Strategic Management and Contemporary Level of Competition - Essay Example

STRATEGIC MANAGEMENT MODULE (2006) INTRODUCTION The level of competition in contemporary times is becoming tense as many entrants with innovative skills enter an industry; they tend to increase the numbers of existing players in the industry. The adoption of new innovative strategic pattern of conducting business operation in an industry means that the organization introducing this strategy wants to curve a niche for itself and gain competitive advantage over its fellow competitors. However, the competitor would not fold hands and watch their fellow rival overtake then therefore they tend to come up with their strategy to withstand the changes in the industry and compete favorably. Strategic management is a process where an organization uses its resources to adapt to the environment in which it operates. There are different segments of environments in which an organization operates; these include external environments like the economic, political, social, cultural, technological, global, and demographic environments. All these segments of the environment influence the pattern of conducting business in an industry. According to Brown & Eisenhardt (1998:3), "strategy is about two things: deciding where you want your business to go and figuring out how to get there". Strategic management pattern of every organization may differ from what is obtainable in another; while there may be areas of similarity, certain aspects are uniquely structured out to suit the operation of the organization in concern. The ability of an organization to successfully compete depends on how unique its strategy is. In this view Peter (2005:5), argues, "Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. When a firm implements such a strategy that other companies are unable to duplicate or find too costly to imitate, this firm gas a sustained, or sustainable, competitive advantage". The environment inwhich today business operates in is very dynamic; with the consistent changes in ways ofconducting business and improvement in technologies and communication. The challenges facing business is how to strategize to curtail these changes. With dynamic changes, experience in an industry the question that decision makers for organization have to tackle is what to do What to do on how to carry out the organization operations When should it be done In order for an organization to gain competitive advantage over its rivals, it tends to come out and adopt a strategy that is different from what its competitors are familiar. This essay would compare and contrastthe sources of competitive advantage in the Aero-engine and thegrocery retail markets. Examples of organizations operating in these industries would be utilized in analyzing the subject matter. GAINING COMPETITIVE ADVANTAGE IN A DYNAMIC INDUSTRY Through an effective strategic management, an organization can adequately cease the opportunities abounding in the industry where it operates. It will utilize its resources most adequately in meeting the changes and challenges in the industry. Looking at the external environment, how it influences the operation of an organization, the ability of an organization to capture untapped opportunities within the industry it operates this will go to put it ahead of its rivals and give it competitive advantage. Opportunities abound for firms operating in an industry, it is only through effective strategic management framework put in place by an organization, and its ability to be innovatively different from its rivals that it would seize these opportunities, before another close rival discover it. This brings us to the issue of strategic competitiveness. According to Peter (2005:5), "strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. When a firm implements such a strategy that other companies are unable toduplicate or find too costly to imitate, this firm has a sustained, or sustainable, competitive advantage. A firm is assured of a competitive advantage only after others efforts to duplicate its strategy have ceased or failed". When anorganization gains insight into what is likely to occur and then positioned itself for the future this creates more new opportunities for the firm and gives it a better way of managing changes in the industry it operates. Armitage (1992), argues that the strategic management process involve taking advantage of the opportunities that are mad available to the organization and minimizing the threats to the organization. As a minimum, an organization must be able to react effectively to changes over which it has no control. Threats are another factor that constitutes the external environment an organization operates. Threats to a firm would be those things that tend to reduce the profit maximization capacity of an organization. Thus it include the changes in pattern of production, change in taste of customers; due to presence of constitutional products or advancement in technology, threat of new entrants, the level of competition etc. According to Peter (2005:49), a threat is a condition in the general environment that may hinder a company's effort to achieve strategic competitiveness. With an effective strategic management function, a firm may be able to endure change that causes threats for the competition. De Wit and Meyer (2004) associated uncertainty with radical strategic change, linked the degree of uncertainty associated with implementing an innovation to the "amount of knowledge" it required of staff to adopt it. The level of uncertainty increased with the degree of change expected of the individuals. The Porter's theory on the five market forces capture these threats that a business organization faces. These include threat of new entrants, the bargaining power of the suppliers, the bargaining power of buyers, the threat of substitute product or services, and the intensity of rivalry among existing competitors. The new entrants of firms into an industry potent a threat to existing firms; since the level of competition would be increased. "In any given market we will see dominant and established players looking to survive in the face of 'disctruptive' change from new entrants. They will struggle to compete with these new entrants due to general 'incremental' change mindset" (McGregor, 2003). The bargaining power of buyer depends largely on the availability of substitute product for a firm's product. "the bargaining power of buyer depends on the volume of purchases relative to the sellers capacity, the fraction of cost the purchase represents, the degree of standardization of the purchase, the level of switching costs, the level of profits, the threat of backward integration, and the importance of its quality (Ankli, 1998). The bargaining power of supplier mirrors that of buyers. An exit/ voice approach shows how the bargaining power of different supplier/ manufacturers would lead to different result. The intensity of rivalry among existing competitors depends on the balance of competitors, industry growth, the size of fixed or storage costs, the amount of differentiation or switching costs, the minimum size of investment, the type of competitors, the strategic stakes, and type of exit barriers (ibid). Industry competition is another force that determines or influences the strategic management of s a firm. When the competition level is tense, it then requires that an effective strategy is put in place for the firm to curve a niche for itself. Michael Porter, in his work 'Competitive Advantage', proffers two ways a firm can obtain competitive advantage: through product differentiation and cost leadership. Product differentiation entails that the firm should come up with innovative product different from what is available in the industrial market where it operates. Cost leadership entails that the organization produces it product with less cost, and thus sell it at a price lesser than what is available in the market. This does not always necessarily means that the organization should sell its product at lower price, but should be cost efficient. According to Flynn & Flynn (1996), the lower cost advantage is defined as the ability to more efficiently design manufacture, and distribute a comparable product than the competition. Products with unique and superior value-in terms of quality, features, and after-sales services- are examples of the differentiation competitive advantage. Porter (1985) argues that a firm can either gain competitive advantage by either of the two, but not the combination of both lower cost advantage and through product differentiation. He argues a firm would be caught in the middle when using both competitive strategies. Some scholars have criticized this notion, arguing that it is possible for a firm to gain competitive advantage using both of the competitive strategies. CONTRAST BETWEEN SOURCES OF COMPETITIVE ADVANTAGE IN AERO-ENGINE AND GROCERY RETAIL MARKETS The aero-engine industry specializes in the manufacturing of aircraft machineries. The industry is capital intensive and thus requires huge investments. Unlike the grocery retail industry, which operates in the sales of foodstuffs and retail clothing, it requires little capital to kick-start a business in this industry; the aero-engine industry requires huge capital outlay to start an organization in the industry. Thus, there are easy entries into the grocery retail industry making many numbers of retailers operating in the industry, with keen competition. "During the 1980s seller concentration in food manufacturing industries and retail food markets has continued to increase. The food system has also become global" (Cotterill, 1993). However, for the aero- engine the number of new entrants is low due to the requirement and capital to commence operation in the industry. The level of competition for the two industries tends to differ because of the number of operators in each of the industry. The aero-engine industry engages in product differentiation as a pattern for ensuring competitiveness for firms in the industry, this is carried out to ensure that each firm get a large market to sell its aircrafts, as a way of covering the huge investments in research and development. According to Open2.net (2006), "Aero engine companies such as the UK's Rolls Royce and the US's General Electric have to seek the widest possible market for their engines, in order to recoup their enormous research and development costs. The number of potential purchasers of expensive aircraft worldwide is limited, and it would not be feasible to produce for only some customers (for example, to seek to be a purely 'national' engine producer). This is a differentiation strategy, although one aimed at a broad range of customer segments internationally". The adoption of product differentiation as a strategy for gaining competitive advantage in the aero-engine industry is as a result to enable firms capture a wide market for their products. Since the buyers of aircraft are small in number product differentiation would tend to attract customer based on their preference for the product of a particular firm or the quality and modern features attached to the product. The quality and efficiency attached to products of firm in the aero-engine industry plays a significant role in how they secure buyers for their products. In this view, MTU Aero Engine Company, the largest Germany aircraft engine manufacturer has adopted the strategy of adhering to quality and efficient in its product manufacturing. "In the aircraft engine service industry, quality and efficiency are critical to revenue performance. Therefore, information technology that helps our mechanics to quickly and accurately service aircraft engines is a top priority for us," said Mr. Stephan Gb, Director Quality Management of MTU (Enigma.com 2006). Similarly, Rolls Royce, American giant aircraft engine manufacturer has adopted the strategy of producing qualitative product as a way of maintaining its stand as the market leader in the aero-engine industry. According to Rolls-Royce.Com (2006), Rolls Royce's strategy is to secure and retain the leading position in its key markets. The company recognizes that an increasing number of customers want to deal with as few suppliers as possible in order to reduce purchasing and search costs. Therefore, customers look for suppliers who are able to meet the full range of their needs with the highest level of service. Rolls-Royce has already built a strong, mature business in defense aerospace and is well placed in future programmes. Over the past three years, the company has won an average of 30% of the civil aerospace market by value. However, aerospace is a maturing market, so it makes sense for Rolls-Royce to look for new opportunities for expansion. For the grocery retail industry, the competitive level here may be somewhat high as a result of the numbers of entrants and players in the industry. The many sellers in this industry require that they adopt a strategy for ensuring cost effectiveness. Adopting cost efficiency strategy does not imply that the organization should engage in the production of low quality product, but should ensure that its prices are below those of competitors in the industry. Thus, the firms in the grocery retail industry operates with the strategy of bringing down cost of production and selling at a price that is very efficient and cost beneficial to buyers. Knowing that buyers may turn to other competitors who offer good price for their qualitative grocery products, operators in this industry tend to watch how they price their products and the cost incur in the production of such products. One way of ensuring cost efficiency is to maintain a supply chain efficiency. As firms adopt strategies to maintain a steady and efficient supply, they tend to maintain their cost and final price that is sold to customers. According to NRF (2006),one way of ensuring competitive advantage and generate robust prospects for profitability for retail grocery business is to create true supply chain visibility with a synchronized demand network that eases inventory pain by providing trading partners with optimal flow through of product and near-real time sharing of forecasts and demand signal. Using cost efficiency strategy to gain competitive advantage may be a tight corner strategy to adopt as in the industry there may emerge one or two cost leader who tends to influence the pattern in which price changes. In this view, Open2.net (2006) argues, "Cost-based competition is an immensely powerful tool; but there is normally only room for one or two cost leaders. Cost leaders do not have to compete on price; they may choose to invest their higher margins in higher levels of service, the creation of more flexible manufacturing facilities, faster response times, more advertising, and so on". Another glaring difference in the competitive environments of the aero-engine industry and the grocery Industry, is made distinct by the durability of product, and hence the level of turnover of the products of each industry. In the grocery retail industry, the product such as foodstuffs, clothing materials have high turnover rate than a capital-intensive aero-engine industry which turnover is very small resulting from the huge investment required to purchase a single airplane. The difference in turnover rate goes along to show the numbers of customers patronizing each industry. For the grocery retail industry, barely every household do shopping to keep life and body together. Thus, the customers' level of this industry is very large, compared to the aero-engine industry which customers are mainly wealthy business organization, wealthy and illustrious persons, and governments of states. The available number of buyers and the turnover rate in an industry goes a long way in influencing the pattern of competition in such industry. Like the grocery retail industry with high level of turnover and available buyers, the level of competition in winning customers may not be so stiff as in an industry as the aero-engine where buyers are few and low turnover rate. The aero-engine industry has to spend and invest more in coming out with innovative products that will aid in winning the patronage of buyers. Closely related to the above point is the issue of product advertisement. In the grocery retail, industry advertisement of product is done on public mass media and print media to catch the attention of the public, which constitute the buyers of their products. While advertisements in aero-engine industry are hardly heard in public mass media, they are directed to those potential customers inform of printed catalog and information on new product. Thus, it can be argued that the cost of product advertisements and sales promotion activities is prominent and high in the grocery industry than the aero-engine industry. Thus, the level of information dissemination is high with the grocery retail industry. "In today's competitive environment, retailers understand the importance of leveraging their customer information," said Scott Hardy, a managing director with Bearing Point, one of the world's largest business consulting and systems integration firms. "Shopping data collected from the store level can be leveraged as valuable real time data and shared throughout a retailer's supply chain network of suppliers, factories, and distribution centers to meet anticipated product demand." (NRF, 2006). SIMILARITIES BETWEEN SOURCE OF COMPETITION IN AERO-ENGINE INDUSTRY AND GROCERY INDUSTRY The differences between the sourcing of competitive advantage between the aero-engine industry and the grocery industry are greater than their similarities. One significant similarity between the industries in their sourcing for competitive advantage is that each firm in the industries tries to win the patronage of customer by engaging in qualitative product production. The quality of product produce tends to make customers continue their patronage in an organization over a long period; this applies to all business organization operating in different industries. In addition, source of competitive advantage for firms in each industry comes from the operation of an effective strategic management, which will make the organization adequately utilize its resources in meeting the vicissitudes in the industry they operate. Gaining competitive advantage in each industry entails that firms come up with innovative pattern of operating that is different from what is known to other competitors in the industry and that which they find difficult to copy. CONCLUSION It is seen that organizations in the aero-engine operates in gaining competitive advantage through product differentiation, and extensive investment in research and development. For organization in the grocery industry ensuring that the organization operates in a cost efficient strategy is a way of gaining competitive advantage. The similarity in ways of obtaining competitive advantage is through qualitative product production and adopting a strategy that is different and difficult for rivals to imitate. REFERENCES Ankli, Robert E. (1998), "Michael Porter's Competitive Advantage and Business History" University of Guelph . http://wwwh-net.org/business/bhcweb/publications/BEHprint/v021/p0228-p0236.pdf (18/05/06) Armitage, Jack L. (1992), "Strategic management for Public Accounting (The CPA Manager)" The CPA Journal http://www.nysscpa.org/cpajournal/old/12543369.htm (10/05//06) Brown, S.L. & Eisenhardt, K.M. (1998), Competing on the Edge: Strategy as Structured Chaos. 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