Study of Competitive Positioning - Coursework Example

School: Topic: Study of Competitive Positioning Lecturer: Competitive positioning is a useful modality by which companies gain competitive advantage. This is because through competitive positioning, companies come to appreciate the different ways in which they are distinct from their competitors, as well as ways in which they can base on their distinctions to create value. As the modern consumer becomes highly informative on their needs, value creation is something that companies cannot overlook and expect to grow. It is against this backdrop that Porter’s five forces have been identified as a useful theoretical framework that may be used companies around the world in understanding the industry in which they compete. Based on the forces, how the company is positioned against customers, suppliers, new entrants, substitute products, and existing competitors are made known to the company. Once this is done, a practical approach such as the drawing of positioning map may be used for the purpose of competitive positioning. Drawing as used in this context refers to the practical activities performed by the company such as quantitative data collection on primary product benefit and prices of competitors, based on which position plotting can be done with the aim of becoming more attractive to consumers. Contents Abstract 2 Introduction 4 Defining a competitive positioning 5 Theoretical perspectives of competitive positioning 5 Why Porter’s five forces work in theory 6 The forces and how they help in determining strategic positioning 6 Benefits of using the five forces as the theoretical framework for competitive positioning 10 Recommendations for practical application of theory on competitive positioning 11 Drawing positioning map 11 Define the market 12 Determine the primary benefit and choose the price 13 Plot positions and draw expected price line 13 Interpreting the positioning map 14 Valuing intangible benefits 14 Anticipating shift in the value of benefits 15 Finding paths of least resistance 16 Conclusion 16 References 17 List of Figure Figure 1: Porters Five Forces 7 Introduction All companies that take advantage of the open ended nature of the globalised market also appreciate one challenge and this has to do with the competitive nature of the market. Grant (2008) emphasised that through globalisation, companies have the advantage of expanding very quickly across the globe but this opportunity also exists for their competitors and rivals. As a result, it creates a system of survival of the fittest, where individual companies have to put in extra effort to ensuring that they survive the completion on the market. It is in such a competitive business environment that strong companies are differentiated from weak ones. Meanwhile, Itami (1987) posited that for a company to be regarded as a strong company in a competitive market is something that can be taken by choice, depending on the ability of the company to have a workable competitive positioning. This paper therefore discusses ways in which companies may use both theory and professional practice to gain competitive advantage by defining their competitive position. Defining a competitive positioning Kong (2008) noted that the competitive positioning of a company is about defining how to differentiate what the company offers with the aim of creating value for the market. To this end, it is important that a company can clearly know the things that set it apart from its competitors and emphasise on these to create value. Companies that identify their competitive positioning effectively have been noted to create a competitive advantage for themselves. This is because customers place emphasis on those the differentiations offered by the company to settle it over other competitors (Prahalad & Hamel, 1990). Having a competitive positioning can therefore be likened to winning the mindshare in the marketplace through the use of the things that differentiates a company from others (Taylor, 2014). For this to be done effectively, some of the areas of the market that may be focused include market profile, customer segments, competitive analysis, and method of delivering value (Aoki, 2006). Theoretical perspectives of competitive positioning There are a number of theories that have been used in conceptualising how and why competitive positioning works. One of these is Porter’s five forces of competitive position analysis. Below, why the Porter’s five forces framework works in theory for conceptualising competitive positioning, analysis of the five forces and advantages with using the forces are presented. Why Porter’s five forces work in theory In various academic journals, the validity of Porter’s five forces in conceptualising the competitive positioning of companies is presented. In the first place, Porter (1980) explained that the five forces makes it possible for companies to determine the competitive intensity of the market in which they operate. Meanwhile, without clearly knowing the level and extent of competition, it is virtually impossible for a company to determine how well it can position itself to be above its competitors (Porter, 1979). At the same time, it is only when a company competitively positions itself above its competitors that competitive advantage can be secured. Hamel (2006) also explained that the five forces works in theory because it helps companies to know the extent of their attractiveness in the market. When discussing the main forces, it would be known that companies are able to determine how well they are attracted to customers and suppliers. With this idea, they are able to know their weak points and strengths within the market, based on which the right competitive positioning is done. The forces and how they help in determining strategic positioning The figure below summarises the five forces as developed by Michael Porter Figure 1: Porters Five Forces The first threat emphasised in the framework is threat of new entrants. As the name suggests, this force helps companies to know the level of strength of new entrants in taking a share of the existing market (Fast, 2005). With such knowledge about the threat of new entrants developed, the company gains a theoretical understanding on how it should position itself against the new entrant. It was for this reason that Barney (2011) explained that companies do not require the same level of efforts and resources in dealing with every other new entrant. It is important that the efforts and resources allocated to a particular entrant will neither be considered as underestimated or overestimated. But to know the right level of resources and efforts to allocate to each new entrant, the company will need to understand the threat that the entrant poses either through a qualitative mechanism or quantitative mechanism (Porter, 1985). The bargaining power of suppliers is the second force, which describes the extent to which suppliers are able to put pressure on companies to pay more for the supplies they receive from them (Ghemawat, 1986). This force is very important in competitive positioning because such things as inventory and supply chain management all come to play in competitive positioning (Bean & Gros, 2012). For example, companies that always run out of stock due to poor inventory and supply chain management are likely to have their customers shifting to other competitors who can guarantee constant supply. Meanwhile, the sort of engagement the company has with suppliers can directly affect inventory and supply chain management. Understanding the extent of supplier threat therefore puts the company in position to rightly deal with the supplier in such a way that the company does not loss at the expense of the supplier. Companies that rely on several suppliers or use internal supplies have been noted to have better control over the threat of suppliers (Lieberman & Montgomery, 1988). Another force noted by Porter is the bargaining power of consumers. Porter (2008) described the bargaining power of consumers as an important force that directly impacts on the attractiveness of the company on the market. This is because the bargaining power of consumers determines the extent to which consumers are able to force companies to reduce prices (Miller, 1992). On the other hand, companies that are generally regarded as value and quality oriented are attractive to consumers and so their bargain for prices to come down is less (Hofer & Schendel, 2008). Meanwhile, it has already been stated that a company’s present state of attractiveness of the company is an important determinant in formulating competitive positioning. Using the framework to measure the bargaining power of consumers therefore plays an important role in competitive positioning because it makes the company understand how it ought to position itself to gain consumer attractiveness and thus minimise the bargaining power of suppliers. There is also the force of threat of substitute products and services. As the name implies, this force determines the availability of substitute products and services and the attractiveness of these substitutes in making consumers choose them over what the company has to offer (Eaton & Lipsey, 1980). Knowing the extent of threat of substitute products and services helps the company to ensure that it raises the value of its own products and services to become preferable over the available substitutes (Zenger & Hesterly, 1997). In some cases, the value of the products and services will need to be reviewed along the prices at which these products and services are offered (Coyne & Sujit, 1996). This is because consumers have been noted to have a behaviour in which they do not only focus on the value of products and services in selecting them but also on the prices at which these are offered. It is however important to know that anything that makes another product or service preferable to what a particular company may be offering shifts the competitive positioning towards the advantage of competitors offering those substitutes (Baumol, Panzar & Willig, 1982). The last force is the intensity of competitive rivalry. This may be described as a one-in-all force which compares a company directly to its competitors. It is said to be one-in-all because it could have components that deal with suppliers of competitors, customers of competitors, products and services of competitors, and stage of competitors on the product lifecycle (Dierickx, Cool & Barney, 2009). Because competitors are the actual focus in competitive positioning, it is always very important that the right form of information will be collected about almost every aspect of competitor’s engagement on the market in order to suppress their competitive threat (Barney, 2012). It is in the need to do this that this fifth force becomes very important in building a theoretical and conceptual basis for thoroughly scanning the engagements of competitors on the market. As with new entrants, the intensity of rivalry among competitors will determine the extent of resources and efforts that will be put into the competitive positioning. Benefits of using the five forces as the theoretical framework for competitive positioning Summing the benefits of the five forces, Wernerfelt (1984) stressed that the forces helps companies to understand all factors that affect their profitability in a specific industry. Elaborating on this, Dierickx, Cool and Barney (2009) noted that there are several company based decisions that can be taken as a result of the understanding that the company gains on the factors that affect its profitability. The first form of decision has to do with whether the company competitively positioned well enough to enter a particular industry. When a weighting is done for different industries, it will be possible to know where a prospecting company will do well most. The second decision has to do with whether the company has to increase its capacity in an industry in order to competitively position itself well (Tripsas, 1997). Finally, the five forces have also been found to be very useful in taking decision on how to develop competitive strategies. It will be noted that it is based on such competitive strategies that the positioning of the company can really be nurtured (Hippel, 1978). Recommendations for practical application of theory on competitive positioning Apart from the use of competitive positioning in theory, there are a number of ways in which companies can put the theories into practice. D’Aveni (2012) recommended two broad practical means by which companies can actually develop competitive positioning. These two practical means are drawing positioning map and interpreting the positioning map. These two are elaborated below. Drawing positioning map D’Aveni (2012) explained that to draw a positioning map simply means to understand one’s exact place within the market. The philosophical reasoning behind this is that until a company knows its place within the market, it cannot determine ways in which it may differentiate itself to create value as the definition of competitive positioning explains. There are three major ways in which positioning map drawing may be done. These are elaborated as follows. Define the market The first step to drawing positioning map has been noted to define the market. This is a practice professional action requiring the company to specify the boundaries of the market in which is currently operates or is interested in operating in. as part of boundary specification, such things as the number of consumers and what their needs are must all be clearly stated (Nelson & Winter, 2012). With the consumers and their needs known, the company will also be required to identify all position products and services that can help in satisfying the needs of consumers within the market. One reason that makes market definition workable for both new and old companies is that when the needs of consumers are identified and the company finds lapses with the provision of these needs within the market, it can be smart enough to provide these as a way of creating a differentiation from its competitors (D’Aveni, 2012). Meanwhile, being the first to identify and supply a particular product or service makes it possible to gain brand equity, which is a requirement for gaining competitive advantage (Williamson, 2005). Determine the primary benefit and choose the price One other practice thing a company may engage itself in as part of drawing positioning map is to determine the primary benefit of what it offers and the price that best suits the primary benefit. Mitchell (2009) found that there are a number of benefits that a product or service offers. Some of these include basic functions, additional features, durability, aesthetics, and so on. Depending on the primary benefit offered by a product, its price may be determined because it is important that the price matches the price in a very parallel manner. As explained by Fast (2005), charging prices that are above the primary benefit will cause apathy among consumers and may make them choose products and services that offer lesser prices. At the same time, charging below the primary benefit may lead to losses for the company as it might not be able to make up for its cost of production (Ireland, 2009). Plot positions and draw expected price line The final responsibility as part of drawing positioning map is to draw the expected price line. The price line is very important in the positioning map because competitive positioning is expected to end in profitability. But before doing this, it is important to first plot positions for all identified competitors within the market (Hvass, 2006). Again, it will be reiterated that this is important to do because competitive positioning is all about become more attractive than competitors. Meanwhile when the position of the competitor is not known, it is not possible position one’s self above the competitor. Position plotting is done by comparing the product and services of competitors to their level of primary benefit (D’Aveni, 2012). Once this is done, it is possible to know the level of acceptability that this may offer to consumers. In comparison to this, the expected price line is set to know how well the company can benefit from its own prices that it has set in the step above. Interpreting the positioning map After the positioning map has been drawn, it is important to interpret this map. The interpretation of the positioning map can be said to be the actual process of performing the competitive positioning. This is because the interpretation is done by taking the map from paperwork into the field by putting in place policies and strategies suggested by the positioning map. There are three major actions that need to be taken as part of the practice interpretation of the positioning map. These are discussed below. Valuing intangible benefits Based on the positioning map drawn, it should be possible for a company to clearly identify its intangible assets, based on intangible benefits may be set. These intangible benefits have been explained as those little giveaways and values that the company gives to customers which cannot really be quantified (Barney, 2011). Examples of these are supplementary services that customers get for free for doing business with a given company. Because such supplementary services are not directly calculated as part of the price that the customer pays, the customer sees these as secondary benefits that serve as a motivation for them to come back for more. It is therefore important the positioning map will be interpreted by clearing stating finding means by which the company can give as many of these intangible benefits without being affected negatively (Rainer & Turban, 2009). This emphasis is made because there is the possibility that some forms of intangible benefits offered for free may to too expensive for the company and therefore lead to losses (D’Aveni, 2012). Anticipating shift in the value of benefits One important thing that companies are admonished to do based on their positioning maps is to know when changes are necessary. These forms of changes can however be determined only when there is an anticipated shift in the value of benefits that the company offers to its consumers (Peteraf, 1993). This is because Grant (2008) observed that there often come a time when consumers demand for a different primary benefit. For example, consumers may feel that they have had enough of durability and will now be asking for portability. Once this happens, it is said that a shift in the value of benefits have occurred. In order to take total advantage of such a situation, it is important that the positioning map that was developed will be interpreted to clearly highlight the shifts that may be occurring in the shortest time period. Once this is known, the company can adequately position its primary benefits in a way that maximises the changing trend on the market. Finding paths of least resistance There is an adage that an animal eats towards places that it finds peace most. Relating this to the positioning map, Mitchell (2009) admonished companies to find paths of least resistance where they can easily compete. As much as it is important for a company to embrace healthy competition, it is also relevant to know that the result of operation is profitability. With this said, it is relevant that the company will find the softest points in the market where it could have the least forms of resistance to operate. The lease resistance could come in many different ways and through many different forms. For example, a company may realise a least resistance with competitors offering a certain line of products. This is because that company may be having a background that makes it possible for it to offer better products than what is currently being developed. With such a least resistant path identified, the company quickly takes the advantage by positioning itself with high value products. Conclusion The paper has been useful in establishing the place of competitive positioning in today’s competitive global market. This is because it has been realised that competitive positioning is the single most effective means by which a company can know how to differentiate itself from others in other to gain value. In doing this, it is important to have a deeper understanding of underlining theories such as Porter’s five forces. Using the five forces makes it possible to the company to compare itself to competitors within the industry to know the best ways to respond to competition. In responding to competition, the paper has clearly emphasised that it is important to use practical means such as drawing a positioning map. Though it may sound illustrative, a positioning map is a practical means by which by which the company knows the best forms of products to offer and at what prices these may be well accepted within the market. On the whole, it can concluded that companies have their destinies in their own hands when it comes to competitive positioning because this can be highly theoretical but also based on practical professional actions that bring about growth. References Aoki, M. (2006). “Horizontal vs. vertical information structure of the firm”, American Economic Review , 76, pp. 971‐983. Barney, J. (2011). “Firm resources and sustained competitive advantage” Journal of Management , 17 P. 99‐120. Barney, J. (2012). Integrating organizational behavior and strategy formulation research: A resource‐based analysis. Greenwich: JAI Press. Baumol, W., Panzar, J., & Willig, R. (1982). Contestable Markets and the Theory of Industry Structure. New York: Harcourt, Brace and Jovanovich. Bean, T., & Gros, J. (2012). R&D benchmarking at AT&T. Research Technology Management , Vol. 35 No. 4, pp. 32‐37. Coyne, K.P. & Sujit B. (1996). Bringing discipline to strategy, The McKinsey Quarterly, Vol. 7 No.4, pp. 47-78 D’Aveni R. A. (2012). Mapping Your Competitive Position. New York: McGraw-Hill. Dierickx, I., Cool, K., & Barney, J. (2009). Asset stock accumulation and sustainability of competitive advantage. Management Science , 12, 1504‐1513. Eaton, B., & Lipsey, R. (1980). Exit barriers are entry barriers: The durability of capital as a barrier to entry. Bell Journal of Economics , Vol. 7 No. 2, pp. 721‐729. Fast, N. (2005). The Licoln Electric Company. Boston: Harvard Business School Press. Ghemawat, P. (1986). “Sustainable Advantage”, Harvard Business Review , Vol. 86 No. 5, pp. 53‐58. Grant, R. (2008). Contemporary Strategy Analysis. Oxford: Blackwell Publishing Ltd. Hamel, G. (2006). “The Why, What and How of Management Innovation”, Harvard Business Review , Vol. 85 No. 2, pp. 2‐12. Hippel, J. (1978). Successful industrial products from customer ideas. Journal of marketing , 1, pp. 39‐49. Hofer, C. W., & Schendel, D. (2008). Strategy Formulation: Analytical Concepts. St. Paul, : MN: West. Hvass, K. (2006). Airline Profitability: Business Model Nuances and Financial Impact. Frederiksberg, Denmark; Samfundslitteratur. Ireland, H. (2009). Understanding Business Strategy. Texas: SOUTH WESTERN. Itami, H. (1987). Mobilizing invisible assets. London: Harvard University Press. Kong, E., (2008). The development of strategic management in the non-profit context: Intellectual capital in social service non profit organizations. International Journal of Management Reviews, Vol. 10 No. 3, pp. 281-299. Lieberman, M., & Montgomery, D. (1988). “First‐mover advantage”, Strategic Management Journal , 9, pp. 41‐58. Miller, G. (1992). Managerial Dilemmas: the political economy of hierarchy. New York: Cambridge University Press. Mitchell, W. (2009). “Whether and when? The probability and timing of incumbents entry into emerging industrial subfields”, Administrative Science Quarterly , 34, pp. 208‐230. Nelson, R., & Winter, S. (2012). An evolutionary theory of economic change. Cambridge: Belknap Press of Harvard University. Peteraf, M. (1993). “The cornerstones of competitive advantage: A resource‐based view”, Strategic Management Journal , 14, 179‐191. Porter, M. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press. Porter, M.E. (1979). "How Competitive Forces Shape Strategy". Harvard Business Review. 56, pp. 35-47 Porter, M.E. (1980) Competitive Strategy. New York: Free Press. Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard business Review, Vol. 213 No. 43, pp. 46-58. Prahalad, C., & Hamel, G. (1990). “The core competence of the corporation”, Harvard Business Review Vol. 68, No. 4, pp. 79‐91. Rainer T. & Turban G. (2009). Introduction to Information Systems (2nd edition) New York: Wiley. Taylor, R. (2014). “Licensing in theory and practice: licensor‐licensee relationships”, Antitrust Law Journal, Vol. 53 No. 5, pp. 561‐609. Tripsas, M. (1997). “Unraveling the process of creative destruction: Complementary assets and incumbent survival in the typesetter industry”, Strategic Management Journal , Vol. 63 No. 8, pp. 119‐142. Wernerfelt, B. (1984). A resource based view of the firm. Strategic Management Journal , Vol. 47 No. 5, pp. 171‐180. Williamson, O. (2005). The economic institutions of capitalism. New York: Free Press. Zenger, T., & Hesterly, W. (1997). “The disaggregation of corporations: selective Intervention, high‐powered incentives, and molecular units”, Organization Science , 65, 209‐222. Read More