have to understand my customers’ needs and provide innovative solutions. Therefore, I would say HC is our main priority while innovation capital is next important element. The rest are equally important”. For another entrepreneur, “in SMEs we have to invest either in human or relationship. For me, RC is more important than HC”. CONCLUSIONS Most entrepreneurs are unaware of how they achieve their CA. They have their own strategies which were rather general and on an ad-hoc basis. It is interesting to discover that entrepreneurs prefer to adapt strategies for cost leadership and product differentiation. The entrepreneurs agreed that in order for SMEs to acquire SCA, they must adopt cost leadership, product differentiation, and innovation performance. However, depending on industry and its life-cycle, SMEs di not necessarily adopt all three dimensions of the proposed SCA but select the one that gives them most advantage.

SMEs understand the importance of IC to achieve SCA. HC is considered the most important elements of IC. Although all capitals are considered important, innovation capital ranks second after HC. Interestingly, entrepreneurs did not rank SC as high as RC which is in contrast to Bontis et al. (2002) and Chen (2004). A qualitative research design proved fruitful in obtaining a description of practices from entrepreneurs (Stokes, 2000). The focus group session helped the researcher acquire in-depth information which would not be obtained through a quantitative approach. Even though primary information was attained from the entrepreneurs, the findings are not generalisable (Threlfall, 1999). Innovation is important to businesses as highlighted by the entrepreneurs, especially in a creative and knowledge based economy. This study showed that most of the entrepreneurs set their strategies based on their intuition without knowing the importance of CA. Their main target is to create value so that they are ahead of their competitors. It is important for entrepreneurs to develop their strategies to capitalise on their IC effectively. In addition, the term “IC” seems new to entrepreneurs. It would be beneficial if entrepreneurs knew the benefits of IC and how it would affect and influence their CA. This study was carried out on a small number of entrepreneurs from different industries and with different background. It would be interesting to select participants from a single industry to gathering information on their SCA and IC.

ACKNOWLEDGEMENTS This study was supported by the Research Management Institute of University Technology MARA and Ministry of Education (600-RMI/FRGS 5/3 (69/2014).

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