A competitive advantage could simply be defined as the advantage or ability a firm has over its rivals in the industry; or the ability a firm has to outperform its industry rivals.
A firm is said to have a competitive advantage when it has the capabilities or means to push out its rivals in striving for the favour of customers. This applies internationally or locally as well as to both services and products.Thus, a sustainable competitive advantage is the persistence the firm applies despite efforts by competitors or potential entrants to copy or overtake it. Sustainability therefore, requires that strategic assets are not easily available to others and imperfectly mobile. This will be considered later.
Porter (1990) states that, though not all nations are in the forefront of competition, the home nation which shapes the competitive advantage is the starting point for a firm’s competitive advantage and also from which it must be sustained. However, in whatever field of endeavor, competitive advantage creation must be a choice of management and it must really fit to achieve results. It must be noted here that competitive advantage can normally be traced to one of three roots:
Superior resources, superior skills and superior positions.
Competitive strategy is one of the ways in which a business relates to its environment by competing with other firms who are also trying to adapt within the operating environment. It is with this aspect- the competitive strategy which if appropriately chosen and implemented appropriately give the firm a competitive advantage over its rivals.
It must be noted here that the prescriptive view of strategic planning emphasizes the importance of the organizational environment as a source of threats and opportunities and the need for effective responses by the organization if survival was to be assured and the success achieved. The response is later formulated into plan which formulates major decisions about entry into new markets or development of new products and services guided by set goals. Under the influence of Porter’s writings in the 1980s the emphasis shifted from the plan to the selection of an appropriate generic strategy to position the business unit in its competitive environment. Porter, arguing that the environment poses threats and brings opportunities than with trends and events, suggested that the environment could be analyzed using the five forces analysis to identify the issues which affect the level of competition in an industry; after which a strategy is formulated to combat it.
The resultant strategy, which he referred to as generic, distinguished some strategic options the firm can possess:
Cost leadership: the business could position itself as offering a low cost product as a standard price i.e. cost leadership strategy. Costs are reduced at every element of the value chain. Producers can exploit the benefits of a bigger margin than the competitors. Toyota is a good example of an organization that produces quality cars at low price coupled with a brand and marketing skills to use a premium pricing policy.
It could offer a product that was different from that offered by rivals. I.e. differentiation. This allows companies to make prices less sensitive and focus on value that generates a comparatively higher price and a better margin. Even though additional costs will be incurred pursuing differentiation, it is possible that this will be offset by the increased revenue generated by the sales.
By focusing on a small but well-defined part of the market, for instance a particular buying group or product area or geographical area. Also known as niche, this is usually suitable for a small company i.e. focus strategy.
Generic Competitive strategy, usually used after competitive analysis or as a response to competitors advantage, is defined as the basis on which a strategic business unit (SBU) might achieve or counter competitive advantage in its market. (Johnson and Scholes, 5th Edition.)
Building on Porter’s (1980) generic competitive strategies, Bowman et al argues that organizations achieve competitive advantage by providing their customers with what they want, or need better or more effectively than competitors and making it difficult for competitors to imitate. This was later developed into five generic strategies which would be used in this discussion. Thus, the generic competitive strategies are the fundamental activities on which an SBU seeks to achieve a lasting advantageous position in its environment and gaining the favor of stakeholders by meeting the expectations of buyers, users or other stakeholders
The following are Bowman’s five-generic competitive strategy options and examples of organizations who applied them to gain competitive advantage: no frills strategy, low price strategy, hybrid strategy, focused differentiation strategy and added value or differentiation strategy.
In brief, a no frills strategy combines a low price, low perceived added value and targets a price-sensitive market. No frills strategy is now a popular strategy with low-cos airlines Easy Jet and Ryanair seeking to enter the airline industry to compete with likes of Virgin and is a determinant in the market. This, therefore, affords the firm the needed competitive edge over its competitors who charge higher price. This strategy is a success because there could possibly be a segment of the market that overlooks the low quality of the commodity provided it fulfills the same purpose.
To obtain the competitive advantage using no fills strategy revenues must increase and the product must really be price-sensitive. Easy Jet frills strategy seems to be going on well as a result of the cost savings techniques they are using. For instance no ticketing, no ticket agents, no in-flight food or drink for customers as well as the short-haul flight. Now, almost all supermarkets in the UK use no frills strategy by introducing own brands the price of which have been reduced to attract customers in order to gain a competitive advantage.
The next generic strategy is the low price strategy. This strategy pursues a lower price than pertains in the market whilst trying to maintain similar value of product or service as those offered by competitor alike. There is the potential of price war among competitors and in the long run consumers are likely to lose as the firms might not be able to sustain the lower-price-good-value strategy. Notwithstanding the price war and low margins, there are some suggested ways in which a low-priced strategy can bring about a firms competitive advantage. The market segment must be low-price sensitive, and also the SBU has a cost advantage over its competitors.
However, in practice, the lower price strategy usually brought about by lowering operational cost alone does not give the firm the competitive advantage if the firm is not able to sustain it in the long-term as there are now more firms entering the market because of low or no entry barriers like small capital requirements and also how efficient the staff might be.
Hybrid competitive strategy seeks to achieve differentiation and a price lower than that of competitors simultaneously. This is not an easy strategy to pursue because to differentiate a product or service involves some money and increases cost the very thing the low price seeks to reduce. This strategy is fit for the DIY industry as the likes of Robert Dyas are not able to stand the competition. The success of this is dependent on providing unique more efficient products or services to consumers whilst at the same time operating at a lower cost to be able to lower its price below the industry level. The success of this strategy could further be enhanced if the firm has economies of scale and can increase volume of sales more than its competitors, thereby, reducing its base cost as a result. Asda’s George brand is an example of a generic hybrid strategy in a SBU.
Another strategy is differentiation strategy. This seeks to provide products or services completely different from those of its competitors by adding features valued by consumers. The main objective of using this is to either maintain the market share or increase market share relative to its competitors. A clear example of this is aircraft manufacturer Airbus’s wider fuselages, cockpits designed for use in more than one aircraft and electrical rather than mechanical flight controls.
Those features have helped Airbus win customers like New York-based Jet blue; although Jet Blue is staffed with former employees from Boeing. (Fortune, Europe Edition 22 November 17th 2003; pp34) This strategy could be used to achieve a competitive advantage which is its ultimate aim by the firm investing more in R&D, unique designs and features. The marketing-based approaches in terms of good marketing communication (example advertising the products or services) as well as the brand power to win the loyalty of consumers. (Example Airbus)
The fifth generic competitive strategy is the focused differentiation strategy which seeks to provide high perceived value; justifying a substantial price premium usually to a selected market, segment. It is usually adopted to counter or to compete others in seemingly similar segment. This could therefore be argued that focused differentiation is just an extension of any of the four strategies so far considered depending on the competitors in this new segment which is usually middle to high income earners. A convincing example is the introduction of Lexus in 1989 by Toyota to compete with other luxury brands of BMW and Mercedes Benz new series.
For the focused differentiation strategy to be used to obtain a competitive advantage over competitors in the industry, the business unit must find ways to make the production more efficient to be able to pass on the savings to customers. The business unit must identify new segments and must also be prepared to aggressively create new market segment where it is believed first movers get huge advantage. Again Toyota prides itself in this by being the first to introduce a brand,scion,specifically for young buyers in January, 2003 which was a success and the introduction of hybrids in 1997 selling 127,000 far more than Honda.( Hybrid uses two engines and is environmentally friendly.) (Fortune, Europe Edition, Number 24 December 22 2003; pp57).
The essence of the various strategies discussed so far is to create or add value to the products or services in order to give improved and or enough satisfaction to the customer so that the firm will gain a competitive advantage over its rivals. However, it is one thing for a firm to gain a competitive advantage and another to sustain the competitive advantage so gained. So when a firm is able to get a competitive advantage over its competitors, it becomes expedient to try to sustain this advantage.
Some of the ways to sustain the competitive advantage is by what is described as isolating mechanism. This is the application of forces like barriers of imitation which limit the extent to which a competitive advantage can be duplicated or matched or even possibly scrapped through the resource creation activities of other firms. Though similar in principle to the barrier of entry force, whereas the entry barriers protect profitability of an entire industry, isolating mechanisms sustain the competitive advantage of a single firm. For example legal barriers like trademarks, patents or intellectual property rights as in Microsoft’s case.
It could also be for the mere fact that the leading firm makes it difficult for the competitor to catch up with the firm’s technology because it entered the market earlier and it continues to research and might be able to move to a superior position by the time its competitors catch up. This is known as the early mover advantage. Because the business unit has entered the market earlier, the past success in the market is believed to sustain the firm.
Nevertheless, no matter how discrete the strategy adopted to gain the sustainable competitive advantage or enough satisfaction that the customer may get as well as the mechanisms put in place to sustain the competitive edge, simple economics has proved that man’s needs are insatiable and with the information technology age, there is an improved dynamism in business that products and services can become obsolete before they even reach the next user.
The question is can the firm continue to create more economic value than its competitors now than then?
Now with the advent of information systems and technology, this traditional way of competitive advantage or competitive edge has, therefore, taken a different turn. Information gathering and I mean a competitive information gathering in deed can to some large extent make a difference to a firm’s position in an industry and for that matter affect its competitive advantage one way or the other.
A good and recent example is Asda installing radio frequency identification (RFID) system, a device which could be used to scan bar codes of incoming goods which could save Asda $8.35 billion annually through improvement in its supply chain management. Fortune, Wal-Mart keeps the change, November 10,2003pp 23.
Firms can either use their own database or an informational gathering software to track its operations and get the required information like inventory, customers, and trends of competitors’ performance and about the fast moving products to formulate their strategies or form what is known as information partnerships for the purpose of sharing information to gain competitive or strategic advantage; and even link their systems with some competitors to achieve synergies.
This is becoming important as a result of the fact that competition in the business world today is not only within a particular industry one operates but can also be cross-competition with people in other related industry like universities and publishers competing due to forward and backward integrations. Baxter Healthcare International is known to offer medical supplies from its competitors and office supplies through its electronic ordering channel to its customers. By doing this the firm increases its customer base as well as loyalty of its customers is enhanced.
At this juncture, the statement that “there is no such thing as a sustainable competitive advantage” can be considered in relation to the circumstances that happened in Sears, which used to be USA’s largest retailer until Wal-mart overtook it after a diversification strategy went bust in spite of the fact that it (Sears) has been heavily computerized with more expenditure going into information technology and networking than all other non-computer firms in the United states apart from Boeing. So why couldn’t this huge amount spent in computers and networking been able to give them the competitive edge over its rivals? Is it due to the fact that the hardware alone is not sufficient to provide the information needed unless it is integrated with the appropriate software? Sears did exactly that.
Trying to reinvent itself, Sears started to explore almost all strategies including low pricing strategy, delayering, improved marketing ploys as well as embarking on a $4billion five-year store renovation to make the stores more attractive. All to no avail.
Then Sears noticed that, its merchandise buyers do not have reliable information on precisely what customers were buying at each store. Management was relying on 18 separate systems that often gave conflicting and redundant pricing information. They could only view a division’s daily performance. This was not good for a firm of Sears’s stature. Sears later tightened its grips over the business once again by building a larger database involving the consolidation of information on transaction records,90 million households,31million Sears’ card users, their credit status, and other related data.
The database houses the company’s Strategic Performance Reporting System (SPRS).Now Sears’ 1,000 buyers and managers know what hot-selling merchandise to replenish right away. This competitive information gathering to some extent helped turn around Sears. Its store sales started rising and planned to join partnership with AOL to boost its online business by targeting AOL’s 21 million customers by developing content for AOL on subjects such as how to build a deck, tips on home decorating and other home improvement topics; and also move its suppliers to an electronic ordering system similar to that described for Baxter Healthcare, by linking its computerized ordering system directly to that of each supplier to eliminate paperwork completely for an improved flow of goods into its stores.
As previously discussed, if a firm can keep or maintain its lead on creating value, leveraging strategic assets for example access to efficient distribution channels, maintain market position and may be low cost advantage then it can be said to have a sustainable competitive advantage. This is absolutely not possible in this dynamic business world. The most difficult part of this is that the firm must create more economic value than its competitors every now and then. Will its competitors be looking on without doing anything?
Microsoft for example is spending billions of dollars to develop its own search engine that will be incorporated in both its online service MSN and its new operating system due in 2006 to combat Google’s dominance in the search engine industry. (Fortune, 22 December 2003pp 17).
In my own opinion based on the discussions above, if really sustainable competitive advantage is the persistence of a firm’s ability to outperform its industry, then suffice it to say that, as much as gathering and use of competitive information as illustrated in the Sears’ story above can give a firm a (sustainable) competitive advantage, it is really difficult if not impossible to sustain any competitive advantage for a very long time. This is so because of the rate of technological changes, changes in business strategies, and the fact that customers’ loyalty can wane and affect sales leading to a fall in market share and thus competitive advantage. Boeing was overtaken by Airbus in the aviation industry at some time. Sears’ leadership was taken away by Wal-mart.
In spite of the availability of choice of the five generic strategies, it is supposed that the onus of their success rests with management and how the technology and the information gathered are blended for use. This is so because a careful monitoring and evaluation constantly and the right identification and proper timing of a particular segment are keys to the success of these strategies due to market dynamism.
Can Sears reinvent it? A case study taken from London South Bank University IS.
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