The Sources of Competitive Advantage in the Aero-Engine and the Grocery Retail Markets - Term Paper Example

The Sources of Competitive Advantage in the Aero-Engine and the Grocery Retail Markets Theoretically, sources of competitive advantage can be discussed with the help of Porter’s five forces perspective and the resource based perspective (RBP). Porter views competitive advantage emerging out of market forces like bargaining power of buyers and suppliers. According to Porter, there are three generic strategies that a company can undertake to attain competitive advantage: cost leadership, differentiation, and focus. The range of RBP view is also quite vastly accepted in the theories of strategy management – adopting an internal approach while Porter follows an outside-in approach. The purpose of both perspectives is same – to create customer value and give performance. While evaluating grocery retail and aero-engine industry on the parameters of both perspectives, it is important to reach at a stage where basic assumptions of both theories are measured in indistinguishable contexts. Although both perspectives stress on a firm’s strategic orientation including Porter’s three generic strategies of low cost, differentiation and focus and RBP approach consisting of a company’s understanding of its strategic management process, yet following one approach may limit the scope of competitive advantage. As the industry managers seek competitive advantage both within firms and beyond industries, requiring a focus on the power of the relationship between the antecedents and results of competitive advantage, both perspectives are equally important. RBP perspective emphasises on recognising a firm’s functional resources – financial and human – critical for the success of a marketing strategy. But these functional resources don’t provide knowledge on the important aspect of general needs of the market segments like customers . Cost-leadership strategy capitalises on value proposition, with an emphasis on low-cost. The success story of Tesco of the UK is such an example of focusing efforts on value-oriented customers in the market. Tesco products are value for money although brand consciousness has been in the forefront, communicating of a total brand identity in future as well. In cost leadership strategy, benefits accrue from process engineering skills, comfort designing of product, cheap capital, and rigid control over cost and motivations on quantity sales. Based on porters’ generic value chain, a firm’s core competencies and activities are defined to get competitive advantage. The costs are modified to distribute them accurately to the value creating activities . Reconfiguring the value chain is another way of getting cost advantage. It needs structural changes to happen like new product process, distribution method or some unique sales approach . Another generic strategy to gain competitive advantage is differentiation. A company needs to focus on such activities related to core competencies and capabilities to outperform its competitors. Differentiation can occur in any part of the value chain. Raw material could be a unique input, not available to competitors. Distribution channels, offering high service levels, can create differentiation. Value chain can be reconfigured as well to create differentiation. Out of three generic strategies, focus was presented as moderator of the earlier two. This strategy was used in markets with least competition, focussing on special niche markets. Competitive advantage can be achieved by employing cost leadership or differentiation approach besides using focus strategy. With cost focus approach, a company can look for cost advantage in its target market only, not the whole market. It holds the same for differentiation approach as well. There is possibility of serving a niche class of clients with low-price product or charging high price for better quality because of cost focus or differentiation focus. Ferrari and Rolls-Royce are standard examples of niche players in the automobile industry. Both these companies have a niche of premium products available at a premium price. They also have a tiny percentage of global market – a feature of niche players. But it is not that important and big to be given serious attention, as niche market can disappear in future because of changing business environment. Otherwise also, economies of scale play a major part than costs in an industry. (http://www.netmba.com/strategy/value-chain/) Porter’s value chain represents traditional sources of competitive advantage but industries are becoming increasingly market space from market place, nullifying the effects of traditional sources of value. Value Cluster Analysis and Value Web Analysis are contrasting tools to analyse companies and the industry environment as a whole. These tools can help to fill gaps in performance and destroy rival companies’ business models. Value system analysis, according to Cartwright and Oliver (2000), is presence of value chains vertically among companies. Value system analysis, explored by McKinsey, cannot comprehend competitive value processes based on intellectual assets. Traditional tools can’t find how and where the processes work, missing the value in value chain. Knowledge creation and innovation are latest activities, providing competitive advantages through such resources, which can’t be imitated. They are human capital, organisational learning, and the network of relationships internal and external to the organisation. At a global level, Okamura & Vonortas (2006), one can perceive clear differences in the competitive positioning of European firms and firms from United States and Japan in the field of sectoral knowledge networks, which reveals difference in international business strategy. European firms have a tendency to tighten their hold in less populated partitions of known sectoral knowledge networks. The European firm hold of the ‘technology broker’ partition could be good for R& D intensive firms like Rolls Royce, getting loads of new technologies for the benefit of the firm but it is not everlasting, as these firms remain with unsuccessful technologies for a longer period. Value Cluster Analysis is a new method of knowing related value-creating activities in an information based firm. Value Web Analysis is its extension, covering all segments of industry. Prahalad (1994) has hinted in an interview that core competencies are not necessarily driven by technology or manufacturing. He has given the example of software-services companies, where managing larger software projects is a core competency. It requires continuous training in new skills, sustaining those skills by using and reconfiguring them, resulting in new opportunities. These core competencies need to be handled by a group of people of different levels in the same team. It is important to note that only larger companies can manipulate innovations better than smaller ones. Prahalad has stressed the importance of middle-level managers in carrying the core competencies. If a firm reduces its middle-level work-force as a cost-cutting measure, it is taking the muscle out of the company. In the light of Porter’s generic strategies and Value Cluster Analysis, let’s compare and contrast the sources of competitive advantage in aero-engine and grocery retail industry. The Aero-engine industry in Europe and US is robust with estimated increase of 40% within a period of 2004 to 2009. Rolls Royce is one of the world’s major aero-engine manufacturers after acquiring US Allison Engine Company and BMW’s aero-engine division. Rolls Royce competitors in the world market are US companies General Motors and Pratt & Whitney and the French company SNECMA among others. The US companies have big budgets and are applying greater scale of production to attract other companies in US programmes. The Rolls Royce is also playing its part in taking ahead the JSF programme to get competitive advantage in this growing field (White Paper: Great Britain, 2005: 87). In aero-space sector, Rolls Royce has full government backing in mutually relative issues concerning the industry as a whole. Rolls Royce is a leader in the field of power systems in the aero-engine and marine too. In the life-engine support matters, for Harrier, VC-10 and Nimrod, its innovation has been exemplary as a strategic partner to MOD. Rolls Royce will continue investing in new propulsion technologies to be ahead in future and is going to invest about £12.4M over 4 years in Affordable Combat Engine Technology TDR. To focus resources on sustaining capabilities particular to the military environment, and leverage from the UK civil aerospace market, Rolls Royce is in contact with its major suppliers (White Paper: Great Britain, 2005: 88). It is pursuing its research budget in partnership with others as a general strategy. Strategically significant supporting skills and technologies are being used onshore. As a result of export sales and commercial exploitation, Rolls Royce is getting competitive advantage from savings accrued from downstream economies of scale (White Paper: Great Britain, 2005). It is important to know that profit margins in aero-engine market are bare minimum in the sale of engines. Spare-parts sale is highly profitable. Price has to be combined with innovation and design to face competition from others. It is pursuing the strategy of sacrificing short term profit for long term benefits from spares, service and repairs (Reading, 2002:164). As is evident from previous analysis, traditional sources are not sufficient to gain competitive advantage, hence education and training as strategic marketing tools are widely used to enhance in business activities from global perspective. It is very much true of aero-engine industry. Rolls Royce has made use of these tools over the years with current and potential customers as well, developing a relation based on personal customer benefit. It is created through opening ‘windows of opportunity’ and ‘sales concession’ making the differentiating carrot more attractive by providing free education and training. In big businesses like Rolls Royce, government backing is crucial, which is evident from British government’s white paper discussed above. Strategic partnerships with government help in financing, building infrastructure, innovation and technology sharing, which might not be as lucrative as in private sector but communication systems and information help entrepreneurs in creating value on world-wide scale. Collaboration with competitors instead of collusion could also be a great source of competitive advantage. If such a joint operation in software development happens on collaborating of GE, Pratt Whitney and Rolls Royce, it would result in better engines . Rolls Royce, according to Morris, aerospace and defence analyst at ABN Amro, should go in a big way in providing after sale service, which will help in the long run to sustain and get competitive edge. Technology of Roles Royce is good and it has taken market share of business from its competitors but it has yet to prove itself as an investment proposition . According to Rolls Royce company report (2001), the consistent strategy pursued by the company has given organic growth and focus on profitable acquisitions and wide product range. It has got away with 40 non-core businesses over the previous decade to remain and increase its focus on its core business. It has grown in services from £1.0 billion in 1991 to £2.3 billion in 2001. In the field of new products, it has launched Aeromanager, using the World Wide Web to provide better customer service. According to company report (2004), sales figure has touched £5,939m, after touching a record high of £6,328m in 2001, recuperating at a balanced pace. Service sales including 100 per cent repair and overhauling joint ventures, recording a steady increase, reached £3.8bn in 2004. In 1994, its installed base of gas turbines in service was 27,000, which has doubled in 2004 to 54,000. In the review of Rolls Royce Chief Executive, Sir John Rose: “Our steady evolution as a global company based on our own state-of-the-art technology, a robust business model and a consistent strategy was evident in many encouraging respects during 2004.” The UK grocery retail market is empowered by two companies – Tesco and Sainsbury. Tesco has been performing remarkably, strengthening its stronghold steadily, which resulted finally in overtaking Sainsbury during 1995. By the 2nd quarter of 1996, it was ahead of its rival company by 2%. Sainsbury lagged behind, scoring badly on many fronts. BrandLoop #1 (1996). Source: Institute of Grocery Distribution Tesco, according to Hammett & McMeikan (1994) has been serving ten million customers a week by its staff of 110,000 in the Retail, Head Office and Distribution divisions. Human resource strategies, which had been helpful in Tesco’s growth in the 1980s, needed a shift in focus on emerging challenges like higher expectations of customers, replacing staff by introducing technologies, retaining quality staff in changing scenarios and challenges in replacing successful management rules, modes and practices in favour of minimised control and discipline. Changes were made in work force to provide first-class management, first-class service, developing customer service skills, supporting the changes, training and development and organising development workshops. Tesco was ahead of Sainsbury in customer service, loyalty and price competitiveness. Sainsbury failed in introducing new products and services. Its promotion campaign was nowhere seen working. There was absence of communication with customers – an important source of competitive advantage. Sainsbury’s introduction of Reward card was another fiasco. Tesco focussed on developing targeted store types, attending customers according to their comfort level. BrandLoop #1 (1996). Tesco’s introduction of Clubcard loyalty scheme proved an ace of spade, followed by Clubcard Plus debit card in the fight for retail supremacy. Once taking lead, it strengthened its competitive advantage speedily. On the contrary, Sainsbury’s public relations department was not straight forward in clearing strategy related issues. Introduction of loyalty cards is a long-term strategy to know customers’ taste – a marketing mix tool to offer customised products, in which Tesco succeeded. BrandLoop #1 (1996). Tesco Clubcard, according to Turner & Wilson (2006), offered 1% discount off prices if the points were not swapped for special reward deals. It was a big hit in the UK. Its success came not only in terms of customer “take up” of the Clubcard but also generating in a big way customer loyalty, which was crucial in providing a competitive edge in comparison to schemes launched by Sainsbury. There is nothing permanent in grocery retailing. Although Sainsbury commanded a better brand value but failed in maintaining it. Sainsbury opened a price run, offering it on 700 products. Tesco followed it with its Unbeatable Value line, starting a price war. It had its bad effect on other retailers selling on price. Price or cost leadership had been Tesco’s forte, as stated in the introduction. It succeeded in leveraging the benefits from process engineering skills, comfort designing of product, rigid control over cost and motivations on quantity sales, modifying costs perfectly to create value activities. On the contrary, Sainsbury performed badly by reducing its profit margin instead of overall cost base, distracting customers to other retailers offering price promotion. BrandLoop #1 (1996). In a grocery retailing market, innovations are easily copied, creating problems in sustaining competitive advantage and leadership – the aim of every retailer. Opening new stores is no solution, as it has reached optimum level. Grocery retailers need to attract and retain their customer base by introducing related products and services. Tesco has been successful in creating brand value but Sainsbury has not been able to reinventing it . Conclusion: It is very interesting to note that both industries – aero-engine and grocery retailing – have behaved contrastingly in the application of traditional sources of competitive advantage and modern outlook on emerging sources of competitive advantage. Traditional sources of competitive advantage based on Porter’s generic strategies had worked well in grocery retailing industry while emerging technologies and such sources have been utilized better in aero-engine industry along with traditional ones. It is well judged by the examples of Roles Royce and Tesco in their fields of operation. References: Ajami & Bear, ‘Entrepreneurship and public policy: Economic competitiveness’ in The Global Enterprise Entrepreneurship and Value Creation, International Business Press, The Haworth Press, Inc. London, viewed 19 January 2007. BBC News, Profile: Rolls Royce, Friday, 19 October, 2001, 08:20 GMT 09:20 UK, viewed 19 January 2007 . Cartwright & Oliver, 2000, ‘Untangling the value Web’, The Journal of Business Strategy, vol. 21, no. 1, viewed 19 January 2007 . Porter’s Generic Strategies, 2007, viewed 19 January 2007, . Defence White Paper, December 2005, Defence Industrial Strategy: Great Britain, viewed 19 January 2007. Food Wars: The Tesco / Sainsbury's Battle, BrandLoop #1, October 1996, viewed 19 January 2007,. http://geodsoft.com/opinion/oslimits/jetengines.htm Hammett & McMeikan, 1994, ‘Tesco – Competitive management development’, Executive Development, vol. 7, no. 6, MCB University Press, viewed 19 January 2007. Strategy: the value chain, NetMBA, The Business Knowledge Center, viewed 19 January 2007 . Okamura & Vonortas, 2006, ‘European alliance and knowledge networks1’, Technology Analysis & Strategic Management vol. 18, no. 5, viewed 19 January 2007. Reading, C, 2002, ‘Strategic Business Planning: a dynamic system for improving performance and competitive advantage’, Kogan page, viewed 19 January 2007 Reuvid & Yong, 2006, ‘Using education and training as a strategic marketing tool in winning international business’, Doing business with China’, viewed 19 January 2007 . Rolls Royce Company Reports, 2001. Rolls Royce Company Reports, 2004 Training, November 1994, ‘An Interview with C. K. Prahalad’, Minneapolis vol. 31, no. 11, viewed 19 January 2007 . Turner & Wilson, 2006, ‘Grocery loyalty: Tesco Clubcard and its impact on loyalty’, British Food Journal, vol.108, no. 11, viewed 19 January 2007, Emerald Group Publishing Limited. Read More