Sustainable Competitive Advantage - Essay Example

 Introduction 2 Competitive advantage 2 Creating Competitive Advantage 3 Utilizing Organizational Resources 3 Achieving Competitive Advantage by Cost Leadership 5 Achieving Competitive Advantage by Differentiation 5 Theoretical Models 7 Sustainable Competitive Advantage 8 Generic Recommendation for managers 10 Conclusion 10 Reference List 12 Introduction According to Porter (2010), competitive advantage of a firm is defined by its strengths and capabilities which provide a superior position relative to the competitors. Competitive advantage can be gained by several strategies, like cost leadership, technological knowhow, differentiation, strong brand reputation, etc. A competitive strategy is the one which ensures sustainable and profitable positioning of the firm against the competitive forces in the industry. The competitive advantage of a company is not defined by a single strong point or a single strategy. Although some advantages may be long lasting and requires less attention, however some of them require constant nurturing to ensure its sustainability. The competitive position of a firm is not attained by a culmination of several business strategies, which allows the firm to stay ahead of its competitors. This paper critically discusses about the competitive positioning of business firms and how they adopt different strategies to gain a competitive advantage over its rivals and simultaneously ensuring its future sustainability. The discussions made in this paper have been backed up by relevant theories proposed by relevant journal articles. The paper also covers the generic recommendation for managers to improve the competitive advantage of their firm. Competitive advantage The concept of competitive advantage was first brought to the lime light by Porter (1985). He mentioned in his book that competitive advantage can be attained by creating a unique differentiation and by achieving low cost of production. However, this theory has been revised by him and the concept of ‘Sustainable Competitive Advantage’ was introduced. He further mentioned that companies should follow either cost leadership or differentiation, and should not follow the middle path. This theory was criticized by Knights and Morgan (1993) stating that Porter’s Theory cannot be implemented as a thumb rule to every type of firms. In case of financial services firm, the operating cost of the company is much harder to ascertain, let alone that of the competitors. Moreover, the products are in most cases are easily imitable which erases the possibility of differentiation. Thus it can be clearly stated that the theories proposed by Porter (1998) contained certain deficiencies which as a result could not be implemented in all situations. Hunt (2000) suggested a more acceptable theory which is relevant in the modern business scenario. He stated that the business strategies implemented in the modern business firms focus on attaining superior financial strength, resource optimization in order to develop a long term sustainable competitive position. Creating Competitive Advantage William and Curtis (2008) have described competitive advantage in the light of core competency. Core competency has been defined by Prahalad and Hamel (1990) as a collaborative learning process within an organization which allows it to improve its skills, develop new resources to improve organizational performance. Based on the theory of core competency, Sekhar (2010) mentioned that competitive advantage can be attained by developing unique core competencies, which is hard to imitate for the rival companies. Utilizing Organizational Resources According to the resource based theory of competitive advantage mentoned by Grant (2001), the resource availability is directly proportional to the organizational success, as high amount of resource can lead higher production volume. As a result, a company with higher amount of resources can easily meet the growing demands of the customers, compared to its rival thereby giving it a competitive advantage. However, Peteraf and Barney (2003) contrasted that availability of resource cannot be the only determining factor of competitive advantage. The resource heterogeneity or resource uniqueness is a major factor that gives firm a unique edge over its rivals. Thus if all the existing firms possess the same resources, even in abundance, will not create competitive advantage for one firm. Thus competitive advantage cannot be same for all firms. The uniqueness of a firm’s skills and resources is the primary factor responsible for development of the competitive advantage. Hooley, Piercy and Nicoulaud (2012) further added that the resources must have the following characteristics to yield competitive advantage, a) the resource must be unique to the firm and exclusively available, b) the resource must be able to generate value for the customer and c) it should be difficult for the competitors to imitate. Woodruff (1997) mentioned that over the years the focus of the organizations has shifted from the product oriented approach to customer oriented approach. Thus efforts have been made in order to improve the product and services quality to enhance the customer satisfaction level. Ensuring higher customer value results in higher customer preference which in turn leads to higher revenue generation and improved brand image. Thus, it can be stated that a firm which is capable of offering higher customer value achieves competitive advantage over its rivals. Piercy and Nicoulaud (2012) described that the resources which is capable of creating customer value should be constantly nurtured and improved. These resources include technological advancement, easy access to raw materials, efficient and motivated employee base, wide distribution channel and cost effective operational process. In order to ensure competitive advantage, the managers should compare the resources of the firm to that of the competitors. Only a higher and improved resource base compared to the rivals results in competitive advantage. Collis and Montgomery (2008) stated that organizational resources are valuable only when it has high demand in the industry, it is scarce and it is appropriate for the firms’ operational process. The uniqueness of the resource suggests that it cannot be copied or acquired by the rival firms and by all means only the owner of the firm can have access to it. These resources include, technological patents, location of a firm or its proximity to the distributers and suppliers, etc. The third parameter of resources that makes it capable of producing competitive advantage is its difficulty of imitation. Rival firms constantly seek out for new ways to take over the ones who are holding the leading position, while doing so they constantly try to imitate their resources. Collis and Montgomery (2008) mentioned that inimitability of resources is proportional to sustainable competitive advantage. A resource which generates a steady stream of profit for a firm attracts a lot of competitors who also seeks to possess the same resource. Thus if the resource is inimitable, it creates a competitive advantage for the owner. However, Grant (2001) further added that inimitability is not a permanent character of a resource. Rival firm constantly invest in research and development to create their own unique resources that surpasses that of others. Thus it can be stated that in order to maintain sustainability of competitive advantage, a firm must invest in resource development by constant innovation in order to stay ahead of the rivals for a longer period of time. Achieving Competitive Advantage by Cost Leadership Porter (1985) described Cost leadership to be a vital factor for developing competitive advantage. Cost leadership can be defined by a firm’s ability to produce goods and services at a lower cost than its rivals. Thus cost leadership increases a firm’s profitability thereby increasing its financial strength (Kotler and Keller, 2011). Huebsch (2014) mentioned in his article that the entire operational process of the firm needs to be optimized in order to achieve cost leadership. Starting from procurement of resources and raw materials to product development and after sales service, each of the stages of the operational process can be modified to reduce the over cost of the company. Thus it can be stated that the managers must optimize the production process of his firm in order to reduce the operating cost and increase the profitability. A higher profitability ensures faster growth of the firm, thereby creating a competitive advantage for the firm. According to Cokins and Capuşneanu (2010), Cost Leadership can be achieved by ten different cost drivers, which are economies of scales, capacity utilization, organizational learning, linking activities, interrelating business units, level of vertical integration, entering market in the right time, policy for differentiation, external regulations and geographic location. Achieving Competitive Advantage by Differentiation He also mentioned a second factor for competitive advantage which is differentiation. The Porter Generic strategy stated by Porter (1987) describes that differentiation can be achieved by developing a product or service by ensuring that it is easily distinguishable from that of the rivals. Differentiation can be achieved in ground of product or service development as well as in creating a unique brand image. Differentiation helps a firm to increase the switching cost of the customers and to decrease the threat of substitute products. Thus, the managers should adopt differentiation strategies to gain better recognition which lead to competitive advantage. Levitt (1986) has mentioned that product is primarily of four types like core product, expected product, augmented product and potential product. By creating differentiation in each of the product types, the competitive advantage can be achieved. The core and expected products can be differentiated by value addition like bulk discounts or ease of purchase, etc. The augmented products offer features and facilities which are mostly unexpected by the customers. These products are differentiated by adding innovative feature that surprises the customers. These features are often varies across the firms, which creates competitive advantage for the firm who is capable of offering a better feature or has been able to impress the consumers more. Potential products are the ones which have been modified over the augmented product, to offer even better features and privileges for the customers. Firms develop potential products by ensuring that the creation by the product is first of its kind and cannot be easily imitated. Denoue and Saykiewicz (2009) contrasted that Branding is a vital factor in creating competitive advantage apart from product differentiation. Kotler and Keller (2011) have defined brand equity as a resource of a firm, which can give returns to the company if improved over time. The brand recognition allows the customers to choose a particular product over other. It is the most favourable way to differentiate a standardized product, which cannot be differentiated by product improvement. Hooley, Piercy and Nicoulaud (2012) further added that Brand adds an emotional value to the product which leads to repeat purchase and positive word of mouth. As a result, a consumer influences its reference groups to purchase the same brand, which eventually leads to constant increase in customer base. Branding provides an assurance of what can be expected from the product, so building strong brand equity allows a firm to build a good reputation in the market, which helps the customers to make their purchase decisions. Clearly it can be stated that customers are attracted to products with higher brand value. Thus in order to create a sustainable competitive advantage, a firm must ensure that it is constantly working on to create a better brand equity. Denoue and Saykiewicz (2009) contrasted that following branding strategy to achieve competitive advantage may not always be a feasible option. They pointed out that in case of regions with weak economic condition, following a generic product strategy is more feasible than applying a branding strategy. The generic pricing strategy follows aggressive pricing and avoids investing in building brand equity. Due to the low purchasing power of the customers, they cannot afford the added cost of brand value. Thus, building brand equity may not always lead to consumer preference; rather firms with lower price offerings may achieve competitive advantage over others. Edvadsson (1998) stated that service quality is one of the major determining factors of competitive advantage. Firms which specialize in offering services, create differentiation by creating good customer relationships. Warraich, Warraich and Asif (2013) further added that service quality creates a bond between the brand and the consumers. Moreover, in case of firms offering durable products, differentiation is made on the grounds of after sales service. Offering a better customers service increases the switching cost for the customers, which compels them to stay with one brand, thereby increasing the firms customer base resulting in high consumer preference and higher revenue generation. Thus it can be stated that providing a superior service quality leads to development of competitive advantage. Theoretical Models Porter (2010) stated competitive force can also be exerted from four other directions apart from rivalry among existing firms, which have been stated as buyers’ power, suppliers’ power, threat of substitutes and threat of new entrants. These five competitive forces form the Porter’s five forces. It assesses the level of competitive forces present in the industry. The competition among rivals measures the level of influence exerted by other firm in a business operation. The buyers’ power is determined by their switching cost in order to shift to a different brand and their influence on the pricing of a product. The suppliers’ power is influence of the suppliers over the supply chain or over the delivery of raw materials, thereby affecting the operating cost of a company and its ability to meet market demand. Threat of substitute is the competition posed by a product that can pose as a potential replacement for another product. Threat of new entrants assesses the likelihood of competitive threats from firms which have newly entered the industry. Thus the Porter’s five forces model assesses the competition level faced by a firm in an industry. Bowman and Faulkner (1997) mentioned that competitive position of a company can be assessed based on eight parameters. These parameters are designed based on two primary factors, customers’ perceived value and price. The eight parameters are low price or low added value, low price, hybrid, differentiation, focussed differentiation, risky or high margin, monopoly pricing and losing market share. Figure 1: Bowman’s Strategy Clock Source: (Bowman and Faulkner, 1997) Ansoff (1957) has designed a matrix with four quadrants that assesses a firm’s strategic position in the industry. It is formed based on two factors, market development and product development. The four quadrants are a) market penetration, where a firm pushes its existing product in the existing market, b) market development, where a firm takes its existing product to a new market, c) product development, where a firm introduces a new product line in the existing market and d) diversification, where the firm introduces a new product line in a new market. Sustainable Competitive Advantage A firm can attain competitive advantage by a number of ways, as mentioned in the above section. Hooley, Piercy and Nicoulaud (2012) mentioned that rival firms seek out for new ways to create unique competitive advantage or try to copy successful strategies of others to achieve a superior position in the industry. Gaining competitive advantage is not a one-time activity. The firms must ensure that the competitive advantage over its rivals virtually lasts forever. In order to ensure sustainability of competitive advantage, a firm should create a defensible position by crafting value added products and services. Hana (2013) highlighted that the firms must constantly innovate to ensure that its knowledge base and technological knowhow is higher than that of its rivals. Some of the factors resulting in a competitive advantage may not be easily imitated by the rivals, whereas factors like marketing strategies or technological development can be easily copied thereby reducing the competitive advantage of the firm. Oliver (1997) stated that product uniqueness is a key differentiating factor of a firm. However, uniqueness does not last longer; it is eventually overshadowed by another newly developed product. Moreover, products which have successfully gained consumer preference are imitated faster by inferior companies who wish to gain the same competitive advantage. In order to prevent this, a firm must continually change its product line by replacing the existing product by developing new ones with better value proposition. Hooley, Piercy and Nicoulaud, (2012) further added that in order to ensure sustainable product uniqueness, a firm must clearly define its target market and get every possible insight about the consumer behaviour, consumption pattern and social preferences. This requires constant monitoring of the target market and a close communication with the target customers. As a result of a clear insight of the market, the firm will be able to streamline its activities to efficiently cater to the customers’ needs. Britain (2008) highlighted that establishing an enhanced customer relationship by improved service quality also results in a sustainable competitive position. Oliver (1997) pointed out that the most defensible assets of a firm are considered to be its brand image and reputation of the company among the investors. Brand image can act as the strongest competitive advantage, if it is well maintained and protected from the external attacks of the rivals. The company must ensure that all of its activities add value to its brand equity; as any wrong decision or mishap can eventually tarnish the reputation of the company. According to Kotler and Keller (2011), it is more difficult to repair a damaged reputation than building a new one. Thus in order to maintain a sustainable competitive advantage, a firm must try in every possible way to protect its brand image and at the same time take steps to improve it further. Porter (1987) mentioned that competition arises when one firms activities of developing itself somehow affects that business activities of another firm, which responds with a retaliation in order to counter the opponent’s strategies. Most firms compete to gain the maximum market share by attracting customers from rival firms. Yannopoulos (2011) mentioned that competition in the business market can give rise to two types of competitive strategies, defensive and offensive. The defensive strategies are employed in order to counter the opponents’ offensive strategies. It helps the established firms to fend off the challenges posed by aggressive rivals or new entrants. Defensive strategies are most effective if they are employed before the opponent implements its competitive strategy. On the contrary, an offensive strategy involves gaining high market share by employing aggressive strategies like ambush marketing, strategic acquisition; develop in business areas where the opponent is weak at, etc (Lynch, 2006). Generic Recommendation for managers In order to achieve competitive advantage the managers must ensure that the strategies employed will yield a superior position for the firm. This can be achieved by creating a distinguishing factor that will differentiate the firms operations and products from the others in the industry. The managers should design innovative product line that will attract the customers from rival firms. This will also increase the switching cost for the consumers and will ensure customer retention. Moreover, the managers can achieve competitive advantage in terms of increased profitability. Higher profitability can be achieved by attaining a cost leadership positioning, by resources optimization or low priced resource outsourcing. Finally, the managers can create a strong brand image that will increase consumer preference thereby increase the sales volume. All these factors need to be nurtured to ensure that the competitive advantage sustains for a long term period. Conclusion Competitive advantage is a vital tool for survival in the increasingly competitive business market environment. The pursuit of gaining a competitive position is a continuous process, which makes the firms to constantly monitor the market scenario, rivals’ movements and seek out for innovative ways for value addition for the customers. The competitive position of a firm needs to be defended from external attacks and at the same time the firm should also employ offensive strategies to take over opponents’ position. It can be stated that the firms must employ a proper combination of defensive and offensive strategies in order to establish a well protected market position and gain in market share. Apart from dealing with rivals, a firm also needs to focus on value creation in order to build a strong brand reputation thereby creating a sustainable competitive advantage. Thus, it can be concluded that in order to succeed in the business market, a firm needs to protect its competitive position by employing proper marketing strategies. Reference List Ansoff, I., 1957. 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