Competitive Advantage of Business - Assignment Example

Use transaction cost theory and resource-based theory to explore the argument that big business has lost some of its competitive advantage in recent years. In the context of globalisation, the ability of firms to compete their rivals has been related to their size; indeed, large firms have been often considered as having a competitive advantage towards the small and medium enterprises. In practice, the above view seems to be invalid; more specifically, the expansion of large firms geographically is not an indication of these firm’s financial strength or highly competitiveness; on the contrary, these firms are often exposed to high operational costs and to increased risks regarding the management of their resources. The above issue is examined in this paper; the transaction cost theory and the resource-based theory are used for exploring and justifying the potential limitation of the competitive advantage of large firms in recent years. Both these theories indicate that the potentials of big businesses to compete in the global market have been limited; this outcome has many different aspects, which are explained and critically discussed used the transaction cost theory and the resource-based theory, at the level that these theories can be used for the evaluation of competitiveness of big business. The understanding of the potential role of the transaction cost theory and the resource-based theory in the identification and evaluation of the loss of competitive advantage of big business requires the reference – primarily – to the framework of these theories, as described in the relevant literature. In accordance with Van Mossel (2008) the transaction cost theory aims to explain how resources would be better distributed across the organization so that the costs of the organization’s operations to be reduced (Van Mossel 26). On the other hand, Baumueller (2007) provided the following explanation of transaction based theory: the specific theory aims to highlight the challenges faced by organization when trying to measure and distribute the transaction costs, which are defined as ‘the costs for the transfer of goods and services’ (Baumueller 46). Moreover, Wilkinson (2005) noted that transaction cost theory refers to the transaction costs, as related to ‘coordination and motivation’ (Wilkinson 25). Through the views presented above it is made clear that the involvement of the transaction cost theory in the identification and the evaluation of the loss of competitive advantage of big business can have different aspects: a) as noted above, the transaction cost theory is based on the view that all organizational activities are based on a specific cost; therefore, the lack of funds for covering these costs would lead to the limitation of organizational activities – at the level that they cannot be fully funded by the organization; in this way, the firm involved can lose its competitive advantage towards its rivals, b) the precise estimation of costs in large firms is a challenging task; since the operations of these firms are expanded the estimation of the cost involved can be quite difficult; this problem could be effectively resolved by using the organization’s reports – in which the activities and the resources of the firm are analytically described; c) large firms can be differentiated from firms of other sizes in regard to its potentials to promote and support its products/ services; regarding the level of costs also, a large firm is highly differentiated from small/ medium firms; however, under certain cases, the financial status of a small/ medium firm can be quite satisfactory allowing the development of various organizational projects – which in large firm may not be feasible because of the lack of the relevant funds, d) transaction costs in large firms – as also in small/medium firms are not standardized; they may change under the influence of the market pressures; this fact could lead to the following problem: a large firm which has no financial problem might become liable to financial obligations in case that it has been engaged in projects which were estimated to a specific cost, which was finally being increased at such level that the level of profit from the particular project has been significantly reduced – even eliminated, e) transaction costs could be used for identifying the loss of a large firm’s competitive advantage; however, it would be necessary that the following terms are met: e1) the transaction costs used in the relevant calculation should be that arranged with the buyer/ supplier and also that expected during the transaction - i.e. reference should be made to the level of the transaction costs at two different points of time: the development of the contract/ agreement for the transaction and the development of the transaction; e2) in case that the transaction cost theory is used for the identification and the evaluation of the loss of competitiveness of a specific organization, it is necessary that the time point to which the relevant figures refer should clearly explained. An important implication of the transaction cost theory when being used for the identification/ evaluation of the loss of competitive advantage of the big business would be the following one: it is possible that the transaction costs involved in a large firm’s activity are significantly increased – under the influence of the global or the local market pressures or the differentiation in the balance of supply/ demand in regard to a specific product/ service. In the above case, the loss of the large firm’s competitive advantage cannot be easily avoided – since the price of the firm’s products/ services will be also increased; therefore, the firm involved will lose its competitive advantage towards its rivals. As for the value of the resource-based theory as a tool for evaluating the level of competitiveness of a particular organization, this is made clear through the description of this theory – as provided by theorists who studied the specific subject. In accordance with the resource – based theory, the resources of each organization should be considered as units or elements that offer to the organization a competitive advantage over its rivals (Millmore 26). In this way, the resource-based theory could help to identify the potential loss of competitive advantage of big business under the terms that the resources of the large firms involved would be precise and accessible – meaning that their condition could be checked. However, in practice, the resources of large firms may not be easily accessible – for instance, in multinational corporations, the resources of which are likely to be expanded globally – for serving the firm’s needs in each foreign market. From this point of view, the use of the resource – based theory for identifying the potential loss of competitive advantage would be problematic. Another fact that could further support the above view, i.e. the potential inadequacy of the resource – based theory for identifying the loss of competitive advantage of big business is the following one: no precise list of resources – as elements of the resource-based theory – is accepted by theorists. For example, Barney (1991) notes that there are three categories of resources – as included in the resource-based theory: ‘physical, human and organisational’ (Barney 1991 in Millmore 26). However, there is also the view that resources – as part of the resource-based theory – can be categorized as follows: ‘financial, physical, human, technological, reputation and organizational’ (Grant 1991 in Millmore 26). How the choice of the most appropriate list of resources – as described above – will be made when the potential loss of competitive advantage of a big business needs to be identified and evaluated? Another implication of the resource-based theory – as a tool for checking and evaluating the competitiveness of big business – would be the following one: one of the key conditions of the resource based theory is that the resources to which the theory refer are unique; otherwise, there would be no point for using the specific theory in order to measure the competitiveness of an organization – if the uniqueness of its resources is strongly doubted (Millmore 26). Regarding this issue, the following comment should be made: who would be most competent or skilled in order to check and evaluate the uniqueness of the resources of a particular organization? Also, on which criteria the relevant decision should be based? These questions set a series of concerns regarding the appropriateness of the resource-based theory for identifying and evaluating the loss of competitive advantage of big business. On the other hand, the resource based theory could be valuable in order to understand the loss of competitiveness of big business; this view is based on the following fact: in the context of this theory the competitiveness of a firm is based on its resources, which means that a firm can be considered as competitive in case that its resources are unique and adequate – regarding the organizational needs (Gottschalk 1). This means that firms, which have unique and adequate resources, can be characterized as competitive – no matter their size or their position in the international market. In this way, the termination of the hegemony of large firms in the global market seems to be terminated; small and medium firms can be also be competitive in the global market if they have the resources necessary for the support of their activities and if their resources are unique – compared to the resources employed by their rivals in the same industry. The above view is similar with that of Bals (2008); in accordance with the above researcher, the resource based theory reflects the following fact: it’s not just the external environment that defines the ability of a firm to locate resources, but also the internal environment – reference is made to the fact that each firm is likely to ‘identify, deploy and protect’ (Bals 29) different resources – compared to its competitors. Based on the above fact, the following assumptions could be made: large firms can loss their competitive advantage in identifying and deploying their resources especially when their activities are not appropriately monitored; from the same point of view, large firms do not necessarily have a competitive advantage towards the small and medium firms – since these firms may be more competent in identifying and deploying their resources, and thus, they may have a competitive advantage towards the large firms. On the other hand, the view of Bals (2008), as described above, set a specific condition for using resources as a tool for evaluating the competitiveness of a large firm: in the context of the view of Bals (2008) the competence of the firm in regard to its communication/ cooperation with its internal and external environment should be identified and evaluated; the criteria on which the evaluation of the competence of the firm in the specific sector would be based need to be set in advance, otherwise the credibility of the relevant assumptions could be doubted. A different approach for highlighting the role of the resource based theory in the identification and evaluation of the competitiveness of big business is used in the study of Wiklund (2006); in accordance with the above researcher, the resources available to firms for the realization of their projects can affect the level of the organizational growth (Wiklund 178). Through the above view, the loss of the competitive advantage of large firms can be explained by referring to the increase of the difficulties faced by these firms when trying to locate their resources – the high costs involved is likely to be the most common reason for the failure of large firms to locate all resources necessary for the development of their activities. From this point of view, the transaction cost theory is related to the resource based theory and they both influence the competitiveness of the large firms involved – indeed, large firms which do not have the funds necessary for locating or protecting their resources are expected to lose their competitive advantage – either in the short or the long term. In accordance with the issues discussed above, in recent years, big business has lost its competitive advantage. The above view has been verified using the transaction cost theory and the resource based theory; both these theories have been found to be valuable in identifying the loss of competitive advantage of big business. However, it has been made clear that the involvement of the above theories in such task would be based on certain conditions. At the same time, the following problem has been identified: the transaction cost theory is likely to be less effective – compared to the resource based theory – for identifying the competitiveness of big business. The reason is probably that the resource-based theory is, by its context, more closely related to a firm’s competitive advantages compared to the transaction cost theory; the fact that both theories have been found to have certain failures when being used for measuring organizational competitiveness should be also mentioned. Finally, it has been revealed that large firms are likely to respond differently to the their environment’s challenges; the competence of the firms to face these challenges can influence their performance towards their rivals, i.e. their competitiveness either in the local or the international market. Works Cited Arndt, Felix. Managing dynamic capabilities in alliance portfolios: from a static dyadic alliance management to a dynamic alliance portfolio management. Hamburg: Diplomica Verlag, 2008 Bals, Lydia. Sourcing of Services: International Aspects and Complex Categories. Frankfurt: Gabler Verlag, 2008 Barney, Jay, Clark, Delwyn. Resource-based theory: creating and sustaining competitive advantage. Oxford: Oxford University Press, 2007 Baumueller, Martin. Managing cultural diversity: an empirical examination of cultural networks and organizational structures as governance mechanisms in multinational corporations. Bern: Peter Lang, 2007 Frauendorf, Janine. Customer Processes in Business-to-Business Service Transactions. Frankfurt: DUV, 2006 Gottschalk, Petter. E-business strategy, sourcing, and governance. Hershey: Idea Group Inc (IGI), 2006 Millmore, Mike. Strategic human resource management: contemporary issues. Essex: Pearson Education, 2007 Van Mossel, Johan. The Purchasing of Maintenance Service Delivery in the Dutch Social Housing Sector: Optimising Commodity Strategies for Delivering Maintenance Services to Tenants. Amsterdam: IOS Press, 2008 Wiklund, Johan. Entrepreneurship: frameworks and empirical investigations from forthcoming leaders of European research. Oxford: Emerald Group Publishing, 2006 Wilkinson, Nick. Managerial economics: a problem-solving approach. Cambridge: Cambridge University Press, 2005 Read More