Firm Resources and Sustained Competitive Advantage - Assignment Example

Examine the assertion that the success of a multinational company depends on exploiting the opportunities and blocking threats in the international markets. This corresponds to Porter’s concept of ‘environmental fit’ that allows the company to improve its competitive position. In an interview for a job for a recent MA in international Business, the interviewer asks you to comment on the view that ‘Positioning determines whether a firm’s profitability is above or below average’. Prepare an answer by arguing that the fundamental basis of above-average performance in the long run is sustainable competitive advantage Aim Multinational companies have previously enjoyed the benefits of competitive advantage in the respective markets as a result of their ability to position themselves in the market and exploit resources. However, the values of competitive advantage are under threat as a result of increasing competition, and also the volatility in the market. For example, clothing companies were able to exploit the low cost labour market in some parts of the world, but improved communication links and the Internet have resulted in public outcry over perceived exploitation. The countries involved in supplying these companies have also benefited from the infrastructure and equipment injection which has resulted in an increase in wages. This suggests that the competitive advantage of multinational companies can no longer be guaranteed which has prompted most to seek out sustained competitive advantage. Sustained competitive advantage is when the benefit of implementing value is prolonged, especially when value strategy is one which cannot be duplicated (van Zyl 2006). This would suggest that more and more companies are investing resources into researching value-creating strategies in a bid to maintain their market positioning and competitive advantage. This coursework aims to provide evidence that above-average performance in the long-run is the basis of sustainable competitive advantage. This will be achieved using the following objectives: Defining competitive advantage Defining sustainable competitive advantage Investigating the theories and models of competitive advantage Statement Sustained competitive advantage is largely down to value creating strategies which serve to differentiate the organization and create a unique selling point for it. However, one must also remember that the success of any strategy will be determined by the efficiency and effectiveness of the application of organization-specific competitive resources and the exploitation of the potential capabilities they provide (van Zyl 2006). When one considers the nature or what comprises the organization-specific competitive resources, these would include: financial resources as they determine the availability of resources and enable developments and innovations; physical resources include space and equipment that will enable value to be added to the good or service; as well as human resources which are key to the implementation of any strategy and its success. Other resources would include the intangible resources such as knowledge and the communication networks within the organization that provide added value. This suggests that the process of attaining sustained competitive advantage is one which relies on the longevity of the organization, and not one which can be rapidly implemented. Leavy (2003) has suggested that the key to attaining a sustainable competitive advantage is down to market position and core competence, which further supports the notion that sustained competitive advantage is dependent on the longevity and performance of the organization. For instance, market positioning is essential when starting and running a business as it determines the organisation’s advantage and position within an industry, whilst core competence builds on the organization-specific competitive resources mentioned earlier (Leavy 2003). This suggests that an organization will be able to achieve above average performance in the long-run, if they can maintain and sustain the factors required to create a sustainable competitive advantage. However, in the current business climate this is becoming more difficult as labour wages rise which results in some valuable personnel being laid off; the financial markets are currently in turmoil which is reducing the real value of assets in organizations as well as market value and confining knowledge within an organization is being hampered by the continuing development of the internet. With such instability in the operating environment, it becomes difficult for organizations to define long-run in terms of real time, as the situation can change at any time. This has prompted some discussion and debate on whether sustainable competitive advantage can still be considered to be the basis of above-average performance, given that the factors that contribute to a sustainable competitive advantage are no longer stable themselves. Literature Review Porter (1985) introduced competitive strategies and stated that a firm’s relative position within its industry determined whether its profitability was above or under average. This suggested that profitability was closely linked to where an organization placed itself within the industry, and it also suggested that one market position did not always work for other organizations. The impact this has is that it allows many organizations within the same industry to achieve above average performance. Porter (1985) went on to state that the fundamental basis of above average profitability in the long run was sustainable competitive advantage, which suggests that competitive advantage is largely linked to market positioning. Van Zyl (2006) has also stated that competitive advantage is the result of following of a planned strategy which further supports the view that competitive advantage is linked to market positioning. However, barriers to entry to certain markets which previously existed have fallen such as the requirement for a physical location for service organization. The internet has enabled individuals to start their own businesses and in some cases they can also achieve a greater competitive advantage than older more experienced organizations. This has resulted in an increase in the number of organizations available and each of those organizations is also looking for a competitive advantage, which has become difficult to achieve given that the power now lies with the customer and not the supplier. For instance, customer convenience could be considered to be a unique feature which contributes to a competitive advantage (Cook 2003), however, the internet now affords every organization this same unique feature. The use of customer call centres has also removed the uniqueness of superior customer experience. Learned et al (1965) have proposed that competitive advantage is based on an organisation’s ability to respond to threats and opportunities that exist in its operating environment. However, one could argue that this is more closely aligned with the ideal of sustained competitive advantage, as this would involve being responsive to the environment and developing strategies which enable the organizations to adapt to its ever-changing operating environment. This is further supported by statements from Learned et al (1965) which state that competitive advantage develops along consistent systems of strategic objectives, the ability to adjust these objectives and policies and the implementation of the resulting strategy within the organization. Models of Competitive Advantage Environmental/positioning model The environmental positioning model was put forward by Porter (1985) and this model states that competitive strategy is based on the external environment, the organisation’s behaviour and the market. It was this model that advocated the presence of two factors which can be considered to influence an organizations competitive advantage: the competitive environment and its market position (Barney 1991). In order to remain competitive within a market, an organization has to be able to attract customers and also maintain healthy relations with its suppliers in terms of cost. In addition to this, competitiveness will also depend on the number of competitors within the market. If there are more competitors then it is likely that an organization will not be competitive as it will not be able to provide a unique service or product. However, Porter (1985) stated that market competitiveness and market positioning had a major influence on profitability within an industry and was primarily determined by the organisations’’ response to industry specific requirements. For example, in the automobile industry, industry specific requirements could include requirements such as converting from lead to unleaded fuel. It is clear that those organizations within this industry that respond the quickest to this requirement will witness higher levels of profitability. However, the essence of this statement is that organizations that occupy a favourable market position within the industry will probably benefit from profitability before other organizations do. Organisations tend to position themselves within a market by following one of three or a combination of strategies. The first being the cost leadership strategy which is when the organization supplies its goods or services at the lowest cost within the market (Hoffman 2000). Examples include Walmart and/or Asda supermarkets which have managed to provide goods at a relatively lower cost than either of their competitors, and in return they have managed to achieve a sustainable competitive advantage that has been fuelled by profitability. The second strategy is the differentiation strategy where the organization provides a different product that is of a higher quality and possibly more functions that the standard product offered by competitors at a higher price (Van Zyl 2006). This can be seen in the video game industry which is highly competitive, but there are a few organizations that are able to offer a higher quality product such as Sony, Microsoft and Nintendo. Without this quality, these organizations would not experience the high profit that is the norm at the moment. The final strategy is the focus strategy which is when the organization focuses either the cost leadership or differentiation strategy on a niche market (Woodruff 1997). This strategy allows the organization to exploit markets which tend to be ignored as a result of non-standard items. Resource based model This model suggests that the source of competitive advantage is derived from associated strategies, resources, strengths and weaknesses, and not market positioning or competitive environment (Coff 1999). This view seems to take more factors into account given the current operating environment is comprised of many factors. This model also differs from the previous model in that Porter’s model attributes competitive advantage to two main factors which are in essence based on strategy. The resource based model expands on the strategies and attempts to present each contributing factor to the model. For instance, the resource based model does not base sustainable competitive advantage on the market position or the condition of the market itself, but it bases sustainable competitive advantage on an organisation’s internal resources (Coff 1999) which may include knowledge resources. Knowledge within an organization is vital as it creates value that cannot be easily duplicated if at all. Proponents of this model state that it is this value which is responsible for profitability and maintaining a sustainable competitive advantage. This suggests that competition is no longer based duplicating other organizational formulae, but that competition between organizations is based on unique resources that are not widely available to organizations in the same field. In some ways this can be considered to closely mirror current businesses, as most organizations now operate across several industries. For example, supermarkets which would normally occupy the retail environment are now involved in selling insurance products, clothes and offering services such as internet. This demonstrates that these organizations are using their resources and utilizing their value and knowledge to diversify into other markets. For instance, a supermarket selling insurance and broadband products is poised to be visible to millions of customers as most, if not every person will enter a supermarket at some point. This is different to the traditional insurance market which would not be able to access this customer base, as the customers would have to look for them. This in turn would increase the operating costs of insurance companies to pay for advertising and marketing, which the supermarket would not have to do, and thus increase its profitability. To summarise this section, Porter’s environmental/positioning model bases profitability on the fortunate positioning and use of strategy to gain competitive advantage, however the resource based model takes the knowledge economy and value into account. Whilst the environmental/positioning model does provide a basis and explanation of some organisation’s profitability, it does not take into account the fact that for strategy to applied and for resources to be positively exploited, certain skills and attributes are required which come in the form of value and knowledge. The environmental/positioning model seems to relate more to the colonial era where companies such as Tate and Lyle were able to become profitable, through market positioning and the absence of formidable sponsors during the time period. However, organizations in the current operating environment no longer view market positioning as the sole guarantee of profitability. As globalization increased, so did the movement of knowledge which has largely contributed to the profitability of some organizations. For example, some organizations have shifted jobs to Asia where costs are lower and thus increased their profitability. The question though still remains: is this long term profitability and is this competitive advantage sustainable. Analysis This section will analyse what is meant by the term sustainability in order to meet the aim of this paper. Gomes (1988) defined sustainability as “the ultimate test of competitive advantage”; which could be interpreted as determining whether the organization will survive the changes in the market. Gomes (1988) also states that a sustainable competitive advantage will exist where rival firms are not able to easily duplicate or imitate the distinctive competencies that are the sources of such an advantage.” This supports the resources based model in the previous chapter which stated that competitive advantage was a result of external factors, some of which included the ability of an organization create value for itself that could not be duplicated. Market positioning alone cannot guarantee that another firm will not duplicate a good or service. For example, referring back to the video gaming market; the Nintendo Wii gaming console would be difficult to duplicate, as would the Sony Playstation. These consoles are unique in that they have added value to their organisations, and this value cannot be easily duplicated and as a result, each organization is able to achieve some level of competitive advantage in the same market. This demonstrates that a sustainable competitive advantage is dependent on the knowledge and value economies. Therefore the resources based model enables the attainment of sustainable competitive advantage by creating an environment where organisations do not compete on copies of products and/or goods, but compete on resources and knowledge. Gomes (1988) states that the ability of an organization to achieve sustainable competitive advantage that yields above average profits would be one that was dependent on the economic and competitive structure of the industry; the organisation’s choice of strategic direction; and the durability of their competence. This clearly acknowledges the resource based model more than Porter’s model, as it encompasses a variety of factors which are known to contribute to sustainable competitive advantage. Components of Porter’s model are acknowledged in this statement from Gomes (1988), which includes the market positioning and nature of the market. In addition to this, one sees constant reference to capability and competency which are related to value and knowledge. It therefore transpires that the extent to which competitors will go to, to close the competency gap will determine the sustainability of the competitive advantage (Gomes 1988). This means that if a product or service was easily duplicated, then the competitive advantage was not sustainable and vice versa. This bears similarities to profitability in that where there are many duplicates, profitability is low, and where little duplication exists the profitability is higher. Therefore, if profitability is proving to be the basis for long term sustainable competitive advantage, it would be equally useful to find out how this can be achieved. Profitability it would seem is generated by the presence of knowledge based assets that have value and that are difficult to duplicate (Coff 1999). This lends more support to the resources based model on competitive advantage. Findings and Conclusions The literature review and analysis have highlighted the use of two main models to explain how profitability is the basis of long term sustainable competitive advantage. However, it becomes clear that the resources based model encompasses more factors into this explanation by including the input and value of the knowledge economy. This does not mean that the alternative model is obsolete, but demonstrates how the understanding of profitability has evolved over the years. As a result, Porter’s model appears simplistic by only attributing profitability to market forces only whilst ignoring the important role that the organization itself plays. One can argue that Porter’s model is based on his five forces model which also includes threats and opportunities to the organization, these still do not acknowledge the role of the knowledge economy in creating value for an organization which can be translated into profitability. On the other hand, the resources based model seems more apt for the current operating climate which has witnessed major changes in terms of its resources. For instance, the labour economy has significantly changed with most jobs being outsourced; organizations are beginning to take more control over their supply and value chains in a bid to reduce costs; and certain world events also mean that the supply of raw goods has the potential to be disrupted. With such changes occurring at a very pace, most organizations are beginning to pay attention to their knowledge base and probably focusing on managing their resources more effectively. The analysis also showed that sustainable competitive advantage was also defined as extent to which competitors will go to; to close the competency gap will determine the sustainability of the competitive advantage (Gomes 1988). This definition was instrumental in this research as it does provide a glimpse of a different kind of competition within all industries. For instance, organizations would compete on price, cost or brand name, but this definition suggests that these factors are not sufficient enough to count as competition. It also suggests that competency within an organization has to be enacted at an early stage and during the recruitment process for it to reap the profits for the organization. When strategy is implemented in this manner, it becomes difficult for an organization without the same strategic insight to duplicate a service or good without undergoing organisational change in the first instance. This definition also provides some evidence that the knowledge economy is gaining importance when it comes to profitability. This will probably result in changes in recruitment policies and strategies, as organizations search for individuals that will add value to their organization, and not just individuals to complete certain tasks. Conclusion This paper sought out to demonstrate that above-average performance in the long run was the fundamental basis for sustainable competitive advantage. After conducting a brief literature review and analysis, the author determined that above-average performance did form the basis of sustainable competitive advantage in the long run. Other theories and models were explored which all came to the same conclusion, however there were some differences on the factors behind an above average performance. It seems that above-average performance could be achieved by increasing the value of services and goods, through exploiting the knowledge within an organization. The paper also met its objectives that were set. The definitions of competitive advantage and sustainable competitive advantage were explored, which provided valuable insight into the components of profitability. The definitions were also useful in that they enabled the author to distinguish between the various schools of thought. The final objective was to investigate the theories and models of competitive advantage, which also provided insight into how organizations can manage and develop strategies that can help them move from just having a competitive advantage to having a sustainable competitive advantage. References Baker. M, Barker. M, Thorne. J & Dutnell. M. (2000). “ Leveraging Human Capital.” Journal of Knowledge Management, Volume 1(1): 63-74. Barney, J. (1991). "Firm Resources and Sustained Competitive Advantage." Journal of Management. Volume 17 (1): 99-120. Bollinger, A.S., & Smith, R.D. (2001).” Managing organizational knowledge as a strategic asset.” Journal of Knowledge Management, Volume 5(1): 8-18. Coff, R.W. 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