Understanding Strategy - Competitive Advantage - Research Paper Example

Understanding Strategy – Competitive Advantage Contents Sr.# Topic Pg Executive Summary 2 2. Introduction 4 3. Analysis Findings 5 a. Key building blocks for BMW and Mercedes 6 b. Current Sustainability 7 c. Threats, Risks and Weaknesses 9 d. Key Achievements and Future Opportunities 10 4. Recommendations 11 5. Conclusion 13 References 14 1. Executive Summary Strategy formation and development forms the core of a contemporary business organization and hence the fact that it is given due significance by the top management can hardly be an overstatement. According to Barry & Elmes (1997) “Strategy must rank as one of the most prominent, influential and costly stories told in organizations”. A strategy acts as a bridge between the internal organization and the external environment and connects them by mutually and commercially viable processes and plans and hence strategy formulation is regarded as one of the most critical aspects of any business. A strategy comprises of various plans and policies adopted by an organization to gain competitive advantage over its business allies and retain its competitive positioning in the industry. It also helps it in retaining its current customer database as well expanding it through creative and innovative strategies, and achieving the company’s goals and targets. Strategic management on the other hand is defined as “an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment (Lamb, 1984). ” Strategic management facilitates a clear and precise understanding of the external environment and helps the organizations and managers in devising appropriate plans to combat such external forces and thereby protect their organizational goals and objectives. It helps in interpreting the factors that are likely to have a strong impact on the organization through various analytical procedures adopted by the top management and thereby shield the external forces from penetrating the organization and disrupting its goals and visions. Strategic management is inevitable for smooth functioning of any business establishment as well as for the creation of a sustainable business environment. Organizations often use strategic analysis as a tool for conceptualizing its competitive environment as well as the resources at its disposal which could be used for framing adequate policies and measures in order to fulfill its long term strategic visions and goals. This report provides an insight into the contemporary business strategies adopted and implemented by global / international organizations to accomplish their long term goals. For the purpose of this study, the automobile industry will be analyzed and assessed in a comprehensive manner, with a view to explore and understand the competitive advantage of two of the major auto giants, BMW and Mercedes. As a part of this study, various key issues concerning the manner in which these two organizations have built, and sustained their competitive positioning in the industry, the differences and / or similarities between their strategies and the steps taken and policies implemented by the management of the respective companies, to ensure the durability of their competitive advantage shall be discussed in detail. It also discusses how companies frame their policies in accordance with its external environment, build sustained competitive advantage, analyze their respective strengths and weaknesses and use the same as a tool for improving their strategic positioning in the industry, identify their core rigidities and transform the same into their core competencies and enhance their business performance in the process. 2. Introduction Competitive advantage is one of the key concepts in strategic management and is used and developed by organizations to sustain their competitive positioning in the industry. According to Grant (2002): “When two or more firms compete within the same market one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit" (Pp. 227). According to Coade (1997) Competitive advantages is defined as: "the development of a superior position in the market by offering the customers a series of benefits which motivate them to purchase one companys product or service instead of the competitor’s" (Pp. 46). However, such competitive advantage cannot be used by organizations to reap long term benefits, since they can be easily imitated by their rivals, in the process destroying the market competitiveness and severely affecting the profitability of the firm. Thus in order to ensure long-term sustainability, and retain the existing customers, organizations nowadays focus on developing a sustainable competitive advantage, which eliminates the possibility of imitating the firm’s competitive advantage in the near future (Lamb et al, 2008; Baker, 2003). Brief Overview: BMW & Mercedes Benz BMW is a (Bavarian Motor Works) is a German automobile manufacturer, headquartered in Munich, Germany. It has a vast global network and international presence and is widely renowned for its luxury vehicles and exceptional performance and unique features (BMW, 2010). Mercedes Benz on the other hand, is also a German automobile manufacturer, headquartered in Stuttgart, Germany, and is famous for its range of luxury vehicles. It also boasts of a strong international presence with branches worldwide. It is famous for its durability, quality, and innovation (Mercedes-Benz, 2010). Both the companies deal in luxury cars and have developed a range of technologically advanced and innovative products for its elite customers. Both of them take pride in their legacy of excellence in service, as well as state-of-the art product features which includes innovation and safety as their core values. 3. Analysis / Findings This section includes a detailed discussion on various key issues related to competitive advantage such as: key building blocks; current sustainability strength; current threat of risks or weaknesses faced by the companies; key achievements as well as the future opportunities available for them. a) Key Building Blocks of Competitive Advantage The generic building blocks of competitive advantage which are applicable to companies regardless of the industry they belong to are: efficiency, quality, customer responsiveness, and innovation (Hill & Jones, 2008). In case of BMW and Mercedes the key building blocks are: Brand equity Unique and innovative products Strong international presence Legacy of exclusivity of their products Both BMW as well as Mercedes have a strong brand value owing to their product which is strongly associated with ‘personal luxury’. They cater to select customer segments who are interested in buying an elite product, which has a strong brand value, along with various essential features such as innovative designs, durability, quality and performance. The German car manufacturers pose a serious threat to American and Japanese auto makers, in the luxury car segment. According to recent reports both the car brands ranked among the top five most valuable global brands list. BMW replaced the Japanese auto giant Toyota as the most valuable global car brand; while Mercedes ranked number 4 on the list (AutoWeek, 2010). Both the companies display a passion for innovation in their product development which differentiates their products from those of their rivals. Where BMW developed innovative concepts such as active steering, air vent control, night vision, gear shift indicators, auto start and stop functions etc; (BMW, 2010) Mercedes on the other hand, developed equally innovative concepts and products including the worlds first driver-less car, way back in the 1980s; a fatigue detection system known as Attention Assist, worlds first seven speed automatic transmission system; worlds first safety cage / cell construction etc among others (Mercedes, 2010). Both the companies have a strong global presence. BMW has 17 production facilities in six countries, while Mercedes has 17 production sites in eight countries, which creates a significant competitive advantage in the international market. The companies are old and established names in the automobile industry and enjoy the reputation of manufacturing some of the world’s most luxurious cars. Since both these companies manufacture exclusive range of cars catering to a select group of customers, it has a high brand value, which is one of the most significant competitive advantages for both of them. b) Summary of current sustainability strength of BMW & Mercedes BMW and Mercedes have a strong brand presence at the national as well as international levels. The customers perceive these brands as luxurious products, highly synonymous with immense style, performance and great features. The brands offer more than a product they offer a lifestyle. The companies are constantly innovating their products, ideas, as well as marketing strategies as a way of attracting their customers, which is one of their greatest strengths. They have recently been featured among the world’s most valuable brands, which can be leveraged for sustaining their market position. BMW and Mercedes both target the high-profit market segments, which is also one of the key strengths of the companies. The German car makers are emerging as serious threats to the Japanese and American auto makers, in the luxury car segment. Their unique and innovative designs have garnered wide spread acclaim. BMW’s Z4 received the International Design Excellence Award in the year 2009 (BMW, 2010), and in the current year toppled the Japanese auto giant Toyota, to become the world’s most valuable global brand. Apart from that, the company has continued its drive towards innovation, and are currently developing a manufacturing method by which emissions would be reduced by as much as 98%. This is regarded as one of the many strengths of the organization, considering the global attitudes towards climate change and the significant increase in environmental consciousness among the international governments as well as customers alike. The group is also focusing on building sustainable employee relationships, by promoting inter cultural understanding. Such hospitable work environment is likely to motivate the employees and result in higher productivity, ultimately translating into higher revenues for the company. Similarly Mercedes, has a history of being one of the world’s most innovative automobile brands. Its core strengths are performance, durability and safety. With a range of successful models the company’s constant drive to keep passenger safety as its top most aim, has paid off, which can be substantiated with the company’s wide global presence and high brand recognition among its elite customers. c) Summary of current threat of risk or weaknesses visible in the company The luxury car segment, in which the companies deal in, has become increasingly competitive in recent times, and since these two auto makers cater to an elite customer segment in the high-profit zone, it is inevitable for them to maintain its existing customer base and expand its sales volume. The competitors of the German car makers are highly process driven, for instance Toyota, while BMW and Mercedes are highly product driven and performance driven respectively. Such high reliance on product innovation could ultimately lead to a neglect of other equally vital areas of business such as employee performance, customer segmentation, marketing strategies and allocation of resources, among others. Although the luxury car market is relatively small and dominated by very few players, the external environmental factors may pose a significant threat to the core existences of these two companies. The recent furore over global warming and the rising consumer awareness regarding key environmental issues has led to a significant shift to more environmentally friendly products. Moreover, the economic recessions, and the rising fuel prices is also adding to the woes of these auto giants. It needs to develop proper strategies to combat such obstacles and retain their customer base, in order to avoid grave economic crisis. d) Key Achievements of the Companies and Future Opportunities The two brands have grown considerably and consistently in the recent years. The BMW has kick started the new year 2010 by successfully achieving its profitability targets. The profit for the first quarter was 508 million Euros against the loss of 198 million Euros in the first quarter in 2009. The sales also reached record highs in almost all the car segments, and the total number of BMW vehicles sold rose by 13.1% in the current year. The management is expecting this profit to rise even further, owing to its wide range of innovative products as well as stabilization of the world economy. The Daimler AG company also reported a tremendous boost in profits due to record sales driven by Mercedes Benz brand, in the current year (2010). The company earned profit worth 1.4 billion Euros and the management expects this trend to continue with a future profitability estimated to be 2.5 to 3 billion Euros in the coming years. The company is predicting a huge surge in demand for its Mercedes Benz brand, owing to favourable market conditions and particularly the rise in demand for their products in the Asian markets. Mercedes proposes to leverage this opportunity by targeting the fast growing Asian markets particularly China, where the demand for the brand doubled during the first quarter (Bloomberg Business Week, 2010). Both the companies are aiming for higher profits and higher demand for their luxury cars owing to favourable market conditions, development and launch of new product ranges, as well as increase in opportunities in international markets, particularly the emerging economies such as India and China. 4. Recommendations A business strategy helps organizations to compete in the market and retain its competitive positioning within the industry. The business strategies of BMW and Mercedes are centered on product innovation and differentiation. Currently both the companies are focusing on expanding its market outreach by venturing into international markets in a bid to expand its sales volume and customer base. Major automobile markets such as U.S. , U.K., Japan, etc., are highly saturated in terms of availability of luxury cars. On the other hand, there is a huge surge in economies of certain Asian countries like India, and China which could offer a wider market for these products. Hence these companies should identify such new and emerging markets and acknowledge their potential by expanding their business and setting up their production facilities in such countries. One of the added advantages of such emerging economies is the availability of cheap labour. This can further help these companies in boosting their revenues and increasing its profitability. Environmental laws are becoming stricter in most European countries. Governments across the globe are in a bid to decarbonize the automobile industry. This is likely to be an advantage for such global giants, whose sole competitive advantage lies in product innovation. Both BMW as well as Mercedes have developed innovative products which have the potential of reducing the carbon emissions significantly. These companies, should, hence continue to develop such ideas and invest in R&D since such innovations could generate huge profits in the long run. Toyota is a major threat to BMW and Mercedes’ luxury car segment. In order to combat such direct competition, these companies can adopt various defence strategies. One of the most vital defence strategies which can be adopted by BMW and Mercedes is the mobile defence strategy, which includes business diversification – i.e. venturing into newer markets. These companies can also opt for completely redefining its business principles and objectives. For instance, both these companies are product oriented. It can change its stance to process oriented, similar to that of Toyota, to avoid being thrown out of competition. Intensifying focus on rivals and competition is highly recommended. Toyota, General Motors etc are known to be industry heavyweights. Both have a strong lineage of successful products, brand value and performance, similar to that offered by BMW and Mercedes. Hence it is extremely essential to focus on the strategies of the rivals and develop policies to thwart their efforts by excelling in all other departments as well. For instance, Toyota is known for its hybrid cars. In order to avoid losing out on market share, BMW and Mercedes could offer low priced environmentally friendly products in the mature as well as emerging markets. Although its niche is dealing in luxury cars and has a strong brand value associated with lifestyle products, the companies can leverage the brand value and strong international presence by venturing into alternative product categories and intensifying the sale of such products as well, rather than focusing solely on one product segment. 5. Conclusion In the age of globalization, multi-national organizations are afforded greater opportunities to become a part of the global economic action, and enhance their competitive advantage. However over and above the competitive advantage, organizations have to develop strategies to sustain such advantage over prolonged periods of time, which is alternatively referred to as sustainable competitive advantage. It offers the companies an opportunity to retain their competitive positioning in the industry and acts as a defence shield against the advances made by their rivals to capture market share. The competitive advantage of organizations is at great risk of being eroded by intense market competition. Rivals rapidly develop strategies to imitate the competitive advantage of other organizations, since it is the most dominant as well as vital part of competition. The dominant position of industry leaders can also be challenged by their rivals either through imitation or innovation. Hence it is essential for organizations regardless of their competitive standing in the industry, whether they are challengers, or industry leaders or simply followers, to sustain their competitive advantage against the onslaught of their rival firms. However firms such as BMW and Mercedes which have a strong and long established brand value, creating barriers to imitation is extremely vital and yet relatively easy. Imitating the product ideas might be easy but acquiring the level of brand value and recognition, may prove to be a deterrent for new entrants or followers. Thus, regardless of their status in the industry or the type of industry firms belong to, acquiring and retaining competitive advantage is extremely vital for their survival. References Baker, M. J., (2003). The Marketing Book, Butterworth-Heinemann Publication, Pp. 507 - 510 Barry, D., Elmes, M. (1997). Strategy retold: Toward a narrative view of strategic discourse. Academy of Management Review, Vol.22. Pp. 429 – 452 Coade, N., (1997). Managing International Business, CENGAGE Learning Publication Grant, R. M., (2002). Contemporary Strategy Analysis: Concepts, Techniques Applications. Wiley Blackwell Publication Hill, C., Jones, G., (2008). Essentials of Strategic Management, CENGAGE Learning Publication, Pp. 81-84 Lamb, R. (1984). Competitive Strategic Management, Englewood cliffs, NJ, Prentice Hall. Lamb, C. W., Hair, J. F., McDaniel, C., (2008). Essentials of Marketing, CENGAGE Learning Publication, Pp. 40 - 42 AutoWeek (2010). BMW replaces Toyota as most valuable global car brand, Accessed: May 11, 2010 [online] from: < http://www.autoweek.com/article/20100429/CARNEWS/100429801> Bloomberg Business Week (2010). Daimler Returns to First-Quarter Profit on Mercedes Benz Sales. Accessed: May 11, 2010 from: BMW (2010). Company Portrait, Accessed on: May 10, 2010 [Online] from: Mercedes-Benz (2010). About Daimler AG, Accessed: May 10, 2010 [online] from: Read More