The Concept of Competitive Advantage - Essay Example

Introduction Competitive advantage provides organizations necessary source to distinguish themselves from others and based on this advantage, they dominate their respective industries. There can be different sources of competitive advantage and organizations use them to achieve a distinctive position within their respective competitive industries. The overall concept of competitive advantage is based upon the resource based view of the organization. Organizations have resources which can be used to perform at a higher level as compared to their competitors within a given industry. Gaining competitive advantage by using the resources of the firm can include access to natural as well as other resources which can help organizations to stay ahead of the competition. Objectives and Methodology This paper will discuss about four firms from retail industries and will discuss as to whether the competitive advantage possessed by each of the firm is based upon the unique resources possessed by them. By using different strategic frameworks and theories, this paper will focus upon how firms like Tesco, Carrefour, Wal-Mart and Aeon use their unique resources to gain competitive advantage and remain at the top of their industry. Frameworks and theories which will be used for analyzing the above thesis will range from Porter’s five forces model, Value Chain analysis, VRIO as well as Core Competences. By using these frameworks, this paper will analyze and explore as to how leading firms in retail industry has been able to use their unique resources to remain at the top of industry in which they are operating. Competitive Advantage Competitive Advantage is considered as the strategic advantage firms have over their competitors in the industry they operate. Achievement of a competitive advantage actually strengthens the position of a firm in the industry and business environment they operate. Competitive advantage theory suggests that businesses should produce and sell high end products and sell them at higher prices in the market. Michael Porter who outlined this theory suggested that organizations need to possess attributes or group of attributes which can actually distinguish them from others in the market. Competitive advantage is based upon the notion of resource based view which outlines that organizations can have certain resources which can actually distinguish from others in the industry. (Stalk, 1992) Resources based view The resource based view suggests that firms possessing competitive advantage are primarily based upon the application of resources which are at the disposal of the firms. This view outlines that a firm is a bundle of resources and it’s through the use of different combinations of these resources which provide firms competitive advantage in the industry in which they operate and gain the required dominance in market. (Andersén, 2010) Resources are defined loosely and are considered as internal to the organization and may include assets, capabilities, processes, information as well as knowledge. The overall range of resources possessed by the organizations may be diverse however, organizations have to decide what resources are strategically important and can be utilized for achieving the competitive advantage over other firms in the industry in which they operate. Porter’s Five Forces Analysis Retail industry is often dominated by few but very large players which control most of the market. Firms like Tesco, Wal-Mart, Carrefour and Aeon, tend to dominate their respective market and as such the impact of different forces on them is relatively unique in nature. Buyers’ Power Due to the large size of these firms, there are very few players operating in the market thus it limits the choice for buyers to look for other alternatives. What is however, important to understand that competitors are large too and buyers can easily switch from one retailer to another if prices offered by one retailer are higher? Due to switching cost, buyers tend to exercise relatively higher power and can force prices down. Suppliers’ Power Due to sheer size of firms like Tesco and Wal-Mart etc, they can dictate suppliers by paying them lower prices. Retail firms purchase in bulk and therefore obtain relatively larger discounts as compared to small retailers. Due to higher purchasing power of these firms, suppliers tend to have relatively low power to bargain. Threats of new entrants It is critical to understand the size of the firms in this industry tend to act one of the biggest barrier to entry in this industry. Firms like Wal-Mart, Carrefour, Tesco and Aeon has been operating since last many years and have grown to the size where it is relatively not possible for new entrants to actually compete with them. The threat of new entrants therefore is relatively small. Threats of Substitutes Though the substitutes of such firms exists in the form of smaller retailers however, due to their size, smaller retailers may not be able to offer the same level of price performance as it is being offered by large firms in the industry. Due to low switching costs, buyers can exercise the option of switching to the substitutes however; it may not be possible as cost savings offered by large retailers may not be easily replicated by smaller retailers. Rivalry The overall exist barriers in the industry are high and industry concentration is higher too therefore the overall degree of rivalry between the firms may be relatively high. Since profit margins are low in this industry therefore firms tend to compete both on price as well as non-price elements and resultantly price wars often can result between the firms. The overall survival of firms in the industry depends largely upon keeping prices as well as costs low. Resources and Competencies One of the key differences between the value chain analysis of other firms and that of the firms like Wal-Mart and Tesco is that lot of middle men are removed. The traditional supply chain will include manufacturer, wholesaler, and retailer and finally a product reaches to the customer however for firms like Tesco, goods are directly delivered by the manufacturers and hence are directly sold to the customers. This reduces the role of wholesalers and resultantly saves costs for these firms to pass on the same to customers.( Barros & Alves, 2003) Inbound logistic activities of the firms like Wal-Mart tend to focus on direct link between the manufacturer and the retailers. Tesco and other firms use economies of scope to achieve the bargaining power required to keep the costs down.( Jones, et.al 2005). Since they are large and bulk purchasers therefore manufacturers can directly offer them their goods at relatively lower margins thus maintaining their low cost advantage over rivals. In-house efficient inventory management as well as approved vendor lists further offer them advantage over other firms. In-bound logistics at Carrefour are managed through its vendors and as much 60% of the inventory of the firm is co-managed by already identified vendors. (Cambra-Fierro, & Ruiz-Benítez, 2011) The overall operations management system of firms like Tesco, Wall-Mart, Carrefour and Aeon has been heavily I.T. oriented. (Rainbird, 2004). Large scale investment into I.T. system, use of ERP as well as in-house I.T. system has allowed these firms to remain efficient and maintain their operations at desired level of costs. Tesco uses its in-house system with the name of Tesco Digital Program to improve its operations by effectively using information technology.( Fernie, et.al 2010) Outbound logistics of these firms are based on their offline as well as on-line selling outlets. By reaching their customers through large retail stores of various sizes and categories, firms like Tesco, Wal-Mart, Aeon and Carrefour offer their customers choices in terms of buying. These firms are also operating their on-line business with free delivery services thus capturing that segment of the market which prefers to shop online. ( Chadwick,et. Al, 2007). Such customers are additionally facilitated through services such as free delivery and on-line discounts to on-line customers through periodic discounts and bulk purchase discounts. Marketing and sales activities of these firms are normally supported through the loyalty programs and other methods. Tesco offers loyalty program where consumers are offered points when they purchase. Wal-Mart offers low prices, cash n carry facilities, credit cards and other schemes which are used as marketing tools. One of the key to cross sale and offer better overall product offerings is based upon the fact that these firms form strategic alliances outside their industries. For example, Tesco has a banking arm, Wal-Mart offers credit card facilities, Aeon has its own financial services wing thus these firms offer a comprehensive shopping experience to their customers to remain at the top of their industry. Services offered by these firms are relatively unique in the sense that stores offer self service facilities which are duly supported by the in-house support. Firms in this industry tend to offer self-service kiosks where customers don’t have to wait in lines and can pay on their own. Services of the firm are duly supported by the dual strategy of cost leadership as well as the differentiation. The overall value chain analysis indicates that these firms tend to derive their competitive advantage through various resources. These resources include their size, investment into information technology, overall design and size of their stores as well as large scale fleets of trucks delivering to customers at their doorsteps.( Kumar, 2008) Value Creating Activities The overall range of value creating activities for firms like Wal-Mart and Tesco etc include their in-store inventory management systems, an efficient and adequate fleet management system which allows it to maintain its inventories at required levels. One of the key value creating activities specially at Wal-Mart as against the industry practices adapted by other firms is the fast replenishment of its store shelves. Wal-Mart specially is considered as efficient in ensuring that its shelves remain filled during any time of the day. This therefore allow customers to actually find what they want without actually waiting for the item to be delivered. Centralized purchasing system at these stores is another important value creating activity which is being exercised almost all the firms under study. Centralized purchasing through pre-selected and screened vendors is done by all the large retailers in the industry. Hub and spoke distribution network is another source from where these firms actually derive their value. Different hubs are being created in order to effectively handle the inventory and the inventory is than properly distributed to the stores through regional hubs. (Randall, et.al 2011) Firms like Tesco and Wal-Mart also tend to create more value for their customers through effective and efficient delivery. (Vignali, 2001). Wal-Mart for example ensures that deliveries to the customers are made within 48 hrs. Same practices are followed by Carrefour and Aeon also which focus on improving their delivery through effective fleet and order management systems maintained at centralized as well as regional levels. Core Competencies A closer analysis of these firms suggests that these firms have developed certain level of core competencies which distinguish them from others. One of the key core competencies of these firms includes their ability to dominate the suppliers because of their sheer size. The ability to purchase in bulks and then subsequently handling such inventory in efficient manner provide them cost advantage over others. The overall nature of their supply chain is such that it inherently offers them advantage over smaller retailers who have to procure through wholesalers rather than directly from the manufacturers. Carrefour co-manages its inventory with manufacturers thus reducing the cost to handle and manage the inventory and resultantly pass on the same benefit to the customers. Another critical core competency of these firms is the management of a large fleet of trucks which can handle large inventory and can easily coordinate with the regional hubs of the firms. The regional inventory hubs of the firms allow them to manage their fleet easily thus not only ensure timely delivery of inventory to stores but to those customers also which prefer to buy online. Probably the most important core competencies of these firms are their ability to keep their prices and costs down. For example, Wal-Mart suggests low prices every day indicating its ability to offer lower prices every day. The inherent cost advantages they offer to the customers actually lock-in the customers and they continue to derive their competitive advantage through low prices. (Wrigley, 2002) VRIO Framework Though VRIO framework is used to assess the internal resources and capabilities of the firm however, it is considered as a part of larger scheme of overall strategy making of the firm.( Barney& Hesterly, 2010) Value As discussed above, firms like Wal-Mart, Tesco, Carrefour and Aeon generate value for their customers in terms of offering low prices. This value creation ability of these firms actually allows them to neutralize any risk arising in the market in terms of new competitors or other perceived risks associated with customers. (Mitchell & Harris, 2005). Lower prices and better shopping experience lock-in the customers and resultantly these value creation activities allow these firms to generate and maintain their value. Rarity The key competitive advantage i.e offering lower prices to the customers is rare in the sense that smaller retailers cannot replicate the same. In a sense, this value generating activity provides a sustainable ground for these firms to actually beat the market. For example, during the current recession time, Tesco while keeping its price at the same level offered double points against purchases made on its loyalty card. This has actually allowed remaining profitable during the time when other firms failed to deliver. Imitation Imitation of the firm’s direct competitive advantage may be possible however it cannot be sustainable. Small and other retailers can actually offer lower prices but they cannot sustain the same for longer period of time. Further, goods and services sold by these retailers can easily be duplicated but cost advantage may not be easily imitated. Organization The overall regional structure of these firms, store level management as well as efficient handling and management of issues at the local level provide firms the opportunity to customize their organization around their core competencies. It is critical to note that these firms have large and centralized procurement process which allows them to procure large and bulk quantitates at the prices which are just right for them. Conclusion The overall competitive advantage availed by the global retailers is mostly due to the possession of unique resources available to them. One of the key resources is their size which allows them to serve mass market and thus potentially neutralize any threat of competition. By organizing their stores according to different sizes and market segments, these firms have attempted to dominate almost every segment of the market. Another important and key resource available to them is their ability to dominate suppliers and exert higher bargaining power. It is only through this ability and resource to procurement goods at relatively lower prices. By procuring at lower prices and by keeping their own costs at lower level, these firms pass on this advantage to the customers and hence lock them in for sustained period of time. Since the overall switching cost is low in the market therefore customers are locked-in through lower price. Lower prices however, are invariably secured due to their ability to purchase in bulk and keep their costs down. These firms also tend to have better fleet and inventory management systems which are not easily duplicated. Better inventory and fleet management system ensure that the goods are delivered on time and the overall shelf-filling time is minimized so that customers don’t have to revert to the competitors to buy the same goods and services. References 1. Andersén, J (2010) Resource-based competitiveness: managerial implications of the resource-based view, Strategic Direction, 26(5), p.3 – 5 2. Barney, J. & Hesterly, W. (2010) VRIO Framework. In Strategic Management and Competitive Advantage. New Jersey: New Jersey, p.68-86. 3. Barros, C, Alves, C (2003) Hypermarket retail store efficiency in Portugal, International Journal of Retail & Distribution Management, 31(11), p.549 – 560 4. 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