The Relationship between Competitive Advantage and Organization Structure - Assignment Example

Section B: 1. “The key to obtaining sustained competitive advantage is to design an appropriate organization structure”. Discuss. The concept of competitive advantage has been studied by business practitioners and diverse definitions have been proffered. The policy working paper written by Richard P. Rumelt (2003) sought to identify the precise definition by examining various literatures in this regard. As indicated, the issue on competitive advantage “is not much agreement on value to who, and when” (Rumelt, 2003, p. 1). To enable one to discuss if the key to obtaining sustained competitive advantage is to design an appropriate organization structure, one need to qualify the meaning of competitive advantage and an appropriate organization structure. Definition of Terms 1. Competitive Advantage The concept of competitive advantage is seen in different perspective according to the endeavor by which it is applied. Barney (2002) averred that competitive advantage comes in terms of economic value of a firm in comparison with other competititors within the same industry. On the other hand, Saloner, Shepard and Podolny indicate that competitive advantage is measured in terms of the minimum cost that a firm can peg their product as compared to competition. The authors likewise averred that “in order to prosper, the firm must also be able to capture the value it creates. In order to create and capture value the firm must have a sustainable competitive advantage” (cited in Rumelt, 2003, p.2). A definition provided by the website tutor2u (n.d.) stated competitive advantage as “an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices” (par. 1). The discourse, likewise proffered that there are business strategies which when employed by an organization, would have greatest potentials for gaining competitive advantage. These strategies have been discussed by Michael Porter in his book entitled Competitive advantage, which identify the elements of differentiation, cost focus, cost leadership and differentiation. Porter’s factors or elements to gain competitive advantage are illustrated below: Source: Porter, 1985. It can be deduced that aside from the elements indicated by Porter, there are essential factors for an organization to gain competitive advantage ranging from “price, service, quality, location, or imbedded customer base.  The better your business performs against one of these factors, the more likely you are to succeed” (Bodwell, 2003, par. 1). These factors are consistent with the elements that organizations consider when marketing their products. The emphasis must be taken in terms of determining appropriate strategies in product (or service), place (location), price, and promotion, among others. 2. Organization Structure On the other hand, organizational structure is another concept with wide range of theoretical framework. It is defined by Sachdeva (1990) as the institutional arrangements and mechanisms for mobilizing human, physical, financial and information resources at all levels of the system. In another discourse, Nystrom and Starbuck (1981) have defined structure as the arrangement and interrelationship of component parts and positions in an organization. It provides guidelines on: division of work into activities; linkage between different functions; hierarchy; authority structure; authority relationships; and coordination with the environment” (cited in FAO, 1997). Structure in the organization manifests a particular arrangement of parts aiming to delineate responsibilities and task in order to put direction and order to the organization’s operations. Other relevant concerns in designing an appropriate organization structure consider elements of clarity, understanding, decentralization, and stability and adaptability, among others (FAO, 1997). Diverse literatures have averred that the type of organization structure vary depending in the requirements, strategy and environment of the firm. In some organizations, there is a level of authority identifying the degree of centralization or decentralization of decision making normally expressed in terms of the width or height of the organization, the span of control and the decision-making authorities. Of course, the design depends on the resources of the organization identifying whether greater numbers of levels or departments are needed. Competitive Advantage and Organization Structure Having defined both competitive advantage and organization structure, it can be deduced that one is not solely dependent on the other; that is, to gain competitive advantage, the organization is not required to merely design an appropriate organization structure. Or taken the other way around, an appropriate organization structure does not necessarily result in defining competitive advantage for the organization. Designing an appropriate organization structure is a necessary requirement for an effective management of the firm to delineate positions and therefore define scope of responsibilities and accountabilities. This, per se, does not assure competitive advantage, but helps in directing the organization to attain the value it desires. For example, organization structure with diversely created departments and levels are more susceptible to complexity and chaos. Large organizations usually require more layering in terms of chain of command and levels of communication. Authority, suggestions, questions and instructions must flow up and down taking considerable longer time before concerns are acted upon. In this regard, the broader the scope of business activities, the more complex the scope and scale of systems and structures that must be considered before a level of expertise and competitive advantage is attained. More factors need to be taken into account, as identified by Porter and Bodwell, before an organization is considered to be operating in competitive advantage. Developing one’s core competency would improve the firm’s value in terms of being able to use resources to generate and maximize profits while operating within the competitive environment. The Euromed Marseille School of Management (n.d.) proffered the link between competitive advantage and organization structure, to wit: “each strategy makes different requirements on the people who are to implement them and, according to Porter; these commonly translate into differences in organizational structure and culture" (par. 17). No prescribed height and width of the department can be given since these would depend on the philosophy, size and available resources of the organization. What is applicable for one organization could be disastrous for the other, despite some similarities in resources or products and services offered. The elements identified by Porter cannot be directly linked to organization structure to prescribe a uniform format which is applicable to all. The discourse analyzed competitive advantage through Porter’s concept of value. The two arguments are crucially noted: "Competitive advantage grows fundamentally from the value a firm is able to create ... Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset higher prices" (Porter, 1985, p 3). It is hereby proffered that competitive advantage stems from the value created by an organization as it provides products and services perceived by customers to be more superior than those offered by its competitors. The interplay of factors that created the value incorporated strategies employed in terms of the 4Ps in marketing, and the appropriate design of an organization structure that organizes the smooth implementation of firms’ functions towards goal accomplishment. In this regard, the key to obtaining competitive advantage is not only to design an appropriate organization structure, but to create value to the customers in terms of improving the perceived benefits more than competitors do. Conclusion The concepts on competitive advantage and organization structure are diverse and intricate that one could not merely conclude simply that structure is the key to competitive advantage. Although an appropriately designed organization structure is a necessary requirement to enable the organization to function effectively and work towards competitive advantage. More factors must be taken into account to improve the value of the firm and to excel in the competitive environment. Reference List Barney, JB 2002. Gaining and Sustaining Competitive Advantage, 2nd ed. Reading, Mass.: Addison-Wesley. Bodwell, DJ 2003. It All Starts and Ends with Competitive Advantage, [Online]. Available at: http://itsallaboutbusiness.com/CAdvantage.htm [Accessed 04 January 2011]. FAO Corporate Document Repository 1997. Management of agricultural research: A training manual. Module 3: Organizational principles and design, [Online]. Available at: http://www.fao.org/docrep/w7503e/w7503e04.htm [Accessed 04 January 2011]. Nystrom, PC & Starbuck, WH (eds) 1981. Handbook of Organizational Design (Oxford: Oxford University Press) Porter, ME 1985. "Competitive Advantage". Ch. 1, pp 11-15. The Free Press. New York. Robbins, SP 1989. Organization Behaviour. Concepts, Controversies and Applications. New Delhi: Prentice-Hall of India Rumelt, RP 2003. What in the World is Competitive Advantage? [Online]. Available at: http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Papers/WhatisCA_03.pdf [Accessed 5 January 2011]. Sachdeva, PS 1990. Analytical framework for the organization and structure of NARS. in: Organization and Structure of NARS: Selected Papers. The Hague: ISNAR. Saloner, G, Shepard, A & Podolny J 2001. Strategic Management. John Wiley & Sons, New York. Tutor2u n.d. Competitive Advantage - Definition, [Online]. Available at: http://tutor2u.net/business/strategy/competitive_advantage.htm [Accessed 5 January 2011]. Read More