Strategic Management - Making Choice between Competitive Advantages - Essay Example

? STRATEGIC MANAGEMENT ………………………….. College ……………………………… ……………….. Words count: 3186 -- Answer Making choice between competitive advantages Competitive advantage is at the very heart of any business or management strategy because businesses invest heavily on implementing various strategies with a view to achieve sustainable competitive advantage. A business is said to have competitive advantage when it is able to utilize its resources as well as competencies to generate a value-creating strategy that its competitors find difficult to copy for their business (Fitzroy and Hulbert, 2005, p. 201). Competitive advantage is the influential power of a firm that in turn convinces the potential customers to buy its products or choose its services rather than its competitors’. Hill and Jones (2009, p. 74) argued that firm can be said to have attained competitive advantage when its profitability is greater than the average profitability of all companies in the industry and this become ‘sustainable’ when the firm is able to maintain above average profitability over a number of years. Fierce competition among firms resulted in varying levels of performance as individual firms may choose to pursue different objectives and strategies to gain increased profits, sales growth, better market share, and cash flow and so on. Strategy has got significant stance in the competitive business landscape and that has become the cornerstone to achieve competitive advantage. Successful firms are those that demonstrate long-term advantage over its competitors with their ability to do its core business activities better than how its rivals do in the market. As firms are highly focusing on achieving competitive advantage, they are attempting to find the best way to position itself against its rivals by using and implementing business-level strategies. Business-level strategy is the plan of action that managers adopt certain methods and ways to effectively use company’s resources and distinctive competences to gain competitive advantage over its counterparts in the market (Hill and Jones, 2011, p.119). Michael Porter, often credited as father of modern business strategy field, has profoundly impacted modern thoughts of management and business strategies through his works ‘competitive advantage’. He wrote that competitive advantage is at the heart of any business strategy and it is extremely important for a firm to make a choice about the types of competitive advantage if it seeks to attain competitive advantage (Porter, 2008, p. 12). Michael Porter argued that firms, no matter they operate nationally or internationally, face an issue of strategic choice in relation to generic strategy. The basic generic strategy described by Michael Porter involved competing either on the basis of low-cost strategy or product differentiation strategy. He argued that a company’s position in its concerned industry can be determined by its competitive advantage and its competitive scope (Gilles, 1996, p. 214). He suggested that each of the generic strategies involved a basically distinctive route to achieving competitive advantage and he recommended a choice for type of competitive advantage a firm may consider for the strategic target. Michael Porter illustrated the combination of competitive advantage and competitive scope through a two-by-two strategy choice matrix as illustrated below. The above depiction of the generic strategy illustrates that cost leadership and differentiation strategies pursue competitive advantage in quite a broader range of industry areas whereas focus strategies tend to vary largely from industry to industry since it represents narrow market segments. Since there are different strategies to achieve competitive advantage and all their routes are different from each other, it is very important that a firm should take a choice among them in order to see and implement the best appropriate strategy for the firm. Michael Porter stressed that each of the three generic strategies requires its own specific circumstances. The firm should ensure that it selects a specific strategy in order not to be stuck in the middle without rightly attaining the competitive advantage. Cost Leadership Strategy: It is perhaps the best clear of the three generic strategies. With cost leadership strategy, the company attempts to become the low-cost producer in the industry may be through a number of different tactics such as economies of scale, use of innovative technology, efficiency improvement, better R&D, preferential access to raw-material and other ways (Wit and Meyer, 2010, p. 269). The low-cost strategy doesn’t simply mean the lowest price actually paid by the customer, but is the lowest among all available alternatives with no compromise on quality and value. Value is what customers expect in return for the price they pay. In certain circumstances, customers may incur costs outside the control of the business such as costs for distribution, transport, tax etc. and therefore when a firm is attempting to take low-cost strategy it needs to achieve all sources of cost-advantages. Differentiation Strategy: If a firm is not able to take cost-leadership strategy, but is able to differentiate its products and services along with those attributes that customers value best, and the cost for implementing this strategy is lower than the extra revenue it may yield, then the differentiation strategy will be appropriate for the company. In the differentiation strategy, the company seeks to be unique in its industry along certain attributes that will be widely valued by its customers. The company thus focuses on certain attributes that its customers perceive as highly important to add up to the values they provide (Wit and Meyer, 2010, p. 269). Focus Strategy : According to Porter’s (1985) view, when neither a low-cost strategy nor differentiation strategy is possible for a firm, a focus strategy may be appropriate. By implementing this strategy, the company focuses on finding a niche in its market and will go for developing that niche to achieve competitive advantage (Analoui and Karami, 2003, p. 134). Industrial Example Apple Inc, one of the leading marketers of computer and Smartphone products, is an example for a company that has successfully implemented differentiation strategy to achieve competitive advantage. As illustrated below, Apple remained far positive in one of the rigorously competitive industries with its differentiation strategy as Apple has become highly renowned for unique products such as iPod, iPad, iTune, iMac, iLife, iPhone and so forth. Apple example emphasizes the fact that a firm that seeks to achieve competitive advantage is required to choose best appropriate strategy for the company and put in efforts to sustain the competitive advantage. Answer-2 Porter’s Value Chain The value chain concept developed by Michael Porter in 1980s proposed that a typical business organization pass through a number of different organizational functions that bring the ultimate outcome, that are the sum total of ‘value’ to the customers and ‘profits’ to the firm. Each and every part of the total operation including designing, manufacturing, marketing, delivering products or services, inbound logistics, outbound logistics, procurement etc deliver a significant part of ‘values’ to customers and a considerable portion of profits to the firm. The value chain analysis proposed a system view of the firm as composed of different stages in the transformation process in which inputs are transformed to outputs. Value is the price that the customer is willing to pay for a particular offering and profit is the difference between this value and the total costs incurred to the firm for marketing its offerings (Grimm, Lee and Smith, 2005, 74). Michael Porter described five value-generating primary activities; that are 1) inbound logistics, 2) outbound logistics, 3) operations, 4) marketing and sales, and 5) services. Inbound logistics are activities associated with receiving, storing and disseminating inputs whereas outbound logistics are activities associated with collecting, storing and physically distributing the products to buyers. Operations are the key activities involved in transforming inputs in to the final product forms. With marketing and sales, products or services are marketed to customers and services are activities associated with providing service to enhance the value of products. The value chain is supported by four activities; they are Procurement, Human Resource Management, Technology development and infrastructure (Needle, 2010, p. 275). Major implications of Value Chain 1- Cooperation from all the members of the chain: Value chain concept proposes that ‘value’ that customers are expecting to gain by acquiring or consuming a product is generated through a number of different functions. These functions work as a chain and each one in the chain contributes significant portion of value to the final output. Value generation or value creation requires cooperation from all the members of the chain. Organization is depending on each functional areas of the chain to get value and all the members in the chain are therefore to be coordinated either through negotiation or through market forces. 2- Considering the needs of other chain to gain mutual advantage Since all the different chains in the value-chain are aimed to generate value, each chain member has to consider the needs of the other chain so that all the different functions can attain mutual advantages. 3- Advantages of cost improvement and efficiency improvement Each one in the value chain can benefit from cost improvement and efficiency improvements in the long-run. 4- Managing value is critically important The primary activities and support activities wont function automatically, but an effective management system is required to successfully coordinate among various functions and therefore managing is an integral part of the chain. 5- Primary reliance on the contribution of people People and their role in the chain seem to be most critical to bring about the value. People play significant roles in the value-chain and their work, efficiency, ability and performance largely determine the efficiency of the value-chain system. Porter’s value chain to pursue cost leadership and differentiation strategies Value chain analysis is an important strategic tool for managers to successfully implement cost leadership and differentiation strategies. The value chain is a specific set of value-creating activities from the basic raw-materials to the disposal of finished goods by the ultimate customers. The value chain framework is a compelling approach to recognizing a company’s strategically important activities such as inbound logistics, outbound logistics etc. As it is a chain, it consists of complex linkages and interrelationships between activities within the chain. Michael Porter illustrated two types of linkages among the chain-activities; they are internal linkage and external linkage. Internal linkage refers to the relationship among the activities that are performed within the firm’s portion of value chain whereas external linkage represents the relationship of a company’s value chain activities that are performed with its customers as well as suppliers (Hansen, Mowen and Guan, 2009, p. 379). Both internal and external linkage can be used to analyze various strengths and opportunities and weaknesses and threats in order to implement cost leadership and differentiation strategies. Managers can exploit internal and external linkages by identifying a firm’s activities to select those that can significantly help it achieve competitive advantage. Managers use value chain analysis to determine the parts of the company’s major operations that create values and those that don’t create values. It doesn’t mean that all the different parts of the operation contribute similarly to the values and profits, but some of them may not perform well. Hitt and Ireland (2008, p. 135) emphasized that managers need to concentrate on finding certain ways to reduce their costs relative to those of their competitors in order to successfully implement cost-leadership strategy. For this purpose, they have to rethink how the primary and support activities in the value chain can be used to reduce costs further while maintaining important and quality features. In order to adopt differentiation strategy, managers need to increase customer value by increasing what the customer receives. Differentiation can help the company achieve competitive advantage because the company with this strategic move provides something to customers that is not provided by its competitors. Orcullo (2008, p. 233) stressed that looking in to a company’s value chain is an important opportunity to make differentiation possible. For this, managers need to examine processes such as purchasing and procurement, product research and development, product designs, production process, technology, manufacturing, distribution and marketing. This can help them identify those activities in the chain that can contribute to differentiating the products or services. For instance, using latest technology along with research and development may help managers think about developing new products or newer brands that are yet to be marketed. Architecture as a source of competitive advantage There are many different strategic ways for a business to attain competitive advantage. John Kay (1993) argued that a firm is able achieve competitive advantage through its distinctive capabilities. A firm’s capabilities become distinctive when they emanate from a specific feature which other firms do not have or cannot easily replicate. Kay hypothesized that the distinctive capabilities of a firm derive basically from three areas; architecture, reputation and innovation. These three areas are primarily linked to certain relationships between an organization and its stakeholders. Architecture, innovation and reputation hold certain relationship among employees, customers, shareholders, suppliers and any others groups that are somehow connected to the business (Henry, 2008, p. 132). Kay (1993, p. 39) advocated that there are different relationships within a firm and between firms. These relationships are complex, subtle and hard to be replicated. It is a pattern of relationships that can yield substantial competitive advantage for these firms. Their competitive advantage arises out of the acquisition of organizational knowledge. A firm’s architecture comprises of systems of relational contracts that exist inside as well as outside the firm. A key component of architecture is information exchange between various departments or parties within the firm. Kay’s assertion that architecture is a source of competitive advantage is closely related to the norm that knowledge management is a strategic pathway to achieving competitive advantage. Knowledge management has recently gained considerable attention among business experts and managers as a powerful strategy to gain competitive advantage. Knowledge management is a process by which business performance can be enhanced and competitive advantage can be achieved by designing and implementing various tools, processes and system in a way that knowledge can be generated, shared and utilized for the organizational purposes. Noe (2002, p. 168) described that knowledge management basically comprises of three elements, knowledge creation, knowledge exchange and knowledge use. The second element in the knowledge management is knowledge or information sharing which is what Kay meant by the architecture. Architecture within an organization refers to certain relationship between various groups and knowledge sharing is one of the most important components of architecture. Knowledge management that has recently emerged as strategy for competitive advantage is a tool that can bridge the gap between organizational change, innovation, learning and processes. Foster (2005) emphasized that knowledge management encompasses the processes by which the experiences, skills, expertise, knowledge and wisdom of different groups of people in an organization are gathered, shared and utilized for the benefits of the organization. These processes are eventually converted to the collective organizational learning process. Dana (2004, p. 296) considered knowledge sharing as an important source of competitive advantage from the definition architecture described by John Kay and he extended Kay’s definition to include social architecture which is a kind of knowledge sharing and information processing. Internal architecture is the very basic source of competitive advantage. Organizations may take several different forms of strategies to enhance knowledge share among its people. some organizations encourage collaboration and team work to enhance information sharing whereas other firms extensively go for professional training programs that are found to help its members share and exchange information among them. Some firms retain older workforce to enhance sharing of their experience and knowledge to the younger workforce whereas some other organizations encourage networking and internalization for transferring both tacit and explicit knowledge. Knowledge share is undoubtedly a powerful strategy that can underpin superior performance. More knowledgeable people are found to work more effectively and are therefore highly productive and are high performers. Architecture is the structure of relationships within an organization and between the organization and its various stakeholders. Successful organizations are those that 1) creates uniqueness within this architecture, 2) create a distinctive character within the structure of these relationships, and 3) creates conditions in which the ultimate value to be delivered to the customers is maximized by the organization. Knowledge exchange process can play pivotal role in bringing about a unique stance in its relationship and thus in improving the value to be delivered to the ultimate customers. Kay (1993, p. 40) asserted that architecture directly impacts the performance. Performance excellence is founded on the abilities of people who maintain certain relationship between them within the organization. As he noted, architecture doesn’t create extraordinary organizations by gathering extraordinary individuals, but rather, the specific architecture makes the firm extraordinary by enabling very ordinary people to perform in extraordinary ways and thus to achieve unique competitive advantage. People’s performance is an extremely critical factor to impact the value. A firm that enhances knowledge exchange among its people in order to make its people work extraordinarily, the firm would certainly attract highest numbers of customers since it can offer high values to its customers. With architecture, John Kay meant a specific structure of relationship within a firm and between the firm and its stakeholders and he considered this as a significant source for achieving competitive advantage. Industry example for architecture as a source for competitive advantage Kay (1993, p. 41) considered Liverpool Football Club as an illuminating example for a firm that achieved competitive advantage through architecture. He pointed that the most interesting fact about Liverpool football club was that its performance is not just that the firm itself has done well, but that it has done better than what has been expected from its players. Kay (1993, p. 41) described that Liverpool Football Club illustrated a principal way in which its architecture could perform the basis of distinctive capabilities. The outer-performance of Liverpool football club was due to the intangible asset it created and enhanced. This intangible asset is the organization knowledge. This organizational knowledge has helped its members become high achievers and thus to achieve competitive advantage. Almost all different firms possess organizational knowledge, but this varies from firm to firm. Organizational knowledge is a distinctive capability and this can largely impact the performance of the organization. Kay (1993, p. 42) explained that certain firms such as professional service and many other small companies in high tech fields need technical knowledge to carry out their business. in order to add values, these companies need to create organizational knowledge from the available skills of its members. This can, in turn, be viewed as the effective utilization of the resources, because skills and knowledge of a firm’s members are the resources available in the firm and this can be effectively utilized to bring better outcomes. Managing resources effectively is the most easiest and highly effective way to achieve competitive advantage. 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