Competitive advantage refers to the ability of an organisation to formulate strategies that place it at a favourable position relative to other companies in the industry. Companies achieve competitive advantage through effectively leveraging their capabilities.
A firm’s capabilities include all of its physical and financial assets as well as all capabilities, competencies, organisational processes, firm attributes, information, knowledge, and so forth that are controlled by the firm and that enables the firm to both design and implement its competitive strategy.
Learn about: 1. What is Competitive Advantage and Meaning 2. Principles of Competitive Advantage 3. Durability 4. Ways of Maintaining a Sustainable Competitive Advantage
5. National Attributes of Competitive Advantage 6. Factors 7. New Developments 8. Types 9. Steps 10. Tools and Techniques 11. Porter’s Model 12. Distinctive Competencies, Resources and Capabilities 13. Core Competency and Competitive Advantage.
Competitive Advantage: What is, Meaning, Types, Techniques, Porter’s Model, Examples, Principle, Factors, Steps and More…
What is Competitive Advantage (Meaning)
Competitive advantage arises when an organization has an advantage competing with its rivals which enables it to earn returns on investment which are higher than the average for the sector. This means that a company which has a competitive advantage is able to compete successful with other companies in its market.
Competitive advantage refers to the ability of an organisation to formulate strategies that place it at a favourable position relative to other companies in the industry. Companies achieve competitive advantage through effectively leveraging their capabilities. A firm’s capabilities include all of its physical and financial assets as well as all capabilities, competencies, organisational processes, firm attributes, information, knowledge, and so forth that are controlled by the firm and that enables the firm to both design and implement its competitive strategy.
One highly regarded core competency calls for reconceptualising the organisation into a portfolio of underlying functions, or core competition. Core competencies are essentially what the organisation does, or could do, best.
Two major principles – perceived customer value and uniqueness-describe the extent to which an organisation has a competitive advantage.
The objective of strategic management is to create a situation where the company has a sustainable competitive advantage. In order to maintain a competitive advantage a strategic manager must have a clear view of an organization’s resources and how there can be used in the best possible way to achieve corporate objectives.
The resources of an organization include the skills of everybody who works for it. Physical resources in terms of property, plant, vehicles and raw materials, and financial resources including cash and credit. The management process is concerned, one way or another, with organizing these resources so that there is a productive outcome.
This outcome is that production and development of products and services which provide benefits to consumers and are offered in such a way that the organization is able to succeed. Products and services have to be offered which customers want, are prepared to buy and able to buy, while the organization has to make a profit or to receive sufficient revenue in one way or another to service and flourish.
This process can be described as operation management. Operations management can be seen as the process of transforming an organization’s resources from one state, such as raw materials to another, such as finished product. This involves the managements of a system which provides goods or services for customer.
This transforming process takes place in one way or another in all areas of the economy. In manufacturing decisions have to be made about products, new materials, machinery and equipment, employee skills, design and so on. In service industries, similar decisions have to be made.
A fast food outlet has to decide what food to provide, where the supplies are to come from, how the food is to be cooked and how it is to be served. Holiday companies bring together online fights, hotel rooms, rental cars, and couriers and guides in order to provide a package which will meet customer needs.
Whatever the process involved in transforming commodities and services to meet customer expectations, the final offering has to be distributed at the right time, in the right place and at the right price, and with sufficient information for customers to know what is available.
In attempting to achieve a competitive advantage, resources are a foundation for-an organizational strategy. One strategic option is to be select a strategy that best exploits the organizations resources and capabilities relative to external opportunities.
To do this requires an analysis of the organization’s resources and capabilities and their relative strengths and weaknesses compared to competitors and then the identifications of opportunities for a better use for them. Gaps in the resources or the capabilities of the organization can be identified so that investment can be directed at filling the gaps and replacing and upgrading resources and capabilities.
One aspect of competitive advantage is strategy aimed at positioning the organization in its market, but fundamental to this process are the resources of the organization and their availability.
For example, the ability to establish a cost advantage requires- an efficient size of operating plant, whether it is a product unit such as a factory or an office based operation; the excellent use of resources: and access to relatively low-cost inputs such as raw materials or labour. Low cost labour has effectively been utilized been utilized by many companies in obtaining their goods from countries that pay low wage, such as China, or in obtaining high levels of productivity in the employment of people which can sometimes compensate for relatively high wage costs.
Competitive advantage can also be obtained through the differentiation of the organization products and services. This can be achieved as a result of image and reputation, product design and development, and through marketing and distribution capabilities. Meeting customer needs requires knowing what there are, having the right product and making it available in the best way.
Strategic marketing is an essential aspect of organization success and is based on having the right product, at the right price, in the right place and having it well promoted. Products and services need to provide customer benefits and they need to be at a price and in a location where customers will know about their and make the decision to buy.
Competition is at the core of the success a failure of firm. Competition determines the appropriateness of a firm’s activities that can contribute to its performance, such as innovation, a cohesive culture, or good implementation. Competitive strategy is the search for a favourable.
Competitive position in an industry, the fundamental arena is which competition occurs. Competitive strategy aims to establish a profitable and sustainable position against the forces that determine industry competition.
Two central question underlie the choice of competitive strategy. The first is the attractiveness of industries for long-term profitability and the factors that determine it. Not all industries offer equal opportunities for sustained profitability, and the inherent profitability of its industry is one essential- ingredient in determining the profitability of a firm.
The second central question in competitive strategy is determinates of relative competitive position within an industry. In most industries some firm are much more profitable than others, regardless of what the average profitability of the industry may be.
Neither question is sufficient by itself to guide the choice of competitive strategy. A firm in very attractive industry may still not earn attractive profits if it has chosen a poor competitive position. Conversely a firm in an excellent competitive position may be in such a poor industry that is not very profitable, and further efforts to enhance its position will be of little benefit.
Both questions are dynamic industry attractiveness and competitive position change. Industries become more or less attractive overtime and competitive position reflects an unending battle among competitor. Even long periods of stability can be abruptly ended by competitive moves.
Both industry attractiveness and competitive position can be shaped by a firm, and this is what makes the choice of competitive strategy both challenging and exciting. While industry attractiveness is partly a reflection of factors over which a firm has little influence, competitive strategy has considerable power to make an industry more or less attractive.
At the same time, a firm can clearly improve or erode its position within an industry through its choice of strategy. Competitive strategy,-then not only respond to the environment but also attempt to shape that environment in a firm favour.
These two central questions in competitive strategy have been at core of analytical frame work for understanding industries and competitors and formulating an overall competitive strategy. Porter describes the five competitive forces that determine the attractiveness of an industry and their underlying courses, as well as how those forces change over time and can be influences through strategy.
It identifies three broad generic strategies for achieving competitive advantage. It also shows how to analyze competitors and to predict and influences their behavior and how to map competitors into strategic groups and assess the most attractive positions in an industry.
It then goes on to apply the frame work to a range of important type of industry environment that term structural settings, including fragmented industries, energy industries, industries undergoing a transition to maturity, declining industries and global industries.
Competitive advantage grows fundamentally out of value a firm is able to create for it buyers that exceeds the firm’s cost of creating form offering lower prices than competitors for equivalent benefits or provides unique benefits that more than offset a higher price. There are two basic types of competitive advantages. Cost leadership and differentiation.
How a firm can gain a cost advantage or how it can differentiate itself. It describes how the choice of competitive scope or the range of firm’s activities can play a powerful role in determining competitive advantage. Competitive advantage is one industry can be strongly enhanced by interrelationships with business units.
Competing is related industries, if these interrelationships can actually be achieved. Interrelationships among business units are the principles means by which a diversified firm creates value and thus provides the underpinnings for corporate strategy.
The emphasis of competitive strategy is on industry structure and competitive analysis in a variety of industry environments, through begins by assuming an understanding of industries structure and competitor behaviour and is preoccupied with how to translate that understanding into a competitive advantage. Actions to create competitive advantage often have important consequences for industry structure and competitive reaction.
Competitive advantage refers to organization or companies with how much benefit from the point views of cost and benefit analysis. Every organization has strategically competitive advantage for their business.
Competitive Advantage Principles – Customer Value and Maintaining Uniqueness
i. Customer Value:
These unique capabilities or core competencies can help build competitive advantage by improving the value that customers receive-or perceive that they receive from the company’s goods and services. When a company fails to take advantage of its unique capabilities the results can be disastrous. IBM virtually owned the computer industry from its inception through the 1970s.
By failing to identify and perceive the importance of the emerging personal computer market, IBM lost as much as Rs. 90 billion in market capitalisation and was forced to undertake drastic repositioning and organisational restructuring actions. An emphasis on customer value as the framework for sustained competitive advantage has a great deal to do with the human resources of an organisation understanding customer value and building HRM programmes with a customer orientation in the contest of core competencies may be the underlying aim of the HRM function.
Competitive advantage occurs if customers perceive that they receive more value from their transaction with an organisation than from its competitors. Price has a lot to do with value. Proctor and Gamble made a strategic decision in 1992 to compete on the basis of low prices, even for its premium brands.
Customer research had indicated price was becoming relatively more important in the buying decision. That data drove a strategic decision to cut costs throughout the organisation. The result was an increase in profit margins by more than 5 per cent despite reducing prices on several major brands. But customer value is far more complicated than a simple assessment of product quality relative to price.
Does corporate image affect customer value?
The notion of customer value is more complicated than it may seem to be unlimited. For examples many customers seek out products and services to some extent as a function of the reputation of the organisation selling the product or services in matters not directly related to the cost or quality of the particular product or service.
One reason companies (and politicians) wrap themselves around the Olympics tends to rub off into the company. Marketing research shows that perception of product quality is positively affected by affiliation with the Olympics. Thus, the theory is that customer value is affected by this connection.
Likewise, the reputation of companies’ environmental policies as well as the use of child labour or pitiful labour conditions in international facilities affects the decision making of some consumers. An organisation’s reputation regarding issues such as corporate ethics or social responsibility, pro-family policies, or affirmative action/diversity practices can go into a “customer value” assessment at least for some customers.
Such issues not only affect customer behaviour but also, perhaps, just as important, the ability of an organisation to recruit and retain valuable employees. There is no question that corporate image has an impact on organisations ability to attract and retain qualified workers. This is one reason companies compete so vigorously to make the various socially desirable lists that appear on the covers of popular magazines.
While customers undoubtedly place greater weight on the quality of the particular product or services they are considering relative to its costs, there is no question that “Customer value” can include tangential variables such as corporate responsibility, environmental impacts, diversity policies, political issues, and affiliations with other products or services. Thus, a company’s business strategy must include consideration of these important environmental factors.
ii. Maintaining Uniqueness:
The second principle of competitive advantage derives from offering a product or service that your competitor cannot easily imitate or copy. For example, if you open a restaurant and serve hamburgers, and a competitor moves in next to you and also serves hamburgers that taste, cost, and are prepared just like yours, unless you quickly offer something unique in your restaurant, you may lose a larger part of your business because your competitor will continue to attract customers. Competitive advantage comes to a business when it adds value to customers through some form of uniqueness.
A key to any businesses sustained competitive advantage is to ensure that its uniqueness lasts. Three traditional types of resources exist to offer customers uniqueness. These three resources are financial capital, physical capital and human resources capital. In addition to these three resources, business may offer customers uniqueness through a non-traditional capability, namely organisational capability.
The four mechanisms for offering uniqueness are as below:
First, a business needs financial, or economic, capital. This uniqueness comes when a business receives special access to financial funding or is able to produce a good or service cheaper than someone else.
If, in your hamburger restaurant, you have received a financial gift from family or friends to build the restaurant, without repayment of the gift, you may be able to charge less for your product than a competitor who borrowed money from a bank or financial institution. Your cheaper hamburgers would then become a source of uniqueness that customer’s value.
Large organisations are frequently at an advantage over smaller competitors in terms of their access for financial capital it has acquired through its sales of operating software products. Microsoft’s available financial capital has allowed it to launch an aggressive strategy for its Internet browsing software, including spending millions of dollars on free subscriptions.
The second source of uniqueness rests in the organisation’s physical capital. This includes all the company’s plants and equipment as well as its ability to purchase necessary supplies. Specific examples of physical capital that could be used to create competitive advantage include specialised company hardware and software, robotic manufacturing systems, and control of prime geographic locations.
Physical capital helps create competitive advantage by allowing the company to develop a unique technological capability. That is, a business can have a distinctive way of building or delivering its product or services. In the hamburger restaurant, the different types of cooking used to prepare hamburgers may distinguish restaurants from each other (boiled versus flame grilled).
The third source of uniqueness that an organisation can use to achieve competitive advantage is it human capital. Human capital refers to the skill and abilities of the individual members of the organisation, including their training, expertise, experience, creativity and relationships. Many examples exist of organisations that have succeeded because of the skills and abilities of their human assets.
The fourth but related source of uniqueness helping a company gain competitive advantage may be derived from organisational capability. While human capital refers to the skills and abilities of individual members of the company, organisational capability refers to the synergies that they create collectively. Organisation capability represents the business’s ability to manage organisation systems and people in order to match customer and strategic needs.
Organisation capability helps a company achieve competitive advantage because the manner in which it contributes value to the organisation’s products or services is rare, hard to substitute for, and difficult to imitate. A competitor cannot reverse engineer organisation capability and create a copy of it as it can an end-product because organisational capability is so closely matched to the unique characteristics of the company.
Human capital and organisational capacity have a great deal to do with the organisation’s core-competencies what the organisation does best and how it differentiates itself from the competition. The increased pace of change required by technology, globalisation, profitable growth and customer demands places workforce competence and organisational capabilities at centre stage.
In a complex, dynamic, uncertain and turbulent environment (e.g., changing customers, technology, suppliers, relevant laws and regulations) organisational capability derives from the organisation’s flexibility, adaptiveness, and responsiveness. In less dynamic environments, organisational capability derives from maintaining continuity and stability of organisation practices.
In a restaurant organisational capability may be derived from having employees who ensure that when customers enters the restaurant, their customer requirements are better met than when the customers go to a competitor’s restaurant. That is, employees will want to ensure that customers are served promptly and pleasantly and that the food is well prepared.
How does strategy evolve from uniqueness?
The creation of strategy repairs an alignment between the organisation’s environment and its unique capabilities. HRM is critical for exploiting these capabilities, some of which may interact. Many experts maintain that organisational capability may be the most important source of sustained competitive advantage. An organisation’s ability to sustain competitive advantage depends on its ability to attract and retain those individuals with the skills needed to give the organisation the edge.
Attracting and retaining individual with skills related to the poor competencies of the organisation are key HR activities directly relevant to organisational capability. Developing HR systems to take hill advantage of the potential competitive advantages are also critical to sustained advantage.
Top 3 Factors Determining the Durability of Business Enterprise’s Competitive Advantage
The durability of a business enterprise’s competitive advantages depends on three factors.
They are as outlined below:
1. The height of barriers to imitation
2. The capability of competitors
3. The general dynamism to the industry
Barriers to imitation, capability of competitors and industry dynamism the durability of competitive advantage of the business enterprise or company or firm or organization.
Factor # 1. Barriers to Imitation:
Barriers to imitation to factors that make it difficult for a competitor to copy a firm to company’s distinctive competencies. Distinctive competencies allow business firms or companies to earn superior profits – therefore, competitors want to imitate them. However, the greater barrier is to imitation for the more almost any distinctive competency can be imitated by competitors to intimate a distinctive competency.
It is the greater opportunity to firm or company to firm or company has to build a strong market position and reputation with consumers, which is then difficult for competitors to attack. Moreover, the longer it takes to achieve a limitation, the greater is the opportunity for the imitated firm or company firm or company to improve on its competency, or build other or companies, thereby, staying one step ahead of the competition.
Imitating resources refers to the easiest distinctive competencies for prospective rivals to intimate tend to be those based on possession of unique and valuable tangible resources like buildings, plant and equipment. These resources are visible to competitors can often purchase on the open market.
Intangible resources can be more difficult to imitate, it is particularly true of brand names. Brand names are important because they symbolize a firm’s or company’s reputation to the heavy, moving equipment industry.
Imitating capabilities refers to a firm’s or company’s capabilities tend to be more difficult than imitating its tangible and intangible resources, chiefly because a firm’s or company’s capabilities are often invisible to outsiders. Since capabilities are based on the way in which decisions are, made and processes managed deep within a firm or company. By definition, it is hard for outsiders to discern the nature of a company’s internal operation.
The invisible nature of capabilities would not be enough to halt imitation. In theory: competitors still gain insights into how a firm or company operates by hiring people away from that firm or company. However, a firm or company’s capabilities rarely reside in single individual.
Rather, they are the product of how numerous individuals interact within a unique organizational setting. It is possible that no one individual with in a firm or company may be familiar with the totality of firm or company’s internal operating routines and procedures. In such cases, hiring people away from a successful company in order to imitate its key capabilities may not be helpful.
Factor # 2. Capability of Competitors:
According to Pankaj Ghemwat, capability of competitors refers to a major determinant of the company’s competitive advantage is the nature of the competitor’s prior strategic commitments. By strategic commitment, Ghemwat means a company’s commitment to a particular way of doing business i.e., to developing a particular set of recourses and capabilities.
Ghemawat point is that once a company has made a strategic commitment, it will find difficult to respond to new competition if doing so requires a break with this commitment. Therefore, when competitors already have long-established commitments to a particular way of doing business, they may be slow to imitate an innovating firms or company’s competitive advantage. Its competitive advantage will thus be relatively durable.
Factor # 3. Industry Dynamism:
Industry dynamism refers to a dynamic industry environment is one that is one that is changing rapidly. The most dynamic industries tend to be those with a very high rate of product innovation. For example, the consumer electronic industry and the personal computer industry. In dynamic industries, the rapid rate of innovation means that product life cycle are shortening and that competitive advantage can be very transitory.
Possible Ways of Maintaining a Sustainable Competitive Advantage
Strategic management is concerned with creating a sustainable competition advantage for an organization compared with its rivals. This arises when an organization has an advantage in competing with its rivals which enables it to earn returns on investments which are higher than the average for the sector.
This involves every aspect of the way that the organizations competes in the market place, including product range, price, manufacturing quality, service levels and so on. However, some of those factors are easily imitated. Price, for example can be changed very rapidly so that a price which provides an advantage for a company at one time may last a very short time. In order to be sustainable, competitive advantage needs to be difficult to imitate and it needs to be deeply embedded in the organization.
A product or service which is difficult to imitate will have an advantage in terms of it design, its quality and its after-sales service and it will also have a price which customers consider to be good value for money.
These factors can be deeply embedded in an organization through the skills of its workforce, its overall culture or its investment in resources. Sustainable advantage can take many forms as organization look for something which is unique and different from the competition, and it can be said to be a vital aspect of strategic management.
Possible ways of maintaining a sustainable competitive advantage:
1. Service Providers:
i. Reputation for quality Service
ii. High-quality staff
iii. Customer Service
iv. Well know name
v. Customer orientated
i. Low costs
ii. Strong branding
iii. Good Distribution
iv. Quality product, and
v. Good value for money.
Service providers will attempt to provide a high-quality service which is both reliable and prompt. They will want to employ high-quality staff and provide then with training to prepare them for their job. Customer’s service will be a top priority for service companies that want to remains ahead of their competitors, and the whole company and the way it worker will need to be customer-oriented.
Manufacturing companies will want to provide good value for money, by producing high-quality products at low cost. A good distribution system will help to provide their products to their customers and strong branding will help to market their products. Again customer-oriented is essential for a manufacturing company that wants to maintain a lead over competitors.
Even public sector and non-profit organization need to consider competitive advantage because although they do not have the same level of competitive as organization in the private sector, they still have to competitive for funding and they are accountable for their performance to funding agencies. Increasing, NGO’s hospitals, universities and colleges, are in competitive situation where they are judged as service providers against other organization in their part of the sector.
One aspect of developing competitive advantage is through product differentiation is the development of unique features or attributes is a product or service that position it to appeal especially to a part of the total market. One method of doing this is by branding. Company will attempt to develop a brand image for their products or services so that customers will develop loyalty to then, recognize then when they see then and perhaps ask for them by name. People will ask for ‘Coca-Cola’ or ‘Pepsi’ but no other Colas.
People develop customer loyalty for particular makes of car, so they always buy a Maruti, Hyundai or Sony television sets or Kodak cameras and so on. Companies will also try to develop unique features for their services, by providing extras as part of the overall package or some other distinctive features. Holiday, company try to differentiate them holidays from those provided by other companies by offering children’s gifts, clubs extra, or upgraded car hire.
Competitive advantage can be obtained through the development of low cost production, which enables a company to compete either on the base of lower prices than rival companies, or by charging the same prices but adding more services. In the 1990s production of many products moved to South-East Asian countries where labour costs were lower than the western countries.
National Attributes of Competitive Advantage
Like each organization, each country is known in terms of its competitive advantage, for example, USA for computers, credit cards, and movies; Japan for consumer electronics and automobiles; Germany for printing presses, chemicals, and luxury cars; Switzerland for pharmaceuticals and confectionaries; and India for software professionals.
The question is-what factors have contributed to generate competitive advantage to these countries in specific areas? The answer of this question is important for the purpose of generating competitive advantage at the global level. Porter has categorised various national attributes in four groups that contribute to, or detract from, the creation of competitive advantage for the firms of that nation.
1. Factor Conditions:
The first basic attribute of national competitive advantage is in the form of various factors (resources) that provide base for undertaking various business activities. These resources can be grouped into five broad categories- human resources, knowledge resources, physical resources, capital resources, and infrastructure.
Of special importance are resources that are created within a country, as distinguished from those that are inherited. If the resources are created, that shows the creative power of the country. Competitive advantage accrues to country’s industry if the mix of the factors available to the industry is such that it facilitates pursuit of a generic strategy- low-cost production or the production of highly differentiated product or service.
2. Demand Conditions:
The nature of demand conditions for an organization or industry’s products and services in the country is important because it determines the rate of and nature of improvement and innovation by the organizations. These factors either train organizations for world-class competition, or fail to adequately prepare them to compete in the global marketplace.
Three characteristics of home demand are particularly important to competitive advantage – the composition of home demand, the size and pattern of growth of home demand, and the means by which a nation’s home demand pulls the nation’s products and services into foreign markets. The interplay of these demand conditions determines the competitive advantage. Of special importance are those demand conditions that lead to initial and continuing incentives to invest and innovate, and to continuing competition in increasingly sophisticated markets.
3. Related and Supporting Industries:
Apart from the main industry in which context, competitive advantage is talked about, the conditions of related and supporting industries also determine industry’s competitive advantage. However, in the long run, the relationship between main industry and related and supporting industries becomes reciprocal. For example, if the main industry is developed, the related industries will also develop with a time lag. In the same way, the related industries will provide support to the further development of the main industry.
For example, when computer industry developed in the USA, it led to the development of computer software industry. However, development of software industry provided further impetus to computer industry in the form of increased sales of computers associated with software due to synergistic advantage
4. Firm Strategy, Structure, and Rivalry:
Differences in strategy, structure, and rivalry create advantages or disadvantages to firms competing in different types of industries in a nation. The aggregate of these determines national competitive advantage. The way different firm shapes their strategies—ranging from a broad outlook and long-term profitability to narrow range and short-term profitability—determines how the nation will be competitive.
For example, US companies rank return on investment, share price increase, and market share in that order. As against this, Japanese companies rank market share, return on investment, and new product introduction in that order. This is the reason that Japanese companies have significant global market share as compared to their US counterparts. Further, Japanese companies introduce new products or their innovation more frequently.
Besides strategy, organization structure of competing firms determines the process through which competitive advantage is generated. Structure dealing with such issues as who will make decisions, how decisions will be arrived at, how hierarchy will be arranged, and so on determines firms’ focus internally as well as externally.
The last aspect in this group is nature of rivalry among competing firms. The degree of intensity of competition and the quality of competitors determine the competitive advantage. If the degree of intensity of competition is high, each competitor will try to put its best in the marketplace. This will also affect the quality of competitors.
Apart from the above four groups of factors, the government is also considered as determinant of national competitive advantage. However, the role of government in determining national competitive advantage is indirect one. It is not a determinant but it has an important influence on various determinants.
Various governments’ policies affect the way the different determinants of competitive advantage will take shape. Various determinants of national competitive advantage act as interactive system in which each activity has impact on other activities and vice versa. The national competitive advantage, in turn, affects individual organization’s competitive advantage.
Generic Building Blocks of Competitive Advantage (Factors that Build Competitive Advantage) – Efficiency, Quality, Innovation and Customer responsiveness
There are four factors to build competitive advantage. They are called as generic building blocks of competitive advantage.
They are as outlined:
4. Customer responsiveness
Superior efficiency, quality, innovation and customer responsiveness represent the four basic ways of lowering costs and achieving differentiation of any company or organization which can adopt regardless of its products and service.
1. Superior Efficiency:
Superior efficiency refers to effective utilization of factors of production from inputs converted into output.
Superior affiance arises due to the following factors:
i. A company or organization is a method for transforming inputs into outputs. Inputs are basic factors of production like labor, land capital, management, and technological know-how and so on.
ii. Output is the goods and service that a company or organization produces output. The more efficient a company or organization has converted the inputs into outputs at lower cost.
iii. One of the important keys to achieving high efficiency is to utilize inputs in the most productive way possible the most important component of efficiency for most companies in employee productivity, which is usually measured by output per employee. The company with highest employee productivity in an industry will typically have the lowest costs of production. In other words, that company will have a cost base competitive advantage.
Quality is another important generic building block of the competitive advantages. Quality product represents goods and services. Quality product can be designed very well. The impact of high product quality on competitive advantage is twofold.
i. Providing high quality product creates a brand reputation for company’s products, therefore. This enhanced reputation allows the company to charge a higher price for its product.
ii. Second impact of quality on competitive advantages comes from the greater efficiency and hence lower unit costs brought about by higher product quality.
Increase the quality products; its impact gets increased on the readability of the products. The organization or company can be charged higher prices for the quality products, ultimately the productivity of the products hence the company or organization can increase the productivity, therefore, even quality products available at lower cost for consumers. The importance of quality building competitive advantage has increased dramatically in recent years.
Innovation is another one of the essential generic building blocks of competitive advantage. Innovation refers searching of anything new, the way accompany operators or the producing of new products. Innovation includes advances in the kind of products, production process, managerial systems, organizational structures, new customers, and marketing strategies developed by a company or organization. Product either success or failure depends on innovation.
4. Customer Responsiveness:
Any business enterprise which has to achieve customer responsiveness, must give its customers exactly what and they want when they want it. Consequently, business enterprise must do everything possible to what they want they want it. Consequently, business enterprise must do everything possible to identify customer needs and satisfy and when it.
Customer responsiveness is the basic function of achieving superior customer responsiveness; it involves giving customers value for money. In other words, achieving superior efficiency for quality and innovation are all part of achieving superior customer responsiveness of the business enterprise.
Another obvious factor that stands out in any discussion of customer responsiveness is the need to customize goods and services to the unique demands of individual customers.
Another important aspect of customer responsiveness that has been increasing attention is customer response time. The time takes for a good to be delivered or a service to be performed. Besides quality, customization and responsive time improve the customer responsiveness. Business enterprise properly and carefully, defined customers responsiveness is superior design, superior services and superior after sales service and support.
New Developments Affecting Competitive Advantage
Changes in the industry environment can have dramatic effects on firms’ sources of competitive advantage. New developments represent triggers that can redefine the way that firms compete. In some instances, the developments are industry-wide and substantially alter the nature of competition and the long-term structure of the industry.
Changes in government regulations (for example, deregulation in electric utilities, airlines, health care, and telecommunications) can have major intended and unintended effects on the industry. Other developments may be “spillover” effects resulting from changes that result from innovations and new products that occur in other industries (such as the impact of digital imaging and new microchips on chemical-based film).
Developments or triggers that frequently change the nature of competition and sources of competitive advantage include:
(1) New technology,
(2) New distribution channels,
(3) Shifts in economic variables,
(4) Changes in related industries, and
(5) Changes in government regulation.
(1) New Technology:
In any industry, a firm invests considerable resources in the technologies used in its value- adding activities. The choice of technology determines the materials, designs, methods, processes, and equipment used to carry out its activities. Technology shapes the firm’s knowledge base.
Over time, a firm learns and builds a considerable base of expertise in dealing with the technologies that directly impact its value chain configuration (business system). Technological change impacts both products and processes. The emergence of a new or superior product or process technology can undermine a firm’s existing distinctive competence.
On a general level, all firms face the potential threat of obsolescence. This problem is especially salient, however, for established firms that compete along a given technology format or product standard for an extended time. When new technologies threaten to undermine or replace existing product designs or process technology, they are known as competence-changing technologies.
Competence-changing technologies redefine an industry’s structure and the dominant technological format used by competing firms. In many situations, competence- changing technologies represent substitutes for existing industry processes, methods, and materials. Another way to think about competence-changing technologies is that they are “disruptive innovations.” Disruptive innovations unleash a process of “creative destruction” that enables new products and technologies to replace older ones.
(2) New Distribution Channels:
Established firms must also look for potential threats to their distribution methods and channels to reach customers. Changes in distribution often mean that the customer can gain access to a product or service through some other means—more conveniently, faster, and usually at lower cost. A new method of distribution also indicates that a competitor has unlocked and penetrated a barrier to entry that no longer shields the established firm.
i. Internet-Powered Methods:
A company can better scan its environment for new products ideas, service opportunities, and customer needs by developing a broad understanding of how alternative distribution systems evolve. Perhaps the single greatest change in distribution channels now affecting every industry and organization is the growing use of the Internet to provide online ordering, distribution, sales, logistics, billing, payment options, and even customer service.
In just the past five years, the Internet has forced existing firms in the real estate, financial services, office supplies, and airline industries to rethink how best to reconfigure their distribution and marketing systems to serve their customers. In one of the most extreme examples of “creative destruction,” Internet-based distribution models have spawned such powerful travel service companies as Orbitz.
ii. Cheaper Distribution Methods:
Firms in many other industries have faced threats from the arrival of new distribution methods and channels, even those that are not specifically Internet driven. Brokerage houses such as Merrill Lynch have been hurt by the growth of discount brokers. Discount brokers such as Fidelity Investments and Charles Schwab have eroded the once dominant position of established, full-service brokers by offering lower-cost commissions on stock and bond trades.
These discount brokers, in turn, face the problem of dealing with online brokerage firms, such as Ameritrade, E-Trade, TD Waterhouse, and other upstarts, that offer customers even lower commission rates, free research, and low account maintenance fees. In addition, because they tend to have small research departments (if any); their overhead costs are lower, and they can pass these savings on to consumers.
iii. Competing Channel Approaches:
In a similar vein, broadcast leaders such as Disney’s Capital Cities/ABC unit, Viacom’s CBS unit, and GE’s NBC Universal television unit now face even more intense threats from cable, pay-per-view, and digital video recorders (DVRs) that shrink the potential audience that broadcasters hope to reach. Unlike other industries where distribution has shown signs of consolidating around a new technology format, method, or channel approach, broadcasting is actually beginning to fragment in unanticipated ways.
Viewers have many more options to watch shows, learn about news events, and will soon have the technology to access digital video. Broadcasting will now have to compete with “Netcasting” as an alternative medium. Broadcasting will face renewed technological challenges in the next few years as the FCC compels networks to complete the transition from analog (over the airwave) transmission to digital television standards.
For the networks and affiliated television stations, this challenge means investing large sums into new technologies that will also change their fundamental business models and the types of programming they offer. As a result, NBC is rethinking its current approach and business model in the broadcasting industry to preempt some of these threats.
Department stores must now build on new “brick-and-click” business models to reach out to customers that want to shop from the convenience of their homes or elsewhere. Companies such as Target, Wal-Mart Stores, Sears, Home Depot, and Lowe’s must now offer customers the speed of the Internet and the convenience of easily returning items they do not want.
This means they must bridge two different retailing models (retail stores and websites) within the same firm—a difficult task that places enormous strain on their procurement, customer ordering, inventory, logistics, and billing systems.
(3) Economic Shifts:
Changes in the basic economic parameters or structure of an industry can dramatically shift the nature of competitive advantage. Consider the current difficulties facing Japanese automobile and electronics manufacturers, for example. Their highly advanced, quality-driven, Japan-based manufacturing facilities once enjoyed an enormous cost advantage over U.S. factories and competitors.
Rising wages of Japanese workers, a dramatic slowdown in the domestic economy, and severe fluctuations in the value of its currency (the yen) have combined to undermine many Japanese firms’ advantage substantially over the past decade. Now Japanese manufacturers are taking aggressive steps to reduce costs through such means as automation, outsourcing, reduced number of product variations, and shifting manufacturing to facilities outside of Japan, particularly through aggressive investments in Southeast Asia.
In fact, Japanese investment in this region has grown so dramatically that economic downturns and recessions in many Southeast Asian economies (for example, Indonesia, Thailand, Malaysia, Singapore) in the late 1990s affected the profitability of Japanese firms.
The same developments have strengthened the market and cost positions of General Motors, Ford, and DaimlerChrysler—both in the United States and in other export markets. Thus, sharp swings or changes in the exchange rate, domestic demand, commodity prices, oil prices, or even the receptivity of trade partners can dramatically alter the competitive advantage of firms across many industries.
(4) Changes in Related or Neighboring Industries:
Sometimes, shifts in one industry’s competitive environment may be precipitated or triggered by changes in a neighboring or related industry. A related industry is one that shares many of the same economic, technological, production, or market-based drivers or characteristics.
For example, consumer electronics and personal computers may be thought of as related, because these two industries often rely on the same type of mass market distribution channel, incorporate many of the same electronic components, and even manufacture key components or peripherals in the same factories.
Increasingly, the telephone, Internet, and computer- networking industries are becoming more related since they share the same basic telecommunications architecture and are growing more linked together through the use of common information transfer technologies (for example, routers, bridges, and packet switches).
Even the cable TV business is becoming more similar to the telecommunications industry as well. Cable providers are now jockeying with phone companies to provide telephone and other Internet services.
(5) Changes in Government Regulation:
Actions taken by the government can markedly shift or threaten the sources of advantage needed to compete in an industry. For example, the U.S. government’s imposition of high tariffs on Japanese motorcycle imports in the 1970s damaged the competitive position of Japanese manufacturers such as Kawasaki, Honda, and Yamaha.
More recently, quotas imposed in the early 1990s on Japanese auto imports, especially minivans, threatened Honda, Toyota, and Nissan, forcing them to increase U.S. manufacturing capacity more rapidly to remain competitive in this country. Likewise, the Clean Air Act of 1990 threatened to render obsolete many U.S. oil refinery operations because of the extremely high costs required to meet new regulations.
The proposed global Kyoto Accord that committed national signatories to reduce their emissions and use of carbon-based fuels is a regulation of such magnitude that it is expected to cause considerable financial distress to companies in many industries; this is one reason why the United States has not been a signatory to this agreement.
Changes in antitrust regulations can alter the competitive dynamics in an industry. For example, the recent sparring and court battles between Microsoft and the U.S. Department of Justice and the European Union have reduced Microsoft’s dominance over the PC software industry, especially as it relates to Internet search engines.
This agreement makes it easier for personal computer manufacturers to use Internet search engines software made by other firms. Moreover, PC makers are not required to pay as much in royalties to Microsoft as in the past. Even though the U.S. government has not sought to break up Microsoft into a series of smaller companies, European regulators were considering more stringent and punitive measures in late 2004 to constrain Microsoft’s market power in Europe.
These government actions will likely stimulate the interest of competing software firms to design new forms of PC operating systems. By early 2005, Microsoft agreed to comply with the EU’s requirement that the company separate its Media Player from its Windows operating system.
Types of Competitive Advantage
The competitive advantage can be defined as the specific advantage possess by the organization over its competitors exists in the external environment, that helps the organization to increase the sales or profit margins and to retain maximum number of customers.
It helps in differentiating the organization from the competitors and results in providing value to the organization as well as to the stakeholders. The organizations should focus on sustaining the competitive advantage to make it difficult for the competitors to take the advantage of the market.
According to Michael Porter, there are two main types of competitive advantage:
1. Cost Advantage
2. Differentiation advantage.
Let us discuss the two types of competitive advantage:
1. Cost Advantage – Ability to provide the similar benefits of product or services at lower cost compared to the competitors in the market to increase the profit margins.
2. Differentiation Advantage – It states that the organization offers the product or services to the customers with enhanced features and benefits than those of the competitors.
Thus, the competitive advantage helps the organization to provide the valued product to the customers as well as to increase its profit margins. The competitive advantage gained by the organization needs to be sustained in the market to cope up with the competitors.
There are two features to determine its sustainability in the market:
i. Durability – It refers to the period of existence of the organizations capability or core competency in the market. The organization needs to focus on continuous research and development processes results in setting the barrier for competitors to come up with innovations.
ii. Imitability – It states that it is the process of replicating the organizations resources or core competency by the competitors. The competitors can imitate core competency by hiring the employees of that organization, by reverse engineering.
4 Major Steps for Sustaining Competitive Advantage
There are four steps to implement the step-by-step approach to sustaining competitive advantage:
1. Disrupt the status quo – A company should identify new opportunities to meet customer needs, thereby shifting the basis of competition.
2. Create a temporary advantage – The temporary advantage should be based on improved knowledge of customer’s needs, innovative application of technology, and an attempt to define the future basis of customer satisfaction.
3. Seize the initiative – Move aggressively and rapidly, forcing competitors to play catch up, taking a provocative approach while leaving competitors to be reactive.
4. Sustain the momentum – Continue to develop new sources of advantage; do not wait for competitors to catch up; stay one step ahead.
As industries move through their life-cycle, the structure of the industry changes and competitive strategies also change. Three stages of the industry life-cycle are relevant to the study of competitive dynamics – (i) new emerging industries, (ii) larger growth-oriented industries, and (iii) mature industries.
As an industry emerges, in its earliest stage it is characterised by slow growth. The key task is to discover and exploit unserved market niches and competitive uncertainty. As the growth rate increases, the industry enters a rapid growth phase, the key task is to take growth-oriented actions. In the last phase, growth slows as the industry enters the mature phase, the key task is to exploit the company’s market position by taking market power actions.
New, emerging industries are characterised by companies fighting to establish a niche of market dominance. This means that there is a strong competitive rivalry for customer loyalty as companies attempt to establish product-quality or advantageous relationships with suppliers to establish a competitive advantage that can be sustained.
Larger growth-oriented industries are made up of companies that have survived the emerging phase. These companies are well established in the industry. As a result, there is decrease in the variety of competitive strategies. They implement similar strategies and directly compete with each other and most companies in the industry are generally less profitable.
Mature industries are those where growth has slowed down. Here emphasis is placed on producing fewer products, only those that are profitable.
Tools and Techniques and Competitive Advantage
The experts have come out with certain tools and techniques which are explained as under:
1. Strategic Advantage Profile:
Strategic advantage profile (SAP) is a technique of analysing the strengths and weaknesses of a company by preparing the concise and critical picture of different capability factors. It is quite relevant to know what is strategic advantage? A strategic or competitive advantage is the essence of a strategy.
It is the relative strength of a company over its competitor. Relative strengths are significant because internal weaknesses or inefficiencies can usually be tolerated, at least for a time. By contrast, deterioration of a company’s position relative to that of its competitor may endanger the very existence of the enterprise.
In effect, it will allow the company profitability to be controlled by its competitors, a situation in which sound management of the enterprise will no longer be possible as expressed by Mr. Kenichi Ohmae.
This competitive advantage or strategic advantage “could consist of superior quality, superior service or technical assistance, a strong brand name, a unique or innovative product or service, or the status of being a full-time producer with wide distribution. Such advantages result from the strength of superior skills or resources, lower costs of manufacturing or distributions, lower cost of capital, design expertise, good trade relationships, and fast and flexible response capabilities and so on” say Professons Jauh and Gleuck.
To recap, it is already found that there are good many factors that are at constant work that influence the strategic management process. These are strengths and weaknesses. It was followed by an analysis of these factors under different areas of operations.
In evolution analysis there was sub-division of factors limped by the stages of PLC from introduction to decline. At times too many factors add to confusion. S.A.P. analysis is an attempt to identify only those core factors which are vital having decisive impact on strategic management.
S.A.P. technique as a short listing for in depth analysis serves two purposes:
i. It provides the focus on key factors instead of attempting on elaborate diagnosis of less important factors
ii. It provides a means of analysing strengths and weaknesses on the self as compared to rivals.
2. Balanced Score Card:
Balanced score card is yet another very useful tool in assessing the internal strengths and weaknesses. It is an attempt to examine the firm’s strengths and weaknesses from different angles in place of focusing on a narrow club of criteria.
Though these perspectives can be used individually yet using them in combination offers deeper insights for a strategy formulation. The balanced scorecard is balanced in that it does not under weigh nor overweigh. It balances all the areas under consideration.
Generally, an organisation has the objective of maximising shareholders value and predefined goal of generating a decent return on investment, as it is operating in competitive conditions. Hence, its performance should be judged from the financial angle by studying its profitability.
However, good profitability is the final outcome of different interdependent processes, to generate much higher return for the shareholders, the firm should have competitive advantage that depends up on its ability to provide certain value to the customers. These values can be provided by offering them better, cheaper and quicker products and services.
This tough task warrants development of operations that supports product development and responsiveness to fulfil orders. To bring into play quality operations, company needs a sound organisation that guarantees creativity, skill and learning. That is, the financial scoreboard is dependent upon many dimensions which contribute to the strength and success of the company.
It calls for drilling deeper to those perspectives to have balanced insight of the firm’s internal analysis. That is why, there is need for considering these four perspectives of the balanced score card namely, financial, customer, operations and organisational-
While evaluating the performance of a company from the financial angle, its return on investment, economic value added or other profitability index are considered. Return on investment is the ratio of profit and capital employed. Here, the profit may be before or after tax depending on the purpose of calculation and the capital employed is both owned and borrowed.
Economic value added is the excess of net profit after tax over the total cost of capital. It speaks of the maximum rate of return which a source of finance say equity, preference shares, and debentures—should generate to justify its use in the organisation. To gauge the financial health of the organisation, variety of ratios such as profitability, liquidity, leverage activity and the like are calculated.
Financial performance of a company rests on superior performance from the customers perspective in providing benefits to them in the form of cheaper better more and faster products or services. In evaluating the firm’s strengths and weaknesses from the customer’s angle, its capacity to provide any of the three values in terms of low price, product differentiation and quick response is considered.
A company’s ability to satisfy customer’s perspective is dependent upon company’s operations concerned with product development, demand management order fulfilment and the like. In order to evaluate company’s strength and weakness from the operational angle, efficiency and effectiveness of cost processes are considered. The scope for improvement and change- warranted for producing greater customer value is also considered.
The efficiency and effectiveness of firm’s operations in meeting customers expectations are dependent upon the skills, learning and creativity of the organisation to assess the company’s strengths and weaknesses from the angle of organisation, company’s ability to learn and change rapidly, organisational leadership, organisational environment and like are considered.
This tool of balanced score card provides certain advantages the company using it. First, it evaluates the strengths and weaknesses of the firm by providing equal and balanced weight to different factors.
Secondly, it reflects the idea of a hierarchy of intent with elements linked in a series of means- ends relationship. Thirdly, it cites explicitly the competitive advantage as the core element for the success of a strategy.
3. Financial Analysis:
This is another technique of internal analysis. Financial analysis is very popular method used by all those involved in investment decisions like entrepreneurs, intrapreneurs, managers, shareholders, financiers and so on. The prime objective of this analysis is to assess the financial health of the organisations.
Though it is useful in thrashing out the financial health of the unit, it provides a post-mortem analysis. In spite of this serious limitation, this financial analysis is stronger so long as managers are able to make necessary changes and accounting standards are respected.
For instance, when one compares these findings with the rivals, due allowance is given to the differing factors of accounting procedures, changes in values of assets and liabilities to make the findings more comparable and acceptable. The financial analysis has most commonly accepted methods namely, ratio analysis, Du-Pont financial analysis, analysis of sources and uses of funds. It pays to touch these in brief.
3. Material Management Tasks:
Material management or Logistics management is the supporting activity in the value chain process. It is to do with purchasing and inventory control, targets at uninterrupted supply, quality control and control of material costs. Let us see how these are achieved-
i. Uninterrupted Supply:
Business is an on-going activity. Manufacturing and therefore, purchasing activities are no exception to this. There is dire need for continuous availability of all types of materials in the works or plant so that production—the conversion process goes on and on.
That is, it is not interrupted for the shortage or delay of materials. That is the minimum— the bare-minimum quantity of each material must be kept in store to have smooth gliding. It is sure that non-availability or insufficient availability of a particular material might make other production facilities idle.
ii. Quality Control:
The materials supplied are not only in just quantity required because, quality of material is more important than quantity. Quality materials are definitely costlier but give better yield, lesser wastages, scrap and other hidden costs. What is more important is the quality of final product which is conditioned by the quality of inputs.
Hence, “cheap and best” is wrong. What is right is “cheap is costly”. It is nothing but quality control. Quality control improves the performance reliability leading to lowering scraps and reworking costs. It leads to increased share in market share and productivity finally resulting in economies of scale. Lower costs, higher will be the margin. Being quality products, the company can charge premium price.
iii. Controlling Material Costs:
Material cost is one of the highest. One study conducted in India by materials management shows out 100 paise, material cost is 50 paise, wages and salaries 27.50 paise, depreciation and depletion 4.50 paise, 6.55 paise goes to tax and interest, 3.95 goes to state and local and foreign taxes, leaving 7.50 paise at profit after tax.
Material cost expressed as a percentage of total cost of production, varies between 60 to 65 per cent. Ever if 10 per cent of this is reduced, it is much achievement. It is only the efficient and effective materials management that brings down the cost—both direct and indirect or open and hidden. One should go in for JIT instead of traditional techniques of material control. JIT has proved beyond doubles its superiority.
It was Kodak in 1970s that switch to JIT from tradition, meant a change of inventory reduce of just 5 per cent (moved down from 23.30% to 18.30%) which meant annual savings of 600 million dollars. Again 1980’s Ford switched over to JIT discarding old methods that brought fortune to the company a single time saving of 3 million dollars.
4. Research and Development:
Those companies which are well ahead prove themselves the “early birds” that get the worms before anybody else. Research and developmental activities bring to light new ideas, new products, new processes, new methods which all lead to future success. The companies like 3M, Du Pont, Micro-soft, Pfizer, and Sony are known for their grit and hit success in research and development.
In India, Reliance Corporation, Novartis (erstwhile Ciba Gaigy), Glindia (erst- while-Glaxo) Larsen and Tubro, Maruti Udyog Ltd., Godrej, Hindustan Lever Ltd. are a few companies are spending much on R and D. It is surprising and shocking that India spends the lowest on research and development, as compared to other nations, as a percentage of national income.
A Company’s research and development strategy comprises of:
i. Product Innovation
ii. Product Development and
iii. Process Innovation.
i. Product Innovation:
This calls for fundamental or basic research and bringing into play the results in the development of new products having a great promise of success. This fundamental research is costly in terms of treasure, time and talent and, therefore, only big companies can afford to undertake such research.
ii. Product Development:
Product development is not necessarily mean introduction of entirely a new product but presenting an improved product which is already existing. Comparatively this strategy is more risk free. This is followed by most of the company’s irrespective size.
iii. Process Innovations:
Unlike product innovation and product development strategies, the process innovation aims at improving the production processes thereby gaining improvement in quality and reduction in costs. Those companies which are engaged in total quality management and bench marking, undertake process innovation.
It is quite natural that each product has its own Life cycle in terms of sales as a human being has in terms of age. Embryonic stage marks the introduction of product and sales are picking up slowly. In growth and shake out stages sales pick up very fast. In maturity stage, there is rise in sales at low pace and in decline period sales fall at higher pace.
The research and development strategy is affected by the industry life cycle. That is, the rate of product innovation is the greatest in the embryonic and early stages of development. At maturity and decline, it decreases at accelerating rate. However, the rate of product development and process innovation increase with advancement in the industry life cycle.
5. Human Resources:
Human resources at the command of the organisation are of paramount significance. An organisation which has a highly talented, committed, dedicated and motivated staff is the richest asset. Just like knowledge power, the human resources are the only assets not subject to depreciation but appreciates over the period of time.
In the present day business conditions, it is the people who compete than the firm. It is because management today is management of people, the agent of company productivity, profitability growth and prosperity.
Now the managements have realised and are busy in keeping work-force happy and gay by improving work environment, empowering them and seeing that they are engaged in learning and creative activities.
In 1992 the bolt from the blue hit Indian economy when government had to go in for liberalised industrial policy to join the new era of globalisation. It meant end of “Licence Raj” or “Controlled Raj”. Now, Indian corporate world is exposed to world class technologies and cheaper foreign capital. So far labour class was treated inferior to capital.
Now the situation has changed where ‘man-power’ is considered superior to capital and other physical resources. If one goes through the vision and mission statements, one is able to realise that top priority is given to human resource management. It is seen that annual reports singing the song in favour of man power capability and firm’s achievement.
As a result, the corporate world of each and every company all over the world are encouraging new ideas and approaches of which “quality circles” and “learning organisation” are of paramount importance. A ‘Quality Circle’ (QC) is a group of four to twelve volunteers drawn from different areas of a function.
They have scheduled weekly meetings to discuss the ways and means of improving quality, efficiency and the work environment and to suggest them to the top management. Learning organisation (LO) is the brain baby of Peter Senge who brought to light his book “Fifth Discipline”.
The fundamental five disciplines advocated by Mr. Peter Singe to be practiced by people in organisation are “mental models”, “personal mastery systems”, “thinking”, “shared vision” and “team learning”.
Mr. Peter Senge strongly advocates of putting away old ways of thinking (mental models), learn to be open with others (personal mastery), understand how their firm really works (systems thinking) to get together to create a common plan (shared vision), and then get together to and work towards achieving that plan (team learning). That implies, the so called Quality Circles, mass customisation, business process re-engineering hardly have any meaning unless the present staff is ready to learn coupled with change in the outlook.
6. Information Technology:
Information technology plays a constructive role in bringing both efficiency and productivity in today’s world of cut-throat competition. A local company can be global player which is the need of hour by welcoming latest information technology. The advanced information technology system that strengthens the business, respond quickly and perform well, has a unique competitive edge over others.
Latest technology brings in the benefits of quality improvement, cost reduction and quantity multiplication. In other Words, it makes available products and services at least cost, of best quality and large quantities. Similarly, the marketing activities can be improved by having internet marketing and electronic marketing research and human resource activity in enterprise resource planning which is popularly known as ERP.
Michael E. Porter and V.E. Miller recommend three steps to create distinct competence in information technology system and exploit the information based on competitive advantages.
i. Having access to information intensity
ii. Identification of information technology to create a competitive advantage and
iii. Developing a plan for taking advantage of information technology.
7. Financial Resources:
Finance or the financial health of a firm can be its strength or weakness. The financial health is the very base of its distinct competencies and strategies. The financial resources cover the variables like cash-flow, credit worthiness, liquidity, tax planning and the like which are briefly elucidated.
i. Cash Flow Position:
Cash is the oil of business lamp. A positive cash-inflow makes the task of new investments easy and economical as it need not borrow at high rates and conditions attached. The opposite is true. Adequate and regular cash inflow rests or sales and production regulated by industry life cycle.
During the introduction and the early growth stage there is need for higher cash requirements to finance the research and development activities, bearing the marketing overheads to create and expand the demand and, therefore, to strengthen the increased production capacity. During growth and expansion stages and maturity, the company is able to produce sufficient cash inflow to pay and earn surplus after meeting all the overheads.
ii. Credit Worthiness:
Credit worthiness is credit status. The persons or business units who have trade or business relations with the firm have a definite image of it. A firm which is regular in meeting the obligations of its suppliers and bankers, long term lenders, has high credit rating. It is a goodwill created by good deals by it. High rating is a source of strength or it is pond of weakness, otherwise.
Liquidity is the ability of the firm to meet out its current liabilities through effective dealing in creating and disposing current assets. Any company which has liquidity can take advantage of good many opportunities. The financial experts say that a company has a good liquidity position when its current assets are double than the current liabilities. This is called as current ratio which is 2:1 as standard.
Another ratio is quick ratio or acid test ratio where the standard is 1:1 that is the quick assets are equal to quick liabilities. This is a source of strength. Coupled with credit worthiness, say a company having total investment is long term and short-term assets Rs.50 lakhs but is not in a position to pay electronically bill is a company not having liquidity.
One thing should be noted that if the company thinks of only liquidity, profitability is affected badly. Therefore, liquidity is a relative term where it should neither more nor less, but what is just based on the business variables faced by the firm.
iv. Tax Planning:
Tax planning is a shrewd game of paying the least tax under the frame-work of the laws. That is, taking advantage of all the concessions by the law and yet to pay the minimum tax. It involves planning of savings income and expenses and investments. Tax planning is the heart of financial planning and, hence, aims at maximisation of shareholders wealth.
A wise company takes maximum benefits being under the provisions of the Tax Act. Thus, a company can change its fortune by establishing industrial units in Free Trade Zones (FTB), Export Processing Trade Zones (EPTZ), hundred per cent Export oriented units (EOUs), entering backward areas, increasing export earnings.
A company can also take advantage of least tax by- (i) charging higher rates of depreciation (ii) capitalising interest for delayed projects (iii) merger with loss-making or suffering units (iv) entering into partnership for export earnings (v) buying depreciation through leasing.
Porter’s Model of Competitive Advantage (With 3 Generic Strategies)
The environment within which many firms operate is characterised by the need to achieve competitive advantage. Competitive advantage is anything, which gives one organisation an edge over its rival.
A competitive strategy is intended to achieve some form of competitive advantage for the firm. Competitive strategy means taking offensive or defensive actions to create a defendable position in an industry, to cope successfully with competitive forces and thereby yield a superior return on investment for the firm. Firms have discovered many different approaches to this end, and the best strategy for a given firm is ultimately a unique construction reflecting its particular circumstances.
Porter suggests that there are three generic strategies for competitive advantage:
(a) Cost leadership – It become the lowest cost producer for the market as a whole.
(b) Differentiation – It is the exploitation off a product or service which is unique in the market as a whole.
(c) Focus – It depends on segmentation and involves pursuing, within the segment only, a strategy of cost leadership or differentiation.
(a) Cost Leadership:
A cost leadership strategy seeks to achieve the position of lowest cost producer in the industry. The competitive advantage that results from producing the lowest cost is that the manufacturer can compete on price with every other producer in the industry and can earn the highest unit profits. Bajaj Auto Limited and Telco appear to be following this strategy in India.
A differentiation strategy attempts to make the product unique in terms of attributes which are derivable to the customer, including customer service. The assumption is that competitive advantage can be gained through the particular characteristics of a firm’s products will build up and customers are not so price sensitive. The firm can then sell its products at prices that are higher than the low-cost producers. Bata Shoe, Otis Elevators, Cini fans are some examples where this strategy seems to be dominant guiding force.
A focus strategy is based on segmenting the market and targeting particular segments instead of trying to serve the entire market with a single product. It has been described as a ‘pistol’ approach as distinct from a ‘shotgun’ approach. The competitive advantage which results is that the firm is thus able to serve its narrow strategic target more effectively and efficiently than competitors who are more broadly.
As a result the firm achieve either differentiation from better meeting the needs of the particular target, or lower cost in serving this target, or both. Genteel, a liquid detergent for expensive clothes and Ponds talcum powder are some examples for this strategy.
Competitive scope refers to whether the organisation chooses to target the entire market, or whether it chooses to concentrate on a more narrowly defined segment. Competitive advantage refers to the route taken to serve the market or segment.
i. A firm pursuing a cost leadership strategy aims to the lowest cost producer in the market as a whole or, in the case of a cost focus strategy, in a segment, cost leader cannot undercut on price, and can enjoy higher profitability.
ii. Not every firm can be a cost leader and many choose to use differentiation, which is the exploitation of unique aspect or features of the product in the market as a whole or in a segment of it.
Porter argues that firms must choose between these strategies and a firm that may stuck in the middle is doomed.
i. The choice of generic strategy is likely to be a long-term one. A firm cannot realistically pursue cost leadership one year and differentiation the next.
ii. Also, most firms employ some form of market segmentation, and the model cannot identify which segments the firm should pursue if it follows a focus strategy.
iii. The model can highlight confusions in the firm’s existing strategy, if it is applied to the current competitive situation of the firm.
Distinctive Competencies, Resources and Capabilities
A distinctive competency refers to unique strength and opportunities that allows a business enterprise to achieve superior efficiency, quality and innovation.
The impact of efficiency, quality, customer responsiveness, and innovation on-unit costs and price. These are indicated the distinctive competences, and capabilities strengths of the business enterprise. A business enterprise with distinctive competency can charge a premium price for its products and service or achieve substantially lower costs it can earn a profit rate substantially above the industry average.
The distinctive competencies of a business enterprise arise from two complementary sources are as listed below:
Resources refer to the financial, physical, human, technological, and organizational resources of the Company. These can be divided into two categories.
They are as outlined:
i. Tangible resources
ii. Intangible resources
Tangible resource includes:
Intangible resource includes:
a. Brand name
Tangible and intangible resource is distinctive competency of business enterprise. Resources must be both unique and valuable.
Capabilities refer to an enterprise’s skill-coordinating its resource and putting them to productive use. These skills reside in an enterprise’s routine i.e., in the way an enterprise makes dictions by managers, its internal process in order to achieve enterprise objectives. More generally enterprise’s capabilities are the product of its organizational structures and control system.
These specify how and where decisions are made within an enterprise, the kind of behaviors the enterprise rewards, and the business enterprises cultural norms and values. It is important to keep in mind that capabilities are tangible and intangible resource. Team and individuals interact, cooperate, and make dictions within the context of an organization that is the major capabilities of business firm.
The distinction between resources and capabilities is critical to understand what generates a distinctive competency. A firm may have unique and valuable resources, but unless it has the capability to use those resources effectively then only successful in business otherwise it may not be able to create or sustain a distinctive competency.
The relationship between distinctive competencies and the building blocks of competitive advantage, how it matches the resources and capabilities is important to build a competitive advantage. And how it matches the resources and capabilities is important to build a competitive advantage.
It is also important to recognize that a firm may not need unique and valuable resources to establish a distinctive competency so establish a distinctive competency so long as it has capabilities that no competitor possesses.
Ultimate for business firm to have distinctive competency it must possess two unique factors as listed below:
i. A unique and valuable resource and the capabilities skills necessary to extract that resource or
ii. A unique capability to manage common resources
A unique capability competency is strongest when it possesses both unique and valuable resources and unique capabilities to manage those resources.
Strategy and Competitive Advantage:
The primary objective of strategy is to achieve a competitive advantage. Attaining this goal demands a two prolonged effort. A company needs to pursue strategies that build on its existing resources and capabilities, as well as strategies that build additional resources and capabilities and enhance the company’s long-run competitive position.
It is important to note that strategist has designed all types of strategies such as functional level strategies, business level strategies, corporate level strategies, and international strategies or, typically some combination of them.
Core Competency and Competitive Advantage
A competency is defined as “any knowledge, skill, set of actions, or thought pattern that distinguishes reliably between superior and average performed i.e. a competency is what superior performers do more and with better results than average performers on the job.”
Competency maybe categorized as core and non-core depending on the nature of capabilities.
Core competencies are seen as an organization’s primary source of competitive advantage, and the areas that an organization should focus its resources and attention. Core competencies are to be protected and nurtured, and all non-core functions should be outsourced. Core competencies help one to recognize the opportunities of the new facets of creating values which are different for every organization.
‘Competitive advantage’ fox an organization means discovering the needs of the customers and then satisfying and even exceeding their expectations for the purpose of achieving the goals of the organization. Core competencies are resources or capabilities that can serve as a source of competitive advantage, strategic competitiveness and ability to earn above average returns. Competitive advantage relates the company’s activities to those of its competitors. Competitive advantage does not mean just matching or surpassing what our competitors are doing.
As a result of technological development and highly competitive environment, the organizations are compelled to work in an environment wherein the customers are having easy access to goods and services and they are in a position to identify and acquire the best of what they want, at reasonable prices immaterial of the goods, place of production in the world. Cost function plays a vital role among all the functions of an organization to ensure success and organizational growth in the environment of global competition.
According to Michael E. Porter, competitive advantage potential offer the strongest basis for a strategic offensive.
These competitive advantage potential include:
(a) Developing a lower-cost product design.
(b) Making changes in production operations that lower costs and/or enhance differentiation.
(c) Developing product features that deliver superior performance or lower user costs.
(d) Giving customers more responsive post-sale service and support.
(e) Escalating the marketing effort in an under-marketed industry.
(f) Pioneering a new distribution channel.
(g) Eliminating wholesalers/distributors/dealers and selling direct to the ultimate consumers/users.
The identification of core competence of a business firm basically aims to find new strategies to grow and improve a firm’s business. A company’s core competence is defined by that set of products, customer segments, processes and technologies in which one can build the greatest competitive edge. Investigating into core competencies can lead to better strategies.
Core competence means resources and capabilities that serve as a source of competitive advantage for a firm over its competitors. A core business is an activity that an organization does particularly in comparison to its competitors. A core competency is something a company can do exceedingly well. It is its key strength. When these competencies or capabilities are superior to those of its competitors, they are called ‘distinctive competencies’.
According to Prahalad and Hamel, the firms must operate only in areas in which it has core competency.
It must market only those products/services which:
(a) Customers perceive as of some distinctive value;
(b) Uniqueness (should be superior to competitors’ capabilities); and
(c) Extendable (something to be used to develop new-products or enter new markets.
A core competence not only integrates the technology but it also organizes workforce and delivery of value. Core competence includes interest, involvement and commitment to working across the organization.
A company can gain access to distinctive competence through:
(a) Asset endowment such as a key patent
(b) Acquisition from someone else; and
(c) Sharing with other business unit.
Some of the ways in which a firm can effectively employ its various ‘distinctive’ or core competencies’ us follows:
To identify a core competence, Prahlad and Hamel prescribe three tests-
(a) It should be able to provide potential access to a wide variety of markets;
(b) It should make a significant contribution to the perceived customer of the end product; and
(c) It should be difficult for the competitors to imitate.
Having identified core business, the analysis requires the following steps:
Step 1 – Define the core clearly, it means narrowing our focus.
Step 2 – Detail those activities that lie outside the core. Step 3 Evaluate core business markets in depth.
Step 4 – Deliver excellence in the operation of the core business operations.
Step 5 – Use value chain analysis, to find new strategies that deepen our focus on the core business.
Step 6 – Explore financial performance potential.
Step 7 – Prioritize most promising strategies and estimate the impact of each.
Step 8 – Contemplate the disinvestment of activities that lie outside the core.
Step 9 – Penetrate the market deeply and finally.
Step 10 – Look to adjacent businesses.
The resources and capabilities lead to competitive advantage when they are:
(a) Valuable – Allow the firm to exploit opportunities or neutralize the threats.
(b) Rare – Possessed by few, if any, current or potential competitors.
(c) Cost to imitate – when other firms either cannot obtain them or must obtain them at much higher cost.
(d) Non-substitutable – The firm must be organized appropriately to obtain the full benefits of the resources in order to realize the competitive advantage.
Differences exist from one enterprise to another within the same industry. Since a given enterprise’s profitability will be influenced by the profitability of the industry it is in. It is also significant because the choice of an industry determines an enterprise’s competitors. Prices, costs and investment influence on industry’s profitability. Prices are influenced by the bargaining power of consumers and the threat of substitutes.
Costs are influenced by the bargaining power of suppliers and the rivalry among competitors. The need to defend a business unit against aggressive competition and the opportunity for initiating offence to build its performance can both exist at the same time, because each business stands in a different strategic position against different competitors, other things being equal, competitors with a cost advantage are threatening and those without such an advantage are weaker.
Market share is of a major importance in defining a company’s strategic position and appears to be of intrinsic value in itself, possibly as a determinant of relative cost. Knowledge of relative costs are an important aspect of company’s competitive position. Investment is influenced by the threat of entrants and other factors including rivalry and consumer’s requirements.
The relative strength of each competitive force tends to be a function of industry structure. This can change over a period of time, with the result that the relative strength of competitive forces will also change, hence the industry’s profitability.
Any change by one competitor is likely to bring a response from others, and so on, with the result that the final outcome in terms of impact on an industry’s profitability maybe extremely difficult to predict. The basic way of an enterprise might seek to achieve above average returns into the long-term is via sustainable competitive advantage.
This can be achieved by the following generic strategies:
(i) Cost leadership where by the enterprise aims to be the lowest cost producer within its industry.
(ii) Differentiation through which the enterprise seeks some unique dimension in its product/service that is valued by consumers and which can command premium price.
(iii) Focus which has variants cost focus and differentiation focus.
Any enterprise seeking a sustainable competitive advantage must select one of the above generic strategies.
In so far as competitive advantage is cost based we need to recall the conventional cost analysis which:
(a) Concentrates on manufacturing activities.
(b) Ignores the impact of other activities.
(c) Overlooks linkages among activities by analyzing each activity in a discrete way.
(d) Fails to assess the cost positions of competitors in relative terms.
(e) Relies too heavily on existing accounting systems.
In contrast, strategic cost analysis focuses on the following:
(1) Determinants of relative cost position.
(2) Ways in which a firm might secure a sustainable cost advantage.
(3) Costs of differentiation.