Gaining a Competitive Advantage and Creating a Business Model - Term Paper Example

Business Models and Strategies used by Firms Author’s Name Institutional Affiliation Contents 1.0 Introduction 3 2.0 Business Models and Competitive Strategies 4 2.1 Porter’s five forces 4 2.1.1 Power of Supplier 5 2.1.2 Power of Buyers 5 2.1.3 Threat of Substitutes 6 2.1.4 Competitive Rivalry 6 2.1.5 Threat of New Entry 7 2.2 Porter’s Generic Strategies in Businesses 7 2.2.1 Cost Leadership 8 2.2.2 Differentiation 8 2.2.3 Focus 9 2.3 Building Blocks of a Business Model 9 3.0 Application of Business Models and Strategies by Companies 13 3.1 Application of Cost-leadership Strategy at Hotpoint Company 13 3.2 Application of Differentiation Strategy at Heineken Brewery 15 4.0 Conclusion 16 5.0 References 18 Business Models and Strategies used by Firms 1.0 Introduction In the contemporary society, the field of marketing has become quite competitive such that most business of firms are implementing strategies in order to gain a competitive edge in the market. In order for any firm or organization to gain a competitive advantage over its competitors, it must be in a position to attract the target customers. This means that a company must ensure that the goods produced or services offered are of high quality and they satisfy customer needs. Currently, most companies are implementing strategies such as innovation, the use of modern technology, and differentiation strategies among others in order to survive in the competitive market. Most companies have implemented various business models that help in boosting the value of their products. Specifically, business model refers to the outlined plan that a company implements in a bid to generate revenue and maximize on the level of profits made. A business model is an abstract representation of an organization, either in conceptual or graphic form, which a firm designs and develops for current and future use. This model also highlights the types of products or services offered in a given firm in order to attain the organization’s goals and objectives. According to Greco, Rodríguez, & Wharton, (2007), a business model helps in describing the rationale created, delivered, ad captured by a firm in regards to socio-economic or cultural contexts. When firms formulate business models, they are involved in implementing business strategies. Some of the most common models that firms have adopted include the Porter’s Generic Strategies and Resource Based View. The aim of this paper is to analyze Porter’s five forces in order to understand the competition level in various industries. Secondly, the paper will analyze porter’s generic strategies in order to understand how firms try to gain a competitive advantage in the industry. This research paper will then outline the nine building blocks of a business model. Lastly, it will identify two companies that apply some of these strategies in order to operate profitably in the market. 2.0 Business Models and Competitive Strategies 2.1 Porter’s five forces Porter’s five forces is a framework that assists in analysing the level of competition that exists in a given industry. It helps in strategy development of a given business in that companies are able to understand the position of their industry in the market. Unlike the Generic Strategy Model, which outlines the position of a company, Porter’s Five Forces focuses on the factors that affect an industry in general. This framework analyses all the five main forces that influence the competitive intensity as well as the attractiveness of a given industry (Porter, 1980). These forces include power of supplier, power of buyer, competitive rivalry, threat of substitution, and threat of new entry. The figure 1 below shows a framework of Porter’s five forces. Figure 1: Framework of Porter’s Five Forces Analysis Source: (Porter, 1980) 2.1.1 Power of Supplier This force analyses whether it is easy for suppliers to drive up or control prices in the market, and it is mainly influenced by factors such as the number of suppliers, the uniqueness of products or services offered in a given industry, and the cost of switching from one supplier to another (Porter, 1980). If an industry has few suppliers to choose from, their power increases in the market. When the bargaining power of suppliers in a given industry is high, the manufacturing companies have to comply with the prices set by these suppliers. On the other hand, existence of many suppliers means that their power is low, since manufacturing companies can switch from one supplier to another. 2.1.2 Power of Buyers The power of buyers or customers is a force that outlines the ability of customers or buyers to drive the prices of goods and services down. Some of the main factors that drive this force include the number of consumers that a company has, significance of each customer to a firm, and the cost of switching from one company to another. If a client base is small within a given industry, their purchasing and bargaining power increases. On the other hand, few companies are producing a given product, the prices increases; hence decreasing the purchasing power of buyers. 2.1.3 Threat of Substitutes This force is affected by the ability of buyers to find substituting products or to discover an alternative way of doing what they do. For example, if a given firm buys a unique product that automates a vital process, customers may substitute by performing the process manually or outsource it. If substitution is easy, it results in the weakening of a firm’s power. This is because in most cases, substitution tends to be both easy, convenient and of low cost. Therefore, existence of substitutes can reduce the level of sales for most companies in a given industry; hence, weakening its power. 2.1.4 Competitive Rivalry The importance of this threat is that it focuses on is the number of competitors and whether they have the ability to threaten a given company. The more the number of competitors within a given industry, and the existence of a high number of similar products and services they offer has a major influence on the power of a given firm in the industry (Porter, 1980). In order to receive fair and affordable deals, suppliers and consumers seek out the competitors of a given firm that offer products or services at low prices. If an industry has many competitors, they offer quality and attractive products, meaning that suppliers and customers can go anywhere. Therefore, high level of competition is not healthy for companies. 2.1.5 Threat of New Entry This force analyses the ability of people, specifically new investors to enter in to an already existing market. If the cost incurred or time consumed in entering a new market is little, it is easy for new competitors to enter the market; hence, weakening the position of existing companies. Investors can also enter the new market if there is existence of few economies of scale and if there are few legal restrictions of entry established by the government. This proves that a high threat of new entry weakens the market of most companies within a given industry. 2.2 Porter’s Generic Strategies in Businesses Porter’s generic strategy is a tool that helps to describe how firms or companies play a major role in outlining how a firm pursues competitive advantage within a given market scope. The strategy employed by any firm usually plays a substantial role in determining the competitive edge of a firm in any given industry (Dlabay & Scott, 2010). Considering the Porter’s generic strategies, organisations have to use one of the strategies in order to sustain a competitive edge in the industry. These strategies are differentiation, cost-leadership, cost focus and differentiation focus. The figure below shows an image of Porter’s generic strategies. Figure 2: A model of Porter’s generic strategies Source: Roy (2009) 2.2.1 Cost Leadership According to Dobbs (2014), a large group of customers, especially those with a low purchasing power tend to lean towards purchasing products that are cheaper and affordable. In the cost-leadership strategy, a company aims towards becoming the low-cost producer in a given industry. There are certain factors that can enable a firm to be the low-cost producer and they include the pursuit of economies of scale, implementation of proprietary technology, and easy access to raw materials among others. For a firm to implement the low-cost strategy, the management must exploit all the major sources of cost advantage. A company that manages to sustain its performance through cost leadership becomes an above average performer in the market. Most firms have implemented this strategy in a bid to pull customers who are price sensitive or those who are not willing to spend too much on certain products. 2.2.2 Differentiation When implementing the differentiation strategy, a company tries to maintain uniqueness within the industry. This is possible by pursuing certain dimensions that customers value and prefer, for example, creating appealing products with unique designs. Firms that use this strategy identify one or more attribute that customers in the industry perceives important (Rego, Morgan, & Fornell, 2013). By implementing this strategy, a firm is able to uniquely position itself in order to meet the needs of customers. By maintaining uniqueness and quality of a product, a company can maintain premium prices for its products and still attracts a wide variety of customers. 2.2.3 Focus Focus is a strategy that cover both differentiation focus and cost focus. The generic strategy of focus aims at having a narrow competitive scope within an industry. The companies that use this strategy selects a certain group of customers in the industry and aims at serving them and excluding others. Companies that have implemented this strategy claim that it has enabled them to gain loyal customers. The focus strategy has two variants. Firstly, in the cost focus strategy, companies try to attain a cost advantage within their target segments (Rego, Morgan, & Fornell, 2013). On the other hand, differentiation focus is a strategy that enables firms to seek differentiation within its target segments. This shows that both of these variants first identify a segment of customers to serve, by either reducing prices or enhancing uniqueness. Evidently, both variants of this strategy rest on differences between a focuser's target segment and other segments in the industry. In order to ensure that the level of sales is high, the target customers must have buyers with unusual needs. This shows that the production system that serves the identified target market must differ from the system implemented in other industry segments. Additionally, cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments. The common factor about these variants is that they both focus on selecting a certain segment of consumers. 2.3 Building Blocks of a Business Model A stated earlier, a business model mainly comprises of the rational that a given firm uses to create, deliver and capture the value of its products and performances. When creating a business model, there are certain factors that help in formulating one. Firstly, customer segments focuses on how a company can decide to serve whether one or more customer segments in the market, depending on the products it produces and their buying potential (Hambrick & Fredrickson, 2014). Therefore, this section revolves around analyzing the types of customers targeted by given companies in the industry. The second vital component of a business model is value propositions, which deals with solving customer problems and satisfying their needs using value propositions. Generally, the main aim of most firms is to satisfy the needs of consumers by producing relevant goods and services that satisfy them (Hambrick & Fredrickson, 2014). This component focuses on the value that a company delivers to customers and the products and services they offer to the various customer segments. Basically, this section enables a company to know the customer needs it is satisfying. Another vital component of a business model is channels, which is based on the principle that value propositions or customer goods and services are delivered to customers through communication. Additionally, factors such as distributions and sales channels also help firms in delivering goods and services to customers. In order for a given firm or company to deliver value proposition, it must have established effective distribution and communication channels (Hambrick & Fredrickson, 2014). In most cases, it is always advisable to understand the communication channels through which different consumer segments want to be reached. For some, online distribution is an effective strategy whereas other consumers refer purchasing their products from the stores. A company must evaluate whether its distribution and communication channels are integrated and also learn to establish the most cost-effective ones. Additionally, customer relationships are also another major building block of business models. It is always important for a business to establish effective customer relations with each customer segment. Moreover, a firm operating in a competitive environment should ensure that it maintains these relationships in order to enhance customer loyalty. In order to enhance effective customer relations, it is important to analyze the type of relationships that each customer segment expects a firm to establish and maintain with them. A company should then evaluate the types of customer relations it has established in the market in order to determine if they are integrated with its business model. Lastly, evaluating the cost of these customer relations is also vital for the company’s financial performance. In addition, key resources are another vital component of a business model, and they refer to the assets required in offering and delivering the elements described previously. In order to any firm to operate in an effective manner, it must have adequate resources for establishing distribution channels, enhancing customer relations, and gaining value proposition. The key resources required for a company’s value propositions include physical, intellectual, human, and financial among others. The physical resources of a given company include buildings, machinery, trucks, and POS, whereas the intellectual resources of a firm include the brand and microchip design. A company must utilize these resources well in order to gain substantial value in the market. The sixth important element is key activities, since a firm must engage in various activities in order to fulfill the needs of customers. When analyzing this model, a company must know the key activities it requires for its value proposition. Most of these activities are covered by other model components, and they include distribution, production process, networking, and problem solving. The main production activities of a given firm include manufacturing, designing and delivering, since the company must ensure that goods produced are within customers’ reach. Coordinating these activities effectively can help a firm in gaining a competitive edge in the market. Key partnerships of a firm are also a vital building block of a business model. This component is mainly influenced by the fact that some activities are outsourced whereas a company can acquire other resources outside the enterprise (Greco, Rodríguez, & Wharton, 2007). In order to create effective and resourceful partnerships, some companies are known for forming strategic alliances with non-competitors in the market. In other cases, a firm can form alliances between competitors as long as it does not reduce the number of customers. Companies are also advised to from joint ventures in order to develop a new business, which enables them to maximise on profits sharing risks. It is therefore important for a company to form key partnerships. Moreover, cost structure is another vital component in formulating a business model (Greco, Rodríguez, & Wharton, 2007). It is always recommendable for a firm to indentify the costs incurred during operation. Some of the most important costs that are inherent in a business model are cost-driven, value-driven, fixed costs as well as variable costs. In a competitive environment, most firms try to minimize the cost of production in order to reduce prices of their products. Fixed costs of a firm remain constant despite changes in the volume of goods that a firm produces. On the other hand, variable costs vary proportionally with the amount of goods a company produces. Lastly, revenue streams represent a vital component of a business model, and they result from value propositions that are successfully offered to customers. This component analyses for what value of product a customer segment is willing to pay and what they currently pay (Greco, Rodríguez, & Wharton, 2007). Learning about the willingness of customers to pay a certain amount also helps a firm in making financial plans. Moreover, other factors such as transactions and fixed payments also determine the financial position of a company. Therefore, revenue streams play a major role in determining a firm’s financial operations. 3.0 Application of Business Models and Strategies by Companies As stated earlier, firms or businesses operating in a competitive environment must implement strategies that help them to gain value. In most cases, these strategies are implemented in a bid to ensure that a company gains a competitive edge over its competitors. In a competitive environment, firms must implement strategies that attract customers in order to survive in the market. Some of the strategies implemented by most firms include the cost-leadership strategy 3.1 Application of Cost-leadership Strategy at Hotpoint Company The kitchen and appliances industry in the UK is known as among the fastest growing segments in the United Kingdom. Moreover, with the advancement in technology, this appliances industry has developed; hence, attracting a substantial investment for the past years. One of the appliances companies in the UK is known as Hotpoint. Hotpoint is a an European and American firm that deals with a range of domestic appliances Bussière, & Rancière, 2013). The ownership of this firm is split between an Italian company known as Indesit and an American company called General Electric. Hotpoint was formed in 2011, and since its establishment, it has extended to other countries worldwide in order to widen its market (Bussière, & Rancière, 2013). This company is well known for its refrigerators and washing machines, and it is also known as the firm that produces the largest among of kitchen appliances in the United Kingdom. In the market, Hotpoint Company has faced major competition from firms such as Samsung, Midea Group, LG, and Appliance365, since they are also main players in the industry. In order to gain a competitive advantage, Hotpoint has considered using cost leadership strategy. In cost leadership, a company tends to set out for the aim of becoming the low cost producer in the industry under which it operates. Taking this into consideration, for the past five years, Hotpoint has portrayed major devotion in trying to become a low cost producers within the kitchen appliances industry. This is evident in branches all over the world as well as in the United Kingdom (Hotpoint Company, 2010). The main attribute that has enabled the company to be a low-cost producer is the large economies of scale enjoyed by the firm. This has enabled the firm to achieve and sustain overall cost leadership in the kitchen appliances industry. Currently, Hotpoint is considered an above average performer in the kitchen appliances industry, and this means that it is able to command prices that are affordable to customers compared to those of other firms within the same industry. By embracing the cost-leadership strategy, Hotpoint has managed to achieve its competitive edge in the market. This is because the strategy has ensured that the company offers its products at lower and cheaper prices unlike other firms in the same industry. The company has also managed to maintain low prices without disregarding the customer needs and expectations. The main advantage of this is that customers have been able to obtain quality products at affordable prices Bussière, & Rancière, 2013). This is one of the reasons that explains why the company has grown significantly over the past few years. Through this, the company has been in a position of sustaining a competitive edge in the kitchen appliances industry. Therefore, the cost-leadership strategy has played a major role in boosting the overall performance of the firm. However, although the cost-leadership strategy has enabled the firm to increase its customers, the strategy is not fully effective in the competitive industry. Even with the fact that some consumers tend to be price sensitive, low-priced products in the industry are perceived as of low quality. As a result, this has affected the level of sales recorded by the company, since a number of consumers prefer buying goods from expensive firms such as Samsung, in the belief that they are of high quality. Currently, the management is considering implementing the differentiation strategy which will enable the firm to enhance its uniqueness; hence maintaining its brand. 3.2 Application of Differentiation Strategy at Heineken Brewery Beer is among the most favourite alcoholic drinks in most countries such as the United Kingdom, which has more than 25 million drinkers across the nation (Tomlinson & Branston, 2014). There are many brewery companies established in both the developing and developed countries. For the past five years, there has been a major increase in the number of brewing companies in the United Kingdom and other countries. These brewery firms have resulted in a high level of competition in this industry. Heineken UK is a subsidiary company of Heineken NV, a Netherland-based international brewer. The company is currently the third in the world in regards to beer production by both quality and volume (Vignali & Vrontis, 2011). In order to outdo its major competitors, the firm has implemented the differentiation strategy. The objective of any ideal and competitive business is to gain a competitive edge in order to maintain a considerable wide share in the market (Warner, 2010). Currently, Heineken has changed its competitive advantage from low cost to differentiation. In reference to this, Heineken is a type of beer that has a distinctive flavour that gives a refreshing European taste. This taste is used for betters produced by Heineken at the headquarters and in other branches worldwide (Tomlinson & Branston, 2014). This refreshing taste has made beer a favourite drink for most consumers in the United Kingdom and other countries. Another uniqueness established by the firm is the packaging, which is both attractive and unique. With such as high level of differentiation, consumers are in a better position to recognize it easily. The implementation of the differentiation strategy by Heineken Corporation has played a major role in boosting and encouraging consumer responsiveness (Warner, 2010). The company has managed this by offering a unique brand of beer in the brewery industry. Despite the restrictions, high taxes, and strict regulations from the government the company has still managed to operate profitably through maintaining uniqueness. Additionally, the differentiation strategy has helped the firm to enhance creativity; hence enabling it to maintain relevance in the industry (Vignali & Vrontis, 2011). Through product differentiation, Heineken Company has placed itself at high level in production of beer. Most customers in the brewery industry are loyal to the brand such that they are willing to buy the product at the current market price. By considering this, it is evident that the differentiation strategy has worked well for the Heineken Company with regards to production of Heineken beer. 4.0 Conclusion In summary, it is evident that the main aim of a company is to operate profitably by gaining a competitive advantage over its competitors. In order for a firm to gain a competitive edge in the market, it must implement effective strategies. Firstly, Porter’s five forces helps in analysing the level of competition in different industries. The level and extent of competition varies within different industries because of differences in the number of customers or types of goods produced by each. The main forces affecting the market include power of supplier, bargaining power of buyers, threat of new entry, threats of substitutes and competition rivalry. Secondly, the generic strategy is a tool that helps in evaluating the manner in which firms pursue a competitive edge by implementing effective strategies. These strategies include, differentiation strategy, low-cost strategy, differentiation focus, and cost focus. A firm decides on the most effective strategy to implement depending to its competitive position in the market. In regards to industry application, Hotpoint is a kitchen and appliances company whose headquarters are located in the UK and its operations in other countries worldwide. Hotpoint has implemented the cost-leadership strategy, which enables customers to obtain the company’s products at cheaper prices. However, the management is considering implementing the differentiation strategy, which will enable it to pull a large group of customer. On the other hand, Heineken is a brewery company based in the United Kingdom and other countries a such as the United States and Germany. This company has implemented the differentiation strategy by ensuring that the alcohol produced by the firm has a unique taste. Overall, the management of firms that operating in a competitive environment must ensure that the strategies implemented are effective and beneficial to both consumers and the company. 5.0 References Bussière, M., & Rancière, R. (2013). The Financial Crisis: Lessons for International Macroeconomics. Journal for financial Crisis, 14(3), pp. 89-95. Dobbs M. (2014). Guidelines for applying Porter's five forces framework: A set of industry analysis templates. Competitiveness Review, 24(1), pp.32-45. Greco, A. N., Rodríguez, C. E., & Wharton, R. M. (2007). The culture and commerce of publishing in the 21st century. Stanford, Calif: Stanford Business Books. Hambrick , D, & Fredrickson, J. (2014). Are You Sure You Have a Strategy? Academy of Management Executive, 15(4): 48-59. Hotpoint Company. (2010). Let's get acquainted with your Hotpoint customline range ensemble: Identification of oven features, identification of cooking top features. Chicago: Hotpoint Co. Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press. Rego, L., Morgan, A. and Fornell, C. (2013). Reexamining the Market Share--Customer Satisfaction Relationship. Journal of Marketing, 77(5), pp.1-20. Roy, D. (2009). Strategic foresight and Porter's five forces: Towards a synthesis. München: GRIN. Tomlinson, P., & Branston, J. (2014) ‘The demand for UK beer: Estimates of the long-run on- and off-trade beer price elasticities’, Applied Economics Letters, 3(3), pp. 209-214. Vignali, C., & Vrontis, D. (2011). Survey research in the UK beer industry. British Food Journal, 4(3), pp. 371-380. Warner, A. G. (2010) Strategic analysis and choice a structured approach. New York: Business Expert Press. Read More