The Concept ofCompetitive Advantage - Term Paper Example

Abstract Competitive advantage is one of the most essential of all business tools that the managers need to apply in their business strategies so as to maximise company profits. The concept indicates a mere value addition in production that could be brought up through reduction in cost or enhancement in quality of production, without any compromise on the past features of the product. The concept has been intricately dealt with in the paper with briefings on several models underlying it. A real life case study of McDonald’s fast food chain has also been included in the paper as a corollary. Executive Summary The following points have been dealt with in the present research work. The concept of competitive advantage has been identified in the present case. According to the concept, efficient managers always try to make additions to their value chains. This addition could be either in the form of lower production cost reflected through low retail prices, or in the form of additional benefits without any increments in price. Competitive advantage could more sensibly be associated with that of a firm or a single industry in a given sector rather than at the macroeconomic level, when comparative advantage is the more appropriate one. It is basically an issue of long run planning and strategic management. However, it is always necessary to revise the plans that the firm managers make since its rivals are always on the run for duplicating the strategies being applied by the topper. A large number of models could be applied by any company to gain a competitive advantage over others in the sector. Irrespective of what the models say, there are two basic notions on which they are all based, viz., cost efficiency and quality differentiation. Model wise, there are a total of six ways through which competitive advantage could be enjoyed, namely - restricting the activities of the competitors, providing services to their customers, economics of the company, efficient management, product upgrades and good suppliers. A real life case study for that of McDonald’s has been included in the paper. The company has been found to be enjoying a competitive edge over its rivals through exploiting its position of being a first mover in the field of retail marketing. Table of Contents Introduction 4 The concept of competitive advantage 4 Sources of competitive advantage 5 Models underlying Competitive Advantage 5 Restricting the activities of Competitors 6 Providing services to their customers 6 Economics of the company 7 Efficient management 8 Product upgrades 8 Good suppliers 8 A Real life case study: McDonald’s 10 Conclusion 10 References 11 Rumelt, R. P. (August, 2003) ‘What in the World is Competitive Advantage?’Retrieved from http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Papers/WhatisCA_03.pdf (Accessed: April 8, 2010). 11 Watson, D. (2005) Business Models. London, UK: Hariman House. 11 Introduction The concept of competitive advantage The primary motive operating beneath the facade of any business enterprise is that of profit maximisation. Efficient managers lend their utmost care towards framing business strategies which cater to such issues properly. However, irrespective of the duration of their plans, it is essential to have a core understanding of certain economic theories as well. The concept of competitive advantage is such a premise that drives the entrepreneurs towards their ultimate target of maximising gains. According to the proponents of the theory, competitive advantage focuses on the quality enhancement of commodities or rather creation of value. It is all about enveloping additional benefits in a product that any other rival firm is unable to accomplish, at the given retail price. Even if inclusion of extra advantages is not possible, an efficient manager aims to reduce the cost of production, without compromising upon the quality, so as to minimise the retail price of the final good. In other words, the theory emphasises upon upgrading marginal value of a commodity or service, so as to gain popularity among their target customers (Rolstadas, 1995). The notion of competitive advantage is quite different from that of comparative advantage in terms of their extensiveness. While the former is an analysis at the micro-level, with firms rather than industries playing the protagonist’s part, the latter could be associated with a macroeconomic scenario, when any concerned nation focuses upon trading their identifying commodity. Furthermore, it is generally found that the aspect of competitive advantage is based on technological variations or business strategies; in contrast, that of comparative advantage is based on exogenous resource endowments. In fact, this is where the difficulty of maintaining a competitive edge lies – a particular firm that enjoys an upper hand needs to mobilise its strategies on a constant basis so that its competitors, who are on a constant vigilance, can never beat it (Rolstadas, 1995). Sources of competitive advantage According to Michael Porter, the advocate of the theory, there are two primary sources how a firm might gain a competitive advantage over its competitors – firstly, through cost leadership and secondly, through differentiation. ‘Cost leadership’, as the term itself suggests, implies cost efficiency in productive activities; such a situation might arise if any particular firm is capable of producing a commodity at relatively low prices, without any concession on the quality features. On the other hand, differentiation implies the inclusion of additional dimensions to the commodity without bringing any changes to the price factor. Both aspects if followed can effectively attract customers and eventually lead the firm to enjoy a competitive advantage (Rumelt, 2003). The sources being identified by other economists are variations of those being introduced by Porter and hence have been omitted from discussion. Models underlying Competitive Advantage Competitive advantage is found to exist in a large number of sectors or rather industries. However, as had been pointed out previously, it is more sensible to carry forward the research from the perspective of a firm. However, as there are several ways of attaining a competitive edge, most of the firms focus towards attaining a fixed business model to follow. The characteristic features of the model set the guidelines for the firm to sustain its market position. Nevertheless, it is always advisable for the firm to revise them from time to time to avoid duplication by their rival firms. Apparently, there are sixty four business models of competitive advantage, being identified till date. This indicates that there are approximately sixty-four ways through which any particular company might seek a competitive advantage. Though it is not possible to discuss them all, even briefly, there are two basic ideologies that all of them follow – those of cost leadership and quality differentiation. However, even these two factors could be applied through manipulating on six different dimensions – restricting the activities of the competitors, providing services to their customers, economics of the company, efficient management, product upgrades and good suppliers (Watson, 2005). The following paragraph discusses the ways through which these six aspects might benefit the company. It will rather be appropriate to call these ways as business models. Restricting the activities of Competitors The activities of competitors could be restricted through any or all of the following three ways - Creating barriers to entry, so as to alleviate or curb any chances of competition. Enjoying the advantages of being the first mover in the sector or the industry. Some firms also try to invigorate pressure among their competitors through circulating news about manufacturing perfectly or nearly substitute goods. Providing services to their customers Besides curbing the operational activities of their rivals, there are a few other ways of ensuring competitive advantage through manoeuvring the preferences of the customers. If a company chooses its customers on its own, it will be easier to predict the tastes and preferences of its set of customers. Hence, the firm can manufacture its products more efficiently, since now it is supposed to cater to the needs of a selective group of people. Cross-selling of substitutable commodities between two or more firms in a single sector. The firm can enhance its global reach so as to create a huge market for its products and not to stay dependent on a few consumers. Introducing long term contracts in business activities. The firm might also provide services such as allowing the customer to pay in advance and book a commodity at a time when the customer perhaps has money in his hand. However, this model is often considered a rather weak one. The firm might also allow its customers to pay in instalments so that they feel comfortable to make small payments rather than forgoing lumpsum amount at a time. The firm can make provisions to deliver all services to their customers themselves instead of hiring any other organisation to accomplish the same. This way the customers might feel protected and cared for by the company. The firms must always keep in mind the stature of the customers. Economics of the company The economics of the company needs to be taken care of as well, through any or some of the following ways. It is often advisable that a company be backed by substantial capital so as to gear up its activities right from the start. The shares which it issuers in the market should be asset backed so that it is able to win over the confidence of the buyers. There are ways that a company can increase its operations through acquisitions and mergers. The company might also fortunately enjoy certain economies of scale which could account to cost efficiency. Sectoral growth could be reflected in the growth of the firm as well. The company could focus towards the earning of high dividends so as to attract more shareholders and thus flourish its business. The break-even point of production could be low as well so that the average cost of production could be maintained at low levels. The company could concentrate on stronger cash flows so that it might retain a huge amount of its earnings for future investments. Efficient management Efficient management is almost like company assets and sometimes could be complied with economies of scale as well. The policies being designed by the company is a reflection of efficient management. There must be as little conflict of interest among the managers as possible. Monitoring should be high within the company, i.e., corporate governance ethics should be properly followed. The company must keep on reflecting upon its past success stories so as to remind its employees about its glorious past and inspire them hence. Product upgrades The company should focus more on the power that its brand name carries to trigger loyalty among its customers. The firm should concentrate on maintaining a consistent growth rate. There should be cost efficiency or quality differentiation in production. The firm could go on venturing for secondary profit sources or maximise profits from different revenue channels. The company could use methods that involve low depreciation and amortisation costs. Good suppliers There are chances of enjoying a competitive advantage if the firm can manage to be on the bargaining end while dealing with its suppliers too. The company must try to attain an upper hand while bargaining with its suppliers. It must concentrate on making opportunistic deals. The firm must not be dependent on a handful of suppliers, to avoid chances of being exploited by them. Though all the sixty-four models could not be discussed, a hint has been provided about all of them in the aforementioned sections. However, there must be a core understanding about the features underlying each of the business models to make an appropriate application of the same (Watson, 2005). The following section deals with a real life case study, with the firm under consideration being the popular food chain McDonald’s. A Real life case study: McDonald’s McDonald’s enjoys a pioneer position in the field of fast food retail chains. It has applied the business model of first mover advantage to gain competitive advantage over all its rivals. When a firm happens to be the proponent in a field, it enjoys certain additional benefits and often weaves out ways that prevent the free operation of its rivals who had followed it. These ways could be in the form of creation of patents or capturing the tastes and preferences of the customers. In fact, the latter had been the method that the retail chain had used. Moreover, the company also enjoys certain cost efficient elements that has helped in providing or rather selling its products at a relatively lower price and thus, get a customer preference. Conclusion Competitive advantage happens to be one of the most effective tools that modern day managers employ to enjoy profits. There are two basic ways through which a company might ensure competitive advantage, namely, cost efficiency and quality differentiation. There are several models that use these two basic elements to ensure a competitive edge. Hence, the managers must take care of the innate features of these models while choosing anyone of them. However, one point that must be kept in mind by the managers is that they must keep on revising their strategies to avoid duplication by their comparatively inferior rivals. References Rumelt, R. P. (August, 2003) ‘What in the World is Competitive Advantage?’Retrieved from http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Papers/WhatisCA_03.pdf (Accessed: April 8, 2010). Watson, D. (2005) Business Models. London, UK: Hariman House.   Read More